Ousting Third Party Defense From Professional Liability Contracts
Engineers’ and architects’ professional liability insurance policies are “indemnification policies” which means that the insurance carrier agrees to “make whole” any party that suffers loss or injury resulting from “negligent deliverance of professional services” up to the available limits of the professional liability insurance policy. Negligence is the operative word meaning that the standard of care is the “ordinary man” standard (not 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.
You might ask why this is uninsurable. Professional liability is elicited by “actual or alleged negligence” and benefits the design professional, only. Giving affirmative defense to a third party because of alleged negligence is outside of policy provisions. Any professional liability insurance policy will reimburse an owner for costs that are actually brought on in their defense given that the engineer or architect was truly negligent.
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.]
What should you do? Strike the word “defend” from the contract and make sure that the balance of the indemnity provision is based on your “negligence.” “Piece of cake — right?” Now, what do I REALLY do when the owner [or their attorney] balks at removal of the word “defend” from the contract?
Timothy Esler, CPCU, is a Principal with Fenner & Esler Insurance Agency, a boutique insurance brokerage and risk management organization representing architects and engineers countrywide. Tim’s complete original articles are published in The Zweig Letter.
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