It is often said that construction contracts are all about allocation of risk, and the same can be said about contracts for engineering services. An effective risk management strategy requires the engineer to be proactive in establishing sound contracting practices and appropriate insurance coverage.
An engineer should exert some control over risks through contractual provisions that limit the liability of the engineer to a maximum dollar amount and/or in respect of certain types of claims to shield the engineer from a crippling exposure. Some approaches are outlined below.
A consulting engineer is often engaged as a sub-consultant to the architect or to another engineer. While this is a practical arrangement, the sub-consultant often loses control over management of its exposure to claims by the owner. Commonly used forms of agreement between the prime consultant and the owner will have a provision that limits the liability of the prime consultant and its sub-consultants. Clauses that extend the limitation of liability to a sub-consultant are generally effective. However, it is often the case that the sub-consultant is unaware of the existence or wording of a limitation of liability provision, such that the sub-consultant has forfeited the ability to manage its risk exposure.
It is an unfortunate reality that not every engineering contract is in writing, or the form of contract may not limit the liability of the prime consultant or sub-consultants. From the sub-consultant’s perspective, a good practice is to insist on reviewing the limitation of liability provisions between the owner and the prime consultant to ensure that the sub-consultant is protected; this has to be done before agreeing to work as a sub-consultant. From the prime consultant’s perspective, its interests are best served by ensuring that the limitation of liability protections and the insurance obligations it has with the owner apply equally to its sub-consultants. This is achieved by harmonizing the limitation of liability and insurance provisions in the contracting chain from the owner through the prime consultant to the sub-consultant.
An alternate practice is for the sub-consultant to contract directly with the owner and in that way takes direct control of the management of its risk. A consulting engineer acting as prime consultant should consider adopting this model as a way to protect itself from liability for design errors that may be made by a sub-consultant.
A recent Alberta court decision highlights how limitation of liability provisions may have unexpected gaps. The engineer revised its design as a result of concerns that the original design did not meet the building code. The engineer revised the design and presented it to the architect. The revised design did not meet code either. The court ruled that by presenting a revised (but deficient) design the engineer made a “misrepresentation”. While the limitation of liability clause that limited liability for design errors, the limitation of liability clause did not expressly limit liability for “misrepresentations”. Rather than facing a liability capped at $500,000, the engineer was liable for the full $2,000,000 claim. The lesson is that a limitation of liability provision should limit claims arising not only from the initial design, but also arising from revisions and corrections. Have contracts reviewed by a lawyer to ensure they are current and comprehensive.
The contractual limits of liability should align with the engineer’s insurance limits so that any claim will be covered by insurance. This approach is almost uniformly recommended and is found in the template form of agreement endorsed by the Association of Consulting Engineering Companies Canada, among others.
Engineers typically carry professional liability insurance. Coverage should be commensurate with the level of exposure and the limitation of liability that the engineer is able to negotiate. As well, the insurance should match the scope of work being performed. An engineering firm may not have coverage if it strays outside of its usual (and insured) field, such as taking on a construction management role when its usual field is solely design. Similarly, an engineer should never agree to take on a risk through its contracting without first consulting with its insurer.
Engineers should always report claims to their insurer in a timely manner. Failure to promptly report a claim to the insurer may result in denial of coverage. Claims have a way of taking on a life of their own, and may erupt into expensive multi-party litigation in which the plaintiff casts its net widely over all participants in the project. One of the most important, but often overlooked, benefits of insurance is the coverage for the cost of defending a claim. Meritless claims can be just as expensive to defend as legitimate claims.
In summary, a consulting engineer should take an active interest in managing its legal exposure and should seek advice from its legal and insurance advisors before it enters into any contract.
Philip Carson is a litigation partner at Miller Thomson LLP in its Calgary office. His practice is focused on professional liability claims defence and construction matters.