STRUCTURAL ENGINEERS ASSOCIATION OF ARIZONA. Gail S. Kelley, P.E., Esq., LEED AP June 3, 2017

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1 STRUCTURAL ENGINEERS ASSOCIATION OF ARIZONA Gail S. Kelley, P.E., Esq., LEED AP June 3, 2017

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3 Engineer shall indemnify, defend, and hold harmless the Client Suggested changes: Delete the word defend Edit to: defend (except for professional liability claims) Edit to defend to the extent covered by Engineer s insurance Add a sentence at the end of the provision stating: Engineer s defense obligation shall not extend to professional liability claims, however Engineer shall reimburse the indemnified party for reasonable attorneys fees and legal costs to the extent such claims are caused by Engineer s negligence or willful misconduct. 3

4 Engineer shall indemnify, defend, and hold harmless the Client... Add a sentence at the end of the provision stating: Client shall reimburse Engineer s reasonable attorneys fees and legal costs to the extent such claims are not caused by Engineer s negligence or willful misconduct. If the Client will not agree to the above sentence, add a sentence at the end of the provision stating: Client shall reimburse Engineer s reasonable attorneys fees and legal costs to the extent such claims are caused by Client s negligence or willful misconduct. 4

5 Alternatively, draft a bifurcated indemnification clause that separates indemnification for professional liability from indemnification for general liability. Example: 7.A For professional liability claims, Engineer shall indemnify and hold Client harmless for losses arising from third-party claims to the extent such claims are not caused by Engineer s negligence or willful misconduct. 7.B Except for those claims covered under section 7.A, Engineer shall indemnify, defend and hold Client harmless from and against allegations and claims arising from Engineer s negligent acts, errors or omissions. 5

6 An agreement to indemnify against claims or allegations could be interpreted as an agreement to defend. Change: To: Engineer shall indemnify and hold harmless the Client against allegations and claims arising from Engineer s negligence. Engineer shall indemnify and hold harmless the Client against losses arising from third-party claims to the extent caused by Engineer s negligence. Remember: under the common law, to indemnify means to financially protect someone who has been held vicariously liable for your negligence. If there has only been an allegation of your negligence, the Client hasn t yet been held liable, so to indemnify against an allegation doesn t make sense. 6

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8 In most design agreements, the indemnification is one-sided, providing protection only to the Client: Consultant shall indemnify and hold harmless the Client, and the Client s employees, directors, officers, and lenders from and against liabilities and expenses arising from third-party claims, including attorney s fees where recoverable under applicable law on account of negligence, to the extent caused by the Consultant s negligent acts, errors or omissions. Some design agreements, particularly subcontracts, contain a mutual indemnification clause. The clauses may be worded identically such that each party assumes the same obligation to the other party. The clauses may also be worded differently to reflect the parties' relationship. Often the Client or Prime Consultant will assume a more limited indemnification obligation. 8

9 8.1.2 The Consultant shall indemnify and hold the Architect and the Architect s officers and employees harmless from and against damages, losses and judgments arising from claims by third parties, including reasonable attorneys fees and expenses recoverable under applicable law, but only to the extent they are caused by the negligent acts or omissions of the Consultant, its employees and its consultants in the performance of professional services under this Agreement. The Consultant s obligation to indemnify and hold harmless the Architect and its officers and employees does not include a duty to defend The Architect shall indemnify and hold the Consultant and the Consultant s officers and employees harmless from and against damages, losses and judgments arising from claims by third parties, including reasonable attorneys fees and expenses recoverable under applicable law, but only to the extent they are caused by the negligent acts or omissions of the Architect, its employees and its other consultants in the performance of professional services under this Agreement. The Architect s obligation to indemnify and hold harmless the Consultant and its officers and employees does not include a duty to defend. 9

10 6.10 Indemnification and Mutual Waiver A. Indemnification by Engineer: To the fullest extent permitted by law, Engineer shall indemnify and hold harmless Owner, and Owner s officers, directors, members, partners, agents, consultants, and employees from reasonable claims, costs, losses, and damages arising out of or relating to the Project, provided that any such claim, cost, loss, or damage is attributable to bodily injury, sickness, disease, or death, or to injury to or destruction of tangible property (other than the Work itself), including the loss of use resulting therefrom, but only to the extent caused by any negligent act or omission of Engineer or Engineer s officers, directors, members, partners, agents, employees, or Consultants. This indemnification provision is subject to and limited by the provisions, if any, agreed to by Owner and Engineer in Exhibit I, Limitations of Liability. B. Indemnification by Owner: Owner shall indemnify and hold harmless Engineer and its officers, directors, members, partners, agents, employees, and Consultants as required by Laws and Regulations and to the extent (if any) required in Exhibit I, Limitations of Liability. 10

11 Both ConsensusDocs 240, Standard Form of Agreement Between Owner and Architect/Engineer and ConsensusDocs 420, Standard Agreement Between Design-Builder and Design Professional contain a mutual indemnification provision in Article INDEMNITY To the fullest extent permitted by law, the Architect/Engineer shall indemnify and hold harmless the Owner, the Owner's officers, directors, members, consultants, agents, and employees and Subcontractors (the Indemnitees) from and against all claims, losses, damages, liabilities, including reasonable attorneys' fees, costs, and expenses, for bodily injury, sickness, or death, and property damage (other than to the Work itself), that may arise from the performance of or the failure to perform Services under this Agreement, but only to the extent caused by the negligent acts or omissions of the Architect/Engineer, the Architect/Engineer 's consultants, or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Architect/Engineer shall be entitled to reimbursement of any defense costs paid above the Architect/Engineer's percentage of liability for the underlying claim to the extent provided for under subsection Nothing in this indemnity shall be construed to limit the insurance obligations agreed to herein. 11

12 7.1.2 To the fullest extent permitted by law, the Owner agrees to indemnify and hold harmless the Architect/Engineer, its officers, directors, members, consultants, agents, and employees, or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable from all claims for bodily injury and property damage, other than property insured under Subparagraph , including reasonable attorneys' fees, costs, and expenses, that may arise from the performance of work by the Owner or Others, but only to the extent caused by the negligent acts or omissions of the Owner, or Others. The Owner shall be entitled to reimbursement of any defense costs paid above Owner's percentage of liability for the underlying claim to the extent provided for under section

13 Mutual indemnification clauses tend to be rare, however, particularly in contracts that have been drafted by the client. Engineers usually need to negotiate for indemnification. While a general indemnification against claims arising from the client's negligence may not be necessary, an Engineer should require indemnification against certain risks. These can include: Misuse of the Instruments of Service Hazardous Materials Existing Conditions Liability that must be assumed under an Access Agreement 13

14 Some design agreements are written such that the engineer grants the Owner a non-exclusive license to use the work product. Other design agreements are written such that the Owner obtains the copyright to the work product upon payment for the Engineer s services. In either case, the Owner will often want to be able to use the plans and specifications for maintaining, altering, or adding on to the Project. Some Owners want to be able to use the documents on other projects. It is a good idea to require that the Owner agrees to indemnify and defend the engineer against claims arising from use of the drawings on other projects or changes made to the drawings by others. 14

15 The wording of such clauses may depend on the scope of work, but commonly used clauses include: The Owner agrees to indemnify, defend, and hold Engineer harmless from any claims arising from changes made to the documents by others or from Owner s use of the Instruments of Service on any other project without engagement of the Engineer. The Owner agrees to indemnify, defend, and hold Engineer harmless from any claims arising from Owner s use of the Instruments of Service for any purpose other than the purpose they were prepared for under this agreement. The Owner agrees to indemnify, defend, and hold Engineer harmless from any claims arising from changes made to the Instruments of Service by others. 15

16 Many contracts make the engineer liable for claims arising from hazardous materials brought onto the site by the Engineer unless the Engineer was acting under the specific direction of the Owner. However, the Engineer should not be liable for claims arising from hazardous materials already existing on the site or brought onto the site by others, unless the Engineer has exacerbated the situation through its negligence. When hazardous materials are a concern, the Engineer may want to require that the contract includes a clause similar to the following: The Owner agrees to indemnify, defend, and hold Engineer harmless from any claims arising from hazardous materials existing on the site or brought onto the site by others, except to the extent the Engineer has exacerbate the situation by its negligent acts, errors, or omissions. 16

17 When the project involves renovation of an existing structure or the subsurface conditions are unknown, it may be advisable to require the Owner to provide a general indemnification against claims arising from existing site conditions, except to the extent the engineer has exacerbated the situation through its negligence. The Engineer s liability should be limited to its negligence; the Owner should bear the risk of existing site conditions. 17

18 Engineers who do site investigations will sometimes need to enter onto a third party's property; this is particularly true of engineers who do geotechnical investigations. Often, the property owner will want the Engineer to sign an Access Agreement that requires the Engineer to indemnify the property owner from any claims arising from the investigation as well as assume the risk of any damage to the property, regardless of whether the Engineer is negligent. This is not unreasonable, as the property owner should not be expected to bear these costs, however, the Engineer's liability for this work should not be greater than its liability under its contract with its client. 18

19 To be covered by professional liability insurance, the Engineer's indemnification obligations should be limited to the extent caused by the Engineer's negligence; when an Engineer anticipates having to enter onto another party's property in order to perform the work required by the design agreement, it should consider including a clause such as the following in the design agreement. If Consultant is required to sign an Access Agreement to enter onto the property of a third party, Client shall indemnify, defend, and hold Consultant harmless from any claims arising from its work on the third party's property, except to the extent caused by the Consultant's negligent acts, errors or omissions. 19

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21 Under the workers compensation acts passed by every state, an injured employee cannot sue its employer to recover for its injuries, but instead is limited to what it is entitled to under the workers compensation law. If an employee of the Engineer is injured and is not satisfied with what he or she recovers from workers compensation, the employee may file a claim against the Owner, alleging that the Owner s negligence contributed to the injury. Likewise, if the Engineer is a subconsultant, its employee may sue the Prime Consultant or Prime Consultant, alleging that the Prime s negligence contributed to the injury. 21

22 A claim where an injured employee sues a third-party for causing or contributing to its injury is referred to an action over claim. An Owner will often want to make sure that the Engineer cannot use the workers compensation law as justification for not indemnifying for this type of claim. In states where there is very strong protection for injured worker, it is very common to see indemnification clauses that contain a provision such as the following: The obligations contained in this Section shall not be limited in any manner by damages payable pursuant to any worker s compensation, disability or similar laws. 22

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24 An indemnification clause will often include a provision such as: Consultant s obligations of indemnification, defense and hold harmless as set forth herein shall survive termination and/or completion of this Agreement. Even without a so-called survival clause, a court would typically hold that the indemnification obligation did not end with the termination of the Agreement or the completion of the parties other obligations under the Agreement. 24

25 An indemnification clause may include a provision such as: Engineer will pay all costs and expenses, including reasonable attorney fees and all other expenses of litigation, incurred by an Indemnitee to enforce the foregoing agreement to protect, indemnify, and hold harmless an Indemnitee. Change to: successfully enforce Or qualify the obligation: hold harmless an Indemnitee, to the extent Engineer has been found to have breached its obligations. 25

26 The obligations contained in this Section shall: (i) not be construed to negate, abridge or reduce other rights or obligations of indemnification which otherwise may exist with respect to any person or party described herein; (ii) shall be separate from and independent of any other party s obligations; and (iii) shall be without regard to any insurance otherwise available to the Engineer or any Indemnitee hereunder. 26

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28 Depending on the scope of work, an Engineer may need to hire subconsultants to perform certain aspects of the work. Often the prime contract will explicitly require the Engineer to pass all indemnification obligations down to its subconsultants. In such cases, the Engineer should take care to negotiate terms that its subconsultants will agree to. As an example, professional liability insurance does not cover defense of indemnified parties. If the Engineer agrees to defend the Owner against any allegations of negligence arising from its services, it may have trouble getting its subconsultants to agree to the flow-down requirement. 28

29 Even if the prime contract does not require that the indemnification obligations flow down to subconsultants, the subcontract should include an appropriate indemnification clause. Typical wording might be: Subconsultant shall indemnify and hold harmless the Engineer, and the Engineer s employees, directors, officers, and lenders from and against liabilities and expenses arising from thirdparty claims, including attorney s fees where recoverable under applicable law on account of negligence, to the extent caused by the Subconsultant s negligent acts, errors or omissions. 29

30 It is also important that the subconsultant be required to carry sufficient insurance to cover its indemnification obligation to the Engineer. The Engineer is liable to the Owner for the services in its scope of work, whether the services are provided by its own employees or subconsultants. Ultimately, the Engineer will be required to provide indemnification in accordance with its obligations under the prime contract. The Engineer will be held vicariously liable for claims arising from the subconsultant s negligence; if the subconsultant does not have insurance to cover these claims, the Engineer s insurance will end up having to cover the claim. 30

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32 In many design agreements, the insurance and indemnification obligations are in the same article, which can create confusion. The agreement may further confuse the issue by requiring that the Indemnitees (the parties being indemnified) be listed as "additional insureds" on some of the Engineer's insurance policies. Alternatively, the indemnification clause may require the Engineer to indemnify everyone listed in the Insurance section as an Additional Insured. While both insurance and indemnification provide financial protection to the covered individuals, it is important to understand the difference between the obligations. 32

33 The insurance obligations in a design agreement generally consist of the policies that the Engineer is required to carry and the policy limits. The policies typically required are: Commercial General Liability (CGL) Commercial Automobile Liability; Workers Compensation / Employers Liability, Professional Liability Insurance (PLI). The agreement may also state that various entities must be named as additional insureds on certain policies. When an entity is an additional insured on another party's insurance policy, it is covered by the policy under essentially the same terms as the Named Insured (the party that the policy was issued to), subject to any restrictions in the additional insured endorsement. 33

34 Often, an Engineer will be required to name its Client and the Client's lender (when the Client is the Owner) as additional insureds on its CGL policy. If a claim is filed against the Additional Insured for injury or property damage suffered by a third party, and the injury or property damage was caused, at least in part, by the Named Insured, the Additional Insured will be covered under the Named Insured's policy, subject to the terms and limits of the policy and any restrictions in the endorsement. The Additional Insured is covered even if the Additional Insured's negligence was primarily responsible for the claim. 34

35 If the Engineer's employee is injured while working on site and files a claim alleging that the Client was partially responsible, the Client could either file a claim under the Engineer's CGL insurance or seek indemnification from the Engineer. However, the indemnification obligation is completely independent of the Engineer 's insurance. The indemnification obligation is between the Engineer and the Client. The Additional Insured obligation is between the Client and the Engineer s insurance carrier. 35

36 Most claims against an Engineer will fall under its PLI, particularly if the Engineer is not providing construction administration or doing work such as surveying or condition assessments which require it to be on site. PLI policies do not allow additional insureds to be added to the policy; if the Client is performing design work or other professional services that could contribute to a negligence claim, it needs to be covered under its own PLI policy. Since the Client cannot file a claim directly under the Engineer's PLI, most design agreements require the Engineer to indemnify its Client against claims caused by the Engineer 's negligence. 36

37 The indemnification obligation is between the Engineer and its Client: If the Engineer agrees to indemnify the Client for claims that are not covered by insurance, the Engineer will be responsible for the claims itself. As an example, PLI only covers claims to the extent they are caused by the Engineer's negligence. If the Engineer agrees to indemnify the Client for "all claims arising from its services," it could be liable for the entire claim, even if the claim was partly caused by the Client, the Contractor or a third-party. The portion of the claim that was not caused by the Engineer's negligence would not be covered by PLI. 37

38 Disclaimer: This information in this presentation is not legal advice and cannot be relied upon as such. Any suggested changes in wording of contract clauses, and any other information provided herein is for general educational purposes to assist in identifying potential issues concerning the insurability of certain identified risks that may result from the allocation of risks under the contractual agreement and to identify potential contract language that could minimize overall risk. Advice from legal counsel familiar with the laws of the state applicable to the contract should be sought for drafting final contract language. This presentation is not intended to provide an exhaustive review of risk and insurance issues.