PROFESSIONAL PRACTICE

Legal Aspects of Professional Practice: Risk Management, Insurance & Bond

Dealing with Contract Risk
Execute the contract in a professional manner
Be quality oriented
Thoroughly educate clients
Use general conditions to cover costs
Identify problems
Impose a fee premium or indemnification
Identify unavoidable/unacceptable risks
For example, modification of existing structure, hazardous materials
Use the contract to close loopholes and avoid traps
List services the client has declined
Dealing with Contract Risk
Establish extralegal conditions
Use dispute resolution (mediation/arbitration), reduce statute of
limitations/repose, restrict damages
Develop clear contract language
Make sure that the contract is easily understood by the client
If a client is adamant about not taking prudent measures
Walk away
Risk Management
Risk can be defined as danger, chance, and/or exposure
to loss or injury
Constructed projects involve the integration of many
technical subsystems and components
Often involves complex and sensitive economic, social, political, and
environmental decision
An unbroken flow of information is practically nonexistent
From early debates & strategic project definition through design,
engineering, procurement, construction, operation, and decommission
This flow is difficult to achieve because the nature of
decisions and type of decision makers change considerably
over project lifecycles
Risk Management
Some projects experience relatively stable partnerships
between firms
More commonly there is greater uncertainty
Risk is managed in hierarchical networks of firms
This form of organization is typified by a management and
decision making environment in which problems are highly
interdependent while the people, methods, and organizations
involved are extraordinarily independent
Dealing with Risk in General
The most effective preventive approach to dealing with risk is
to perform professionally
This professional approach to practice concerns not just execution of
technical effort but also a focus on eliminating misunderstanding and
unrealistic expectations between civil engineers and their clients and
among civil engineers and other professionals
Very important three factors are
A good formal contract
Good project management
Knowledge of prevent risks
Dealing with Risk in General
Civil engineers can attempt to transfer risk, typically via
insurance and/or indemnification
Professional liability insurance is the most common mechanism,
though many risk exposures are not covered or are covered only in part
Therefore, professional liability insurance affords only partial transfer
of risk
Indemnification of the civil engineer by the client may be appropriate if
risk is created by nature of the project and the civil engineer is powerless
to control the risk
Indemnification can be full or partial
Partial indemnification can be used to cap the civil engineer’s liability,
but client also want to minimize risks
Like insurance, indemnifications are imperfect risk transfer mechanism
Dealing with Risk in General
Transferring all risks is impossible
Civil engineers can establish a loss reserves account by including
risks in their fees
Competition in the marketplace can make this difficult
Also, some problems associated with managing risk are not merely financial
Unsuccessfully managing risk can become an emotional drain and can have a
negative effect on professional reputation
Civil engineers need to understand and abide by the “rules of the
road”
They should be thoroughly acquainted with their responsibilities
and how to execute them
Being careful with selection of clients and projects is extremely
important
Dealing with Risk in General
Before proposing on a project, the civil engineering firm should
Do background research on the client and the current project
Critically evaluate your firm’s capability and experience with the type of
work and project
Not rely on past behavior as an indicator of future
Not rely on assumptions
Also necessary before signing a contract, the civil engineering firm
should be sure that the contract includes
Appropriate clause
Explicit general conditions
A well-defined work-scope
An accurate schedule
A clear budget
Dealing with Risk in General
Other actions to take include insisting on an adequate fee or
reducing work-scope
However, limiting internal plan review, shop drawing review,
or construction monitoring is not advisable
Providing additional quality control & applying realistic work
assignment and scheduling procedures also help manage risk
Also, civil engineers should not agree to deadlines that
cannot be met and may need to hire additional personnel to
meet schedule demands
Establish a Risk Management Program
At least one person in a civil engineering firm should be
assigned the task of risk management
For small firm, the Risk Management Program could be part of
quality control, though it should include more than technical
quality control
Establishing a risk management program is an attempt to
prevent losses that are not really the fault of the firm
Through a risk management program, all staff can be
educated on loss prevention
It is important to balance risk and award
Establish a Risk Management Program
Documentation also is another key to managing risk
Proper documentation often can result in claims being
dropped
Notes, memos, e-mails, and meeting minutes can eliminate
some of the worst client statements a civil engineer can hear:
“We never said that…”
“You said…”
“I’ve never heard [seen] that before….”
Establish a Risk Management Program
Finally, civil engineer should
react quickly to the symptoms of problems,
maintain open lines of communication, and
use emotion intelligence
If someone’s body language or your “gut” is telling you that
there is a problem, there probably is
Deal with issues promptly
Approaches to Risk in Construction
Globally within the business of construction, multiple
techniques have been adopted improve risk management in
projects
PERT (Program Evaluation & Review Technique)
Monte Carlo simulations
Cause & effect diagrams
Fault trees
Decision trees, etc.
Approaches to Risk in Construction
Originally risk management was the domain of insurance
companies, where risks are bought and sold
Architectural and engineering firms carry errors and
omissions insurance policies
Additionally, many owners require surety bonds of their
contractors
A surety bond is financial instrument issued by a third party
(surety company) to a first party (owner)
Which provides a guarantee that a second party (construction firm) will
complete a project according to the terms and conditions of a written
contract
Approaches to Risk in Construction
The approach to risk used by construction firms seldom is
based on sophisticated quantitative techniques
Firms tend to ignore remote possibilities, look at a few
outcomes rather than all alternatives, and focus on
opportunities rather than danger
Firms developed several ways of managing risk by
By using incremental approaches, performing cost justification exercises,
limiting expenditures to those which could be funded from existing
projects rather than overhead, and passing risk to vendors and
subcontractors through the use of performance clauses in contracts
Approaches to Risk in Construction
Regardless of the risk analysis technique employed, the focus
on remedial action by optimizing within task performance
has tended to lead to sub-optimization of the overall project
process
This fragmented approach currently is being challenged by
sophisticated owners who want more value from their
expenditures on constructed projects
Therefore, risk management, as a distinct activity, is gaining
attention in construction
Practitioners and researchers alike advocate a two phased
approach using assessment and action
Approaches to Risk in Construction

The identification of risk is seen as the most critical element of any

risk management scheme as risk cannot be managed if it is not
identified
Insurance and Bonds
As the frequency of claims increases and balancing revenues
& losses becomes more difficult, professional liability
insurance has become vital to the practicing civil engineering
professional
Professional liability insurance is an essential part of risk
management
Bonds typically are associated with construction; but more
design professionals are becoming involved with design build
and integrated project delivery contract structures
Civil engineers should be familiar with the various bonds
required by owners
Insurance and Bonds
Liability insurance
A contract under which an insurance company agrees to protect a person
or entity against claims arising from real or alleged failure to fulfill an
obligation or duty to a third party who is an incidental beneficiary
Professional liability insurance
Insurance coverage for the insured professional’s legal liability for claims
arising out of damages sustained by others allegedly as a result of
negligent acts, errors, or omissions in the performance of professional
services
Bond
In suretyship, an obligation by which one party (surety or obligator)
agrees to guarantee performance by another (principal) of a specified
obligation for the benefit of a third person or entity (obligee)
Professional Liability Insurance
Industry
The principal players in the professional liability insurance
industry are:
Insureds-those to whom a policy’s coverage is extended
Insurance agents-those who specialized in selling various types of insurance
and who obtain commissions based on their sales
Insurers-insurance companies that issue policies and establish what policies
do and do not cover, limits,& deductibles, and the premium that must be paid
Actuaries-compute the odds that a given risk will materialize and the
probable cost of the risk
Underwriters-evaluate each applicant to determine the extent to which
various risks may occur & what the premium should be
Claims Managers-advice insureds on what course of action to take when a
claim arises
Reinsurers-those who insure insurers, providing both back-up (should a
large claim be filed) and stability to the industry
Professional Liability Insurance
Industry
Insurance is outlined in a policy (contract) between the civil
engineer (insured) and insurance company
Protection is provided for the professional in case of
negligence
The cost of professional liability insurance is influenced by
several factors: risk, demand, and level of coverage, among
others
Results of the analysis of prevalent risks conducted by
insurance company actuaries & underwriters are a prime
aspect
Professional Liability Insurance
Industry
In addition, the law of supply and demand is at work
When the supply capacity of insurance is high and demand is
low, insurance costs will be relatively low
However, if the demand for insurance increases, insurance
costs become more expansive
Level of coverage also affects cost
Liability Insurance Coverage
Professional liability insurance coverage is designed to create a source
of recovery in the event that a civil engineer, or other professional,
experiences claims arising out of damages sustained by others
allegedly as a result of negligent acts, errors, or omissions in the
performance of professional services
Policies do vary in coverage,
The person responsible for purchasing the policy should read the fine
print
Should choose an insurance broker with the same care they would
exercise in selecting an attorney or accountant
Qualifications, services available, cost, and ability to
communicate all matter
Liability Insurance Coverage
Some professional liability insurance company provide
extensive educational & risk management assistance
programs, others offer little advice or guidance
General policy considerations might be:
What scope of coverage is offered, what endorsements are
available to expand the coverage, and what is excluded from the
coverage?
What is the cost of the basic policy and any endorsements?
Is this coverage part of the firm’s overall financial management
program?
Liability Insurance Coverage
Specific concerns for professional liability insurance include:
Policy limits
The more protection a policy provides, the more expensive it is
An analysis should be conducted to determine the lowest practical
amount of coverage
Another consideration is the amount of coverage required by clients
Deductible
Usually, raising a policy’s limit is relatively less expensive than lowering a
deductible
There has to be a balance among the deductible, premium, and level of
coverage, considering that a new deductible obligation occurs with each
claim
Liability Insurance Coverage
Cost
The cost of a firm’s professional liability insurance is calculated
individually by an insurance company’s underwriter
The cost of coverage is based on
The type of practice (geotechnical, structural, environmental, and so
forth)
Geographical area
Project mix
Claims history
Coverage needs
Resulting risks to insurer
A firm should ask its insurance agent how its premiums will be calculated
This presents a way to be able to compare policies
Liability Insurance Coverage
Insurability
Professional liability insurance only covers the professionals for whom it
is purchased
Problems arise when owners
ask design professionals to indemnify them or
require certificates that have the effect of express warrantees or
guarantees
None of these is covered by professional liability insurance
Subconsultants
Prime designers routinely retain consultants
Because of this contractual relationship, prime designers are exposed to
vicarious liability for damages resulting from subconsultants’ negligence
Consequently, prime designers need to review the policies of their
subconsultants for limits of liability and potential gaps in coverage
Liability Insurance Coverage
Joint ventures
From a legal point of view, joint ventures are similar to partnerships, even
though the joint venture has a more limited purpose
If a professional liability claim is made against a joint venture, one or all
members can be held liable for any decisions rendered against it
Care needs to be taken regarding the type of professional liability
insurance used by the joint venture
Project professional liability insurance
Project insurance covers the entire project team, even those who practice
without insurance
Owners usually pay for project insurance when they desire coverage
beyond that normally carried by design firms
When the project scope is generally increased, this can provide a way to
cover consultants who could not otherwise obtain coverage
Liability Insurance Coverage
Expanded project delivery
Insurance company have begun to offer coverage for designers involved in
design-build or acting as a developers
This coverage often is provided through endorsements to existing basic
policies
An analysis of this coverage should be conducted to locate and eliminate any
potential gaps
Claims
Claims can be made directly via a demand for money or services based on an
allegation of a wrongful act
Claims also can arise from more subjective circumstances, such as the threat
of action or a troubling circumstance
Insurance policies should be checked for terms that require timely reporting
of claims because not reporting claims on time could jeopardize coverage
A legal term important to know is barratry, the fomenting of claims where
none exist
Liability Insurance Coverage
In addition to professional liability insurance, the civil
engineering firm may want to carry additional liability
insurance, including
General liability insurance
Civil engineering firms can be exposed to loss from other liability
exposures such as slips & falls, libel & slander claims, and property
damage to third parties arising from office operations and nonprofessional
activities at jobsites
General liability insurance policies usually cover claims involving third-
party liability
Bodily injury, personal injury, property damage, and so forth
They do not cover professional, automobile, and workers’ compensation
exposures
Liability Insurance Coverage
Employment practices liability insurance
In addition to utilizing sound management practices, some firms might
choose to purchase employment practices liability insurance to protect
against losses arising from employee charges of harassment, discrimination,
and wrongful termination
Insurance may seem deceptively simple, but insurance coverage
and cost are influenced by many factors
Buying appropriate insurance coverage is a major business decision
For the majority of civil engineering firms, the most devastating
professional & business risks stem from litigation based on
accusations of negligence in the performance of professional
services
Bonds
Almost all contractors use the services of national surety
companies, which provide written bonds guaranteeing the
performance of obligations
Like the insurance industry, these companies are subject to
public regulation
The most common bonds are
Bid bonds
Payment bonds
Performance bonds
Bonds
Bid bond
Guarantees that if a contractors is successful in winning a bid, the contractor
will enter into a contract within a specified period of time and furnish any
required bonds
Payment bond
Provides assurance that certain payment obligations associated with a
construction project will be satisfied
Performance bond
Typically is delivered at the time the contract between the owner and
contractor is signed
It guarantees that the contractor will perform the work in accordance with
the contract documents
The owner usually reserves the right to approve the surety
company and the form of the bond
Bonds
The cost of bond depends on
The class of project
The contract amount
The contract format
The ability of an entity (contractor, design-build joint
venture, partnership, or integrated engineering-
procurement-construction firm) to obtain these bonds
greatly influences the type and size of projects it can pursue
Bonds
Before issuing bonds, surety companies usually undertake
thorough investigations
The usual and most important aspects of this type of inquiry
Essential characteristics of the project under consideration
including size, type, and nature, identity of the owner and the owner’s
ability to pay, contractor’s adequate resources, equipment, expertise, and
experience
Total amount of bonded and unbonded uncompleted work
in the contractor’s current inventory, including work that has yet to be
awarded-helps determine if the contractor’s working capital, equipment,
and organization are becoming overextended
Bonds
Adequacy of working capital and availability of credit
Substantiated by financial reports-may prevent the contractor from taking
on too much work
Amount of money between the contractor’s bid and the next
lowest bid
what was “left on table”-if the spread is more than 5 or 6 percent, there is
cause for concern and the surety company may question the soundness of
the contractor’s bidding practices
Largest contract amount of similar work successfully
undertaken and completed
to date by the contractor-the surety company is more comfortable if the
contractor stays within its realm of expertise; if the contractor wants to
enter a new market sector, the surety will advise starting with small
projects
Bonds
Terms of the contract and bonds required
details of how the owner’s payments will be made to the contractor,
retention (amount of money to be withheld from each of the owner’s
payment until the project is complete), time allotted for construction,
liquidated damages, and required warranties-all affect the contractor’s
ability to perform the work
Amount of work subcontracted and qualifications of the
subcontractors
Must possess the necessary organization, financial resources, and
experience to carry out the work
Bonds
After a bonded project is completed, the owner is asked to
send a final report to the surety
This report includes a statement regarding the contractor’s
execution of the contract, changes that were made during the
course of the work, and the final total contract amount,
which will be used to adjust the amount of the final bond
premium
Professional liability insurance and bonds are both ways of
attempting to manage risk
But not even the best risk management plans are
guaranteed to yield 100% success rates
Fiduciary Risk
Fiduciary risk may be defined as the risk that funds are not used
for the intended purposes; do not achieve value for money;
and/or are not properly accounted for
The realization of fiduciary risk can be due to a variety of factors,
including lack of capacity, competency or knowledge; bureaucratic
inefficiency; and/or active corruption
The risk that may be responsible for a trustee or
other fiduciary not performing their duties or achieving the
best value with relation to the best of the beneficiary's interests.
An example could be the fiduciary making more trades than truly
necessary, which can be a source of risk to the client
Managing Fiduciary Risk
Managing fiduciary risk is based on three mutually
reinforcing principles,
Understanding the fiduciary risk environment
Mitigating risks to the proper use of funds
Monitoring performance on an on-going basis
Managing Fiduciary Risk
The three elements feed into each other
A good understanding of fiduciary risk should beforehand helps
designer to decide whether any mitigating measures are
required to help safeguard funds
Monitoring progress reinforces understanding and also allows
remedial action to be taken quickly if problems arise
The three elements of fiduciary risk management should be
undertaken on a continuous and continuing basis