Understand Dangerous Indemnity Clauses To Avoid Claims
Past experiences supports that indemnification clauses can be among the most dangerous and most misunderstood terms in a design professional’s contract. When in doubt, design professionals should exercise best risk management practices and consult with an outside contract review specialist or attorney.
An indemnity contract arises when a design professional takes on the obligation to pay for any loss or damage that has been or might be incurred by another individual such as an owner, contractor, or subcontractor. Non-specific indemnification language can lead to enormous, unintended exposure for the design professional.
Typically, indemnification clauses are governed by state law. And each state’s law of indemnity is unique. Always consult with local counsel to be fully informed about indemnity terms you are being asked to agree to.
For example, until January 2012, Texas was among the few states without an anti-indemnity statute for construction contracts. Now, indemnity clauses in construction contracts are unenforceable in large part. The statute, however, excludes several key exceptions such as bodily injury or death claims, single family homes, and the contracts covered by the Texas Oilfield Anti-Indemnity Act.
Generally, for an indemnification provision to be enforceable, it must provide “fair notice” of “a commitment by one party to pay for the damages resulting from another party’s own negligence.” Fair notice usually is a question of law for the trial court judge. But, in layman’s terms, it means the indemnification clause must be conspicuousness. This requirement is included so that one party can’t “sneak” indemnification language into a contract.
Examples, might include the use of all capital letters, large or bold-faced type. Anything that calls the reader’s attention to the indemnification language may meet the conspicuousness requirement. Indemnity provisions hidden among unrelated terms and conditions, or on the reverse side of a document, generally won’t satisfy the conspicuousness requirement.
One pitfall for design professionals arises where they agree to a contract that requires them to “defend” another party to the contract, in addition to the duty to “indemnify.” The “duty to defend” is contractual in nature, and is separate from the “duty to indemnify.”
Professional liability insurance policies frequently include contractual liability exclusions. In other words, a professional liability insurance policy may not provide coverage if the design professional contractually agrees to “defend” an owner, contractor or other third party.
Design professionals also should be cautious about entering into contracts that hold the design professional to the same terms and conditions as the prime contract between the owner and architect. At minimum, request a copy of the prime contract and have it reviewed by an attorney. Frequently, the prime contracts may contain indemnification language creating liability for clams the policy holder never intended to assume
Indemnification clauses are a minefield of potential liability. By exercising best risk management practices, including taking advantage of “contract review services" available to design professionals, it may be possible to avoid agreeing to a duty to “defend” or “indemnify” the design professional never intended to assume, and avoid resulting claims and lawsuits altogether.
For a quick-tip video on this topic and other issues effecting design professionals, architects and engineers, visit http://admiral-design.omnisure.com/quick-tip-videos/
Timothy B. Soefje is a Managing Member and head of the professional liability section at the boutique firm of Seltzer│Chadwick │Soefje, PLLC. in Dallas, Texas. Mr. Soefje devotes his practice to the representation of architects, engineers, lawyers and other professionals involved in large, complex professional negligence, catastrophic personal injury, and business litigation claims. He also defends claims in the areas of products liability, premises liability, trucking and auto. He also works as a consultant with OmniSure Consulting Group, LLC, an industry leader in risk management solutions. Follow him on Twitter at @TimSoefje. For more information, contact Mr. Soefje at firstname.lastname@example.org.