Protecting Engineers in Professional Service Contracts
What You Need to Know About Broad Form Indemnification and the "Duty to Defend" in contracts
Broad Form Indemnification
The Dangers of Broad Form Indemnification in Contracts
What does it mean when a contract requires the engineer or another design professional to “indemnify” a client?
Well, “indemnify” simply means “to compensate for a loss.” For example, in a contract for engineering services, an indemnification clause might ask for compensation for damages caused by the engineer’s professional negligence. This is typically acceptable since professional liability insurance covers that risk.
The problem is that the indemnification clause could open the door to much broader – and much more dangerous – financial risk.
Unreasonable indemnification clauses may ask engineers to take financial responsibility for any of their actions, whether negligent or not - or even damages just “related” to their work. Such clauses may even require the engineer to pay for damages caused by other parties.
Can you imagine being asked by another party to pay for damages they caused? This is called “broad-form indemnification,” it’s unfair, and it should not be allowed in any design professional contracts.
Keep in mind that very often engineers and other design professionals have no choice but to accept unfair indemnification provisions. The bargaining power is usually on the client’s side.
The only way to protect ALL design professionals from this financially devastating risk is to do what a number of states have done already: pass a law to make broad form indemnification contractual provisions void and unenforceable.
Duty to Defend
The "Duty to Defend" in Engineering Professional Services Contracts
Some engineering contracts call for an engineer or another design professional to pay the legal expenses of a client even if the engineer didn't do anything wrong.
This is fundamentally unfair. If a client is sued by a third party, this “duty to defend” clause can mean, for example, that an engineer would have to pay the client’s legal fees in addition to its own without any finding that the engineer was at fault. Paying on the “duty to defend” could bankrupt a design professional firm for the sake of covering someone else's legal expenses even though, again, the firm might have done nothing wrong.
Keep in mind that engineers and other design professionals are not contractors, and their insurance coverage is not the same. Professional liability insurance for design professionals only covers damages to the extent caused by their own professional negligence. A “duty to defend” obligation not tied to a finding of negligence is unlikely to be covered.
This uninsured risk could prove financially disastrous, especially for small firms on large projects. It’s important for engineers to always push back hard on a “duty to defend” clause in their contract. This clause is, simply put, unacceptable and uninsurable. Whenever possible, this clause should be negotiated out of the contract. But that’s not all. The only way to protect all design professionals from this financially devastating risk is to do what a number of states have done already: pass a law to make the “duty to defend” contractual provision void and unenforceable.
For More Information, Contact:
Charles Kim, ACEC General Counsel