Clients engage consulting engineers to provide engineering and related professional services. Based on their advice, clients can invest in an asset, the value of which may be 10 to 1000 times greater than the consultant’s fee. In the unlikely event that the engineer is negligent in that advice, the cost of rectifying the error may be several times greater than the original fee. This constitutes a risk to the client.
An initial reaction by some clients is to attempt to transfer the risk to the consultant by requiring high, or even unlimited liability. This is not the safest, nor the most cost effective way of managing such risk.
This is not the best way to mitigate risk, because often what you don't realise is that the insurance itself won't cover either of you under these conditions. It's not realistic nor a healthy business undertaking. What is a win-win for both client and consultant is to have an open conversation about the root of the concern and to set a reasonable liability amount that is covered under the consultant's insurance policy. ACE New Zealand Members carry robust insurance...it's a criteria of their membership with us, so by engaging with an ACE New Zealand Engineer, you can rest assured that your consultant will be knowledgeable and professional handling your client concerns.
Other appropriate methods to mitigate risk include: preparing a brief with the scope of work and services well defined; making consultant selections competitively, but based primarily on qualifications rather than price; when appropriate, arranging for peer reviews of the consultant’s work; setting a commercially viable limit of liability; or requiring the consultant to maintain Professional Indemnity (PI) insurance to match the agreed limit of liability. In order to maintain necessary skills, consultants need to operate businesses or partnerships that are commercially viable. If there is no reasonable limit on liability, consulting engineers have a number of unsatisfactory options, such as:
- Risk their business on the job through the potential liability being greater than their PI insurance and the value of their company. This usually means not offering some services or offering services with conditions;
- Strip their company of assets such that a claim above the insured sum will not be worthwhile to the claimant;
- Not provide services to clients who insist on unlimited or unreasonable liability;
- Play it safe by providing overly conservative advice, which will have greater financial impact on the client.
The “liability” of the consultant is only a safeguard for the client if it is backed up by PI insurance.
The Importance of Scope
Our partners at CEAS offer a FREE case study which illustrates how important it is to define your scope of work on a project. In addition to this resource, CEAS offers a wide variety of support in the risk and liability sector. You don't have to be a consulting engineer to become a Member either, although most of their members are.
Professional Indemnity premiums are expensive and increasing. Insurance providers worldwide are limiting the size and types of risk that they will cover. In some locations and for some services, PI cover is no longer available. Insurers often argue the engineer was not liable or not covered for that action. ACE New Zealand actively works with many insurers and CEAS (the risk advice and insurance organisation for consulting engineers) to advocate for reasonable terms of liability in contracts, which creates better business sense for consultant and client.
A commercial balance is required to provide clients with security and consultants with viability, backed by insurance. The general rule of thumb that has developed over time, internationally, is that the limit of liability should be about three to five times the fee. This level has substance in the event of errors made by the consultant; covers virtually all legitimate claims that arise; and is commercially sensible for both the client and consultant. Even so, this level is demanding from the consultant’s point of view. In many industries (eg IT), damages are limited to the value of goods or services only.
ACE New Zealand Partnership
ACE New Zealand Members are entitled to a discounted membership rate if they choose to join CEAS as well, and visa-versa. CEAS Members have an incentive rate to join ACE New Zealand. To find more information on this reciprocal partnership, click here or visit the CEAS website by clicking the logo below.
While ACE New Zealand does NOT require Members to use a specific insurance provider, Aon is a long-standing sponsor and partner of ACE New Zealand and you can find out more information by clicking their logo below.