CONTRACTUAL DEFENSE PROTECTION

CONTRACTUAL DEFENSE PROTECTION – A NEW SOLUTION FOR THE OLD “DUTY TO DEFEND” PROBLEM

 

Per the AIA:

A contractual duty to defend is an obligation whereby one party, in this instance, design professionals, agree to defend another party, generally an owner or developer against a covered third-party claim, thus incurring attorney’s fees and costs. This duty arises at the beginning of litigation – upon a client’s request that its design professional tender a defense to a third party’s claim of the client’s alleged liability. A related, yet different, duty is the duty to indemnify. Indemnification involves one party, an indemnitor, agreeing to save another, an indemnitee, from legal consequence by a third party. It is activated at the end of that underlying litigation, upon an adverse judgment against the indemnitee for money.

Two reasons make it risky for design professionals to sign a contract with a duty to defend clause. One is that the design professional is agreeing to all of the risk to defend his client, regardless of whether the design professional was at fault. In doing so, the design professional is obligated to pay for the client’s legal fees, which can easily exceed the design professional’s liability.

The second reason it is risky for design professionals to agree to a duty to defend concerns insurance. When design professionals must pay for or reimburse an owner/developer’s defense costs, they will likely turn to their insurance carrier under their policy coverage. Insurers, however, will generally deny coverage for duty to defend claims because they typically do not cover claims by third parties where their insureds have not violated the applicable standard of care.

Design professionals often come across contractual language requiring that they indemnify and defend their clients.  This has long been a sticking point in negotiations, as professional liability policies typically exclude coverage for contractual liability.  How many times has an a/e walked away from a project, because the client is insistent on this point?  How many times has an a/e signed a contract obligating them to mount a defense on behalf of their client regardless of their own negligence, or lack thereof ?  A new product has hit the marketplace in recent months, aimed at confronting this risk head on.

Click HERE to read more on this subject at ae ProNet website.