Indemnification Clause

The indemnification clause is among the most highly disputed provisions in every A|E contract. The indemnification clause’s specific language can significantly impact a firm’s risk exposure. Thus, every architect, engineer, and contractor should understand the meaning of the indemnification before executing a contract.

An indemnification provision is a contractual provision under which one party (the indemnitor) agrees to assume liability for the losses incurred by another party (the indemnitee). In other words, your Client wants you to promise to reimburse them for damages caused by your negligence.

A broad-form indemnity requires one party to assume the obligation to pay for another party’s liability, even though that other party is solely at fault.

Example: A/E shall defend, indemnify, and hold harmless the Owner from any claims, damages, and losses arising out of the performance of this Contract.

An intermediate form indemnity clause is when the indemnitor is not bound to indemnify for the indemnitee’s sole negligence but is bound to indemnify for all damages to which it partially contributed, even when its contribution was minor.

Example: The A/E shall indemnify and hold harmless the Owner for all damages, losses, or claims that arise as a result, in whole or in part, from the negligence, error, omissions, or failure to perform by the A/E, his employees, or his agents.

In a narrow form indemnity provision, the indemnitor agrees to be responsible only for losses or harm it actually caused.

Example: A/E shall indemnify the Owner for damages arising out of the performance of the Work, but only to the extent caused by the negligent acts, errors, or omissions of the A/E

It is important to remember that architects and engineers are like doctors and lawyers—licensed professionals—required by law to meet the standard of care for their professions as determined by their peers.   Professionals are not legally required to be perfect, as they provide a service, not a product. They do not provide widgets, gadgets, or gizmos. Professional liability insurance (PLI) (in the A|E licensed environment) is written to cover damages caused by a professional’s negligent acts, errors, or omissions. An architect or engineer cannot purchase any insurance coverage to defend their clients before negligence is established. 

PLI only insures the professional and only for professional liability (as opposed to contractual liability). When broad form indemnification or “duty to defend” clauses are used in design contracts, the “duty to defend” language in the Contract effectively nullifies the A|E’s PLI coverage. Architects and engineers also carry general liability insurance; defense can be included in general liability coverage.

In contrast, contractors are strictly liable because they are providing a product—negligence does not need to be established to trigger insurance coverage. Therefore, contractors defend their clients before negligence is established and are covered under their general liability insurance. 

Defense in Indemnification Clauses

Part and parcel of many indemnification clauses you may come across is an expectation from your Client that you also “defend” them. It has become increasingly important to recognize the difference between “indemnity” and “defense” and its implications on you as a design professional. Here is the problem: When you agree by Contract to “defend” your Client in the event of a claim against them, you agree to pay your Client’s attorneys’ fees and costs from the first day a claim is made against them, regardless of your liability. The Client has every right to hire an attorney of their choice and send you the monthly invoice. And perhaps the biggest clincher is that your professional liability insurance will probably not cover you for defense obligations you have assumed vis-à-vis the Contract. At a minimum, the question of coverage among carriers remains unclear.

The use of broad-form indemnification clauses in A/E contracts can often be viewed as a “cut and paste” issue. However, these clauses do not make sense for contracts for architectural or engineering services (where only PL insurance is available since the broad-form indemnity is not insurable). Many lawyers simply borrow broad-form indemnification language they come across in other contracts (including contracts they have drafted for their clients to use with contractors) and use them for architectural and engineering contracts, too. 

A majority of clients or owners do not understand that the broad form of indemnification and duty to defend clauses in the A/E context is uninsurable. They want the benefit of the indemnitor’s insurance policy, but broad-form indemnification language nullifies it. It’s a lose-lose scenario. Shifting risk to a party who cannot obtain insurance for that risk is not in the best interest of anyone involved. Indemnity provisions provide assurance, not insurance, and are only as valuable as the indemnitor’s ability to pay. No one should “bet the firm” against whether or not an owner, with a broad-form indemnification provision protecting them, will be sued.

Solutions

An agreement to “defend” can be quite costly. If your Client continues to fight you and insists that you pay their costs of defense from the moment a claim rears its ugly head, consider the following:

1.     Whether this is a Client you genuinely want to work with.

2.     There are means to negotiate. Perhaps you can negotiate a “cap” on defense costs coming from your firm’s pocket.

3.     Language that will limit your duty to defend to your adjudicated share of responsibility (the intermediate or narrow provision from above).

4.     Incorporating two indemnity paragraphs, one for general liability and one for professional. You include defense in the former and not in the latter. If you are working on a design-build project and your Client is construction-oriented, explain that defense is an uninsurable condition under a professional liability policy, but you are happy to include it under the general liability provisions. It may be understood when the Client realizes they cannot access your insurance for this and must rely strictly on your firm’s assets.

The ”Perfect” Indemnification Clause

If you need counter-language for your Contract, consider the following indemnification language provided by Stephan Andrews, Esq., O’Hagan Meyer.

“The subcontractor shall indemnify and hold harmless the contractor and its respective officers, directors, and employees from and against all damages, costs, and expenses (including, without limitation, reasonable attorney fees and costs of defense) to the extent caused by or resulting from 1. The negligence, errors, omissions, or failure to perform by the subcontractor, its agents, partners, employees, subconsultants, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable or 2. The negligent breach of the Agreement, intentional acts, omissions or other failures to perform the subcontractors, its agents, partners, employees, and subconsultants, anyone directly or indirectly employed by them or anyone for whose acts they may be liable.”

Other Resources:

Indemnification Clauses: All You Need to Know, By Glenn W. Birx, FAIA

Walking the Thin Line on Indemnification,  AIATrust

The Indemnity Dilemma, by Mark C. Friedlander

Indemnification Clauses, ContractsCounsel

Indemnification - Negotiating a Reasonable Clause, YouTube Presented by Kent Holland

Understanding the Implications of “Defending” Your Client by Jacqueline Pons-Bunny, Esq., Weil & Drage, APC.

NOTE: SDA does not endorse any products or services mentioned, and SDA does not assume responsibility for any circumstances arising out of the interpretation, application, use or misuse of any information presented.  SDA recommends the reader consult the appropriate legal, financial or human resource counsel before implementing information contained herein.