Virtually every design professional has signed a contract containing an indemnity clause. Indemnity clauses may include any, or all three, of the following obligations to the client: (I) indemnify; (II) hold harmless; and (III) duty to defend. “Indemnify” means to reimburse your client following a loss. “Hold Harmless” may have several meanings; however, it is most often understood to protect the client against harm from suits by third parties or yourself. “Duty to Defend” means to pay the client’s legal expenses as the client defends itself against a third party claim. We recommend that a duty to defend clause be removed from a contract.
If you agree to “defend” your client, you may incur your client’s defense costs as the client defends itself against a third party claim. Attorneys’ fees and costs accrue from the first day a claim is made against them. In essence, the client can hire an attorney of their choice and send you a monthly invoice.
Your obligation to pay these defense costs is based on your contractual commitment, not common law. Most likely, your professional liability policy’s contractual liability exclusion will not provide coverage for your client’s defense costs.
Professional liability insurance covers claims caused by the design professional’s negligence. Your negligence must be determined before the policy will cover costs to defend other parties.
Once the extent of your negligence is determined, your insurance carrier will reimburse your client for those defense costs incurred as a result of your negligence. Typically the policies will reimburse the client’s costs for defending against a claim to the extent the client’s damages arise as a result of your negligence. The extent of your liability remains unknown until the parties resolve the claim, at which time defense costs and proportionate liability become known.
Again, we recommend that the duty to defend should be removed from a contract, even if the contract states that the duty to defend is limited to damages resulting from the negligent performance of your professional services. The courts may interpret the duty to defend to be such a broad, separate duty from the duty to indemnify. The design professional could be expected to begin defending a claim on behalf of your client and paying their attorney’s fee as soon as a claim is tendered by the client and before a determination of your negligence has been rendered.
Sample language should be written as follows: “To the extent allowed by Florida law, the design professional will indemnify and hold harmless the owner, its employees and officers from damages, claims and losses to persons and property (except the project itself) to the extent caused by the negligence of the design professional or its consultants during the performance of their duties under this agreement.”
A recent court case in California illustrates the importance of not agreeing to defend your client. In UDC-Universal Development, L.P. v. CH2M Hill, a condominium homeowners’ association brought suit against UDC, the developer. UDC then cross-complained against its design professional, CH2M Hill, based on an indemnity provision in their contract. The UDC jury returned with a finding of no negligence and no breach of contract by CH2M Hill. Therefore, CH2M Hill had no duty to indemnify UDC. However, the court ruled that regardless of that jury finding of no negligence and no breach of contract, CH2M Hill still had a duty to defend UDC and pay UDC’s defense costs in the suit brought by the condo association. The language of the indemnity provision in CH2M Hill’s contract explicitly called for CH2M Hill to defend UDC from “any claim or demand,” regardless of CH2M Hill’s negligence or non-negligence. Therefore, CH2M Hill was ordered to pay UDC’s costs of defense even though CH2M Hill was not negligent or in breach of its contract. Under the CH2M Hill analysis, even if you are found not negligent nor in breach of your contract, your contract may force you to pay all of the other side’s attorney fees and costs. Because this is a contract obligation aside from any negligence, this obligation would not be covered by your insurance policy.
Before signing a contract, it is best to strike any duty to defend your client. At the very least, any obligation to defend or indemnify needs to be tied directly to a finding of negligence on your part.
It is imperative to know the risks involved in the agreements you sign. If you have any questions or doubts about what your client is asking you to sign, contact your attorney and insurance broker.