Caught in the Net

A new wastewater treatment plant in Winnipeg ends up costing almost 50% more than the original budget. In Vancouver, a balcony on a low-income apartment building gives way after partygoers crowd onto it; the wooden frame hangs for several days, rotten and resting on the balcony below. Commuters in Laval near Montreal are horrified — and scared — after a huge section of a concrete overpass built in the 1970s breaks off and crushes to death five people travelling on the highway below.

These are a handful of construction problems that have hit the headlines over the past year. Countless more trivial — but still expensive — problems with buildings and other structures occur all the time, and in most cases there will be denials over who is responsible. Not surprisingly many disputes end up in the courts or mediation. In every case, they put a psychological strain on the individuals involved and a financial drain on the companies and their insurers.

Whether it’s an owner, contractor, architect or consulting engineer, everyone dreads becoming embroiled in legal disputes, but everyone finds it difficult to avoid them. An engineering firm might follow the best risk management practices with seemingly foolproof contracts, yet as one insurance broker says, “Even having all those things in place, you are still subject to suits. You just lower the percentage of your projects that incur them.”

Early this year, a claim of unprecedented proportions was made against some large engineering companies working in the vast oilsands of Northern Alberta. Suncor Energy is suing the engineers to the tune of $650 million for loss of business after a fractionator caught fire in 2005. The suit filed in early January alleges that the fire was caused by a nozzle that hadn’t been clad and lined with stainless steel and so had failed after three years, though it was designed to last 15 years. Is this massive suit a taste of things to come?

Insurers and brokers who specialize in providing professional liability insurance for consulting engineers tend to see the Suncor case as an aberration. They do, however, see engineers being dragged into more construction disputes from the sidelines, and they also see new areas of risk that engineers need to be leery of. The new threats of litigation on the horizon are all related to broad trends taking place in society as a whole: a booming economy, green buildings and environmental awareness, the explosion in electronic communications, and aging infrastructure.

Named in more and more suits

Jamie Cardella, a senior account executive with insurance brokers Sinclair Cockburn in Toronto, says they are having to defend engineers in lawsuits, even when the engineers are not at all responsible.

“What’s happening is that the net is being thrown out a little more widely,” he says. “Consulting engineers are being named in more and more suits every year where we read the claim and in our assessment our engineer has no liability whatsoever. But we can’t get them released and unfortunately we have to defend them. That is where the costs mount up on the claims side.”

Mark Dunn, an account executive in Toronto with another brokerage firm, Jones Brown, which acts for consulting engineers in Ontario and Alberta, agrees: “The ongoing boom in the construction industry means tighter schedules, more pressure to deliver on time, and seemingly more financial disputes between building owners and contractors.” As a result, Dunn continues: “It’s getting harder and harder for consulting engineers to avoid being dragged into a suit once the other parties have ‘lawyered up.’ While the severity of these claims remains relatively stable, the frequency continues to rise. And the escalating defence costs are passed down to engineering firms by way of higher deductibles and premiums.”

Impact of the shortage of engineers

The booming construction market poses a particular danger in that some engineering firms are taking on more work than they can handle. They are rushing to meet deadlines, which could lead to design errors. Derek Holloway, senior vice president with Encon Insurance in Ottawa, says that already the insurers have seen “a couple of pretty significant claims.” He explains: “The shortage of engineers is starting to cause some problems. Firms don’t have people to do the work and clients are getting dissatisfied. There’s a case where junior engineers were assigned to projects and work wasn’t being reviewed. That led to some problems.”

Graham McLennan, a lawyer with McLennan Ross in Calgary, who has worked in construction litigation for over 20 years, agrees that engineers are taking on work beyond their resources, and that “causes strain.” He has one short piece of advice for consulting firms: “Don’t bite off more than you can chew.”

Cost overruns on projects are another symptom of the boom times according to Holloway. When projects end up costing much more than the original budgets, building owners frequently go to court to seek redress from contractors and engineers. “Cost overruns are a big issue and there are claims,” Holloway says. Rising costs are due to the demand for materials, for design staff and construction labour. The result can be an explosive rate of inflation — up to 1 1/2 points per month last year in places like B.C.’s Lower Mainland. “If you’re in a red-hot industry for construction, then you’re bound to have to deal with issues of higher costs,” says Holloway.

In terms of building sectors, according to Mike Feeney, a broker with Quadrant Insurance in Calgary, the condominium market is still a potential trouble spot for consulting engineers. “It’s a risky area and one that consultants need to go into with their eyes wide open,” he says. “One of the factors contributing to the increased risk could be the condo ownership structure. Often the developer operates it as a separate company which is wound down when the last unit is sold — meaning the consultants can be a target for dissatisfied owners,” says Feeney.

In other words, it’s a case of the disappearing developer.

In Vancouver, Mike Russell, who is senior vice president with Metrix Professional Insurance Brokers, says there could be more lawsuits emerging over public schools. An audit conducted by the B.C. government uncovered many problems with older and renovated buildings, problems that were “typically related to building structures and the building envelope,” Russell says. His advice to engineers, like that of other brokers and insurers, is “make sure you read the contract before signing.” If possible, he says, have brokers review the insurance requirements and indemnity section.

Going green is risky?

A group of building designers who have been relatively immune from legal action are now facing a less assured future. Insurance companies are warning that mechanical engineers involved in heating, ventilating and air-conditioning systems for buildings might face risks with the advent of green building rating systems such as LEED. The problem is that the engineers hired to design a building to reach, say a Leed Gold classification, might be held responsible if the building does not end up making the grade. There’s a long lag time between when the building is first conceived and when the completed building is actually assessed for Leed certification by the U.S. Green Building Council. During that time lag, many issues arise beyond the control of the engineer that could prevent the building achieving its goal.

“Leed is fine and is a great thing to aim for,” says Holloway, “but firms have to be aware of who takes responsibility for whether the project gets Leed-certified or not. Is it the engineer, is it the contractor, or is it the owner?”

“It’s probably not a good thing for a consultant to take that responsibility because there are so many different things that go into determining whether a project gets certified or not,” Holloway explains. “We know that in many parts of Canada there is a
shortage of certain types of material, for example, and if you can’t get the windows, or the waterless urinals, or the special mechanical systems that you want, it may impact on whether you get certified. Leed certification… requires a lot of collaboration between all the parties, including the owner and contractor.”

Holloway has not yet seen any lawsuits over failed Leed building applications, but says, “I have seen some pretty onerous contracts [between owners and their consultants]. That is to say, if the project fails to get certified there are significant penalties to be paid.”

The legal risks of green building certifications were a topic at the American Society of Heating, Refrigerating and Air-Conditioning Engineers’ conference in Long Beach, California in June. Lawrence G. Spielvogel, PE, an energy consultant from Pennsylvania who made a presentation in Long Beach, explains why disappointed developers might seek redress from the building designers: they have invested lots of money — sometimes an extra 50,000-$100,000 — on design and promotion to make the green label claim.

Spielvogel sees another issue “looming large” in the U.S. related to the green building movement. The federal government is promising large tax credits to buildings designed to reduce their energy use and emit less greenhouse gases. “In order to get those tax credits you need either a licensed engineer or a licensed contractor to certify that the design meets certain requirements,” Spielvogel explains. The pitfall for the designers is the possibility that the government turns down the application. “We haven’t yet seen any lawsuits, but again, when you ask an owner to spend a lot of money in anticipation of getting a tax deduction and the IRS disallows some or all of the deduction, you can imagine the owners are not going to be happy.”

Even more alarming is Spielvogel’s observation that owners in the U.S. are beginning to sue designers simply because their new building is using too much energy. “When the energy cost turns out to be more than what the owner would like or what was represented, the designers can be sued. For example, I recently did a case where a school district sued the building designers — architects and engineers — for what they believed to be the excess utility costs for the next 50 years, which is what they claimed was the life of at least parts of the HVAC system. Fortunately the case was settled in mediation, but you can imagine the risks involved if they had gone to a trial. Fifty years of utility bills is a lot of money.”

E-mails can be incriminating

Another explosive trend that is affecting engineers’ liability — or at least will indirectly affect them through higher premium rates — is the use of e-mail and other electronic communications. An Encon newsletter of March 2007 warned about the massive tide of expenses being incurred in “e-discovery” during legal disputes.

The author of the Encon article said that electronic documents are now an accepted part of the evidence requested in the discovery process. It means companies caught up in legal actions might have to recover and produce an entire history of data and correspondence from their networks and hard drives. With companies exchanging millions of e-mails alone every year, following the electronic trail is cumbersome and expensive. Derek Holloway says that in one U.S. case, the plaintiff and defendant spent $750,000 each “just going through the documents.” (Note: Could recreating the history of electronic documents be a lucrative new business area for consulting engineers?)

As defendants in construction court cases, says Holloway, what engineers need to remember, is that “everything is producible.” In other words, “even if you delete the file, it is still there on your system so it can be produced. And if you’ve been working from home, investigators can go into the hard drive on your home computer.”

We tend to be less careful writing e-mails compared to the more rigorous form of letters and case notes. And it’s all too easy to zap e-mails off into cyberspace without due thought. “The problem with e-mails in this day and age,” says Holloway, “is that people tend to use a lot of loose language in them. And because it’s an easy way of communicating, things that people normally wouldn’t put into writing but might talk about face to face or over the telephone, now end up in e-mails. You can find statements in e-mails that are very incriminating.”

Owners heap more risk onto engineers

With so many litigation worries, it’s a wonder any consulting engineer can sleep at night. What protection do they have against potential lawsuits?

Besides having insurance, having sound contracts are held out as the standard defence. But contracts can also become a noose around a consultant’s neck. Brokers in Calgary and Vancouver warn about an increasing tendency for project owners to try and put more onus on consulting engineers to answer for every possible loss they might incur on a project.

Mike Feeney explains: “Sometimes the owner-written contracts have ‘unfair and uninsurable’ obligations put onto the consultants where they will make the consultants responsible for damages that are beyond the consultants’ typical responsibility. We see this all the time.”

Mike Russell in Vancouver sees engineers signing agreements that say the consulting engineers will cover their client’s losses, including paying for the client’s legal costs, even before it has been established who is at fault. But “This is not the case,” Russell says emphatically. Even if the engineer does sign such an agreement, he points out, the insurer is not bound by what the engineer has signed, but by what coverage is afforded by the insurance policy.

He urges engineers to read the fine print on contracts and not to sign off on “assuming unfair risks.” If pressed by the client, don’t be afraid to negotiate with them, Russell advises. For the owner, it’s often seen as just good business practice to try and manoeuvre engineering consultants into accepting more risks, but the engineers must look out for their own interests.

Suits larger than fees

What premiums a firm pays for professional liability insurance depend on factors such as their total fees, the types of work they do (structural and geotechnical engineers tend to have the highest rates), their history of claims, and what deductible and coverage amounts they choose to have. One firm, for example, pays a rate of approximately 0.5% based on its $70 million annual fees, while another pays 1.5% on $100 million in fees, but has a high deductible and high coverage of $5 million. Whatever the case, premiums are a major business expense amounting to hundreds of thousands of dollars a year for most companies.

Feeney sees a small trend where clients are asking for higher levels of coverage. He points out that the city of Calgary, for example, now requires consultants to have coverage limits of $2 million per claim, whereas a few years ago it was half that amount.

And consulting engineers continue to be shocked by how hard they are being hit by claims. This is how Jamie Cardella describes it: “What surprises engineers is that they get sued for more than their fees were. I will hear consultants say, ‘Well that job was only $40,000 in fees, and yet I’m being sued for a quarter of a million dollars. How can they sue me for more than my fees? I should have never done the work.’ But, of course when the owner claims a delay or a business interruption, they simply throw in everything to build the claim up to whatever number they can get to, and what they hope for is to settle somewhere in between.”

Cardella says that typically claims are substantial. Depending on the type of work being done, they might be “several hundred thousand dollars anyway. We’ve even seen lawsuits as high as $6 or $7 million,” he says.

Cardella’s $7 million is a lot less than the fabled $680 million named in the Alberta oilsands suit, but $7 millio
n is still a scary sum for most consulting engineers.

Finally there is the spectre of aging infrastructure. Roads, bridges and other structures that have not been maintained and renewed over 30 or 40 years may well come back to haunt the original engineers. When terrible tragedies happen, such as in Laval last year and recently in Minneapolis, everyone involved in the original project is put under the microscope in an attempt to discover fault and lay blame.

We can only hope that governments will heed these tragedies and begin to invest more seriously in maintaining our infrastructure. Otherwise if more bridges collapse, engineers will inevitably be swept up in the litigation fallout, and then they are going to need a strong insurance safety net in order to survive.