The facts

Steve, a mechanical engineer and the business owner of a mechanical and electrical consulting engineering firm—whose firm has professional liability insurance with Victor—was retained by a developer for the mechanical and electrical design of a high-rise residential condominium.  The firm’s scope of work included design, contract administration and periodic field review during construction.

Little did Steve know that lurking beneath the surface of the completed constructed condominium were hidden defects that would soon lead to a legal dispute.

The condominium corporation commenced a $4 million legal action against the developer, contractors and design professionals alleging multiple defects in the design and construction of the building.

Among the allegations were problems with the mechanical system responsible for heating and cooling to the units. These issues resulted in flooding, causing significant property damage amounting to $450,000!

Suddenly, the firm found itself named as a defendant in the lawsuit and was caught off guard by these unforeseen issues until the firm was served with a Statement of Claim.

The mechanical contractor also working on the high-rise residential condominium construction did not follow the design provided by Steve and his engineering firm. In fact, experts discovered that an insufficient number of anchors installed by the mechanical contractor cause a downward shift i the risers, leading to the heat pump branch connection pipes rubbing against the sheet metal back plates. This friction caused leaks, which results in water damage to several condominium units.

While the primary liability for the loss fell on the mechanical contractor for their deficient installation of the anchors, the engineering firm faced secondary liability due to the firm’s field review mandate. The firm failed to identify the deficiency, leaving Steve and his firm exposed to potential legal consequences.

The result

After two mediations, the total claim was resolved with payments from the various involved parties paying a combined amount of approximately $850,000. Due to the exposure to the engineering firm, there was a contribution made under the practice policy. The total cost for the policyholder (insured) was approximately $150,000. The majority of those expenses related to defence and investigation costs. Even with a much lower liability exposure, the insured’s field review mandate meant that the insured could not be easily extracted from the litigation. These are technical claims, and the costs add up very quickly! 

Now let’s talk about deductibles.

Steve’s consulting engineering firm as an insured in this claim example had a per claim deductible under their Victor Engineers in Private Practice Professional Liability policy of $25,000 which applied to damages only. However, because the claim was settled through mediation, the deductible was reduced to $12,500. The insured’s contribution towards the settlement was $12,500, while the insurer covered the remaining $137,500 which included 100% of the claims expenses.  

Risk factors

Risk factor #1

• Don’t certify what you have not seen. If a consultant is required to certify work, it’s imperative that the work be adequately reviewed in person prior to issuing certification.
• Before agreeing to issue certification, it’s important to establish the nature of the certification and the nature of the certification required in a written contract so that it is clear and specific.
  • For example, if the intent of the certification is to ensure only that construction has been carried out in general conformance with the design, this ought to be expressly set out in the contract.
• A consultant should also outline the necessary degree and frequency of field reviews to be carried out.  

Risk factor #2

• Good contracts are good business.
• Here are the reasons why professional duties must be detailed in written form, in a contract: 
  • The contract defines the consultant’s duties to the client and that creates responsibility. That responsibility, in turn, creates liability.
  • The duties form the basis of any judicial determination of negligence against the consultant. In other words, the courts will look to a contract to determine what the parties to it expect from one another.
  • In the absence of a written contract, the court will make a decision that may not reflect anybody’s expectations.
  • The consultant’s scope of work defined in the contract should be clear and concise.
  • Equally as important as including the services rendered, services not being rendered should also be outlined.
  • Communication with clients is key to avoiding disputes. When undertaking a field review mandate, it’s good practice to clearly outline the parameters of the review and inspections to be carried out.

*This claim scenario is for illustrative purposes only. Please remember that only the insurance policy can give actual terms, coverage, amounts, conditions and exclusions.