Limitation of Liability

Transcription

1 Limitation of Liability Submission to the Attorney-General (Western Australia) July 2000 The Institution of Engineers, Australia Institution of Engineers, Australia 11 National Circuit, Barton, ACT, 2604 tel , fax

2 SUMMMARY The members of the Institution of Engineers, Australia (IEAust) have expressed significant concerns regarding the liability environment in Australia. As such, IEAust is seeking the support of all governments to implement much needed reform. With respect to engineering, the basis for changing the current situation rests on achieving a balance between protection of the community and the provision of affordable, innovative engineering services. As with other professions such as accountants and lawyers, there are three issues of major concern for the engineering profession. Joint and several liability v proportionate liability The provision of professional engineering services often requires the professional engineer to be part of a team for the delivery of a project. This creates special circumstances with respect to the level of liability of the professional engineer. The current system of joint and several liability allows that each person who has contributed to the plaintiff's loss may be liable to the plaintiff for the entire amount of the loss suffered, irrespective of the person s share of responsibility for the loss. Actions are taken against the member of the service team with the most assets and/or insurance cover, rather than the person or organisation mainly responsible for the problem (the deep pocket syndrome). This is often perceived to be an engineer or other professional. IEAust is recommending that all States and Territories to introduce proportionate liability. Limitation of quantum of liability In an unlimited liability environment, there are difficulties for the community and the professional alike. Some issues of major concern to engineers as professionals and members of the community are: uncertainty for clients; the consequences of undue exposure to financial risk for professionals; and the affordability of insurance cover. Additionally, an increasing number of professionals are arranging their affairs so that assets are not held in their names. Professionals may choose to forgo any form of insurance, thereby providing no assets or insurance for the plaintiff to claim against. July 2000 Page 1

3 IEAust supports the introduction of a statutory limit the quantum of liability. In this regard, IEAust congratulates the Western Australian Government for introducing the Professional Standards Act. However, anecdotal evidence suggests that the Professional Standards Act could be substantially enhanced if liability coverage was extended to include death and personal injury, and if the scheme was to include actions that may be taken under the Trade Practices Act. Limitation of time of liability A major problem for professional engineers relates to the period of time in which the practitioner remains liable for faults that emerge in completed products or delivered services. Under the current law, the term during which litigation is possible begins at the time the fault became apparent or should have become apparent, as opposed to when the original product was created or the service delivered. Liability may therefore exist long after the practitioner has retired. IEAust favours a modification of statutes of limitation in respect of professional services to reflect a definite commencement date for the period during which litigation may be initiated to recover actual loss or damages. July 2000 Page 2

4 BACKGROUND The practice of engineering impacts on all facets of everyday life, particularly on the health and well being of the community. The various branches of engineering indicate the diversity of the role of engineers in the community, including: aeronautical, chemical, civil, electrical, electronic, environmental, mechanical, mining, industrial and structural, and bio-medical. Additionally, professional engineering services account for a significant and increasing proportion of national and international trade. IEAust has around 6,500 Western Australian members in various categories, ranging from Fellows, to Associates and Students. As well, a substantial number of interstate members practice in Western Australia. Professional engineers operate in a substantially deregulated market in Australia. However, in recent years, changes in social and economic structures have called into question the control systems that have traditionally underpinned the delivery of professional engineering services. Changes include minimisation of prescriptive regulation; the introduction of competition as the main driver of economic efficiency; reduced public sector intervention in commercial activities; replacement of statutory controls by private certification; and an increasing resort to litigation as a compensation mechanism. Issues currently under debate in several Australian jurisdictions include: how community health, welfare and safety can best be protected, while encouraging responsible competition in delivering professional engineering services; and the extent to which professional engineers can be expected to recompense their clients for losses that may be attributed to shortcomings in those services. In recent years there has been an increase in the number and quantum of claims against professionals to recover loss or unexpected costs that are alleged to have resulted from the unsatisfactory delivery of professional services. July 2000 Page 3

5 This is due to a number of factors: Changes in community attitudes with respect to risk and a willingness to litigate more frequently. An increase in the size and complexity of work being undertaken. As a result of developments in the law, for instance, expansion of the range of matters capable of providing a cause of action in tort, especially with respect to liability to third parties. There is usually a significant asymmetry of knowledge between the provider of the service and the consumer. Therefore, there is a recognised need to provide a measure of protection for the less informed and less resourceful members of the community. An area of significant concern to practising professionals is the changing attitude of the community at large with respect to risk and a failure to understand that there are risks associated with all aspects of human endeavour. The community relies on a professional s skill and knowledge, and as such, expects compensation for any loss as a result of that reliance, without understanding that risk is involved in the delivery of professional services. No matter how high the standards of professional practice, there will always be a degree of risk. Professional indemnity insurance is taken out by professionals to overcome any loss that they may incur as a result of errors in professional practice. This insurance is often viewed by clients of professionals as being for their benefit rather than the professional, and as such, clients do not generally take out project specific insurance, which would provide better cover for the client. A key component of achieving a balance between protection of the community and the provision of affordable, innovative engineering services is the extent of liability for professional engineers. As with other professions, such as accountants and lawyers, there are three issues of major concern for the engineering profession: 1. Joint and several liability v proportional liability. 2. Limitation of quantum of liability. 3. Limitation of time of liability. July 2000 Page 4

6 JOINT AND SEVERAL LIABILITY V PROPORTIONATE LIABILITY The provision of professional engineering services often requires the professional engineer to be part of a team for the delivery of a project. This creates special circumstances with respect to the level of liability of the professional engineer. The current system of joint and several liability allows that each person who has contributed to the plaintiffs loss may be liable to the plaintiff for the entire amount of the loss suffered, irrespective of the person s share of responsibility for the loss. Claims can be progressed even where a practitioner has contributed little or nothing to the critical decisions that led to the loss, and where there may be no question of professional negligence. Therefore, actions are taken against the member of the service team with the most assets and/or insurance cover, rather than the person or organisation mainly responsible for the problem (the deep pocket syndrome). A further effect of the joint and several liability system is the greenmail effect, where professionals tend to settle out of court, even where they may have good claims and defences against major claims of negligence and/or did not cause the damages claimed. Professionals are being sued for negligence more frequently than at any other time in our history, especially with regard to property damage and pure economic loss. There is also an alarming increase in the size of the judgements being awarded. The costs of defending claims, insuring against them and paying successfully litigated claims is eventually borne by the community. This is because a professional must pass on these costs to their clients. Additionally, an increasing number of professionals are arranging their affairs so that assets are not held in their names. Under such arrangements, and where professional indemnity insurance is expensive, professionals may choose to forgo any form of insurance, thereby providing no assets or insurance for the plaintiff to claim against. The experience of members of the engineering profession under present liability rules, both in terms of litigation costs and incidences and insurance costs are outlined below. There are no collected statistics available to support a rigorous analysis. However, some things are known: July 2000 Page 5

7 The vast majority of actions for negligence are settled and the terms are not revealed due to confidentiality clauses in settlement agreements. Commercial decisions by insurers to settle actions in which their insured is not the principal defendant are influenced by the potential for the whole of the damage to fall on their insured, regardless of the insured s contribution to the damage. The potential for a defendant to be required to meet all damage, irrespective of the degree of contribution, has led to the deliberate design of actions to force settlement and this syndrome has developed into a form of greenmail. This development (over the past three or four decades) has caused professional indemnity premiums to be higher than they would be in a regime which limited an insured s liability to an amount commensurate with the insured s contribution to a damage. Every insurer must factor in the possibility of picking up the whole cost of damage, and this means that theoretically the pool of insurance is several multiples of the pool of damage. Specific problems experienced by professional engineers as a direct result of the joint and several liability system include: Reduced affordability of insurance cover. This is having a significant effect on the professional and consumer alike. There are difficulties in obtaining adequate and affordable professional indemnity insurance based on the increase in quantum and number of claims. Insurance companies are not able, or are unwilling, to underwrite such risks without substantial premiums. Proportionate liability would enable a reduction in insurance premiums. Uninsured professionals and divestment of assets. Anecdotal evidence suggests that an increasing number of professionals are arranging their affairs so that assets are not held in their names. Under such arrangements, and where professional indemnity insurance is expensive, professionals may choose to forgo any form of insurance, thereby providing no assets or insurance for the plaintiff to claim against. By lessening the risk of paying the whole damage in an action, proportionate liability, with its consequent reduction in insurance costs, would provide an environment where professionals are more likely to insure. July 2000 Page 6

8 Lack of certainty for claimants. If a major claim is made against the professional, or where there is a substantial gap between what is insured and the claim, this may have to be met through the realisation of the professional s or his/her partners assets. This, even then, may not cover the amount of the claim. Therefore, there is no certainty for clients with respect to how much of the claim can be satisfied, as it depends entirely on the level of insurance of the professional and the value of their personal assets. Australia s professionals accept that they must bear the responsibility for negligence and acknowledge that members of the community are entitled to recover reasonable damages where the professional has been negligent. However, they should not be asked to bear unlimited or disproportionate liability. Any limitation scheme must ultimately benefit the client and must take into account that those with valid claims have an opportunity to obtain compensation for loss suffered as a result of a breach of duty by the professional. The scheme must provide the professional with a reasonable opportunity to ensure the liability can be met. IEAust favours a model that supersedes the doctrine of joint and several liability with a statutory mechanism, in which damages are distributed by the courts or by a specialised tribunal in proportion to the assessed contribution of each party to the problem. Proportionate liability not apply claims based on breach of trust, breach of fiduciary duty, fraud or dishonesty. LIMITATION OF QUANTUM OF LIABILITY In jurisdictions other than Western Australia and New South Wales, IEAust is concerned about the lack of a limitation on the quantum of liability. IEAust congratulates the Western Australian Government for introducing the Professional Standards legislation to overcome some of the difficulties inherent in an unlimited liability environment for the community and the professional alike. However, there are still some limitations in the Professional Standards Act, which have been significant factors in the low membership level of the NSW Scheme: July 2000 Page 7

9 The Act deliberately excludes liability for death and personal injury from any limitation that applies. Members of the Scheme must still insure against this liability which often curtails potential savings from the cost of insurance and adds to nervousness about the Scheme. There is a view that the limits of liability provided by the Act may be bypassed by actions brought under the Trade Practices Act. This remains untested to date but has proved to be major barrier to membership growth. Progress of the legislation to other jurisdictions is slow. The initial take up from the engineering profession in NSW has been small. However IEAust believes that with amendment to the scheme, IEAust members will see the benefits of the legislation, and will be eager to join a scheme under the Western Australian legislation. IEAust believes that, to be fully effective, this type of legislation should be introduced in all Australian jurisdictions. LIMITATION OF TIME OF LIABILITY A major problem for professional engineers relates to the period of time in which the practitioner remains liable for faults that emerge in completed products or delivered services. Under the current law, the term during which litigation is possible begins at the time the fault became apparent or should have become apparent, as opposed to when the original product was created or the service delivered. Liability may therefore exist long after the practitioner has retired. This exposure puts pressure on practitioners to adopt an unduly conservative approach to the delivery of products and services. The professional engineer may be reluctant to propose innovative solutions for the client, and this may, in turn, result in higher costs. Industry sources have suggested that such undue aversion to risk, together with the increasing direct costs of insurance premiums, is beginning to have an adverse impact on both the initial and life cycle costs of the products and services. There is less innovation in product and service design in an environment where professionals are placed in high and prolonged risk situations. Additionally, there is a detriment to the community where retired professionals do not continue to carry insurance after retirement, thereby going bare. July 2000 Page 8

10 In this situation, the consumer is left with uncertainty if there is a claim, as this will depend entirely on the value of the assets of the retired professional. As many professionals are setting up their affairs to divest themselves of assets due to risk, there may be no assets available to allow the payment of a claim. IEAust favours a modification of statutes of limitation in respect of professional services to reflect a definite commencement date for the period during which litigation may be initiated to recover actual loss or damages. CONCLUSION The benefits to the community and to professionals of instituting a comprehensive limitation of liability scheme, and of making provision for proportionate rather than joint and several liability outweigh the disadvantages. Consumers gain certainty for payment of claims by mandated levels of insurance, and professionals gain affordable insurance coverage. Limitation of liability schemes provide a balance between the competing interests of consumers and professionals and promote the development of the profession as a whole, which, in turn, benefits society. July 2000 Page 9