Successful Management of Engineering Practice Risks NSPE 2014 Annual Conference Washington, DC

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1 Successful Management of Engineering Practice Risks NSPE 2014 Annual Conference Educational Session July 3, 2014 Victor O. Schinnerer & Company, Inc. and the CNA Professional Liability Insurance Program Acknowledgements/Credits The information presented and opinions expressed are those of Victor O. Schinnerer & Company, Inc., the program administrator and underwriting manager of the CNA professional liability insurance program for design firms, the only Commended Program of the National Society of Professional Engineers since Copyright and Licensing of Materials This presentation is protected by US and International copyright laws and is the intellectual property of Victor O. Schinnerer & Company, Inc. The National Society of Professional Engineers has a non-exclusive license to reproduce and distribute this information for educational purposes only. Further reproduction, distribution, display and use of the presentation without written permission of the speaker is prohibited. Victor O. Schinnerer & Company, Inc. Two Wisconsin Circle Chevy Chase, Maryland

, the program administrator and underwriting manager of the CNA professional liability insurance program for design firms, the only Commended Program of the National Society of Professional Engineers

2 Agenda Engineering Firms and the Law Major Sources of Risk for Engineering Firms Risk Management Tools / Mitigating Risks Engineering Firms and the Law THE TWO THINGS ABOUT THE LAW: 1. The law protects the reasonable expectations of the parties. 2. You are responsible for the foreseeable costs of your wrongful conduct. THE TWO THINGS ABOUT DESIGN PRACTICE: 1. It's all about trade-offs. 2. The trade-offs are about money, time, and quality. Negligence and Liability Was there a breach of a duty? What duty existed? Was the standard of care met? If there was a breach of a duty, did It cause damage? Can the damage be traced to the breach? Could such damage have been expected? 2

THE TWO THINGS ABOUT DESIGN PRACTICE: 1. It's all about trade-offs. 2. The trade-offs are about money, time, and quality.

3 Breach of Contract Did a valid contract exist? Could the parties enter into a contract? Was there an agreement? Was there consideration? If a contract existed, was it breached? Was there a failure to perform as promised? If not performed in substantial compliance with the contract, what is an adequate remedy? Transferring Risk Through Insurance Professional Liability Protects insured against liability arising from negligence in rendering professional services; excludes coverage for services warranted beyond nonnegligent performance. Commercial General Liability Protects insured from claims by third parties for bodily injury or property damage; generally excludes coverage for negligent design and cost of correcting own work (for contractors) The Role of PL Insurance A tool of the risk management process Protects corporate assets and shareholder investment Protects the professional Manages potential project risks Supports contractual commitments No salvation to a poorly executed project 3

Transferring Risk Through Insurance Professional Liability Protects insured against liability arising from negligence in rendering professional services; excludes coverage for services warranted

4 What is Covered - PL Insurance Wrongful Acts - negligent acts, errors and omissions by the professional What is Not Covered PL Insurance Client expectations Fines, penalties and liquidated damages Warranties and guarantees Repair or replacement of faulty workmanship or remediation Delays and estimates Major Sources of Risk for Engineers 4

penalties and liquidated damages Warranties and guarantees Repair or replacement of

5 Key Risk Factors for Engineers Client Contractor Project Delivery Method / Role Contract THE CLIENT Type of Client Track Record Financial Capability Claims History Clients as a Source of Risk Repeat clients Are goals consistent? Has management changed? Do new financial pressures exist? New clients Are they financially capable for project? Do they understand your services? 5

Risk Repeat clients Are goals consistent? Has management changed?

6 Common Danger Signs- The Client Unreasonable refusal to accept your advice regarding scope of services, level of effort required, or time required for services. Unwillingness to negotiate fair terms and fees. Demand for an unreasonable standard of care (perfection.) Use of unreasonable indemnification provisions. Common Danger Signs- The Client Insistence that you perform within a specific time frame, despite factors that are outside your control. Refusal to consider your advice regarding contractor s performance. Refusal to pay - especially when services are completed. THE CONTRACTOR Experience Financial Status Selection Method Claims History 6

Common Danger Signs- The Client Insistence that you perform within a specific time frame, despite factors that are outside your control.

7 THE CONTRACT Scope/Time/Compensation Relationships and Communication Responsibility for Specific Services Risk Recognition and Allocation Documentation of Mutual Understanding Risk Management Tools / Mitigating Risks Key Contract Provisions Include Contract Provisions To Control Risk: Exculpatory Clauses Indemnification by Others Limitation of Liability Limitation Periods for the Assertion of Claims September 23,

Risks Key Contract Provisions Include Contract Provisions To Control Risk: Exculpatory Clauses

8 Key Contract Provisions Avoid Contract Provisions That Expand Duty: Express Warranties and Guarantees Indemnification or Defense/Indemnification Language Creating Unfulfillable Expectations September 23, 2013 Mitigating Contract Risk 1. Determine who is in the best position to carry out each responsibility and assign responsibility accordingly. 2. Accompany responsibilities with the authority to fulfill them. 3. Assign each responsibility to only one party. 4. Use language that creates realistic expectations. September 23, 2013 Scope Definition Scope is the sum of the services and deliverables to be provided as a project. Scope definition involves dividing the services and deliverables into smaller, more manageable components. 8

3. Assign each responsibility to only one party. 4. Use language that creates realistic expectations.

9 Scope Definition What is Your Firm s Role? Preparation of Final Design Documents Submittal Review/Approval Observations of the Work Testing and Inspections Rejection/Acceptance of Non-conforming Work Commissioning and Approval Scope control requires that all changes go through a formal change review process integrated with other project control processes (e.g., time, cost, and quality.) It also requires that you clearly state when your services end. Scope Control Process Conduct Regularly Scheduled, Documented Progress Meetings Document All Deliverable Submissions and All Client Comments, Change Requests and Approvals Institute a Formal Change Review and Authorization Process Maintain Well-organized Project Records 9

Approval Scope control requires that all changes go through a formal change review process integrated with other project control processes (e.g., time, cost, and quality.

10 Communication and Documentation Systematic Establish and Enforce Communications and Documentation Procedures Contemporaneous Document Events and Circumstances as They Occur Objective State the Facts Only; Don t Speculate in the Project Files Communication and Documentation Address contractual and other project-specific requirements. Plan for effective information distribution. Consistently provide progress and exception reporting. Preserve the project record at least for duration of the applicable statute of repose. LIABILITY AND RISK MANAGEMENT Managing risk is basic to profitability. Learning to identify, respond and control risk on each project is critical. Avoiding risk is often prudent. Project risk varies and services and fee should reflect this variation. Working to solve problems early during disputes is vital. 10

Consistently provide progress and exception reporting. Preserve the project record at least for duration of the applicable statute of repose.

11 Contact Information More information about the CNA professional liability insurance program can be obtained through the National Society of Professional Engineers at or directly from Victor O. Schinnerer & Company, Inc. through Additional risk management information is available through these websites and through Schinnerer s The speaker can be contacted directly at: Nahom.A.Gebre@Schinnerer.com Victor O. Schinnerer & Company, Inc. Two Wisconsin Circle Chevy Chase, Maryland

Additional risk management information is available through these websites and through Schinnerer s www.schinnerer.

ARCHITECTS AND ENGINEERS PROFESSIONAL LIABILITY INSURANCE By Bruce H. Schoumacher

Querrey Harrow When Results Count. SM www.querrey.com Copyright 2005 Querrey & Harrow, Ltd. All Rights Reserved. ARCHITECTS AND ENGINEERS PROFESSIONAL LIABILITY INSURANCE By Bruce H. Schoumacher Architects