Design professionals need to know exactly what you’re agreeing to before you sign on the dotted line. With some contract clauses, you could be tying yourself to broad indemnity obligations far beyond what you intended, which is why you need to beware of indemnification clauses.
Agreeing to the wrong contract clause can not only expose you to excess risk not covered by your insurance, it can also harm the client who included the clause in the contract in the first place. Here’s what you need to know to protect yourself.
Why You Should Beware of Indemnification Clauses
Most architects, engineers, contractors and other design professionals know to be wary of indemnification clauses where terms are weighted in favor of clients. Any obligations not related to your own professional negligence will be uninsurable and lead to excess risk exposure for yourself and your clients.
Under typical professional liability policies, coverage is often unavailable for a liability assumed under a contract or agreement, especially if that liability would not have existed without the contract in place. Accordingly, most design professionals try to avoid indemnification clauses altogether, or at minimum, limit the scope of the agreement.
Even so, you can still enter into dangerous territory by agreeing to indemnification clauses, even when you limit the scope to claims arising out of your negligent acts, errors or omissions in the performance of professional services as a design professional and specifically exclude any obligation to defend or pay attorney’s fees and costs.
What Liabilities You May Take on With an Indemnification Clause
Indemnification clauses are dangerous in part for the unforeseen consequences that can arise in various situations. There are many different examples, but one of the most common cases involves what happens when one of your workers gets injured on the job when an indemnification clause for bodily injury is in the contract.
A typical example involves a client inserting a clause asking you to indemnify the client from any bodily injury, including injury to your employees, arising from your professional services under the contract. At first look, it may not raise any flags, but this contract clause could cause you to take on uninsurable liability risks and wave certain protections guaranteed to you under other laws.
Most professional liability insurance policies don’t offer you coverage for injuries sustained by your employees. Instead, these claims are usually addressed by your workers’ compensation coverage or an employer’s liability policy. Such an indemnification clause could cause you to take on a liability that won’t be covered by the correct insurance.
Additionally, workers’ compensation laws offer certain protections to employers, such as limiting lawsuits brought by third parties and placing a cap on damages for injuries. But if there is an indemnification clause in the contract, you could lose these and other protections and be sued by your client and pay more than needed for damages. Examples such as Szymanski-Gallagher v. Chestnut Realty Co. (Penn. Super. Ct., 1991) and Braye v. Archer-Daniels-Midland Co. (Ill., 1997) where such complications occurred show this to be a real danger.
Why to Seek out Professional Contract Reviews
Pushy clients insisting on indemnification clauses continue to be an issue within the design profession. Where possible, the best practice is to avoid agreeing to indemnification clauses altogether. But in situations where such clauses are unavoidable, it’s imperative to get a professional opinion from a design contract expert who can help you avoid a risky agreement and protect yourself and your career.
With Professional Liability coverage from Lockton Affinity’s Architect and Engineer Program, you can get access to pre-claim resources and assistance, including contract reviews, as a policyholder. We know that contract reviews are key to managing design risk, so our coverage includes up to 2 hours of complimentary consultation service with industry leader Marshall Dennehy to assist in this area.
Lockton Affinity Architect and Engineer offers products and services that are a cut above other industry offerings to meet the needs of design professionals like you. Plus, we make it easy for you to quickly receive a quote, apply for coverage and get certificates of insurance.
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