Indemnification & Duty to Defend
These are terms we use everyday, and at first glance they seem pretty straightforward, but as is often the case in insurance, they can be quite complicated and nuanced.
Here’s a few sections on indemnification and duty to defend from a/e ProNet, of which we are a member.
What is the difference between defense and indemnification?
What does is really mean when you agree to defend as well as indemnify? It means that long before any legal liability is established, you have an obligation to retain an attorney and mount a defense on your client’s behalf. Under most circumstances, this is an obligation your insurer will likely refuse to accommodate. Remember, contractual liability coverage may afford compensation for defense costs once negligence is established, but absent negligence, there is no coverage. As a practical matter, the problem may well go away once the specific circumstances surrounding a loss are known. It may not be in your client’s interest to pursue your obligation to defend. On the other hand, your refusal or inability to retain counsel on behalf of your client could fuel the fires of the dispute. “Add it to the list” is an appropriate response here, but added fuel is not what is needed in a situation in which the interests of the parties might better be served by putting out the fire. Indemnify your client against costs of defense attributable to your negligence, if you must (and if your insurance stands behind it), but avoid agreeing to mount that defense if you can. That commitment is likely to be contrary to everyone’s interest in the long run.
Is there a problem with indemnifying my client’s representatives, designees, or agents?
Indemnification is serious business, far too serious in terms of its consequences for the Owner’s attorney to trivialize it by throwing in the kitchen sink. Who are these fine folks, and why should you stand in their shoes in the event of a loss? Anyone can be transformed into an agent at any time. “Zap, you’re an agent! I designate you” is all it takes. The same holds true for a representative or a designee. Accept this language and you may find you have agreed to indemnify an army of unknown and unwelcome beneficiaries-the construction manager, for example, or the owner’s nephew, or a trip and fall victim the owner would prefer to have you compensate regardless of fault. Delete these words and all like them. If you encounter resistance, ask for a list of those representatives, designees, and agents your client believes to be appropriate recipients of your largesse. At the very least, you deserve to know who they might be. Nor is it stretching the limits of fairness for you to insist on the opportunity to evaluate, in each and every case, the appropriateness of extending the security of your indemnification to any of them. This is not necessarily a make or break proposition, at least not in states where the protections of privity have long since been swept away. If the balance of your agreement to indemnify is limited to the consequences of your negligence, and if representatives, designees, or agents of the owner are damaged by your negligence, you are likely to have legal liability for those damages, and your insurance is likely to respond. You might ask yourself, nevertheless, whether you are willing to put your deductible on the line, undertake obligations with potentially serious consequences, and concede significant negotiating leverage in the event of a loss-all for the benefit of some third party with whom you have no contractual relationship, from whom you receive no consideration, and who you do not even know. Probably not.
Am I going too far by indemnifying my client against claims, demands, actions and suites?
You might be as this is an all-encompassing statement. A mere claim against you does not equal culpability. Remember that your insurance pays for damages, and it pays to the extent you are found to be negligent.
Recommended: How to Identify Unacceptable Risks and Get Them Out of Your Agreements (ProNet Practice Notes, Vol. 4, No. 2)
What if the indemnification includes the language “any and all claims, demands, actions and suits?”
Attorneys are overly fond of absolutes. Otherwise, they would stop using “of every kind, nature, and description” as if it were punctuation. Absolutes leave room for argument where clarity is the only appropriate goal. You know by now that where you have to be when your negotiations are over does not include “any and all” losses, nor does it include “claims, demands, actions, or suits”. It includes only those damages for which you are legally liable. Losses, liabilities, expenses, and costs are damages for which you could be legally liable if they are caused by your negligence. Even attorneys’ fees may be construed to be damages in some states, and where not, your limited contractual liability coverage may well respond. But claims, demands, actions, and suites, in and of themselves, are not damages, and the mere fact that they occur may or may not have anything to do with your negligence. This is not a make or break proposition, either, but clarity of intent finds offense in these words and the absolutes which precede them. Best they be deleted.
Why should I strike “breach of contract” from the indemnity provision in my agreement?
It is redundant, as there is already a remedy under the law should you breach your contract.
Recommended: How to Identify Unacceptable Risks and Get Them Out of Your Agreements (ProNet Practice Notes, Vol. 4, No. 2)
Hopefully, you see that there can be many issues with this simple concept. If you’d like us to look at the wording in your client’s policy or contracts and see if there’s a better way to handle things, please Contact Us.
About PDI
PDI is an Indianapolis-based wholesale brokerage firm with a national network that includes thousands of insurance agents, brokers, architects, engineers and contractors in all 50 states. Since PDI’s beginning in 1980, we’ve handled a single line of coverage: errors & omissions (E&O) for design professionals. Contact Us today for a review of your design client's insurance program.
