knowing when to say no! pt. 1: indemnification
TRANSCRIPT
Knowing When to Say No! Indemnification
RLI Design Professionals
Design Professionals Learning Event
DPLE 135
January 20, 2016
RLI Design Professionals is a Registered Provider with The American Institute of Architects Continuing Education Systems. Credit earned on completion of this program will be reported to CES Records for AIA members. Certificates of Completion for non-AIA members are available on request.
This program is registered with the AIA/CES for continuing professional education. As such, it does not include content that may be deemed or construed to be an approval or endorsement by the AIA of any material of construction or any method or manner of handling, using, distributing, or dealing in any material or product. Questions related to specific materials, methods, and services will be addressed at the conclusion of this presentation.
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© RLI Design Professionals
Course DescriptionThis presentation will address ways in which
indemnification clauses in contracts
may expose design professionals to liabilities
not covered by their professional liability insurance policy.
We will also identify tactics to limit
the scope of indemnification clauses
and explore how statutes may affect
the legality of an indemnification provision.
Learning ObjectivesParticipants will:
1. Learn to identify indemnification clauses and distinguish among the various types.
2. Gain an understanding of how indemnification provisions relate to professional liability insurance coverage.
3. Acquire techniques to limit the scope of indemnification provisions when negotiating contracts
4. Develop a familiarity with statutes that impact the enforceability of indemnification provisions in contracts.
Indemnification Explained
What is an Indemnification Clause?
An indemnification is a contractual obligation by one party (indemnitor) to pay or compensate for the losses, damages or liabilities incurred by another party to the contract (indemnitee) or by a third party.
Three Types of Indemnifications
BROAD
INTERMEDIATE
LIMITED
Broad Form IndemnificationsSample Broad Form Indemnification
“To the fullest extent of the law, Consultant shall indemnify, defend and hold harmless Owner, its officers, employees, agents, representatives, lenders, consultants, and contractors from and against any and all loss, costs, penalties, fines, damages, claims, expenses (including attorney’s fees) or liabilities …arising out of, resulting from, or in connection with the services contemplated by this Contract…”
Broad Form Indemnifications
Liability under Broad Indemnification
Design Professional Liability
Client Liability
Client Liability = 100%
Design Professional may pay 100% of damages!
Broad Form Indemnifications
Contract Breach
Sexual Harassment
TheftWorkers’
Compensation
Potential Claims
Broad Form Indemnifications
Broad form indemnification provisions often
include a
“duty to defend”
and a
“duty to hold harmless.”
Intermediate Indemnifications
Sample Intermediate Indemnification
“Consultant agrees to hold harmless and
indemnify Client from any and all liability,
arising out of Consultant’s negligence,
whether it be sole or in concert with others,
in connection with performance
of the services described herein.”
Intermediate Indemnifications
1%
99%
Design Professional Liability
Client Liability
Liability under Intermediate Indemnification
Design Professional still may pay 100% of damages!
Limited Indemnification
Sample Limited Indemnification
“Consultant agrees to indemnify
Client from and against liability
caused by Consultant’s
negligent performance of services.”
Limited Indemnification
25%
75%
Liability under Limited Indemnification
Design Professional Liability
Client Liability
Intended to limit Design Professional's paymentto only 25% of damages.
Indemnification and Professional Liability Insurance
Professional Liability Insurance
What Does Professional Liability Insurance Cover?
(1) Damages
(2) Caused by
(3) Your Negligence
(4) In the performance of professional services
Professional Liability Coverage
Damages
Include:
Monetary judgments or settlements
Do Not Include:Taxes, criminal or civil fines or penalties, attorneys fees, or claims for unjust enrichment.
Professional Liability Coverage
References to damages that “arise out of,” “in connection
with,” or “as a result of,” (and other similar phrases) the
performance of professional services may exceed those
damages that are proximately caused by your negligent
performance of professional services.
Correlation ≠ Causation
Professional Liability Coverage
Professional liability insurance coverage
only extends to damages that are caused
by your negligence.
Professional Liability Coverage
Professional liability coverage only
extends to damages
caused by your negligence
in the performance of professional
services.
Limiting the Scope of Indemnification Provisions
Scope of Indemnification
Pay attention to the type and number of indemnitees included within the scope of the indemnification.
“Prime,” “Client,” and its “Employees”
“Agents,” “Representatives,”
“Affiliates,” “Servants,” and
“Members”
Red Flag Words
Indemnification provisions will often contain certain “Red Flag” words that may raise questions regarding the scope of liability.
For a more in-depth discussion, please visit www.rlidesignpros.com and review DPLE 120, entitled “Red Flag Words,” on the DPLE Course Resources page.
Red Flag Words (cont’d)
Breadth
• “Arising from”
• “Defend”
• “in whole or in part”
• “fees, costs, expenses”
Ambiguity
• “Agents”
• “Representatives”
• “Assigns”
• “Insurers”
Degree
• “any”
• “all”
• “To the fullest extent”
• “highest”
As a general rule, “Red Flag” words are B.A.D.
Limiting the Scope of Indemnifications
Consult an Attorney Establish Time LimitsInclude Monetary
Caps
Establish when the duty to indemnify
“kicks in”
Limit Number of Indemnitees
Include Reciprocal Terms
Reciprocity Sample Mutual Indemnification Clause
“Consultant agrees to indemnify the Client against all damages…
caused by the Consultant’s negligent performance
of professional services…
Client agrees to indemnify the Consultant against all damages…
caused by the Client's negligent acts
Neither the Client nor the Consultant shall be obligated
to indemnify the other party in any manner whatsoever
for the other party's negligence.”
Government Immunity
Additional Resources Standard industry contract forms may be a valuable
resource to consult when drafting contracts.
The American Institute of Architects
AIA Document B103-2007 – Standard Form Agreement between Owner and Architect
AIA Document B503-2007 – Guide for Amendments to the AIA Owner-Architect Agreements
Engineers Joint Contract Documents Committee
EJCDC E 500 – Standard Form Agreement between Owner and Engineer
Additional Issues Related to Indemnifications
Scattered Indemnification Provisions
Incorporation by Reference
Flow-Down Provisions
Statutory Limits on Indemnification Clauses
Statutory Limits on Indemnifications
Anti-indemnification Statutes
Statutes of Limitation and Repose
Contractual Interpretation Statutes
Anti-indemnification Statutes
Anti-Indemnification statutes are legislatively enacted laws that invalidate indemnification provisions that call for a party to indemnify another party for its own negligence.
The scope of these laws vary by state.
Anti-indemnification Statutes Arizona’s Anti-indemnification Statute
Ariz. Rev. Stat. § 32-1159
“A covenant, clause or understanding in, collateral to or affecting a construction contract or architect-engineer professional service contract that purports to indemnify, to hold harmless or to defend the promisee from or against liability for loss or damage resulting from the sole negligence of the promisee or the promisee's agents, employees or indemnitee is against the public policy of this state and is void.”
Statutes of Limitation and Repose
Statute of Limitations = 2 years
Statute of Repose = 5 Years
Joe Incurs Injury
Joe Files
Claim
Statute of
Repose
Betsy Incurs Injury
Betsy Files
Claim
Year 1 Year 4 Year 5 Year 6 Year 7
Project Completed
Contractual Interpretation Statutes
Sample Contractual Interpretation Statute
Cal. Civ. Code §2778(3)
“An indemnity against claims, or demands,or liability, expressly, or in other equivalent
terms, embraces the costs of defense againstsuch claims, demands, or liability incurred in
good faith, and in the exercise of a reasonable discretion.”
This concludes The American Institute of Architects
Continuing Education Systems Program
Alayne McDonald, Client Risk Management Coordinator
Marie Bernier, Senior Risk Management Consultant