Vol. 5 No. 2		February 1986

To indemnify means to stand in the shoes of someone else; to assume a responsibility that would otherwise be theirs. An insurance contract is an indemnity agreement. In return for the payment of a premium, your insurer agrees to stand in your shoes in the event of a claim.

When you agree to indemnify one of your clients, you become, within the scope of the indemnity provision you sign, an insurer of your client's losses. Knowing this, most architects and engineers approach indemnification agreements with great care.

It is, nevertheless, common for clients to hand over drafts of those agreements demanding that you assume an unhealthy or an uninsurable portion of their risk of loss. In the litigious environment of the 1980's, it makes no sense to do either. In fact, there are times when it would be far more appropriate for your client to indemnify you. The key lies in knowing where (and how) to draw the line.

Underlying the concept of indemnification are both historic precedents and an economic rationale. It is a long-standing principle of commerce that those who assume control of the property of someone else for their own financial advantage can reasonably be expected to assume the associated risks of loss-even losses that may be caused in part by the owner. Thus, unequivocal responsibility for the protection of persons and property on the construction site has long been assigned to the general contractor.

The economic rationale is based on the fact that the contractor and each of the subcontractors on the job are in a position to insure against the adverse consequences of their operations (including losses for which the owner might otherwise be liable) more readily and at a lower net cost to the project than is the owner. Under these circumstances, indemnification of the owner is not all that unreasonable a proposition.

The idea that the same rules apply to the delivery of professional services is simply unfounded. You do not assume control of the owner's property, nor that of anyone else. You cannot insure against liabilities the owner may face as a result of his or her contribution to a loss. Thus, there is no historic precedent and no economic rationale behind the notion that you, somehow, ought to indemnify your clients against the consequences of their own acts. Nor is there even the slightest element of fairness involved.

The owner's liabilities notwithstanding, what about your potential liabilities? Some projects involve exposures you cannot insure; others pose risks which, even though insurable, are so disproportionate to any possibility of gain that only a venturesome few would agree to take them on without some measure of protection against the adverse consequences. This is where you ought to draw the line.

Consider these examples:

1. Projects involving the identification and removal of asbestos;

2. Those calling for the monitoring, treatment, or containment of hazardous materials;

3. Affording the possibility of unauthorized reuse of your design;

4. Accepting responsibility for unknown and unknowable conditions within an existing structure;

5. Turning over partially completed work to be misinterpreted, modified, or misused by others.

The first two of these examples are uninsurable. Each involves a situation in which the owner has a serious problem, the solution of which requires your assistance and expertise. The privilege of taking part can hardly be worth assuming responsibility for risks that are not yours to begin with and that ought not be yours in the end. The latter three entail potentially unacceptable risks. They can be losses waiting to happen-losses which, should they occur, could jeopardize your future insurability. All raise questions about who ought to be indemnifying whom.

There are times when the only indemnification that makes sense is the one that runs in your favor to the fullest extent permitted by law. A word of caution, however. Indemnity agreements are only as good as the financial capacity of those who stand behind them. There are some risks your clients can no more insure than you can, and unless you are satisfied that the commitments made to you can be met in the event of a loss, you might best direct your attention to less dicey undertakings.

It is also important to understand that the courts are not overly enthusiastic about indemnity agreements. Those that are ambiguous, unjustifiable, or not fairly bargained for may well be found to be unenforceable. Where you are asked to indemnify your client, this is not an outcome you will want to take comfort in relying upon. The argument is too costly, for one thing, and the result is far from certain. What it does suggest, however, is a need, in each indemnity provision you seek on your own behalf, for a clear explanation of the reasons underlying its use. For example:

"It is recognized and agreed that the design services provided for in this Agreement will not and cannot be completed until all such services, including construction phase services, have been performed in full by the Architect (Engineer). The Owner acknowledges that the inability of the Architect (Engineer) to complete those services will significantly increase the risk of loss resulting, among other causes, from misinterpretation of the intent of the design, unauthorized modifications thereto, and failure to detect errors and omissions in the plans and specifications before they become costly mistakes built into the project. Therefore, in the event that this Agreement is prematurely terminated or that the Architect (Engineer) is otherwise precluded from completing the services set forth herein, the Owner agrees to hold harmless, indemnify, and defend the Architect (Engineer) from and against...."

Such an explanation not only tends to enhance the enforceability of this provision, but it can help to preclude the possibility that it will ever be put to the test in the first place.

As more and more public and private clients find themselves facing risks they cannot (or choose not to) insure, you can expect the pressures on you to assume those risks to increase. The stakes are high and they are rising with each passing month. Seek the advice of a knowledgeable attorney. Indemnity provisions involve legal complexities which can only be addressed by competent counsel, and they pose negotiating challenges your attorney can be of great assistance to you in meeting. For our part, we would be pleased to help in any way we can.