The Source Civil Engineering Magazine The Law: Think twice about taking on a duty to defend

The Law: Think twice about taking on a duty to defend

By Michael C. Loulakis and Lauren P. McLaughlin

A few months ago, Virginia enacted a statute that is friendly to design professionals with its “duty to defend void” provision. Although it sounds like legalese, there are two reasons to learn about the new law.

First, it reflects a growing trend nationally in which architects and engineers have sought legislative protections from contract provisions requiring them to pay their clients’ attorneys’ fees. In enacting its legislation, Virginia follows in the footsteps of California, Georgia, Indiana, North Carolina, and Kansas, all of which have passed similar statutes in recent months. Given the attention this has received from industry groups like the American Council of Engineering Companies and the American Institute of Architects, it will likely be introduced in other states soon.

Second, the statute serves as an important wake-up call for civil engineers to recognize the contractual liability their firms may be agreeing to take on when pursuing new design work. Project owners — your clients — often request that design professionals agree to reimburse them for damages they incur as a result of the design professional’s negligence as determined by a judge, jury, or arbitrator. But the owner may also require that the firm agree to assume a duty to defend the client in any claim brought against the client that relates to the design professional’s services. That is something different.

Duty to defend vs. duty to indemnify

Most design contracts require the designer to “hold the owner harmless” and indemnify it for any costs, losses, or claims resulting from bodily injury or property damage on the project. This duty to indemnify refers to the designer’s obligation to pay any judgment awarded to a plaintiff suing the owner (or a settlement the plaintiff has accepted). Many design firms simply agree to this standard language or are unable to negotiate or limit the clause to costs arising from the designer’s sole negligence. Oftentimes, this provision also includes a duty on the designer’s part to not only indemnify but “defend.” The duty to defend refers to a designer’s obligation to pay for or provide a defense for any claim filed on the owner’s policy.

Why a call to state capitals?

Major concern in the design professional community erupted when two court rulings came out holding that when a party agrees by contract to indemnify another, the indemnity obligation automatically includes a duty to defend, even if the agreement does not specifically say so. Under these rulings, a designer could be responsible for paying the owner’s legal fees (at the allegations stage) even if the designer is determined to have done nothing wrong. Because some professional liability insurance policies will not cover claims until causation and damages have been proved, there is a significant risk that the design firm would take on (uninsured) legal costs in the process of defending these third-party claims against the owner.

Within the past year, the design professional community sought to change state laws to ensure no court rulings would take such an expansive view on the duty to defend. The statutes vary — in Virginia, for example, even if an architect or engineer signs a contract expressly taking on that duty to defend, the statutes now on the books will void that clause as if it didn’t exist.

The public policy argument supporting this legislative tide is manifest: Why would the party with superior bargaining power (the public or private owner) shift the risk of defending third-party lawsuits to a design professional, which has less bargaining power, may not be at fault, and is less able to shoulder the financial burden of hefty attorneys’ fees? Equity dictates the change in law, say the proponents of the legislation.

What do the statutes say?

By and large, the statutes in Virginia, Georgia, Indiana, and North Carolina make any provision in any architecture or engineering contract that purports to impose a duty to defend onto the designer void and unenforceable as against public policy. However, the statutes do not necessarily foreclose on an owner’s right to indemnity in the form of reimbursement of attorneys’ fees paid out in the process of defending a third-party suit.

But the statutes, in their various forms, do limit the scope of the indemnity obligations to ensure that such duties only arise after trial and are limited to when the design professional is found to be solely (or partially) at fault.

The takeaways

Irrespective of what jurisdiction engineers are licensed in or what statutes exist there, the most fundamental way a design firm can protect itself is to insert language in its indemnity provision expressly stating that there is no duty to defend. Simply put, if your firm desires a fair and reasonable contract, it must negotiate one with clear and unambiguous terms that do not require a duty to defend. If you practice in a jurisdiction that does not have these new statutory protections in place, you may consider exploring the benefits of proposing legislation to amend the existing indemnity statute in your state.

Michael C. Loulakis is the president and chief executive officer of Capital Project Strategies, LLC, in Reston, Virginia. Lauren P. McLaughlin is a partner at Smith, Currie & Hancock, LLP, in Tysons, Virginia.

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