The facts

Roger, an electrical engineer and the business owner of an engineering firm—whose firm also has professional liability insurance with Victor—was hired by a US-based owner under a Purchase Order to provide design and field review services for the construction of a new industrial processing plant. The extent of the engineer’s services, while not outlined in the Purchase Order, was agreed to be limited to bringing power to the motors. An explosion occurred in the plant injuring four employees.  

Little did Roger and his firm know that even though their services did not touch on the programming, controls and processes related to the plant where the explosion occurred, the event would lead to their involvement in a claim.

Allegations of liability on the part of the engineer was in relation to the appropriateness of the plant standards developed, specifically the programming template as well as the engineer’s obligation to review the vendor’s energy system design including drawings and programming for compliance with national codes and regulations.   

The firm had to deal with a significant bodily injury claim of $14 million USD and a higher jury verdict.

So, what went wrong? 

The vendor faced most of the exposure to liability as it was their programming of the logic that was erroneous in that it did not allow an alarm signal to be sent when power was interrupted causing the temperature to rise to a point of explosion.

The electrical engineer faced minimal liability in the matter. The firm failed to identify the deficiency, leaving Roger’s firm exposed to potential legal consequences.

The result

At a mandatory mediation, the matter was settled for $7 million USD prior to the scheduling of a three-week trial. The engineering firm contributed $750,000 USD towards the settlement. The insurer’s expenses on adjusting, legal and experts amounted to $1 million!

Now let’s talk about deductibles.

Roger’s engineering firm as the policyholder in this claim example had a per claim deductible under their Victor Engineers in Private Practice Professional Liability policy of $100,000 which applied to damages only. The policyholder’s contribution towards the total damages of $750,000 USD at the time of settlement was $100,000 CAD. The insurers paid the remaining settlement amount and 100% of the total $875,000 claims expenses incurred to investigate and defend the insured in this matter.

Risk factors

Risk factor #1

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 contract, the court will make a decision that may not reflect everybody’s expectations.   

Risk factor #2

Where innovative materials are involved, either in the original design or through changes and substitutions, the design professional should take nothing for granted when vendors and suppliers are involved. Even when time is tight, installation requirements and peculiarities of new materials or techniques should be thoroughly investigated. And there should be good paper trail documenting that investigation, including manufacturer’s reports, test results and other material that would substantiate effective research. New materials are involved in a substantial percentage of claims and good paperwork will allow the insurer to deflect a claim, negotiate a good settlement or mount an effective defence in court.

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