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Duty to Defend

Do Design Professionals Have a Duty To Defend Their Clients?

By John Droutsas, Architects & Engineers Managing Claim Executive at Travelers

With the economy in a recession and projects slowing to a crawl, design professionals are increasingly being asked to take on more risk and even to provide their clients with a defense if something goes wrong with the project. The question is, should design professionals agree to this?

A glimpse at some of the current headlines show the economic climate architects, engineers and their insurance carriers are facing today. Probably some of the most important headlines: US Construction Market Still in Recession. Design Firm's Revenues Down a Consecutive Year. A/E Firms Taking on More Risk Driven by Slow Economic Conditions. With design firm income down and insurers' premiums largely based on that income, what does that mean for the claims' side? Experience tells claim handlers that poor construction business cycles lead to more frequent claims, and expenses, against design professionals. In fact, one survey reported 80% of attorneys have seen an increase in unique claims or claimants driven by economic conditions. Revenues are reduced while expenses are increased, both for architects and engineers, as well as the insurance companies that insure them.

Add to this challenging economic environment the following headline from the legal world. California Supreme Court Rules that Design Firms that Sign Indemnity Must Defend Client even if Found not Negligent. This recent case, UDC-Universal Development v. CH2MHill, means that courts in California will require design firms who sign contracts containing indemnity provisions that do not expressly disclaim an immediate defense obligation pending a determination of negligence, to provide an immediate defense of the client or pay for that defense. Insurance companies have for many years disclaimed coverage for such an obligation because it arose from a contractual basis, not from a finding of negligence. Architects and engineers could then find themselves caught in the squeeze between clients who are increasingly aggressive in demanding an immediate defense indemnity and insurors who cannot profitably cover it.

What can a design firm do when asked to agree to such a provision? One option is to reject the contract even at the risk of losing the project. But clearly the economic times are tough for exercising that option. Another option is to try to reason with the client. Most clients request/demand that the design firm be insured for professional liability. They want the potential benefit of knowing that the architect or engineer is financially able to respond to a claim for breach of their professional standard of care. That being the case, if the client demands the designer sign a contract containing a provision that is not covered, the client then imperils their own protection.

A better solution, if the client will not back down and demands an indemnity, would be to agree to an indemnity provision where the parties defend themselves at the outset of a mutual claim arising from allegations of design negligence, and if that claim is shown to be true and it is the design firm that was negligent, then the design professional would be obligated to reimburse the client for all reasonable legal costs caused by his/her negligence. This obligation, triggered by a finding of negligence rather than the mere existence of an indemnity, would be covered by professional liability insurance.

After all, even though an owner can coerce a design firm to sign a bad contract, they cannot squeeze money out of a firm that simply does not have the money to pay for the owner's defense. This type of balanced indemnity restores fairness by allowing the design firm to show both how and why it was not negligent or stand behind its professional services with the help of its insurance company rather than be bankrupted by having to pay for the client's legal defense with no insurance coverage to help out.

As always, design professionals should obtain the advice of their legal counsel regarding contract language and should speak with their insurance carrier if they have questions about coverage.

About the Author: John Droutsas is a Architects and Engineers Managing Claim Executive at Travelers in Pt. Richmond, CA.

The views expressed in this article are those of the author and do not necessarily reflect the views of The Travelers Companies, Inc. or any of its subsidiary insurance companies. This paper is for general informational purposes only. None of it constitutes legal advice, nor is it intended to create any attorney-client relationship between you and the author. You should not act or rely on this information concerning the meaning, interpretation, or effect of particular contractual language or the resolution of any particular demand, claim, or suit without seeking the advice of your own attorney.