Ousting Third Party Defense From Professional Liability Contracts

Written By: Tim Esler on January 10, 2010 No Comment

Professional Liability policies for Engineers and Architects are considered “indemnification policies” literally meaning that the insurance carrier agrees to “make whole” any party who suffers injury or loss as a result of your “negligent deliverance of professional services” up to the available limits of the professional liability policy. [Negligence, of course, is the "operative" word meaning that your standard of care is the "ordinary man" standard as opposed to perfection.]

Regrettably, most drafters of contracts for the professional services of architects and engineers are unaware that as opposed to a General Liability policy’s “additional insured” provision which provides affirmative defense of a third party, an A/E professional liability policy does not have a provision to provide “defense” outside of the design professional.

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.

Why is this uninsurable? Your Professional Liability is triggered by your “actual or alleged negligence” and is for the benefit of the design professional herself. Providing affirmative defense to a third party arising out of your alleged negligence is well beyond the policy provisions. Point in fact is that any professional liability will INDEMNIFY [meaning reimburse] an owner for costs that they actually incur in their defense should the facts bear out that the Engineer or Architect was actually negligent. [IE -- we will reimburse them after it is proven and not before --- and doesn't that seem reasonable that you are innocent until proven guilty?]

Moreover, all architects’ and engineers’ professional liability insurance policies have a contractual liability exclusion which states that the only contractual coverage given is “such liability that would have existed in the absence of a contract.” 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.