An Unfair Duty to Defend
No engineering project is without risk. Somewhere between the goal of designing the best bridge, building or water treatment facility and running a profitable business lurks the ever-present possibility of litigation. A legitimate disagreement can occur, a company can make a mistake, or a firm or government entity—or a member of the public—can file a lawsuit that forces the firm to defend itself and its work. “A lot of risks exist and they’re not necessarily related to the quality of the work performed,” says John Moossazadeh, a senior vice president at Kleinfelder in San Diego.
Engineering firms often take jobs that knowingly expose the firm to legal risk. But how much risk is too much?
That’s a question that more and more engineering and design firms are asking when confronted with contracts that contain controversial “Duty to Defend” language.
A contractual Duty to Defend provides that the engineering firm will pay for attorney’s fees and costs incurred in a client’s defense of a claim. Depending on the con-tract language and the governing jurisdiction, this duty may be immediate from the time the claim is made, and may exist regardless of whether the engineer is found to be negligent. Although basic indemnification and defense clauses are common, and they typically assign risk to the negligent party, a growing number of developers and agencies request—and, in some cases, demand—that the consultant or firm in charge of the project defend any suit or other legal action brought against the developer or owner, and sometimes even irrespective of whether the claim is related to the engineer’s services.
Duty to Defend provisions are therefore criticized because a consultant or engineer who signs such an agreement could be legally required to bear the cost of defending against any project-related claim, even when the claim has nothing to do with the services performed by the firm, and there’s zero evidence of negligence. “It forces engineers to take responsibility for far more than the work they’re being paid to do and what their insurance covers,” explains P. Douglas Folk, principal at Folk & Associates in Phoenix.
Recent court rulings have put A/E/C firms at greater risk, extending the express or implied defense obligations contained in indemnity clauses. Many firms, meanwhile, say they’ve had enough.
Because of concerns about the scope of Duty to Defend language in new project con-tracts, engineering and design firms have attempted to strike such provisions from deals or write in protections. Firms that cannot negotiate such protection or reduce their overall liability have been forced to turn down work. The industry, meanwhile, has attempted to enact laws that offer a more balanced assumption of risk for engineers and their clients. “Duty to Defend is a very serious obligation with potentially disastrous consequences. Unless it is carefully limited, it can be fundamentally unfair,” says Paul Meyer, executive director of ACEC/California.
Over the years, indemnity clauses have emerged as a standard fixture in engineering and construction contracts. The typical goal is to assign responsibility for third-party claims to the party that is responsible for negligent acts or omissions underlying the claims. Most of these contracts contain language that states that the person or firm in charge of the project will indemnify the other party for damages to the extent arising out of or relating to that person’s or firm’s negligence.
However, these indemnity provisions often include in their scope an express or implied Duty to Defend obligation. This Duty to Defend may force the design professional to retain or pay for attorneys to defend the client against claims, even if the claims are merely alleged to arise out of services per-formed by the design professional and even if it is deter-mined that the services in question met the professional standard of care—in other words, even if the design professional was not negligent.
Most professional liability insurance (PLI) policies do not cover the cost of legal fees paid to defend a client. Moreover, PLI typically only covers the firm that obtains the policy and only applies to damages resulting from negligence. “Anything more is barred from coverage,” explains J. Kent Holland Jr., an attorney who heads Construction Risk Counsel, a Tysons Corner, Va.-based consulting firm.
It’s no small problem. “Duty to Defend extends the defense obligation and the costs associated with the law-suit without consideration for the party that is actually negligent,” says Karen Erger, vice president and director of practice risk management at Lockton Companies in Kansas City, Mo., a provider of insurance and risk management services for the design, engineering and construction industries. “For those who agree to a Duty to Defend clause, there is a huge unfunded liability and a significant level of financial risk.”
This has been an excerpt of the September 2013 issue of ProNetwork News. To continue reading, download the full PDF version of An Unfair Duty to Defend here.
About the Authors:
Samuel Greengard is a freelance writer living in Oregon. His work has appeared in materials for Charles Schwab & Co., Cisco Systems, Honda, IBM, Intel, Korn/Ferry, Microsoft, Oracle and Sun Microsystems. He is also the author of the AARP Crash Course in Finding the Work You Love: The Essential Guide to Reinventing Your Life (Sterling, 2008). Mr. Greengard is an instructor at UCLA’s Writer’s Program and a past president of the American Society of Journalists and Authors.
This article is reprinted by a/e ProNet with the permission of ACEC. a/e ProNet is an international association of independent insurance brokers dedicated to serving the design profession since 1988. We are dedicated to representing the best interests of our design clients as a trusted and impartial source of information on professional liability insurance, risk management, loss prevention and continuing education. Please visit our website for additional information: www.aepronet.org.