Engineers Australia Professional Indemnity Insurance Survey Report

Transcription

1 Engineers Australia 2004 Professional Indemnity Insurance Survey Report 21 July 2004 Contact: Leanne Hardwicke Director Public Policy Ann Ryle Associate Director Engineering Practice Engineers, Australia Engineering House, 11 National Circuit, Barton ACT 2600 Telephone: (02) Facsimile: (02)

2 INDEX BACKGROUND EXECUTIVE SUMMARY i ii RESEARCH FINDINGS 1 Sample Profile 1 Professional Indemnity Insurance Years Covered 5 Level of Cover, Premium Paid & Excess Payable ( to ) 8 Claims Made & Alerts Registered in Past Ten Years 14 Claims Details 17 Impact of Claims on Premiums & Re-Insurance 24 APPENDICES Appendix 1: Questionnaire Appendix 2: Additional Respondent Feedback Engineers Australia Russ Knight Research

3 BACKGROUND In seeking approval for the professional standards scheme for members of Engineers Australia, comprehensive data is required on the professional indemnity insurance claims history of potential members of the scheme. Approaches had been made to professional indemnity insurance underwriters for claims statistics specific to the types of claims being recorded against professional engineers. However, it was determined that this information would not be readily available through this source. This meant that the professional indemnity insurance and litigation experience of members had to be obtained from other sources. Accordingly, all members of Engineers Australia, excluding students and graduates, were invited to complete an online questionnaire that focused on the following areas: The proportion of members carrying professional indemnity insurance in each of the previous ten financial years ( to ). The number of claims and alerts in each of those ten financial years. The level of cover purchased, the cost of the premium (including GST) and the amount of excess in each the last four financial years ( to ). Information specific to each claim made in the last ten financial years. a) The value of the claim? b) The type of claim? (Negligence, Trade Practices/Fair Trading, Other) c) The value of the fees for the project? d) Whether the claim had been settled or was still outstanding? And if the claim had been settled. e) How much, excluding costs and fees, was the amount settled for? f) How the claim was resolved? (Negotiation, Mediation, Arbitration, Court or tribunal judgment, Other) g) When the claim was settled? (Before trial, During trial, By the court) h) How much the legal costs associated with the claim were? i) How much the other expenses associated with the claim were (ie internal costs such as time taken and/or actual expenses)? The survey site was pilot tested April Some minor modifications were made including the requirement for members to insert their Membership Number. Due to the importance of the information we are collecting to the development of an effective Professional Indemnity insurance scheme in this country, we must ensure that only registered members complete the questionnaire. Members were assured that the confidentiality of their response was guaranteed and that the final data file would contain no identifiers. The site was re-opened on 28 April and closed on 31 May completed questionnaires were obtained for analysis. The margin of error associated with the sample of 477 is +/ This document presents and discusses the research findings. Computer analyses have been provided under separate cover. Engineers Australia - i - Russ Knight Research

4 EXECUTIVE SUMMARY Engineers Australia Russ Knight Research

5 Chart 1A: Level of Cover, Premiums & Excesses Payable ** 2004 Data ** Chart 1B: Level of Cover, Premiums & Excesses Payable ** 2003 Data ** $25,000 $5.00 $25,000 $21,970 $5.00 $20,000 $15,000 $3.34 $19,020 $3.22 $11,650 $4.00 $m $3.00 $20,000 $15,000 $3.31 $23,110 $3.53 $4.00 $m $3.00 $10,000 $8,180 $2.00 $10,000 $8,270 $2.00 $5,000 $6,590 $1.00 $5,000 $7,460 $1.00 $ $0.00 $ $0.00 Financial Years Financial Years Premium Excess Payable Level of Cover Premium Excess Payable Level of Cover Chart 2: Claims & Alerts (per1000 PI Insured Firms) ` Financial Years (Rolling 3 Year Averages) Claims Alerts Engineers Australia Russ Knight Research

6 EXECUTIVE SUMMARY Two key conclusions can be drawn from the 2004 survey data. 1) While the amount of Professional Indemnity insurance cover taken out by engineers has not changed significantly over the last four years (-4; Table A & Chart 1A), premiums have more than doubled since (up 133) and excesses have jumped 77. Similar results were obtained in the 2003 survey (Chart 1B). TABLE A Has PI LEVEL OF COVER PREMIUM EXCESS PAYABLE FINANCIAL YEAR Cover Mean Change Mean Change Mean Change $3.22m -4 $19, $11, $3.36m +4 $14, $9, $3.24m -3 $9, $7, $3.34m $8,180 $6,590 Base: Carried PI in Financial Year 2) Analysis of the claims data clearly indicates a steady decline in the number of claims made and alerts registered over the last ten years (Table B & Chart 2). TABLE B CLAIMS & ALERTS PER 1000 PI INSURED FIRMS Claims Made Rolling 3 Year Averages Alerts Registered Rolling 3 Year Averages Base: Carried PI in Financial Year Engineers Australia - ii - Russ Knight Research

7 Incidence of PI Cover 68 of the 477 firms responding to the survey carried Professional Indemnity insurance in The incidence of PI cover peaked in and at 73. It has not fallen below 66 in the last ten years. 20 of firms, including almost half of the large firms who responded, have carried no PI insurance for the last ten years. Nearly half of the sample was comprised of sole practitioners. Sixty percent of this group carried PI insurance in The incidence of cover in was lowest among the largest firms (50+ staff; 47) and sole practitioners (60). It was highest among firms with 5-49 staff (84). It varied regionally from 59 in Western Australia to 77 in the Northern Territory. 85 of structural engineers carried PI insurance this year. Areas of practice with high levels of cover included: - Acoustics engineering 82 - Building services engineering 81 - Construction engineering 80 - Civil engineering 76 - Fire safety engineering 76 - Building engineering 75 - Geotechnical engineering 74 Specialist areas of practice were the least likely to carry PI insurance in Communications engineering 50 - Information technology 50 - Mining engineering 50 - Software engineering 48 - Instrumentation & control 38 - Biomedical engineering 33 - Naval architecture 25 - Aeronautical engineering 11 Engineers Australia - iii - Russ Knight Research

8 Level of Cover, Premium Paid & Excess Payable ( to ) Level of Cover 68 of firms responding to the survey carried PI insurance this year (ie 32 were uninsured). Most of the PI insured firms had cover of either $1 million (30), $2 million (23) or $5 million (19). Ten percent had cover of $7 million or more. The average cover in was $3.22m. The level of cover increases with staff numbers, turnover and the size of the maximum fees. Sole practitioners carried on average $2.2 million PI cover this year. By comparison, very large firms (50+ staff) had $11 million cover on average. Firms with maximum fees of $30k had an average of $2.5 million cover this year. Those with maximum fees exceeding $100k had an average of $4.6 million cover. The level of cover has not changed significantly over the last four years (+/- 3-4 each year). Similar results were observed in the 2003 survey. Has PI Cover Average Cover Change $3.22m $3.36m $3.24m $3.34m Engineers Australia - iv - Russ Knight Research

9 Premiums Paid The average premium in was $19,020. This compares to $8,180 in and represents a rise of 133 over the last four years (similar trends were identified in the 2003 survey). The greatest increase occurred in (52). Average Premium Change $19, $14, $9, $8,180 The largest increases in premiums over the last four years have occurred among the following groups: Tasmanian firms (298). (caution: small base) Firms with 5-49 staff (253) Firms turning over $1m to <$5m (261) or $0.25m to <$1m (207) Owner/ managers (209) Firms with a maximum fee of $30k to <$100k (207) NSW (126) & Victorian (119) firms Excess Payable The amount of excess payable has almost doubled over the last four years. It has risen from $6,590 in to $11,650 in , an increase of 77. The greatest increase occurred in (33). Average Excess Payable Change $11, $9, $7, $6,590 The largest increases in the amount of excess payable over the last four years have occurred among the following groups: Firms with a maximum fee of less than $30k (151) Firms turning over less than $0.5m (103) or $5m+ (99) Firms with less than 10 staff (91) or 50+ staff (107) Sole practitioners (100) & owner/ managers (94) Tasmanian firms (92). (caution: small base) Victorian (75), NSW (72) & QLD (70) firms Engineers Australia - v - Russ Knight Research

10 NUMBER OF CLAIMS MADE IN EACH FY (326) (320) (321) TABLE C (292) (256) (220) (191) (177) (164) None or more claims made Number of Claims in FY Number of Claims per 1000 PI Insured Firms Rolling 3 Year Averages Base: Carried PI in Financial Year (145) NUMBER OF ALERTS REGISTERED IN EACH FY (326) (320) (321) TABLE D (292) (256) (220) (191) (177) (164) None or more alerts registered Number of Alerts in FY Number of Alerts per 1000 PI Insured Firms Rolling 3 Year Averages Base: Carried PI in Financial Year (145) Engineers Australia - vi - Russ Knight Research

11 Claims Made & Alerts Registered in Past Ten Years Claims Made Thirty-six firms, representing 8 of the sample, had made one or more claims in the last ten years. Those 36 firms had made a total of 58 claims during that period. On average, 3 of PI insured firms had made a claim in any one year (Table C). The incidence of claiming was higher among large firms (turnover $5m+, 23; 50+ staff, 26) than those with a turnover below $0.5m (7) or less than five staff (5). The size of the maximum fee did not impact on the incidence of claiming (but the number of claims made per claimant appears to increase with the size of the maximum fee caution; low bases). The number of claims made per 1000 PI insured firms has declined over the last ten years. The incidence fell from 40 per thousand PI insured firms in to 15 in (rolling 3 year averages). Alerts Registered Eighteen percent of the firms surveyed (87 of the 477) had registered one or more alerts with their PI insurance company in the last ten years. They had registered a total of 267 alerts between them during that period. On average, 8 of PI insured firms had registered an alert in any one year (Table D). Firms with 10 or more staff were the most likely to have registered an alert in the last ten years (44 cf 24 with 2-9 staff). Sole practitioners were the least likely (15). The incidence of alerts being registering increased with turnover and, to a lesser degree, the size of the maximum fee. More significantly, the number of alerts registered increased considerably with the size of the maximum fee. The number of alerts registered per 1000 PI insured firms has declined over the last ten years. The number has fallen by a quarter; from 135 per thousand PI insured firms in to 99 in (rolling 3 year averages). Engineers Australia - vii - Russ Knight Research

12 Claims Made in the Last 10 Years (Caution: low bases) Details were provided by 36 respondents on a total of 58 claims made over the last ten years. A third of the claims made in the last ten years were less than $20k (31). The majority of claims were for less than $200k (76). The average claim was for $196k (excluding one very large claim for over $5.0m). Claims made in the last five years were, on average, twice the value of the claims made between 1995 and 1999 ($268k cf $121k). 72 of claims were for negligence. In two out of three claims, fees for the projects were less than $20k (64). Fees for seven of the projects were for $50k or more (12). The average fees across the 58 projects resulting in a claim were $30k. This compares to the average claim of $196k. 71 of the claims had been settled, in particular, those prior to 2000 (83). Half had been settled for under $20k (54). Twenty percent were settled for $100k or more. The highest claim was settled for over $1m. This increased the average to $117k. Most of the claims were settled by negotiation (61). Some involved mediation (20). All except two were settled prior to going to trial (95). Half of the settled claims resulted in legal fees (51), in particular, those made in the last five years (65). Legal fees averaged $13k. Fees were considerably higher for claims settled in the last five years (8 claims averaging $23k) than those settled in (7 claims averaging $6k). Most claims incurred other expenses (85). They averaged $11k across the 41 settled claims. Other expenses were higher in claims made in the last five years ($15k) than those from ($8k). Engineers Australia - viii - Russ Knight Research

13 Impact of Claims on Premiums & Re-Insurance (Caution: low bases) A third of the firms that had claimed in the last ten years said that they had made a payment to resolve a case even though the claim was wrongful or unjust (33). In most cases, the decision was based on the belief that it would cost the firm less to settle the claim than to defend it. In three instances, the insurer determined that the claim should be settled rather than defended. Over half of the firms believed that their premiums had risen as a result of making the claim (61). Premiums were thought to have increased by 67 on average. Two firms stated that they had been refused re-insurance as a result of settling a claim (6). Both were small firms with a turnover below $0.5m. Three firms claimed that their work had been declined, refused, rejected or discriminated against after litigation (8). All three firms had less than 10 staff and a turnover below $1m. Engineers Australia - ix - Russ Knight Research

14 RESEARCH FINDINGS Engineers Australia Russ Knight Research

15 Q1. AREA(S) OF PRACTICE 2004 (477) TABLE 1 Q1. AREA(S) OF PRACTICE Civil engineering 37 Mining engineering 3 Structural engineering 27 Risk & forensic engineering 3 Project management 23 Building engineering 3 Mechanical engineering 21 Acoustics engineering 2 Electrical engineering 13 Aeronautical engineering 2 Building services engineering 9 Instrumentation & control 2 Environmental engineering 9 Biomedical engineering 1 Energy management 8 Construction engineering 1 Geotechnical engineering 5 Petroleum engineering 1 Information technology 5 Naval architecture 1 Management 5 Other 2 Chemical engineering 4 Communications engineering 4 Fire safety engineering 4 Software engineering (477) Q2. EMPLOYMENT STATUS TABLE (550) 2004 (477) Owner/ manager of a firm Sole practitioner Employee 11 9 Q3. NUMBER OF STAFF TABLE (521) 2004 (477) Engineers Australia Russ Knight Research

16 RESEARCH FINDINGS SAMPLE PROFILE Area of Practice Survey respondents practise primarily in the following five areas (Table 1): Civil engineering 37 Structural engineering 27 Project management 23 Mechanical engineering 21 Electrical engineering 13 Description of Respondent Most respondents were either the owner or manager of a firm (45; Table 2) or a sole practitioner (45). The balance stated that they were an employee responding of behalf of a firm (9). Sole practitioners had on average the smallest annual turnover (97 reported a turnover below $0.5m). Six out of ten owner/managers came from firms with a turnover below $0.5m (60). While most of the others had a turnover between $0.5m and $1.9m (26), a sizable proportion reported having a turnover in excess of $2.0m (13). Size of Firm Three out of four firms represented had a maximum of four staff (73; Table 3). A sixth employed between 5 and 19 staff (16) and 10 employed 20 or more staff. Six percent employed 100 or more staff. In the majority of cases, employees completed the survey on behalf of these large firms (24 out of the 27). Engineers Australia Russ Knight Research

17 TABLE 4 Q4. STATE(S) FIRM PRACTICES 2003 (528) 2004 (477) NSW VIC QLD WA SA ACT TAS 10 7 NT 8 6 Q5. ANNUAL TURNOVER OF FIRM TABLE (527) 2004 (477) <$0.25m 55 $0.25m to <$0.5m $0.5m to <$1m $1m to <$2m 9 5 $2m to <$5m 6 4 $5m to <$10m 3 2 $10m to <$20m 1 $20m TABLE 6 Q6. MAXIMUM FEE RECEIVED 2004 (477) Under $5k 13 $5k to <$15k 12 $15k to <30k 18 $30k to <$50k 10 $50k to <$100k 23 $100k to <$200k 11 $200k to <$500k 8 $500k + 6 Engineers Australia Russ Knight Research

18 Location(s) of Practice Survey respondents practised in all Australian States and Territories, predominantly New South Wales (49; Table 4), Victoria (38), Queensland (31) and Western Australia (25). South Australia was represented by 13 of the sample. Fewer firms practised in the ACT (11), Tasmania (7) and the Northern Territory (6). Annual Turnover Most firms had an annual turnover of under $0.5 million (72; Table 5), in particular sole practitioners, 88 of whom reported a turnover below $250k. Most of the others said that their firm turned over between $0.5m and $1.9m (15). Large ($2.0m to $9.9m; 6) and very large firms ($10m +; 7) made up the other thirteen percent. Turnover averaged $2.15m across the 477 responding firms. Maximum Fee Received One out of four firms claimed that their maximum fee was less than $15,000 (25; Table 6). Half of the sample estimated their maximum fee at $15k to $99k (51). Most of the others reported a maximum fee of between $100k and $499k (18). Six percent of maximum fees recorded were over $500k. This was most common among firms with 50 or more staff (44) and a turnover exceeding $5m (41). However, one out of five firms with staff (20) and/or a turnover of $1-5m (23) also claimed to have a maximum fee of $500k+. The maximum fees cited averaged $106k. They increased with staff numbers and turnover. Engineers Australia Russ Knight Research

19 Q7. FINANCIAL YEAR COMMENCED BUSINESS TABLE (477) of Practices Operating In Each Year Before June Q8. FINANCIAL YEARS CARRIED PROFESSIONAL INDEMNITY INSURANCE TABLE (477) of Operating Practices Carrying PI In Each Year Not carried PI in last 10 years 20 Engineers Australia Russ Knight Research

20 PROFESSIONAL INDEMNITY INSURANCE YEARS COVERED Years Firm Practising A third of the firms, including nearly half of the sole practitioners (46), had been in practice for less than five years (34; Table 7). Less than 2 years years 26 Twenty percent had been practising for 6-9 years, and half for ten years or more (46). There were no significant differences across the states practised in. Years Professional Indemnity Insurance Held 68 of firms responding to the survey carried PI insurance in (Table 8). The incidence of PI cover peaked at 73 in and It has not fallen below 66 in the last ten years. One out of five firms has carried no PI insurance for the last ten years (20). This included almost half of the large firms. No PI Cover in Last 10 Years 50+ staff 47 Turnover $5m+ 46 Owner/managers were the most likely to have PI insurance cover this year (80). Sixty percent of sole practitioners said they had cover. However, only half of the employees reported that their firm carried PI insurance this year (50). The incidence of cover in was lowest among largest firms (50+ staff; 47), sole practitioner (60) and firms practising in WA (59), SA (62) and TAS (64). Carried PI Insurance in States Practise In Respondent No. of Staff Turnover NT.77 Owner/ manager <$0.25m.63 QLD.73 Sole practitioner $0.25m-<$0.5m.80 NSW.73 Employee $0.5m-<$1m.78 VIC $1m-<$5m.88 ACT $5m+.49 TAS.64 SA.62 WA.59 Engineers Australia Russ Knight Research

21 Structural engineers were the most likely to carry PI insurance in (85; Table 9A). The following table identifies the areas of practice where at least two out of three firms carried PI insurance in Q8. PROPORTION OF FIRMS CARRYING PI INSURANCE IN TABLE 9A Number of Firms in Sample Carried PI Insurance in Structural engineering Acoustics engineering Building services engineering Construction engineering 5 80 Civil engineering Fire safety engineering Building engineering Geotechnical engineering Risk & forensic engineering Environmental engineering Petroleum engineering 3 67 Project management Energy management The following table identifies the areas of practice that were least likely to carry PI insurance in Q8. PROPORTION OF FIRMS CARRYING PI INSURANCE IN TABLE 9B Number of Firms in Sample Carried PI Insurance in Mechanical engineering Electrical engineering Management Chemical engineering Communications engineering Information technology Mining engineering Software engineering Instrumentation & control 8 38 Biomedical engineering 3 33 Naval architecture 4 25 Aeronautical engineering 9 11 Engineers Australia Russ Knight Research

22 Q9A. LEVEL OF COVER TABLE (326) (320) (321) (292) Less than $0.5m $0.5m - $0.9m $1.0m - $1.4m $1.5m - $1.9m $2.0m - $2.4m $2.5m - $2.9m $3.0m - $4.9m $5.0m - $6.9m $7.0m - $9.9m $10.0m - $14.9m $15.0m - $19.9m $20.0m Don t know Mean * $3.22m $3.36m $3.24m $3.34m Base: Carried PI in Financial Year * The low point of each range was used as the weighting factor in the means calculation Mean ** (excluding outliers) 2003 Survey Data (427) $3.53m (446) $3.55m (424) $3.47m (395) $3.31m Base: Carried PI in Financial Year ** In the 2003 survey, the actual dollar value was used as the weighting factor in the means calculation Engineers Australia Russ Knight Research

23 LEVEL OF COVER, PREMIUM PAID & EXCESS PAYABLE TO Respondents were asked to detail for each of the years , , and , their level of PI insurance cover, the premium paid (including GST) and the excess payable. Level of Cover to of the sample indicated that their firm carried PI insurance cover this year (ie 32 were uninsured). Most had cover of either $1 million (30), $2 million (23) or $5 million (19). The average cover in was $3.22m (Table 10). The proportion of firms carrying PI insurance has declined marginally over the last four years (down from 73 to 68). However, the level of cover has not changed significantly (+/- 3 or 4 each year). Similar results were observed in the 2003 survey. Has PI Cover Average Cover Change $3.22m $3.36m $3.24m $3.34m Not surprising, the level of cover increases with staff numbers and turnover. Sole practitioners are carrying on average $2.2 million PI cover this year. Very large firms (50+ staff) have on average $11 million cover. The size of the maximum fee also influences the level of PI cover taken. Firms with maximum fees of $30k at most have an average of $2.5 million cover this year. Those with maximum fees exceeding $100k have an average of $4.6 million cover. Level of Cover in Respondent No. of Staff Turnover Maximum Fee Employee. $7.6m 1. $2.2m <$0.25m. $2.4m <$30k. $2.5m Owner/ manager. $3.5m 2-4. $3.0m $0.25m-<$0.5m. $2.9m $30k-<$100k. $3.0m Sole practitioner. $2.2m 5-9. $3.4m $0.5m-<$1m. $3.3m $100k+. $4.6m $4.1m $1m-<$5m. $4.7m 50+. $11.0m $5m+. $10.1m Engineers Australia Russ Knight Research

24 Q9B. PREMIUMS PAID (Including GST) TABLE (326) (320) (321) (292) Less than $1, $1,000 - $1, $1,500 - $1, $2,000 - $2, $3,000 - $3, $4,000 - $4, $5,000 - $6, $7,000 - $9, $10,000 - $14, $15,000 - $19, $20,000 - $49, $50,000 - $99, $100,000 - $199, $200k Don t know Mean * $19,020 $14,270 $9,380 $8,180 Base: Carried PI in Financial Year * The mid point of each range was used as the weighting factor in the means calculation Mean ** (excluding outliers) 2003 Survey Data (Including GST) (427) $23,110 (446) $15,080 (424) $9,280 (395) $7,460 Base: Carried PI in Financial Year ** In the 2003 survey, the actual dollar value was used as the weighting factor in the means calculation Engineers Australia Russ Knight Research

25 Premiums Paid to The amount of premiums paid has more than doubled over the last four years (Table 11). The average premium has increased from $8,180 in to $19,020 in , a rise of 133. The greatest increase occurred in (52). Average Premium Change $19, $14, $9, $8,180 A similar trend was identified in the 2003 survey. The largest increases in premiums over the last four years have occurred among the following groups: Tasmanian firms (298). (caution: small base) Firms with 5-49 staff (253) Firms turning over $1m to <$5m (261) or $0.25m to <$1m (207) Owner/ managers (209) Firms with a maximum fee of $30k to <$100k (207) NSW (126) & Victorian (119) firms Increases in Premiums Paid between & States Practise In Respondent No. of Staff Turnover Maximum Fee TAS. 298 Owner/ manager <$0.25m. 107 <$30k. 118 NSW. 126 Sole practitioner $0.25m-<$0.5m. 191 $30k-<$100k. 207 VIC. 119 Employee $0.5m-<$1m. 226 $100k QLD $1m-<$5m. 261 WA $5m SA. 59 ACT. 16 NT. 13 Engineers Australia Russ Knight Research

26 Q9C. AMOUNT OF EXCESS TABLE (326) (320) (321) (292) Less than $1, $1,000 - $1, $1,500 - $1, $2,000 - $2, $3,000 - $3, $4,000 - $4, $5,000 - $6, $7,000 - $9, $10,000 - $14, $15,000 - $19, $20,000 - $49, $50,000 - $99, $100,000 - $199, $200k Don t know Mean * $11,650 $9,440 $7,100 $6,590 Base: Carried PI in Financial Year * The low point of each range was used as the weighting factor in the means calculation Mean ** (excluding outliers) 2003 Survey Data (427) $21,970 (446) $13,640 (424) $11,080 (395) $8,270 Base: Carried PI in Financial Year ** In the 2003 survey, the actual dollar value was used as the weighting factor in the means calculation Engineers Australia Russ Knight Research

27 Excess Payable to The amount of excess payable has almost doubled over the last four years (Table 12). The average excess payable has risen from $6,590 in to $11,650 in , a rise of 77. The greatest increase occurred in (33). Average Excess Payable Change $11, $9, $7, $6,590 The increases identified in this survey (77 over four years) were not as large as those revealed in the 2003 survey (166). The largest increases in the amount of excess payable over the last four years have occurred among the following groups: Firms with a maximum fee of less than $30k (151) Firms turning over less than $0.5m (103) or $5m+ (99) Firms with less than 10 staff (91) or 50+ staff (107) Sole practitioners (100) & owner/ managers (94) Tasmanian firms (92). (caution: small base) Victorian (75), NSW (72) & QLD (70) firms Increases in Excess Payable between & States Practise In Respondent No. of Staff Turnover Maximum Fee TAS. 92 Sole practitioner <$0.25m. 102 <$30k. 151 VIC. 75 Owner/ manager $0.25m-<$0.5m. 111 $30k-<$100k. 83 NSW. 72 Employee $0.5m-<$1m. 87 $100k+. 61 QLD $1m-<$5m. 60 WA $5m+. 99 SA. 41 NT. 18 ACT. 15 Engineers Australia Russ Knight Research

28 Q10. NUMBER OF CLAIMS MADE IN EACH FY (326) (320) (321) TABLE (292) (256) (220) (191) (177) (164) None Number of Claims in FY Number of Claims per 1000 PI Insured Firms Rolling 3 Year Averages Base: Carried PI in Financial Year (145) Q10. NUMBER OF CLAIMS MADE TABLE 14 In Last 3 Years (286) In Last 5 Years (220) In Last 10 Years (128) None Number of Claims Base: Carried PI in All Financial Years Engineers Australia Russ Knight Research

29 CLAIMS MADE & ALERTS REGISTERED IN PAST TEN YEARS Claims Made Thirty-six respondents, representing 8 of the sample, had made one or more claims in the last ten years. They had made a total of 58 claims between them during that period. Analysis of the claims history over the last ten years reveals that, on average, 3 of firms with PI insurance had made a claim in any one year (Table 13). While the number of claims made per year by respondents was very small (between 3 and 8 per year), analysis of rolling three year averages of the number of claims made per 1000 PI insured firms (Table 13) clearly indicates a decline in the incidence of claims among insured firms. The incidence fell from 40 per thousand PI insured firms in to 15 in This conclusion was reinforced by the findings that of: 286 firms that carried PI insurance for each of the last three years, 4 had made one or more claims during that period (Table 14). 220 firms that carried PI insurance for each of the last five years, 9 had made one or more claims during that period. 128 firms that carried PI insurance for each of the last ten years, 22 had made one or more claims during that period. Owner/ managers (14) were considerably more likely to have made a claim in the last ten years than sole practitioners (4). The incidence of claiming was also much higher among large firms (turnover $5m+, 23; 50+ employees, 26) than those with a turnover below $0.5m (7) or less than five staff (5). The size of the maximum fee did not impact on the incidence of claiming (but the number of claims made per claimant appears to increase with the size of the maximum fee caution; low bases). Engineers Australia Russ Knight Research

30 Q11. NUMBER OF ALERTS REGISTERED IN EACH FY (326) (320) (321) TABLE (292) (256) (220) (191) (177) (164) None Number of Alerts in FY Number of Alerts per 1000 PI Insured Firms Rolling 3 Year Averages Base: Carried PI in Financial Year (145) Q11. NUMBER OF ALERTS REGISTERED TABLE 16 In Last 3 Years (286) In Last 5 Years (220) In Last 10 Years (128) None Number of Alerts Engineers Australia Russ Knight Research

31 Alerts Registered Eighty-seven respondents, representing 18 of the sample, had registered one or more alerts with their PI insurance company in the last ten years. They had registered a total of 267 alerts between them during that period. On average, 8 of firms with PI insurance had registered an alert in any one year (Table 15). Between 17 and 38 alerts were recorded by the sample in each of the last ten years. Analysis of rolling three year averages of the number of alerts registered per 1000 PI insured firms (Table 15) reveals a decline in the incidence of alerts among insured firms. The number dropped from 135 per thousand PI insured firms in to 99 in Half of the 128 firms that carried PI insurance for each of the last ten years had registered one or more alerts during that period (48). Of the 220 firms that carried PI insurance for each of the last five years, 26 had registered one or more alerts during that period. Of the 286 firms that carried PI insurance for each of the last three years, 16 had registered one or more alerts during that period (Table 16). Owner/ managers (30) were twice as likely as sole practitioners (15) to have registered an alert in the last ten years. And firms with 10 or more staff were the most likely to have registered an alert (44 cf 24 with 2-9 staff). The incidence of registering alerts also increased with turnover ($5m+ 45 cf $0.25m to <$5m 32 and <$0.25m 13). There appears to be a small positive correlation between the size of the maximum fee and the incidence of alerts (<$30k 19 cf $30k+ 25). More significantly, the number of alerts registered increases considerably with the size of the maximum fee (<$30k 1.9 per registrant cf $30k+ 3.8). Engineers Australia Russ Knight Research

32 CLAIMS DETAILS Eight percent of the sample had made one or more claims in the last ten years (36 respondents). They were asked to provide the following details for each of the claims made during that period (58 in total). a) The value of the claim? b) The type of claim? (Negligence, Trade Practices/Fair Trading, Other) c) The value of the fees for the project? d) Whether the claim had been settled or was still outstanding? And if the claim had been settled. e) How much, excluding costs and fees, was the amount settled for? f) How the claim was resolved? (Negotiation, Mediation, Arbitration, Court or tribunal judgment, Other) g) When the claim was settled? (Before trial, During trial, By the court) h) How much the legal costs associated with the claim were? i) How much the other expenses associated with the claim were (ie internal costs such as time taken and/or actual expenses)? Engineers Australia Russ Knight Research

33 Value of Claim A third of the claims made in the last ten years were less than $20k (31; Table 16). The majority of the claims (76) were for less than $200k. The average claim, excluding one very large claim ($5.0m to $9.9m), was for $196k. Claims made in the last five years were, on average, twice the value of the claims made between 1995 and 1999 ($268k cf $121k). TABLE 16 Q12A. VALUE OF CLAIM All Claims Made in Last 10 Years (58) Claims Made in to (29) Claims Made in to (29) Less than $20k $20k - $49k $50k - $99k $100k - $199k $200k - $499k $500k - $999k $1.0m - $1.9m $5.0m - $9.9m Other comment Mean (<$2m) $196k $268k $121k Base: All Claims Made in Last Ten Years The value of the claims made was highest, albeit not significantly, among the firms with the largest turnover, maximum fees and staff numbers (caution: small bases). Mean Value of Claims ( <$2m) * Respondent No. of Staff Turnover Maximum Fee Sole practitioner (9 claims) $276k 1-4 (16 claims). $178k <$0.5m (24 claims). $193k <$30k (18 claims). $208k Owner/ manager (44) $186k 5-49 (29). $177k $0.5m-<$5m (21). $159k $30k-<$100k (20). $87k 50+ (8). $304k $5m+ (8). $304k $100k+ (15). $328k * Caution: small bases Engineers Australia Russ Knight Research

34 Type of Claim Three out of four of the claims made in the last ten years related to negligence (72; Table 17). One was regarding trade practices. Fifteen respondents classed their claim under other ; eight provided details: Counter claim for debt recovery. Design of bus shelter as part of CBD revitalisation. Defamation. Design error. Sewage assessment. Soil site classification. Differing opinion by structural engineer for builder. Soil classification and builder changed internal wall structure of residence which lead to cracked walls. Slipping injury - really a public liability claim against our client who then joined us in the matter. Speculative - Electricity Authority changed policy without warning. Surveying setout. Yet to be resolved. Q12B. TYPE OF CLAIM TABLE 17 All Claims Made in Last 10 Years (58) Claims Made in to (29) Claims Made in to (29) Negligence Trade Practices/ Fair Trading Other Base: All Claims Made in Last Ten Years Engineers Australia Russ Knight Research

35 Value of Fees for Project In most cases, the fees associated with the projects that resulted in a claim were for less than $20k (64). Fees for seven of the projects (12) were for $50k or more. This lifted the average up to $30k across the 58 projects resulting in a claim. TABLE 18 Q12C. VALUE OF FEES All Claims Made in Last 10 Years (58) Claims Made in to (29) Claims Made in to (29) Less than $20k $20k - $49k $50k - $99k $100k - $199k Other comment Mean $30k $34k $26k Base: All Claims Made in Last Ten Years The fees for the projects that resulted in a claim increased with firm turnover, maximum fees and staff numbers (caution: small bases). Mean Value of Fees * Respondent No. of Staff Turnover Maximum Fee Sole practitioner (7 projects) $23k 1-4 (15 projects). $24k <$0.5m (23 projects). $23k <$30k (17 projects). $19k Owner/ manager (44) $31k 5-49 (29). $28k $0.5m-<$5m (21). $31k $30k-<$100k (20). $26k 50+ (8). $49k $5m+ (8). $49k $100k+ (15). $47k * Caution: small bases Engineers Australia Russ Knight Research

36 Claim Settled or Outstanding Forty-one of the 58 claims had been settled (71; Table 19), in particular, those from (83). TABLE 19 Q12D. CLAIM SETTLED OR OUTSTANDING All Claims Made in Last 10 Years (58) Claims Made in to (29) Claims Made in to (29) Settled Outstanding Base: All Claims Made in Last Ten Years Settled Claims Amount of Settlement Half of the 41 claims had been settled for under $20k (54; Table 20). Twenty percent were settled for $100k or more. The highest claim was settled for over $1m. This increased the average to $117k. TABLE 20 Q12E. AMOUNT SETTLED All Claims Made in Last 10 Years (41) Claims Made in to (17) Claims Made in to (24) Less than $20k $20k - $49k $50k - $99k $100k - $199k $200k - $999k $1.0m Other comment Mean $117k $146k $98k Base: All Claims Made & Settled in Last Ten Years Engineers Australia Russ Knight Research

37 How Resolved Most of the claims were settled by negotiation (61; Table 21). A fifth involved mediation (20). TABLE 21 Q12F. HOW RESOLVED All Claims Made in Last 10 Years (41) Claims Made in to (17) Claims Made in to (24) Negotiation Mediation Arbitration Court or tribunal Other Base: All Claims Made & Settled in Last Ten Years When Settled All except two of the claims were settled prior to going to trial (95; Table 22). TABLE 22 Q12G. WHEN SETTLED All Claims Made in Last 10 Years (41) Claims Made in to (17) Claims Made in to (24) Before trial During trial Base: All Claims Made & Settled in Last Ten Years Engineers Australia Russ Knight Research

38 Legal Costs Half of the settled claims resulted in legal fees (51; Table 23), in particular, claims made in the last five years (65). Legal fees averaged $13k. The eight claims settled in the last five years had legal costs averaging $23k. This was considerably higher than the $6k for the seven claims in Q12H. LEGAL COSTS TABLE 23 All Claims Made in Last 10 Years (41) Claims Made in to (17) Claims Made in to (24) Nil $1 - $4.9k $5.0k - $9.9k $10k - $49k $50k - $99k $100k Other comment Mean $13k $23k $6k Base: All Claims Made & Settled in Last Ten Years Other Expenses (ie, internal costs such as time taken &/or actual expenses) Most claims incurred other expenses (85; Table 24). They averaged $11k across the 41 settled claims. Other expenses were higher in claims made in the last five years ($15k) than those from ($8k). Q12I. OTHER EXPENSES TABLE 24 All Claims Made in Last 10 Years (41) Claims Made in to (17) Claims Made in to (24) Nil $1 - $4.9k $5.0k - $9.9k $10k - $49k $50k - $99k Other comment Mean $11k $15k $8k Base: All Claims Made & Settled in Last Ten Years Engineers Australia Russ Knight Research

39 IMPACT OF CLAIMS ON PREMIUMS & RE-INSURANCE Made a Payment to Resolve a Case Even Though Claim was Wrongful or Unjust Thirty-six respondents had made a claim in the last ten years (8 of the sample). A third of this group said that they had made a payment to resolve a case even though the claim was wrongful or unjust (33; Table 25). Q13. MADE PAYMENT TO RESOLVE A CASE TABLE (60) 2004 (36) Yes No Base: Made a Claim in Last 10 Years In most cases, firms made the payment on the basis that it would cost them less to settle than to defend the claim. In three instances, the insurer determined that the claim should be settled rather than defended. Two respondents displayed a lack of confidence in the legal system. One referred to an unpredictable legal system most often decided by Judge alone who usually has no experience whatsoever in Engineering matters. The other commented on the whims of magistrates who do not necessarily rule on matters of law, but on feeling sorry for the home-owner. Q14. Reasons firm made a payment to a claimant to resolve a wrongful or unjust case even though the claim was wrongful or unjust claim was settled on commercial grounds. Encouraged by mediator and legal team acting for our insurer to accept making the settlement payment even though no liability in our, and legal team s, opinion. Commercial decision of Company Board because our PI insurance excess has always been greater than the value of nearly all claims made against the Company. Also, costs of defending are too high and of course no guarantee of winning against claimants in an unpredictable legal system most often decided by Judge alone who usually has no experience whatsoever in Engineering matters. Additionally time drain on Principals to defend is expensive. Expense of arguing or defending action. simple, quick - life can go on. Expense of defence and extra time taken to reach a decision by the court. Expense of defending action. Expense of defending action unwarranted. Expense of defending unwarranted claim - not within scope of service. Form of legal blackmail is used. The problem is described and our company is vicariously brought into the proceedings and we offer money to expedite or get rid of the matter. Better to make an offer and get rid of the matter than let it fester. Psychological pressure makes one try to resolve matters with money, rather than engaging the legal community. In each of two cases, we were 3rd party, where builder or another party no longer exists, and insurance company has opted to settle rather than go to court. At the last claim, the solicitor stated to me that the insurance company would rather pay than risk relying on the whims of magistrates who do not necessarily rule on matters of law, but on feeling sorry for the home owner. Only the insurance excess was paid. 10 or so years ago, insurer decided to settle out of court. The end cost for making a claim was greater than the cost of paying the client and accepting the loss. Engineers Australia Russ Knight Research

40 Premiums Increased As a Result of Claiming Over half of the firms that had claimed in the last ten years reported that their premiums had risen as a result of making the claim (61; Table 26). TABLE 26 Q15. PREMIUMS HAVE INCREASED SINCE SETTLEMENT 2001 (60) 2004 (36) Yes No Base: Made a Claim in Last 10 Years The increases reported were quite substantial. Six respondents stated that their premiums had at least doubled (27; Table 27). Four said that they had risen by around 50 (18). And a further six reported moderate rises of less than thirty percent (27). Six others did not know by how much their premiums had increased (just that they had gone up). Increases averaged 67. Q16. INCREASE TABLE (24) 2004 (22) Over Don t know 8 27 Average (1-200) Base: Premiums Increased as a Result of Making a Claim Engineers Australia Russ Knight Research

41 Refused Re-Insurance After Settlement Two firms stated that they had been refused re-insurance as a result of settling a claim (6; Table 28). Both were small firms with a turnover below $0.5m. TABLE 28 Q17. REFUSED RE-INSURANCE AFTER SETTLEMENT 2001 (59) 2004 (36) Yes 8 6 No Base: Made a Claim in Last 10 Years Firm s Work Been Declined/Refused/Rejected After Litigation Three firms claimed that their work had been declined, refused, rejected or discriminated against after litigation (8; Table 29). All three firms had less than 10 staff and a turnover below $1m. Two respondents provided details. TABLE 29 Q18. FIRM S WORK BEEN DECLINED/REFUSED/REJECTED AFTER LITIGATION 2001 (59) 2004 (36) Yes 3 8 No Base: Made a Claim in Last 10 Years Q19. Reasons why, after the litigation, the firm s work had been declined/refused/rejected, or discriminated against. Word-of-mouth by builder has lead to difficulties with both local authorities and other builders even though no proof of error has been reached. Builder has also instigated action with board of Professional Engineers which is now using up more time to answer and possibilities of action by the board. A) Insurer declined renewal terms before actually receiving notification of claim. No reason for non-renewal was given, but I can guess that it relates to my specialisation in bridge design and the associated risk of large claims. Directly as a result of current claim, no other insurer offered terms and I am now uninsured. B) As a result of being uninsured I have lost a significant amount of work. There is no question of my competence, just the lack of PI cover. Engineers Australia Russ Knight Research

42 APPENDIX ONE - Questionnaire - Engineers Australia Russ Knight Research

43 2004 Professional Indemnity Insurance Survey Engineers Australia POST PILOT (F) INTRODUCTION SCREEN Welcome to our website survey. In seeking approval for the professional standards scheme for members of Engineers Australia, comprehensive data is required on the professional indemnity insurance claims history of potential members of the scheme. This data will be used as the basis for calculating and setting the liability thresholds. It is very important that ALL sole practitioners, owner/managers etc complete the questionnaire even if you have never made a professional indemnity claim (the questionnaire is very short for those who have never made a claim). Please complete the questionnaire if you are sole practitioner, an owner/manager of a firm or an employee responding on behalf of a firm. Approaches have been made to the insurance underwriters for professional indemnity insurance claims statistics specific to the types of claims being recorded against professional engineers. However, initial feedback is that the information is not readily available through this source. This means that the professional indemnity insurance and litigation experience of members has to be sought through a variety of sources. The survey site will be closed at 10pm on Tuesday 18 May The data is being collected by CogNETive on behalf of independent researchers, Russ Knight Research. The confidentiality of your response is guaranteed. The final data file will contain no identifiers. Engineers Australia Russ Knight Research

44 Due to the importance of the information we are collecting to the development of an effective Professional Indemnity insurance scheme in this country, we must ensure that only registered members complete the questionnaire. Therefore we must ask you to enter your Membership Number at the start. Please note that the confidentiality of your responses is guaranteed. Only aggregated data will be used; no individual information will be released. Once the researchers have checked the data, all Membership Numbers will be deleted. If you have any concerns regarding the confidentiality of your responses, please contact Russ Knight at Russ Knight Research on (03) or The questionnaire should take minutes to complete depending on your claims history. You can quit and re-enter the questionnaire freely. Just re-enter your Membership Number and you will be returned to where you left off. Once the questionnaire is completed, it is filed and can only be accessed by the researchers. It is recommended that the information requirements detailed on the Engineers Australia website are prepared prior to starting the questionnaire. Please enter your Membership Number to start The questionnaire is divided into three parts: Part 1: General information about your firm. Part 2: Your Professional Indemnity insurance history. Part 3: Requires detailed answers to specific questions about your claims history. Please tick only one box per question unless otherwise instructed. If you have any questions relating to the survey, please call Ann Ryle at Engineers Australia on (02) or If you require help completing the questionnaire, call Russ Knight on (03) or Engineers Australia Russ Knight Research