Past experiences support that indemnification clauses can be among the most dangerous terms in a design professional’s contract.
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.
Unfortunately, that same past experience tells us these indemnification clauses often are misunderstood or misconstrued by both parties.
Additionally, 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.
But 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. Generally, “fair notice” is a question of law for the trial court. 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 letter, large or bold-faced type, or anything that calls the reader’s attention to the indemnification language.
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 “Contract Review Services,” it may be possible to avoid agreeing to a duty to “defend” or “indemnify”that the design professional never intended to assume, and even avoid resulting claims and lawsuits altogether.
Timothy B. Soefje is Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. For regular information about professional liability matters, follow him on Twitter at @TimSoefje. For more information, visit us at www.realclearcounsel.com or contact Mr. Soefje at email@example.com.