The Problem with “Duty to Defend” Provisions

Professional Liability policies for Engineers and Architects are considered “indemnification policies” literally meaning that they insurance carrier agrees to “make whole” any party who suffers injury or loss as a result of your “negligent deliverance of professional services”  up to the available limits of the professional liability policy. [Negligence, of course, is the “operative” word meaning that your standard of care is the “ordinary man” standard as opposed to perfection.]  Unfortunately, too few drafters of contracts used to engage the professional services of engineers and architects understand that, unlike a General Liability policy’s “additional insured” provision which provides affirmative defense of a third party, a Professional Liability policy has no provision within the policy to provide “defense” to anyone other than the design professional him/herself.

Thus, the familiar contractual indemnity that goes something like “Engineer / Architect will defend and hold harmless owner from and against any costs, losses or other financial burdens incurred by owner as a result of any claim, lawsuits, …. based on the alleged errors of the Engineer / Architect ” is often an overlooked provision that is generally “uninsurable” by the professional liability policy.  Owners have not been well educated in the nuances that differentiate an engineers / architect’s professional liability policy from a general contractor’s general liability policy.

Why is this uninsurable?  Your Professional Liability is triggered by your “actual or alleged negligence” and is for the benefit of the design professional herself.  Providing affirmative defense to a third party arising out of your alleged negligence is well beyond the policy provisions.  Point in fact is that any professional liability will INDEMNIFY [meaning reimburse] an owner for costs that they actually incur in their defense should the facts bear out that the Engineer or Architect was actually negligent.  [IE — we will reimburse them after it is proven and not before — and doesn’t that seem reasonable that you are innocent until proven guilty?]  Additionally, ALL professional liability policies for engineers and architects contain a CONTRACTUAL LIABILITY exclusion that states that the only contractual coverage granted by the policy is “such liability that would have existed in the ABSENCE of a contact.”  [In short, this means that even without a contract the Design Professional is always held to the negligence standard of care.]

1. The duty to “indemnify” covers all costs associated with their defense through reimbursement [if we are deemed negligent, then the owner will be made whole.]

2. It is patently unfair for an owner to request an affirmative defense by you, the Engineer or Architect, based on a mere allegation.  Of course the owner will then state that it is unfair that they should have to defend themselves from a lawsuit when they are not the contractor or the engineer / architect. [They are merely the owner].  True enough, however, you will often find that their fear of suit is based on “B-I / bodily injury” type claims from the site itself.  Again, remind the owner that contractually you are NOT RESPONSIBLE for site safety or means / methods / sequences of the contactor.  Thus, B-I suits and their defense can be handled by the “additional insured” provision of the contractor’s General Liability policy.

3. Without our “duty to defend” the owner has complete control over the course of their defense.  [Which most would probably want anyway.] If we defend, then we control strategy; counsel; etc. Many owners would be uncomfortable with this course of action.

4. I am certain that before or after the onerous indemnity provision there is a section of the contract that outlines all manners of insurance that must be maintained at certain limits with such insurance to be maintained for “three years after substantial completion of the project.”  [Inclusion of such provisions clearly indicates that the owner recognizes that there are real risks associated with the undertaking of a project and that the backing of the appropriate levels of insurance affords comfort and security to the owner that should some catastrophic failure result from design deficiencies then there is insurance in place to reimburse them for losses.]  Why then would the owner want to include contractual obligations that negate the availability of the insurance and possibly put them in a position whereby they [the owner] is compelled to bring suit against the engineer or architect to force their compliance in providing affirmative defense?  [It simply makes no sense.]  In other words, if the insurance won’t pay for defense, few Engineers and Architects possess the cash reserves to fund a potentially expensive and lengthy defense.

5. If you must, then try to limit the defense to a specified figure that has some relationship to your actual fee for services.  [$100k in fees = limit defense to $5k.]

6. Get the clause changed to say that you have a “right” as opposed to a “duty” to provide the owner with defense.

7.  I suppose my favorite “get out of jail free” provision would be to ask the owner to insert “to the extent such provisions or indemnity is covered by the engineer’s / architect’s professional liability policy” as the last sentence of a contractual provision.  This get’s to the heart of the matter which is that whatever you are agreeing to NEEDS to be covered by insurance.  In my opinion, it’s troubling to begin a relationship with an owner who would knowingly but you in a position of being forced into agreeing to a contract that is potentially uninsurable.  Their inability to agree to such a provision brings up another common saying amongst Risk Management Professionals which is that “sometimes the most profitable project you undertake is the one that you didn’t.”

I have additional information on the subject of the word “defend” and insurable indemnity provisions that I would be happy to share with you.  Please feel free to contact me with questions.

Timothy Esler’s original articles are published in The Zweig Letter.