ENGINEER agrees to hold harmless, indemnify, and defend CLIENT from and against damages arising from ENGINEER"s errors, omissions, and negligent acts, to the extent of ENGINEER"s negligence.
You have probably agreed to contract language such as this.
And why not? It appears to be a limited-form indemnity, something that is probably covered by your professional liability insurance (PLI) policy. A limited-form indemnity sets forth the basic common law tenet that you repay people for damages caused by your negligence. For example, if your client experienced $100,000 in damages, and your firm was responsible for 65 percent of that loss, you would owe the client $65,000.
However, not all clients will see the provision as you do. Some might say that, in the event of a third-party claim naming the client and the engineer (as many third-party claims do), the provision would obligate the engineer—you—to pay for the client"s defense, even though negligence against you was merely alleged.
"Oh, no!" you’d say. "That’s not what "defend" means. It means that if our firm is ruled to have been negligent to some extent—say, 65 percent—then we’d be obligated to pay 65 percent of the damages, and damages include the cost of defense. And what would your client say? Something along the lines of, "Gosh, we made a mistake. Of course your interpretation is correct." Dream on. In fact, the client—with the strong urging of its attorney—would likely argue the following:
- the defendant’s portion of the indemnity is a separate and distinct element;
- no matter what, the promise to defend begins with defense-dollar-one; and
- the "to the extent of engineer’s negligence" requirement applies to the rest of the provision, but not "defend," meaning that, no matter what, you would have to pay 100 percent of the client"s legal expenses.
So, assuming you and your client interpreted the provision differently, what would happen in the event of a third-party suit? You would probably have to retain counsel to sort out the issue in court, and your attorney might be less than optimistic about the prognosis. Although many courts prefer to not enforce indemnities, they enforce them nonetheless. In the case of this particular language, some courts may even rule in favor of the client, at least to the extent that you would have to pay for the client’s defense.
"That would be unfortunate," you say, philosophically, "but, if I’m found not negligent, I would get the money back." Not likely.
You probably wouldn’t be found not negligent, or anything else for that matter, because you would probably settle out of court, and defense costs likely would be part of the settlement negotiation.
One thing is certain: Your professional liability insurer would scrutinize the defense costs. In fact, you may be required to pay for the portion of defense costs that exceed your portion of fault, because the "extra" costs would have stemmed not from errors, omissions, or negligence—exposures your PLI policy covers—but rather from a contractual agreement (to defend), which no PLI that I"m aware of routinely covers.
So what do you do if the client offers you a limited-form indemnity with a defend provision? Your lawyer may suggest that you simply drop the "defend" provision and change the indemnity to something like this:
ENGINEER agrees to hold harmless and indemnify CLIENT from and against damages arising from ENGINEER’s errors, omissions, and negligent acts, to the extent of ENGINEER’s negligence.
The change is justified, you would tell your client, because without it you may be required to provide a defense solely because it’s alleged that you’ve been negligent. "Where there’s smoke, there’s fire," a client representative may respond, a silly notion you could counter by noting that, for two reasons, almost all parties to a project are named as defendants when third parties file claims.
First, as plaintiff ‘s counsel might explain, "We can’t tell who’s really at fault until we begin discovery. If we omit parties from discovery, we may be unable to discover important information, so we name all parties as defendants." Second, and as some of those same attorneys may observe to their clients, "Any number of the parties we name may be willing to spend $5,000, $10,000, or more just to avoid the nuisance."
Fact: You are obligated to indemnify the client for damages caused by your negligence, and those damages could include all, or a proportionate share, of the cost of the client’s defense. Assuming your attorney agrees, you could make that obligation obvious by offering a replacement provision similar to this sample:
ENGINEER agrees to hold harmless and indemnify CLIENT from and against damages arising from ENGINEER’s errors, omissions, and negligent acts, to the extent of ENGINEER’s negligence. ENGINEER and CLIENT expressly agree that these damages include CLIENT’s reasonable cost of defense.
You also may want to let the client know that it could cover its exposure far more effectively through its own insurance policy.
Were the client representative to respond to all of that with an unmoved, take-it-or-leave-it attitude, you would have learned something important about the client. If you would still be willing to accept the client"s project, that would be your business. But, unquestionably, it would be risky business.
John P. Bachner is the executive vice president of ASFE, a not-forprofit trade association that provides programs, services, and materials to help geoprofessional, environmental, and civil engineering firms prosper through professionalism. Visit ASFE"s website at www.asfe.org.