Vol. 3 No. 7		July 1984

The language can be convoluted and arcane. Attorneys seem to write things that way. But the intent is clear: It is to shift risk. When you agree to indemnify others, you agree to stand in their place in the event of a loss. The stakes can be high, and the terms and conditions of that agreement can be of vital importance to you.

There is no reason to assume those terms and conditions will be fair. Indemnification provisions are drafted by attorneys who, at least going in, are not particularly concerned with what is fair. They are concerned with advancing the interests of their own clients to the fullest extent of their ability.

Consider this typical example (stripped of legal clarifications which, for most of us, tend more to confuse than to clarify):

The Architect (Engineer) agrees to hold harmless, indemnify, and defend the Owner against all claims, damages, and losses arising out of the performance of services under this Agreement, except only those claims, damages, and losses caused by the sole negligence of the Owner.

This is not a provision you can reasonably accept. It expands your potential liability well beyond your responsibilities under the law, it establishes a requirement (defense of the owner) you are unlikely to be able to meet, and it places you in an untenable position of responsibility for negligence on the part of your client. Most importantly, it imposes risks no professional liability insurance carrier in the United States will insure.

To understand why, it is important to keep this in mind: Your professional liability insurance is intended to protect you against the consequences of your negligence. It is not intended to protect others against the consequences of theirs. Nor, with very few exceptions, will it protect you against liability you voluntarily assume under contract, liability which would not be yours in the absence of such a contract.

Under the common law, it generally takes more than an error in professional judgment to establish liability for a loss. The law requires the proving of negligence, and under most circumstances, only after the experts have convinced the court of your failure to provide usual and customary professional care is a finding of negligence likely to be made. It is against this eventuality that your professional liability insurance indemnifies you.

The law affords an enormous degree of protection, for professional negligence is extremely difficult to prove. But you can cast this protection aside (and the protection of your professional liability insurance along with it) with the stroke of a pen. All you need do is sign a contract which makes you responsible, not just for losses arising out of your negligence, but for losses arising out of anything that may somehow be attributable to the services you perform.

This, in fact, is the principal effect of the indemnification provision set forth above. You can safely agree to accept responsibility for the consequences of your negligent acts, errors, or omissions (or the negligent performance of your services). Only at great risk can you agree to accept responsibility for losses arising out of any act, error, or omission. The distinction: Liability for losses that would not otherwise legally be yours.

What does it really mean when you agree to "defend," as well as indemnify? It means that, long before any legal liability on your part is established, you may have an obligation to retain an attorney and mount a defense on your client's behalf. Under most circumstances, this is an obligation your insurance carrier is likely to refuse to accommodate. Your insurer may, however, depending on the provisions of your policy, agree to reimburse your client for the costs of defense.

At best, the problem will go away once the specific circumstances surrounding a particular loss are known. It may not be in your client's interest to force you to make good on your obligation to defend. At worst, your refusal or inability to retain an attorney on your client's behalf could fuel the fires of a dispute with your client that would not otherwise exist. You could find yourselves adversaries in a situation in which resolution of the real conflict at hand might best be served through cooperation.

Indemnify your client against the costs of defense if you must, but avoid agreeing to mount that defense. It is likely to be contrary to everyone's interests in the long run.

Never mind the fact that it may be permissible under the law in some states. Is it reasonable for you to accept 100% of the liability for losses for which you may only be partially responsible? Not really. Yet, that is precisely the effect of the language, "...except only those claims, damages, and losses caused by the sole negligence of the Owner." You cannot insure against the risk that your client may somehow contribute to a loss, but your client can. Why not simply leave the risk where it belongs?

In the final analysis, how far can you reasonably go in agreeing to indemnify your client? Not very far beyond the protection of your insurance. Here is an insurable restatement of the example above:

The Architect (Engineer) agrees to hold harmless and indemnify the Owner against all claims, damages, losses, and costs, including reasonable costs of defense, to the extent caused by the negligent performance of services under this Agreement.

Curiously, this brings you full-circle, for it amounts to little more than what is already required of you under the law. But, with the exception of responsibility for willful misconduct and some manageable legal refinements, it is the most you can reasonably concede. It may seem as if a great deal of wasted effort is required to produce a result that would have been achieved had the issue never been raised in the first place. Negotiations are sometimes like that. Once raised, however, it is an issue you can ill afford to ignore.

Indemnification provisions involve complex legal considerations, and their ultimate acceptability may depend upon the specific coverage afforded by the insurance you carry. Seek the advice and assistance of your attorney and your insurance broker. Both can be of great help to you in your efforts to negotiate fair, equitable, and insurable agreements.