“Everybody Else Has Signed It. What’s Your Problem?” Why Deep South Engineers Need to Present a United Front on the Indemnity Issue
Roger Guilian Volkert, Inc. Vice President General Counsel Presenter
TRUE or FALSE? One short paragraph in a single contract can cost you and your shareholders your entire firm. TRUE.
Definition of Indemnity Indemnify ( verb ): To reimburse; compensate for loss or injury; give back; pay back; recompense for past loss; remunerate; repay; restore; return money paid out - Legal Thesaurus , Second Edition. William C. Burton Defend? Protect? Indemnity is an agreement (a contract or a provision in a larger contract) by which one engages to save another from the legal consequence of the conduct of one of the parties, or of some other person
Three Basic Forms of Indemnity Broad-Form Indemnity Requires Engineer to indemnify Client for any losses arising out of the project for virtually any reason or due to the Client’s or other parties’ conduct, even if Engineer is completely free from fault “ . . . connected with or arising out of the Project/ your Services . . .” I nsurability problems Intermediate-Form Indemnity Requires Engineer to indemnify Client for any losses arising out of the project so long as Engineer has the slightest degree of fault “ . . . caused in whole or in part by the fault of the Engineer . . .” I nsurability problems Limited-Form Indemnity Requires Engineer to indemnify Client only for those losses that are actually caused by the professional negligence of the Engineer or its subconsultants “ . . . to the extent caused by the Engineer’s negligent acts, errors, and omissions . . .” I nsured for this!
“How Can I Tell Which One I’m Dealing With?” Broad-Form Indemnity - Example “Engineer agrees to indemnify and hold harmless Owner from and against any and all claims, damages, suits, causes of action, losses, and expenses (including attorneys’ fees and other expenses) arising out of, caused by, related to, or in any way connected with the Project or Engineer’s Services . Intermediate-Form Indemnity - Example “Engineer shall indemnify and hold harmless Owner from and against losses, damages, costs, claims, suits, and expenses (including reasonable attorneys’ fees) which are caused in whole or in part, directly or indirectly, by the negligence of Engineer in the performance of Services hereunder.” Limited-Form Indemnity - Example Engineer shall indemnify and hold harmless Owner for damages, judgments, costs, losses, and expenses (including reasonable attorneys’ fees) actually incurred by Owner to the extent caused by the negligent acts, errors, and omissions of Engineer (or its subconsultants) in the performance of professional services hereunder .”
The Virtues of Limited-Form Indemnity Limited-Form Indemnity limits the design professional’s liability to reimburse the owner/ indemnitee to only those losses actually suffered by the owner/ indemnitee as a direct result of the design professional’s negligent professional acts Grounded in a common law negligence standard Must be a professional act, error, or omission No obligation for the acts of others Client/ Owner/ I ndemnitee responsible for its own acts and those of its agents Who is the riskiest “agent” here, and the one with the most ability to manage risk on a project? You guessed it The Contractor Why should you be responsible for the acts of the contractor? I n-line with design professional’s policy of professional liability insurance
Deep South Anti-Indemnify Statutes - Engineers State Bars Bars Indemnity Limits Statute Comments Indemnity for Client’s Sole Indemnity to for Client’s or Partial Fault only YOUR Sole Fault Negligent Acts In Alabama, sophisticated parties Alabama No statute negotiating at arms-length will be held to the terms and conditions of the contract – even if unfair Ark.Code §§ 4-56-104; 22-9-214 Arkansas WOO PIG SOOEY! Does not protect design Louisiana La.R.S. § 38:2216G professionals. Only protects prime contractors on public works. Mississippi Miss. Code § 31-5-41 You can still be liable for acts of others; just not client’s Florida Fla.Stat. § 725.08 SUNSHINE! Fla. Stat. § 725.06 Georgia Ga. Code Ann. § 13-8-2(c) GEORGIA’S ON MY MIND!
BREAKING NEWS!!! NEW NORTH CAROLINA DESIGN PROFESSIONAL ANTI-INDEMNITY LAW On July 8, 2019, North Carolina Governor Roy Cooper signed into law NC House Bill 871 Effective August 1, 2019 • Outlaws the duty-to-defend others against third-party claims • Indemnity only for damages proximately caused by the A/E • Applies to both public and private contracts • ACEC-NC led the coalition that got this landmark legislation passed. ACEC-NC NCSS • AIA/NC ASLA-NC •
States With No Anti-Indemnity Statutes ALABAMA Maine Nevada North Dakota Pennsylvania (existing statute protects owners only) South Carolina (ACEC-SC undertaking an effort at this time!) Vermont Wisconsin Wyoming The trend is to pass anti-indemnity laws. NOW IS THE TIME.
TRUE or FALSE? “Our professional liability insurance covers any indemnity we agree to.” FALSE.
Professional Liability Insurance & Indemnity Professional Liability Insurance policies do not cover all forms of indemnity PLI only covers losses Engineer becomes legally liable for, to the extent caused by negligence in the performance of professional services There must be a breach of the standard of care by the Engineer The damages must have been caused by a negligent professional act
TRUE or FALSE? “I have read my professional liability insurance policy from cover to cover, and understand everything it says.”
Indemnity & Professional Liability Insurance
Indemnity & Professional Liability Insurance
TRUE or FALSE? “Indemnify” and “Defend” are the same thing. FALSE.
The Defense-of-Claims-Obligation Problem Guilty Until Proven Innocent Does not depend on the outcome of the claim Inequitable You may have to pay your client’s legal bills even if you don’t have to indemnify your client Does not appropriately or authentically allocate risk to responsible parties best suited to manage that risk Not insurable under professional liability insurance policies What happens when the design professional is judged to be free from fault? What happens when the court finds you are not liable but your client is? I s Client going to reimburse you for all the attorneys’ fees you paid defending Client? Guess what. You’re probably going to have to keep paying for your Client’s lawyers.
Indemnify v. Defend – Separate & Distinct INDEMNIFY DEFEND Depends on the outcome of the claim Triggered by receipt of the claim If limited, it is insurable Never insurable If limited, it is insurable Comes out of firm’s pockets Based on fault Irrespective of fault Based on fault Based on contract Obligation avoided upon MSJ, dismissal Obligation continues despite MSJ, dismissal Innocent until proven guilty Guilty until proven innocent
So, Why Should We Be United on Indemnity? We will continue to see unfair indemnity provisions until we speak as one Clients hear conflicting messages from us on indemnity, and don’t believe us When DPs “sign anything”, clients have no incentive to change “Everyone else has signed this. What’s your problem?” A united front insisting on fair, insurable indemnity is good for our profession Realistic, fair fees Keeps insurance premiums manageable Reduces coverage litigation between DPs and Clients Clients do not benefit from forcing uninsured liability onto underfunded DPs You don’t really gain a competitive advantage by being more risky Every project becomes a “bet the firm” project You may be one bad project away from bankruptcy or having to sell your firm Hope is not a strategy!
Risk Trends From Around the Industry Staffing Shortages; Finding Qualified Employees Poaching Seller’s Market Cyber Fiduciary Duty P3, Design-Build Surrender of Intellectual Property by Contract (“IP Grab” Clauses) Works for Hire v. I nstruments of Service Indemnity/ Duty to Defend Standard of Care Contracts PLI Market is still relatively “soft” right now – decent premiums Lots of consolidation in the PLI market – fewer insurers; higher capacity
TRUE or FALSE? “I have a better understanding of indemnity, and will do my part as a design professional to insist on fair contracts.” TRUE! ( Hopefully)
Thank you for having me.
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