ASCE Risk Management Resources


It Can Be Perilous to Agree to Defend and Indemnify Another Party in a Written Contract

Posted on 3/12/2018 by ASCE Insurance in Contracts
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By Sarah A. Johnson, Esq.

Most engineers recognize indemnification clauses can be problematic. Under any normal professional liability policy, such as the forms used by Certain Underwriters at Lloyd's of London, there is no coverage for liability assumed under a contract or agreement unless the insured would have such liability in the absence of a contract.

Therefore, if the indemnification clause at issue is limited to claims arising out of the engineer’s negligent acts, errors, or omissions in the performance of his or her professional services as an engineer, it is unlikely the engineer would be agreeing to any liability he or she would not have in the absence of the contract (excepting attorney’s fees and expenses).

Most indemnification clauses include language that the engineer will "defend" the client and/or the indemnification obligation specifically includes payment of the client's "attorney's fees and expenses." It is unlikely the engineer would be liable, or in any way responsible, for the attorney's fees and expenses of another party absent any agreement. Therefore, when such language is included in the indemnification clause, the engineer could face uncovered exposure for attorney's fees and expenses.

Unfortunately, it is not unusual for an engineer to sign contracts with indemnification clauses including such language requiring the engineer to "defend" the client and/or specifically including "attorney's fees and expenses" in the indemnification obligation even knowing such clauses may result in uncovered exposure. However, many engineers in this situation assume they will not be required to pay the client's attorney’s fees and expenses unless and until they are found to be negligent by the applicable court or tribunal.

Indeed, some jurisdictions, such as Texas and Massachusetts, use the bar against indemnification of one's own negligence in the context of construction to find the obligation to defend the indemnitee does not arise until the indemnitor's negligence is determined.1 However, other jurisdictions, such as Illinois, have conflicting laws as to when the indemnitor is required to pay for attorney's fees and expenses of the indemnitee.2 In yet other jurisdictions, the engineer will be required to pay for the client's attorney's fees and expenses upon any allegations against the client that in any way implicate the engineer's work without any finding of negligence by the engineer.

For example, in California there is a statute expressly stating if the indemnity provision embraces the costs of defense, then the person indemnifying is bound, on request of the person indemnified, to defend actions brought against the latter in respect to all matters embraced by the indemnity.3 California courts have interpreted this statute as requiring an indemnitor to defend the indemnitee at the indemnitor's own expense against suits raising claims covered by the indemnity provision as long as the indemnitee requests the same.4 Thus, the engineer could be required to defend his or her client at the engineer's expense upon request of the client so long as the allegations in the claim against the client relate to work done by the engineer, and regardless of whether it is ultimately determined the engineer was actually negligent.

Therefore, in jurisdictions like California, by signing contracts including cost of defense indemnity language, the engineer is opening himself or herself up to liability, even in instances where the engineer was not negligent. Moreover, the attorney's fees and expenses of one party in construction cases can be quite costly and often exceed six figures. Further, professional liability policies rarely cover contractual agreements to pay the attorney's fees and expenses of a third party. Finally, even if the engineer's professional liability policy was to provide coverage, which is unlikely, the limits would quickly be used up defending the client, leaving little or nothing left to defend the engineer.

Accordingly, engineers should avoid signing indemnity clauses that do not run in their favor. If an engineer must sign an indemnity clause that favors the client, then he or she should make certain it does not include language obligating the engineer to defend the client or to pay the client's attorney's fees and expenses. Being aware of contract issues such as these will help to lessen the level of risk while still protecting engineers and their firms from the effects of damaging lawsuits.

CITATIONS

1See Foster, Henry, Henry & Thorpe, Inc. v. J.T. Constr. Co., 808 S.W.2d 139, 140-41 (Tex. Ct. App. 1991) (architects were able to recover attorney’s fees and expenses pursuant to an indemnity clause based upon the jury’s findings that the contractor’s negligence, and not that of the architects, was the cause of the damages to the adjoining property owner); see also Cafferky v. John T. Callahan & Sons, Case No. 99-02604, 2001 Mass Super LEXIS 578, *5 (Mass. Sup. Ct. Oct. 30, 2001) (finding that the claim for indemnification, including of attorney’s fees, is premature until such time as the issue of negligence is resolved).

2McNiff v. Millard Maint. Serv. Co., 715 N.E. 2d 247, 252 (Ill. App. Ct. 1999) (finding that whether the duty to defend under an indemnity provision is triggered depends solely upon the allegations against the indemnitee); Dominick’s Finer Foods, LLC v. Eurest Servs., Inc., 2015 IL App (1st) 150369-U, ¶¶ 36, 43 (finding that indemnity provisions between non-insurer-insured parties are to be analyzed under ordinary contract principles, that indemnitors may go beyond the allegations of the complaint to determine their obligations under the indemnity provisions, and that absent a finding of negligence by the indemnitor, there is no requirement to defend the indemnitee (citing Ervin v. Sears, Roebuck & Co. 469 N.E. 2d 243 (Ill. App. Ct. 1984)).

3Cal. Civ. Code § 2778.

4Crawford v. Weather Shield Mfg., Inc., 187 P.3d 424, 439-42 (Cal. 2008).

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