A musical about a plant with an insatiable thirst for human blood seemed an unlikely hit when it premiered in 1982, but by the time Little Shop of Horrors closed, it was the highest-grossing and third-longest running show in off-Broadway history. Revivals spring forth eternally, not only in New York City but in professional and amateur productions from coast to coast.
Like the unstoppable carnivorous Audrey II, uninsurable indemnity clauses crop up in most client-drafted contracts, despite the best efforts of lawyers, risk managers, and savvy engineers to weed out potentially pernicious language.
Before we go hunting for pestilential phrases, let’s consider what a reasonable, insurable indemnity clause might look like.
Unless the contract sets a higher standard, an engineer is liable for legal damages caused by their failure to perform their services in accordance with the professional standard of care. This requires engineers to employ “the care and skill ordinarily used by members of the subject profession practicing under similar circumstances at the same time and in the same locality.” (EJCDC E-500 2020, §6.01A)
An indemnity clause that doesn’t increase your liability beyond what the law imposes on you anyway is likely insurable. Here’s an example (adapted from the American Institute of Architects Document B103-2017):
Engineer shall indemnify and hold the Owner and the Owner’s officers and employees harmless from and against damages, losses, 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 caused by the negligent acts or omissions of the Engineer, its employees, and its consultants in the performance of professional services under this Agreement. The Engineer’s obligation to indemnify and hold the Owner and the Owner’s officers and employees harmless does not include a duty to defend.
Here are some of the most common species of uninsurable and inappropriate “horrors” in indemnity clauses.
The trouble is that most indemnity clauses do expand your liability. For that reason, they run afoul of the “contractual liability” exclusion normally found in professional liability policies, which bars coverage for liability the insured assumes by contract if that liability would not exist in the absence of the contract.
Duty to defend the client
If you agree to indemnify “and defend” your client, you may be obligated to pay your client’s lawyers and legal costs as soon as a claim touching on your design is made against your client, perhaps even if it is determined that you weren’t negligent. This won’t be covered by professional liability insurance, which provides a defense only for the insured engineer. The contractual liability exclusion comes into play, too, because you would not owe your client a defense in the absence of this contractual promise. (Note that in some jurisdictions it is not sufficient to delete the word “defend”—you must state that it is not your intention to provide a defense, e.g., “indemnify but not defend.”)
Some clients may say that your refusal to defend them means you are not willing to stand behind your services. But in reality, if the claim against your client arises out of your design, it is extremely likely that you will be brought into the claim. Your professional liability insurer will defend your firm and your design, and that will help defeat the claim against your client, too.
Damages caused by others
Also problematic are indemnity clauses that require the engineer to indemnify the client for damages caused by others. This can be phrased many different ways; one of the most insidious requires the engineer to indemnify for damages they cause “in whole or in part.” Even if only 60 percent of the damages were caused by the engineer and the remaining 40 percent by unrelated parties, the engineer would have to pay 100 percent. Professional liability will pay damages caused by the insured engineer’s negligence but not damages caused by parties the insured engineer does not control.
Damages caused by the engineer’s nonnegligent conduct
Make sure your duty to indemnify is limited to damages caused by your negligence, rather than “any and all damages caused by the engineer.” Not every “error” rises to the level of negligence, and assuming liability for nonnegligent conduct risks a professional liability coverage gap. Even more important, it’s critical for your client to understand that error-free design is impossible. If your client cannot accept this fact, they are bound to be dissatisfied with your services, and headaches, unpaid bills, and claims are all predictable outcomes.
As with any invasion of persistent pests, it may be advisable to call a professional for assistance—in this case, a lawyer who understands your business. Indemnity clauses are not only full of “magic words” whose meaning may not be apparent to non-lawyers but also are subject to varying interpretations under the laws of different jurisdictions.
Karen Erger is senior vice president and director of practice risk management at Lockton Companies. She also is a member of the ACEC Risk Management Committee and can be reached at email@example.com.
The material in this article is provided for informational purposes only and is not to be regarded as a substitute for technical, legal, or other professional advice. The reader seeking such advice is encouraged to confer with an appropriate professional consultant or attorney. ACEC and its officers, directors, agents, volunteers, and employees are not responsible for, and expressly disclaim liability for, any and all losses, damages, claims, and causes of action of any sort, whether direct, indirect, or consequential, arising out of or resulting from any use, reference to, or reliance on information contained in this article.