Why PI risks for engineers and their insurers could increase

Why PI risks for engineers and their insurers could increase | Insurance Business Australia

Construction & Engineering

Why PI risks for engineers and their insurers could increase

Brokers lift lid on Design and Building Practitioners Act

Construction & Engineering

By
Daniel Wood

Engineers in NSW, together with their insurers and brokers, are coming to grips with new legislation that significantly impacts the way this profession operates in the construction sector. Some brokers say the new requirements increase professional indemnity (PI) insurance risks and could lead to increased rates and more claims.

The Practice Standard and Registration requirement for engineers under the Design and Building Practitioners Act 2020 (DBP Act) is expected to be enforced from early next year.

Simon Gray (pictured above left) and Carina Bogaard (pictured above right) say with these construction sector reforms, the NSW government aims to improve the quality of buildings, increase consumer confidence and enable more units to be built.

Engineers Australia welcomed this move.

Gray is practice leader and Bogaard is senior adviser in Bellrock’s construction advisory division. The two Sydney-based brokers have worked together for nearly 20 years in the construction sector. Gray was asked by the NSW government to participate in consultations that led to these reforms.

Engineering anomaly

NSW engineers are something of an anomaly. Unlike architects, lawyers, doctors or other professionals, they were under no obligation to become registered. This means engineers aren’t faced by the same level of regulation or insurance requirements under the law as other professions.

In 2019, when Australia’s construction sector entered a crisis caused by building defects, cladding fires, insolvencies, supply chain challenges, affordability and availability issues, the state government decided to take a range of measures.

One response was the DBP Act. The legislative piece relevant to engineers and their insurers is what’s expected to roll out in early 2025.

“The government wanted to increase consumer confidence and one of their objectives was obviously the registration of engineers,” said Gray.

When that registration becomes mandatory for engineers, another compulsory requirement will likely oblige them to find adequate insurance for their design work on buildings.

“The [other] main addition to the registration scheme is the requirement on engineers to perform services that are fit for purpose,” he said.

Some of the main changes, he said, include making sure design work “accords with the provisions of the National Construction Code (NCC)” and “is within their competency.”

There are also more obligations on engineers to coordinate with other designers on the project and “takes all reasonable steps to provide guidance to the building practitioner.”

However, the FFP requirements as they currently stand, said Gray, are actually a watered-down version of what the government initially intended.

This followed about 18 months of lobbying efforts from engineers and insurers when the first version of FFP requirements were released. Those requirements placed much stronger obligations on engineers and, said Gray, were more like the FFP rules that govern consumer products.

Consumer law and FFP

He explained that Australian consumer law has had an FFP requirement since the 1980s. However, that law was more focused on making sure consumer products like fridges or washing machines performed the tasks they are expected to do. Professions like engineers and architects were exempted.

“However, it’s been something that government’s been targeting for a little while,” said Gray. “In the first draft of the DBP Act they brought in an express fitness for purpose requirement which sent engineers and the insurers into a tailspin because a design service is very different to the supply of a fridge.”

He said the current version of the FFP requirements, even in their current form, are a better outcome for both engineers and their insurers.

“So under the registration scheme we have a fitness and a purpose obligation which really just brings it back to a reasonable standard of care that engineers must use, it’s not a guarantee,” said Gray.

More direct involvement in construction projects

Bogaard suggested that the new Act obliges engineers to be more personally and directly involved throughout a construction project than before which increases their PI risks. One example, she said, is how the rules require them to sign on and off at different stages of the project more often than previously.

“The increased risk from a PI perspective could potentially lead to increased rates and particularly increased claims,” she said. “So if they’re exposed to more risk on the project, they’re exposed to potentially more claims.”

This article was updated on 4/10/24 to reflect the delay to the enforcement of the Practice Standard and Registration requirement.

Are you an insurance professional in the construction sector? How do you see the changes under the NSW Design and Building Practitioners Act? Please tell us below.

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