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Kent Holland, J.D.
ConstructionRisk, LLC

Where an engineer entered into a contract with a homebuilder, its contract included a broad form indemnification clause that included a duty to defend and an obligation to indemnify for all claims and damages regardless of whether caused by the engineer’s negligence, questions arose as to whether a subsequent suit against the engineer for failure to honor the terms of the indemnification clause required the plaintiff to file a certificate of merit by an expert.

Breach of Contract Case

The trial court and appellate court both concluded that certificate of merit was not necessary since this was a pure breach of contract case that could be determined without need of an expert witness. It did not matter whether underlying issues concerned negligent performance of professional services. The homebuilder settled a claim against it by a homebuyer. The builder’s Commercial General Liability (CGL) insurance carrier then filed a subrogation suit against the engineer for breach of contract for failing to defend and indemnify the builder. The insurer sought to recover “the defense costs, litigation expenses, attorneys’ fees, and settlement sums paid on the builder’s behalf.”   Childress Engineering Services, Inc. v. Nationwide Mutual, 456 S.W. 725 (Texas 2015).

Comment – Indemnification Clause

The indemnification clause quoted in the decision is well worth reading. This case is an excellent demonstration of why it is so important that design professionals not agree to broad form indemnification, and certainly not agree to defend a client. There is no insurance coverage for the indemnity and defense obligations that this engineer agreed to accept. It is interesting that it is a CGL insurance carrier that is seeking to recover these costs from the engineer that, if successfully recovered, will likely come out the Engineer’s own pocket without the benefit of professional liability coverage.

The indemnification clause in the contract provides the following:

INDEMNIFICATION. [CES] shall fully protect, indemnify and defend [Homebuilder] and hold [Homebuilder] harmless from and against any and all claims, demands, liens, damages, causes of actions, liabilities of any and every nature whatsoever, losses and expenses, including but not limited to personal injury, property damage, attorneys’ fees and court costs, arising in any manner, directly or indirectly, out of or in connection with or in the course of or incidental to any of [CES’] work and obligations as provided in the Subcontract Agreement, including any extra work, REGARDLESS OF CAUSE OR ANY FAULT OR NEGLIGENCE OF [HOMEBUILDER] OR ITS AGENTS, OFFICERS OR EMPLOYEES AND WITHOUT REGARD OF CAUSES OR OF ANY CONCURRENT OR CONTRIBUTING FAULT OR NEGLIGENCE, WHETHER SOLE, JOINT OR CONCURRENT, ACTIVE OR PASSIVE BY [HOMEBUILDER].

Further comment:  See my website at http://www.constructionrisk.com/indemnification-clause/ for papers and articles on the important issue of indemnification clauses.

The contractual liability exclusion in the standard professional liability policy will cause the exclusion of all damages, losses, claims and costs imposed upon the engineer in this case that would not have been incurred under common law in the absence of the contract language.

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 contractual 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.

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.

 

About the author: Article written by J. Kent Holland, Jr.,  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 founder and president of a consulting firm, ConstructionRisk, LLC, 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. 17, No. 7 (October 2015).

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