Anyone who has been tasked with negotiating an owner-drafted agreement has been faced with the obligatory defend obligation within the indemnity provision of the contract. And, anyone who knows better will always ask that this wording be struck from the agreement. This blog will attempt to review the issues and challenges of dealing with prospective clients on the issue of the defend obligation.
The issue is that in most owner-drafted agreements there is indemnity language, and within this language there is often the requirement for the architect or engineer (A&E) to provide a defense. Agreeing to this would be a liability assumed under contract and thus uninsurable under the design firm’s professional liability (PL) insurance policy.
The problem is that agreeing to provide a defense is uninsurable under ANY A&E professional liability insurance policy. This is because this wording requires that the design firm pay for an owner’s defense prior to a finding of any negligence on the part of design firm. Not only is this overly broad, it is above the standard of care and thus uninsurable. EVERY A&E professional liability insurance policy excludes liability assumed under any contract –unless that liability would be covered in the absence of that contract.
Why We Have This Problem
When in doubt blame it on the legal profession.
In this case, in addition to over-lawyering these agreements (especially the indemnity clauses), there are attorneys who draft professional agreements for their owner/clients who apparently don’t fully understand professional liability insurance and the standard of care of a design consultant. These attorneys are usually a lot more familiar with a general contractor’s general liability insurance versus a design professional’s professional liability insurance policy. Where it’s acceptable to add additional insureds to a GL policy, it is NOT acceptable to add additional insureds to an A&E’s professional liability policy. As an additional insured under a GL policy you would receive a defense under that policy. Not so with professional liability coverage where agreeing to provide a defense prior to a finding of negligence to another party would be uninsurable.
The solution is to make certain you have an insurable contract in place. Both the design firm and the owner/client need to recognize that it isn’t in anyone’s best interest to have an uninsurable contract.
It’s important to note that professional liability insurance is third-party coverage, meaning the owner/client, not the design firm, will receive any proceeds from this insurance. In fact, the professional liability insurance policy of the design firm is arguably the only asset the owner/client can look to in the event any damages caused by their A&E team.
There is no bonding to protect the owner/client and the typical A&E firm has no real assets to go after. So why risk adversely impacting design firm’s professional liability insurance policy with an uninsurable contract?
The solution is delete the “defend” obligation and revise the indemnity language so that it is fully insurable. A sample of insurable indemnity language can be found below.
Another solution to achieve this same result would be to bi-furcate the indemnity language by breaking out the GL from the PL. By doing this you will keep the defend obligation under the GL and delete it from the PL.
So how do we address the owner/client’s concerns that without this defend language they might get stuck with legal costs resulting from their design firm’s negligence?
The answer to this is that defense costs incurred will be considered and included in any assessment of damages when settling a claim. The indemnity would note that “damages” would include “reasonable attorneys’ fees and litigation costs”. This is noted in the following sample indemnity language that is widely regarded as fully insurable under a design firm’s PL policy:
“Consultant agrees to indemnify and hold harmless the Client, its officers, directors and employees against all damages, liabilities or costs (including reasonable attorneys’ fees and litigation costs) to the extent caused by the Consultant’s negligent performance of professional services and that of its sub-consultants or anyone for whom the Design Consultant is legally liable under this Agreement.”
As noted, the goal is to have a fair and insurable contract and to recognize that it’s in everybody’s best interest that you do.
If you have the misfortune of having to deal with an unreasonable prospective client who refuses to negotiate a fair and insurable agreement, you will be faced with a difficult business decision: Is this a “deal breaker”? While the answer to this question will ultimately rest with the design firm, I do feel it’s fair to question that if you find your prospective client to be difficult to reason with at this juncture in your relationship, how reasonable will they be down the road when they are your client and something doesn’t go exactly as planned…?