FIDIC 2005 Beijing Workshop 14

1. FIDIC 2005 BeijingWorkshop 14 Risk and Liability for Consulting Engineers: An Australian Perspective Tony Barry, President and Therese Charles CEO Association of Consulting Engineers Australia

2. Risk or Liability Management? • Risk management is one aspect of project management and like quality management, environmental management and safety management it is about the project or the service we deliver to our clients • Liability management on the other hand is about managing the impact of claims for loss on our business

3. Will Managing Risk Limit our Liability? • If risk is managed effectively, it may reduce the likelihood and severity of loss • However, the consulting engineer is rarely in a position to manage, control or bear project risk • Liability management may prevent or reduce the loss incurred by the consulting engineer.

4. The Business Environment • The last 10 years • PI Insurance • Where are we heading? • ACEA Initiatives • The Problem • Onerous Terms • What can you do?

5. Last 10 years • Increasing obligations on consultants - well beyond common law • Common law has moved in its application exposing consultants to new sources of claim • Clients laying off responsibility for own actions • Trade Practices exposure • Occupational Health & Safety • Insurance crisis

6. PI Insurance 2001 -2004 • Increased premiums • Absorb the first level of loss - increasing deductibles • Increasing use of captive insurance • Restricted cover - narrower policy wording • Insurers concentrate on risk selection • Restrictions on availability

7. PI Insurance - Unreasonable Outcomes? • Could infer consultants are taking on risks they cannot manage or bear • Could infer the problem is inherent in the forms of project delivery we use • When the loss ratios improve, capital will flow back into the PI Insurance market

8. ACEA Initiatives • Law reform • Policy debate • Information • Negotiation

9. ACEA Initiatives • Promoting Legislative Reform • Professional Standards Legislation • Proportionate Liability • Trade Practices Act Amendments • Educating Insurers and Firms • Insurer Site Visits • Guidelines and Tips for Firms • Continuing Professional Development • Individual Contacts for Firms • Talking to Clients • Public Sector - APCC Guidelines • Private Sector - Discussions to Follow

10. PI Insurance - A Scarce Resource • Engineers fees - 1% - 5% project • Insurance premiums 2% - 4% income • Claim pool resource say 0.07 - 0.1% industry value • Building & Construction industry value say $ 35 Billion • Claims pool resource say $ 35 Million • Reported claims history (IBNR’s) 300% of premium

11. APCC /ACEA PI Guidelines • Professional indemnity insurance of consultants relate to project risk and the services required • A consistent approach (formula developed for determining project risk and insurance requirements • Principal-organised insurance recognised as an alternative to consultant PI insurance, or for some extreme risk projects

12. The Problem • Client risk dumping through contracts • Risks inherent in Design & Construct, no avenue to claim against client, the losses crystallise in the D&C team • Clients pass on risk to consultants for fitness for purpose, delayed project delivery, inadequate or incorrect information, cost overruns, safety and consequential loss • Most of the risks are commercial risks in contract not in the consultant’s control • Onerous contracts create grounds for claim against consultant • Neither the Consultants or their PI cannot support project risks

13. Onerous Terms Create Liability • High standard of care • Responsibility for client supplied information • Absolute Fitness for Purpose warranties • Strict compliance • Open ended Indemnities • Duty of Care to multiple parties • Liability for delays outside control • Disclosing terms of PI Policy

14. The Solution • Don’t accept unreasonable terms – walk away • Negotiate terms which focus on maintaining a good relationship and a good business • Use Limits of Liability above which Clients carry the risk • Adopt commercially sustainable PI Insurance levels and guidelines

15. Limits of Liability - the Firms’ Perspective • reduces the impact of unreasonable indemnities • dissuades clients from taking legal action where the prospect of recovery is small • assists in maintaining the firm as an attractive risk to insurers • protects the livelihood of thousands employees • protects the owners interests in the firm • assists to maintain the professions as an attractive career

16. Limits of Liability - the Clients’ Perspective • reflects an agreed realistic allocation of risk between the Consultant and the Client • forces the Client to properly consider managing (and insuring) the risk which it in reality retains • protects the Client from the impact of adverse outcome of a claim against the Consultant taken out by another client

17. Limits of Liability - the Clients’ Perspective • maintains PI insurance as being available to Consultants generally • keeps the cost of providing consulting services reasonable • assists to maintain professional services for the community • equitable basis for tendering – all required to offer same capacity • avoid unsustainable risk-taking culture

18. Therese Charles Chief Executive on behalf of Level 12, 75 Miller Street | North Sydney NSW 2059(02) 99224711 | www.acea.com.au | acea@acea.com.au