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Walking the Thin Line on Indemnification

With increasing frequency, architects and other design professionals are being asked (and in some cases, even required) to sign agreements in which they undertake to indemnify their clients against any loss that the clients may suffer in connection with projects for which the design professionals have provided services. In some cases, the indemnification clause is so broadly worded that it applies to any loss the client may suffer whether or not it is attributable to the design professional’s activities on the client’s behalf.

There are other cases where the indemnification for loss is based on any wrongful conduct by the design professional regardless of the degree of responsibility for the loss. Other clauses make the design professional liable for losses (caused in whole or in part) by negligence regardless of the fact that much of the damage may have been caused by the party seeking indemnification. While there are some clauses that only require indemnification for the portion of the loss attributable to the design professional’s negligence, indemnification language is likely to impose liabilities on design professionals that are not their proper professional responsibility or involve exposures considerably in excess of what the law would otherwise normally require. Owners should be prepared to accept some risk as being incident to the owner’s participation in the project and not attempt to transfer such risks to design professionals through indemnification provisions.

 

 

 

 

 

 

 

It would be preferable to see simple, specific indemnification provisions for damage resulting from the negligent acts, errors or omissions of the insured than the somewhat confused broad-form indemnification provisions that owners frequently attempt to include in professional service contracts. Many indemnification provisions could be construed to require indemnification for damages resulting from the non-negligent performance of the insured. While an insured may agree to indemnify its clients for anything allowed under law, professional liability insurance only provides coverage for those damages and costs resulting from the insured’s professional negligence in providing services on a project.

Broad-form indemnification provisions do not void professional liability insurance coverage—the coverage will exist for those risks that we have accepted through our contract of insurance with the design professional. Thus, an indemnity agreement that goes beyond damage caused by the negligence of the insured in providing professional services on a project would be covered to the extent that the insured was negligent in its performance of professional services (that is, if the allegation was that the insured’s act or error did not meet the standard of care and resulted in damage) or was negligent in not providing the professional services which should have been performed under the contract. Insureds should be aware that in agreeing to an indemnification provision they may be accepting contractual responsibilities beyond this normal insurable legal liability.

An uninsurable indemnification obligation

Design professional agrees to indemnify and hold harmless the client from all claims, losses, damages, and expenses (including attorneys’ fees and other legal expenses) caused by, related to, or in any way connected with the project [or the design professional’s services.]

This indemnification provision extends beyond the coverage provided by the professional liability insurance policies available in the industry. Such an indemnity agreement would be covered if the design professional were negligent in its performance or in not providing the professional services at all. While it is possible that a sophisticated client would not demand indemnification for anything resulting from the design professional’s performance without alleging negligence on the part of the design professional, that is not assured. Therefore, in this case the design professional may not have coverage for a claim or may have to argue with its insurer to determine if coverage exists.

On the whole, indemnification provisions such as this provide little benefit to a client. If the intent is to hold the design professional responsible for any claim that could tangentially be associated with the project or with his or her performance, the client is overreaching. Since no design professional has insurance coverage for such broad indemnification provisions, the client is left to try and secure the indemnity payment from the assets of the design professional. Since few firms have much in the way of financial assets (no professional service firm of any type has sufficient financial assets for such broad liabilities), the client spends its resources essentially to drive its design professionals out of business.

 

 

 

 

 

 

 

To increase the likelihood that a professional liability insurance policy would respond to a claim, the provision should be modified so that the language states “caused by or arising out of any negligent act, error, or omission,” clarifying the fact that the indemnification obligation is triggered by the legal liability of the design professional not to commit a negligent act or to be responsible for a negligent omission.

A broad-form indemnification provision ignores the realities of professional practice, the legal standard to which design professionals are held, and the basic fact that without professional liability insurance coverage, most professional service firms do not have assets that can effectively indemnify the client. Nor is the client well-served by engendering coverage battles over claims against the design professional. Note that a client can tender the defense to the design professional in a situation where the claim alleges the sole negligence of the design professional or where the damage is caused by the design professional’s negligence. The client can also ask for indemnification of reasonable attorney fees resulting from a claim alleging damages caused by the negligent act, error, or omission of the design professional once that negligence is established through adjudication.

While the language of this provision represents a fairly common attempt by owners to shift all of the risk and cost of any claim to design professionals, professional liability insurance will only respond to the allegation of professional negligence. The uninsured risk that this indemnification agreement may present is an assumption of a business risk on the part of the design professional. Naturally, the design professional is in the best position to decide if that business risk is acceptable.

Indemnification provisions based on negligence

While we do not recommend specific language to clients seeking insurable indemnification provisions, the following sample language is clear in its intent:

To the fullest extent permitted by law, Consultant shall indemnify Client, its officers, directors, partners, employees, and representatives, from and against losses, damages, and judgments arising from claims by third parties, including reasonable attorneys’ fees and expenses recoverable under applicable law, but only to the extent they are found to be caused by a negligent act, error, or omission of Consultant or Consultant’s officers, directors, members, partners, agents, employees, or subconsultants in the performance of services under this Agreement.

It would be unusual to find that such a provision exceeds the coverage. Clients, of course, should also be required to give the design professional prompt notice of any claims of injury or damage subject to the indemnity obligation. It is specifically understood and agreed in such a provision that in no case shall the design professional be required to pay an amount disproportionate to his or her culpability.

A contractual restatement of normal indemnification rights is usually acceptable to courts and to clients but does little more than provide an easier way to obtain an indemnity payment. Any indemnification obligation that is broader than that covering the negligence of the insured or those working for the insured is likely to raise judicial scrutiny. Any indemnification provision that asks a design professional to indemnify the client for damage caused by the client’s negligence is likely to be voided as running against public policy.

 


Victor and CNA work with the AIA Trust to offer AIA members quality risk management coverage through the AIA Trust Professional Liability Insurance Program, Business Owners Program, and Cyber Liability Insurance program to address the challenges that architects face today and in the future. 




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