For design professionals considering design-build projects for the first time, special attention must be paid to the prime agreement between the owner and design-builder. Frequently, design professionals provide their design services as a subconsultant to the design-builder. During a recent contract review we came across the following clause in the prime agreement between the owner and design-builder:

 

 

This is known as a skip over clause where, essentially, the design-builder has agreed that if there is a problem that appears to be design-related the owner has the right to bring a claim directly against the architect. Just about any problem is going to involve questions about design adequacy, and as such a skip over clause would make the architect a target for cost recovery efforts by the owner. From a risk management standpoint it would be prudent not to have such a skip over clause; instead the owner can pursue a claim against the design-builder, the entity with whom it has a contract. The design-builder can then bring a claim against the architect if it relates to the professional services that the architect provided on the project. Having the owner designated as a third-party beneficiary with a right to bring claims directly against the architect increases the risk for the project significantly.

A recently reviewed contract contained an indemnification provision that required the design professional to indemnify the client as well as the state, the city, and the local transportation department. The design professional wanted to know who should be included when agreeing to indemnify a client.

 

Client-drafted indemnity provisions often include a long list of parties to be indemnified whose connection with the client or project is remote and may not ordinarily be entitled to indemnity under common law, i.e. in the absence of the contract. Beyond naming the client, a reasonable list of parties to be indemnified could include, but generally should be limited to the client’s officers, directors, partners, employees, and representatives. If some third party is damaged, such as a lender, that party is free to pursue its own legal remedies.

 

Design professionals should check with local legal counsel to determine how common law in the local jurisdiction handles indemnity obligations to parties other than the insured’s direct client. Agreeing to indemnify a party that has no common law entitlement to such indemnity might result in an uninsurable contractual obligation. The professional liability policy issued by CNA excludes coverage for costs “arising out of the liability of others you assume under any oral or written contract or agreement, except that coverage otherwise available to you shall apply to your liability that exists in the absence of such contract or agreement.”