Indemnitiesby Jerry De Zelar, CSI, CDT, Education Committee
Of all the provisions in an agreement for consulting services, indemnities
have the most far-reaching liability implications. They are also the most
difficult clauses to negotiate, especially if a client is not the most
reasonable individual. Furthermore, enforceability, restrictions and
interpretations vary widely from state to state. It is critical that
consultants understand the issues and work closely with their attorneys
and professional insurance specialists to review and negotiate any
contract indemnification language.
The concept of indemnification (or hold harmless) is simple: it is an agreement to assume a specific liability in the event of a loss. It may mean a shifting of risk from one party to another, a kind of insurance. When a consultant indemnifies a client, they may be assuming some of the client's potential or actual legal liabilities, thereby acting as an insurer, of sorts, for that client.
When a contractor takes over control of an owner's property and occupies it for the purpose of constructing something on it, it's reasonable to ask the contractor to hold the owner of the property harmless from liability for virtually anything that happens on the site. The same logic does not apply to architects or engineers. Consultants do not occupy or exercise constructive control over the jobsite. Therefore, it makes no sense for consultants to have to provide the same kinds of indemnity protection as contractors.
It is only logical that all parties (owner, contractor and consultant) be responsible for their own risks or those risks they can best control. If no one can control a risk, then it must remain with the owner. In some cases, a project may be so hazardous or the consulting services so risk-prone that it would make more sense to reverse the situation and have the owner indemnify the consultant for those risks.
There are a couple points to keep in mind. First, lawmakers generally disfavor indemnities and the courts tend to follow their lead. When it comes to indemnities, consultants should expect the worst of both worlds that a client's indemnity might be enforced and the consultant's might not. This is why good legal advice is especially important on any indemnity language.
Second, many sample clauses offered include specific indemnifications simply because each contract topic is considered separately. Many attorneys believe that a contract should have as few indemnities as possible. Often this can be accomplished by combining all the issues, causes or situations for which the consultant wants to be indemnified into one general indemnity clause. Overall, the agreement should allocate project risks clearly and unambiguously (specify who is responsible for what risks).
A consultant may encounter at least four different types of indemnity situations:
When Your Client Wants an Indemnity from You
In that agreement sent to you by your client’s attorney probably lurks one or perhaps a dozen clauses requiring you to indemnify the client. The language may be short or it may be pages long. In either case, proceed with caution. With the help of your attorney, your professional – liability insurance specialist, you can unravel even the most offensive legal verbiage and, if you can’t dispose of the provision altogether, perhaps you can negotiate to make it more equitable.
The biggest problem is the existence of the clause itself. By including this indemnity, your client is attempting to transfer some or perhaps all of his or her risk to you, and likely demanding that you take on more liability than the law or custom requires. If you doubt this, ask yourself: without this indemnity, whose risk would it be? Almost invariably, it would be the client’s.
Several other critical factors must be examined:
At all times, your guiding principle should be: unlimited liability is not an option. Refuse to accept it. The goal is to keep the risk in the hands of the party who is in the best position to control or transfer it. If the risk cannot be reasonably controlled or transferred, it should remain with client.
Your best solution? Delete any provision that requires you to indemnify the client. Second best, if your client insists on some form of indemnification, counter with a mutual indemnity, in which each of your own negligent acts.
As a final alternative, you may be forced to give your client some kind of unilateral indemnity. However, you should, if at all possible, limit the indemnity to that which is insurable. Make certain the indemnity is tied to your negligence and purge the clause of any client-generated onerous language.
To protect yourself against third-party claims, add language to your contract with the owner that requires the owner to include provisions in the owner/general contractor agreement requiring that all contractors indemnify you, your sub consultants and the owner for claims by the contractor’s employees. You also will want to have the contractor name you and the owner as additional insureds on the contractor’s general liability policy.
When You Want an Indemnity from Your Sub-consultants
Prime consultants often require indemnities from their sub consultants to protect themselves from damages and costs arising form claims due to the actions of these sub consultants.
If your sub consultant is sued for negligence, you ad the prime consultant, will almost certainly be named it the suet. Even if you are blameless, the very act of defending yourself may well cost you your deductible, if you are insured, besides your time and the staff costs expended in your own defense can be considerable sum.
It is recommended that in your sub consultant agreements, you use a reasonable indemnity clause that is both mutual and insurable and that allows you to recover your costs in the event of a claim.
In closing keep in mind indemnities are extremely complex and have enormous liability implications. Have your lawyer examine any indemnity language with respect to the law of the governing jurisdiction to determine exactly what your rights and exposures may be. Also, work with your professional liability insurance specialist to determine the insurability or any indemnities you intend to sign.
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