Schinnerer's RM Blog - negligence tag

Review Indemnification Provisions Carefully

Thu, 09 Jun 2011 19:55:00 GMT

Indemnification provisions that are not limited to the extent of a design professional’s negligence may result in claims that are not covered by professional liability insurance. We were recently asked to review the following Indemnification provision:

Indemnification: The Consultant shall indemnify, defend and hold harmless the Town, its officers, officials, agents, and employees from any claim, damages, injury, or death and action of any kind, whether at law or in equity, arising from any negligent act, error or omission in the performance of professional services by the Consultant. This undertaking shall not apply to damage, injury, or death suffered in the performance of a construction contract caused by or resulting solely from the negligence of the Town, its agents or employees attributable to the sole negligence of the Town, its agents or employees.

This indemnification is broader than the limited contractual liability coverage afforded by a professional liability insurance policy. Firstly, this indemnity includes an obligation to "defend" the town. Professional liability insurance only provides defense for the insured, not for clients of the insured. Once liability is determined, assuming such damages are recoverable in the jurisdiction, the policy would reimburse the client for expenses to the extent they were caused by the insured's negligence.

Secondly, this indemnity is not limited to the percentage of the consultant’s negligence. This could result in the consultant having to indemnify the town for a claim that will not be covered by the professional liability policy. In this provision, the only exception to the consultant paying 100% of the damages is for claims “resulting solely from the negligence of the Town….” Thus, unless the town is 100% at fault, the consultant may have to pay 100% of the damages, even when only partially at fault. The professional liability policy only provides coverage for claims to the extent they are caused by the insured’s negligent acts, errors, or omissions.

Here is an example of an insurable indemnity:

Sample provision: To the fullest extent permitted by law, Consultant shall indemnify Client, its officers, directors, partners, employees, and representatives, from and against losses, damages, 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 found to be caused by a negligent act, error, or omission of Consultant or Consultant’s officers, directors, members, partners, agents, employees, or subconsultants in the performance of services under this Agreement.

The interpretation and enforceability of indemnity provisions depends upon the jurisdiction, statutes, and case law. There are significant differences on how different jurisdictions interpret and enforce indemnity provisions. Accordingly, when reviewing or drafting indemnity provisions, it is essential to consult with knowledgeable legal counsel.

Client’s Implied Warranty of the Adequacy of Plans

Thu, 21 Apr 2011 14:58:00 GMT

In United States v. Spearin (1918), the U.S. Supreme Court held that a contractor will not be liable to the client for loss or damage caused solely by inadequate information in the plans and specifications that the client provides to the contractor. Over the years, a version of this principle has been adopted in federal courts and most state courts, and it is known as the Spearin Doctrine. The Spearin Doctrine states that there is an implied warranty from the client to the contractor that the client’s plans and specifications have enough information for the contractor to construct the project.

It is important to note that the design professional’s legal obligation is to provide services in a manner that meets the standard of care for the profession. The standard of care required of design professionals is to practice with the same skill and care used by members of the profession practicing under similar circumstances at the same time and in the same locality. Therefore, clients face the risk that they can still be held responsible for any additional costs if the contractor can successfully claim that the plans and specifications did not have enough information to construction the project, even if the design professional’s services met the standard of care.

A recently reviewed contract contained the following provision:

The Engineer/Architect further agrees to indemnify and hold harmless the Owner and Owner's agents and employees against all claims, damages, losses and expenses, including but not limited to attorneys' fees arising out of the Owner's implied warranty of the adequacy of the design and plans prepared by the Engineer/Architect. (emphasis added)

This provision shifts the risk that the client has due to the Spearin Doctrine to the design professional. It is important to note that the design professional would not ordinarily be obligated to indemnify the client for the Spearin Doctrine as long as the services were performed in a non-negligent manner. Prudent risk management requires careful review of contracts so that the client’s attempts to transfer risk to the design professional are identified and negotiated before the contract is signed.

Indemnity: Limited "to the extent" of insured's negligence

Tue, 22 Mar 2011 13:02:00 GMT

The professional liability policy provides coverage for claims to the extent that they were caused by the insured’s negligent acts, errors, or omissions. Professional liability insurance only pays for damages caused by the insured, not for damages caused by other parties.

We recently reviewed a contract that included an indemnification provision containing the following statement: “This indemnity obligation applies regardless of whether or not such claim…is caused in part by the negligence or other fault of a party indemnified hereunder.”

In some jurisdictions, this language may expand the insured’s legal obligation to pay for damages that are partially caused by another party. In other jurisdictions, this language could impact comparative or contributory negligence statutes. The interpretation and enforceability of indemnity provisions depends upon the jurisdiction, statutes, and case law. There are significant differences on how different jurisdictions interpret and enforce indemnity provisions. Accordingly, when reviewing or drafting indemnity provisions, consultation with knowledgeable legal counsel is essential.

Here is an example of an indemnity provision that attempts to limit the design professional’s indemnification obligation to the proportionate share of the design professional’s negligence:

Sample provision: To the fullest extent permitted by law, Consultant shall indemnify Client, its officers, directors, partners, employees, and representatives from and against losses, damages, 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 found to be caused by a negligent act, error, or omission of Consultant or Consultant’s officers, directors, members, partners, agents, employees, or subconsultants in the performance of services under this Agreement.

In the following mutual indemnification provision this limitation is further clarified:

Sample provision: To the fullest extent permitted by law, Client and Consultant each agree to indemnify the other party and the other party’s officers, directors, partners, employees, and representatives from and against losses, damages, 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 found to be caused by a negligent act, error, or omission of the indemnifying party or any of the indemnifying party’s officers, directors, members, partners, agents, employees, or subconsultants in the performance of services under this Agreement. If claims, losses, damages, and judgments are found to be caused by the joint or concurrent negligence of Client and Consultant, they shall be borne by each party in proportion to its negligence.

Waiver of Subrogation Rights

Fri, 18 Mar 2011 13:26:00 GMT

When a party pays a claim caused by the negligence of another, the party who paid the claim is legally entitled to step into the shoes of the negligent party and pursue any claims that the negligent party may have. This concept is known as subrogation. Clients often require that consultants waive subrogation rights; this is done to provide finality to the settlement of claims. Clients want to know that if a claim is paid by their insurance carrier to a third party that the matter is settled and that they will not be facing renewed litigation by the insurance company seeking to recover money.

Design professionals should check with their broker as to how their other insurance policies address waiver of subrogation. The Schinnerer and CNA professional liability policy allows the insured firm to waive subrogation rights against their client. However, the waiver of subrogation rights has to be in a written agreement prior to a claim or circumstance.

For additional information, please see our Management Advisory on waiver of subrogation rights at http://www.schinnerer.com/risk-mgmt/Documents/ManagementAdvisories/Waiver-of-subrogation.pdf. (Access limited to policyholders only.)