There is no common law duty of a consultant to defend its client against third party actions. That duty can only arise as a result of a contractually liability created through the indemnification clause of the contract. Since this is a contractual liability, it is excluded from coverage pursuant to the contractual liability exclusion of the errors and omissions policy.
Duty to Defend
Courts that have interpreted indemnification provisions that included the duty to defend have explained that this means the consultant must defend its client (pay legal fees on behalf of its client) as the litigation is ongoing — and that it cannot wait until the conclusion of the litigation to determine whether it is found to have negligently performed services and therefore owe a separate duty to indemnify. The courts see the duty to defend and the duty to indemnify as two separate and unique duties. The insurance policy only covers damages to the extent they are caused by the consultant’s negligence – and that determination can only be reached at the conclusion of the case or by settlement to which the carrier agrees.
Although it is theoretically possible that the damages awarded by a court might include some attorneys fees if there is statute that requires the same, attorneys fees are generally not awarded as part of a judgment in the American system of justice. Therefore, a clause stating that the consultant will defend (pay on behalf of) or will indemnify (pay attorneys fees after judgment is rendered) both may create uninsurable liability. Agreeing to defend on behalf of a client, however, is the far worse situation since the consultant would be paying out of its own pocket its client’s attorneys fees as they are incurred to defend against a third party claim that might not even ultimately be found to have been caused by the consultant’s negligence.
My routine advice for design professionals when reviewing their contracts for insurability of risks:
“Please note that any duty to defend its client that the design professional may agree to under an indemnification clause, or other provision of the contract, is uninsurable pursuant to the contractual liability provision of the contract. Note also that it is our opinion that any duty to defend should be struck from a contract, even if the contract states that the duty to defend and indemnify is limited to damages resulting from the negligent performance of professional services. This is because we believe courts may interpret the duty to defend to be such a broad separate duty from the duty to indemnify, that the consultant could be expected to begin defending a claim on behalf of its client (paying attorneys fees as they are incurred) as soon as a claim is tendered by the client even if no determination of negligence has been rendered.”
The way I look at the issue is that a contractually agreed upon duty to defend is triggered as soon as the claim is made because it is a separate duty from the duty to indemnify. It is comparable to an insurance company providing you a defense against a claim. It doesn’t wait to see if you are negligent before defending you. The carrier defends you in the hope of proving you are not negligent.
In my opinion, the clause below is not a reasonable one for a design professional to sign because courts may interpret the clause to mean that the indemnification requirement only applies to damages ultimately caused by negligence – but that the defense obligation is immediate and is not limited by the language of the clause concerning negligence.
INDEMNIFICATION (example of problem clause)
The Consultant covenants to save, defend, hold harmless, and indemnify the County, and all of its elected and appointed officials, officers, employees, agents, departments, agencies, boards, and commissions (collectively the “County”) from and against any and all claims, losses, damages, injuries, fines, penalties, costs (including court costs and attorney’s fees), charges, liability, or exposure, however caused, resulting from, arising out of, or in any way connected with the Consultant’s negligent acts, errors, or omissions, recklessness or intentionally wrongful conduct of the Consultant in performance or nonperformance of its work called for by the Contract Documents. This indemnification shall survive the termination of this Contract.
See, for example, the recent California court decisions of Crawford v. Weathershield Manufacturing, as well as the CH2M Hill decision, that were reported in previous issues of this newsletter.
Because of the confusing language in so many of the contracts I am reading these days, I have suggested in some instances adding the following paragraph to clarify the intent of the indemnity obligations. It attempts to make clear that there will be no defense duty, and that the indemnity is limited to costs and damages the indemnitee is legally obligated to pay to third parties.
“Indemnification. Notwithstanding any clause or provision in this Agreement or any other applicable Agreement to the contrary, Consultant’s only obligation with regard to indemnification shall be to indemnify and hold harmless (but not defend) the Client, its officers, directors, employees and agents from and against those damages and costs (including reasonable attorneys fees and cost of defense) that Client is legally obligated to pay as a result of the death or bodily injury to any person or the destruction or damage to any property, to the extent caused by the negligent act, error or omission of the Consultant or anyone for whom the Consultant is legally responsible, subject to any limitations of liability contained in this Agreement.
About the author: This article is written by J. Kent Holland, a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 12 No. 3 (March 2010).