Defending and Indemnifying a Client
consulting engineering firm is responsible for rectifying any harm to its
client that is the result of the firm’s negligence or breach of contract. Such
responsibility is a basic tenet of U.S. law, and the responsibility
for correcting damage or compensating for loss caused by negligently performed
professional services—but not necessarily by breach of contract—is the basis of
professional liability insurance coverage. However, firms are increasingly
facing demands from clients that exceed this responsibility. Clients often want
to shift defense responsibilities and costs when a suit by a third party simply
mentions the possible negligence of the professional service firm.
liability insurance is a specific coverage. It does not cover contractual
obligations except the obligation to carry out duties according to the
professional standard of care. Assuming there exists a contractual obligation
to defend and indemnify a client against claims from third parties in fact goes
beyond the scope of coverage. No professional liability policy is priced to
include the cost of defending a client against any claims that might have some
relationship to the services provided by the insured firm. Such an extremely
broad contractual obligation is clearly not covered by insurance.
obligations may implicitly require claims defense. In some
jurisdictions, with California
being the latest, the obligation to provide defense is implied or is required
by statute in any obligation to indemnify. In states that infer defense from
indemnity commitments, firms should consult legal counsel for appropriate
language to state contractually that the firm has no obligation to defend the
client and that the firm’s obligations regarding the client’s defense only
include the reimbursement of reasonable attorneys’ fees and expenses recoverable
under applicable law, but only to the extent such expenses are incurred due to
a proven negligent act, error, or omission of the firm in the performance of
need to understand the limitations of professional liability insurance
When firms discuss an indemnity provision that includes an up-front defense
obligation or requires defense irrespective of fault, they should make sure
their clients know the following:
professional liability policy covers the insured firm for its wrongful
acts that are based on an unmet standard of care for professional
services. Coverage is only for the firm’s negligence in performing
professional services to the client.
- The defense
by the insurer of a policyholder does not extend to the defense of the
- Nothing in
a professional services agreement expands the duty an insurer has to a
policyholder; that duty is based on the contract of insurance between the
insurer and the consulting engineering firm.
- Onerous contract
language usually produces nothing but an illusory sense of protection for
commitments can distort normal legal relationships. A
contractually-assumed indemnity agreement that includes a defense obligation
puts a consulting professional engineer at great risk. When assessing any
contractual obligation that extends beyond normal professional liability
exposure or risks covered by other insurance policies, a firm should analyze
what risk-funding allowance should be built into its fees. A firm may feel
confident that the contractual commitment assumed in an indemnification
provision does not extend beyond the professional liability insurance coverage
- It relates
to the professional services being provided by the firm or the firm’s
- It is tied
to the indemnification of a cost, loss, or damage that was caused by the
failure of the firm to meet the standard of care for professional services;
- It is
proportional so that the contractual liability of the firm is only to the
extent that the cost, loss, or damage was the result of the firm’s
- It has some
time limitation either by contract, the statute of limitations, or the
statute of repose; or
- No defense
obligation is stated. In those states where defense is implied in any
agreement to indemnify, consult your legal counsel regarding appropriate
language specifically excluding the defense obligation.
party should be willing to be responsible for losses and claims to the extent
that they are caused by the party’s negligence. Few clients, however, are
willing to contractually commit to paying for harm they cause and some, such as
government clients, have the ability to avoid responsibility for their own
negligence. While reciprocal obligations make sense, a one-sided commitment
should be narrow in scope to commit the consulting engineering firm to
financial responsibility to the extent that the firm is determined negligent.
is prudent to state that the firm is not assuming any obligation to defend the
firm should communicate in the contract that the firm’s obligation regarding
the client’s defense only includes the reimbursement of reasonable attorneys’
fees and expenses recoverable under applicable law. Such an obligation is only
to the extent that costs are incurred due to the firm’s negligent act, error,
or omission. This makes it more likely that a firm’s contractual obligation
tracks with its legal duty as a professional.
firm’s legal counsel, professional liability insurance broker, or an insurer
such as Victor O. Schinnerer & Co. Inc., can provide a statement that
clearly indicates that a contractual indemnity obligation, with or without a
stated defense obligation, triggers the contractual exclusion in the policy,
and therefore is a business risk for which the firm should be compensated.
Since neither a broker nor an insurer can provide legal advice, it is essential
that contractual commitments, such as assumed defense and indemnity obligations,
be reviewed with legal counsel.
© 2010, Victor O. Schinnerer & Co. Inc. Statements concerning
legal matters should be understood to be general observations based solely on
our experience as risk consultants and may not be relied upon as legal advice,
which we are not authorized to provide. All such matters should be reviewed
with a qualified advisor. Victor
O. Schinnerer & Company Inc. is managing underwriter for the CNA/Schinnerer
Professional Liability Insurance Program, commended by NSPE/PEPP since 1957.
PEPP at Work
Mark Davy, PE PEPP Chair 2010-2011
honored to be stepping in as PEPP chair this year. My family has been involved
in PEPP since its inception. I have seen firsthand all of the value created by
PEPP programs such as the Professional Liability Committee, the Engineers Joint
Contract Documents Committee, and the HR/CFO Roundtables. I have seen the
impact that these groups have made on the industry as a whole.
direction this year is to focus on two issues of importance to the industry: building
information modeling and LEED accreditation. Below is a little information on
Sustainability and LEED Team discussed 3 potential goals for NSPE/PEPP:
ELEVATE—Elevate the engineer’s role in
the LEED decision-making process. Currently, more times than not, the owner and
the architect are the only individuals involved in the planning phase. The
engineer is brought into the project during the design phase, which is too late
since the project’s goals and objectives have already been determined. Therefore,
the engineer is told what to design, rather than being part of the initial decision-making
LEED designated projects to more engineering-dominated projects, such as
transportation (roads, bridges, and mass transit), treatment plants (potable
water, wastewater, and reclaimed water), hydrology designs (canals, dams,
levees, drainage, flood gates, and pumping systems), parks and recreation facilities
(playgrounds, aquatic facilities, and sports fields and courts), etc.
engineers on specific LEED design methods and criteria using real LEED projects
as examples. There appears to be a gap between passing the LEED test and
working on that first LEED project. NSPE could bridge that gap by educating the
engineer with seminars, which would enable the engineer to build their design
toolbox with valuable information. NSPE could also have vendors showcase their
products and show how to correctly use them in LEED project applications.
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A Second Look at Safety
For much of the spring and summer,
the nation watched in dismay as oil gushed from a BP well into the Gulf
of Mexico—an incident that may be one of the worst environmental
disasters in U.S. history. This disaster has highlighted the fragility
of the environment and its connection to the health of the economy, and
it has spurred debate about how Americans use energy resources.
The disaster has also given rise to serious questions about the
proper levels of oversight of critical industries to protect the
environment and the public. Within the engineering profession, the Gulf
disaster is fueling long-burning discussions about the role of PEs
within industry. Should industrial exemptions to state licensing laws be
reviewed and changed to require more PEs in positions of responsible
charge? How will the engineering profession address this issue? Will
To find out more and join the conversation please see the August/September
Issue of PE Magazine and visit the blog
to post your comments.
Also, NSPE is hosting a Webinar: Part I Engineering Ethics: Key
Issues in the Aftermath of the Gulf Oil Spill". To sign up visit our web
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NSPE Membership Potentially Yields Insurance Savings
Victor O. Schnnerer & Co. Inc./CNA, the leaders in business insurance
for design professionals, has introduced its most innovative program. DesignOne
combines property, casualty, and professional liability coverage into one
convenient, cost-effective program. DesignOne covers the full range of risks
faced by design firms, in one source of protection.
Qualifying engineering firms are eligible for an underwriting premium
credit of up to 5% if at least 50% of the firm's professional staff are NSPE
members. To date, 90% of the eligible firms have not yet taken advantage of
these savings. Paying membership fees costing in the hundreds of dollars for
your professionals could equate to the value of thousands of dollars off your
premium. Sign up new members at http://www.nspe.org/JoinNow/index.html
or sign up for Enterprise Membership at http://www.nspe.org/TypesofMembership/Enterprise/index.html.
for details. Victor O.
Schinnerer & Co. Inc./CNA is the largest and most experienced
underwriting manager of professional liability insurance and risk management
programs worldwide. Call Schinnerer/CNA at 301-961-9800 or e-mail vos.info@Schinnerer.com.
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Happenings on the Hill
Congress will attempt to pass a "tax extenders" bill, an annual
authorization that provides tax cuts for businesses and includes the R&D
credit, during the lame-duck session. NSPE is a member of the R&D Credit
Coalition, a group of more than 100 trade and professional associations and
companies of all sizes that collectively represent millions of American workers
engaged in U.S.-based research throughout major sectors of the U.S. economy,
including aerospace, agriculture, biotechnology, chemicals, electronics,
energy, information technology, manufacturing, medical technology,
pharmaceuticals, software, and telecommunications. The objectives of the
R&D Credit Coalition are a strong, permanent R&D credit of commensurate
rate for all companies; a 20% simplified credit; and an extension of the
NSPE signed a joint letter with other professional organizations and
universities urging the Senate to reauthorize the America COMPETES Act (H.R.
5116, S. 3605) this year. Enacted in 2007, the act was drafted in response to Rising Above the Gathering Storm, the
National Academies' report on America's
lagging competitiveness in science and technology. The COMPETES Act funds
investments in science and engineering research and STEM education from
kindergarten to the postdoctoral level. The House passed the bill in May. If the
Senate passes the reauthorization, the House and Senate could produce a final
bill for the President's signature before the 111th Congress ends.
For more information on what NSPE is doing for you in Washington, please visit NSPE Government
Relations's Latest News at http://www.nspe.org/GovernmentRelations/LatestNews/index.html.
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NSPE Fall Ethics Forum
Part II: What Do Millennials, Gen
X'ers, and Boomers Think?
October 13, 12:30-1:30 p.m.
Part III: What is the Impact of
the Ongoing Economic Crisis on Engineering Ethics?
November 10, 12:30-1:30 p.m.
Health, Safety, and Welfare: The
Social Responsibility of Construction Quality Assurance
October 14, 12:30-1:30 p.m.
Many states have regulations
requiring construction quality assurance (QA) to be directly supervised by a
licensed architect or engineer. This session will focus on some of the reasons
why society, and the legislators they elect, expects architects and engineers to
maintain direct responsibility over construction QA, and the potential
consequences to public health, safety, and welfare if these responsibilities
Wind-Generated Electricity and
the Engineering of Wind Machines
October 21, 12:30-1:30 p.m.
It all sounds so simple. Just rig
a generator to a wind turbine, and you can provide power to your sockets. This
webinar will primarily address the physics of wind, the problems that causes
for wind-generated electricity, and the engineering of wind machines. There
will also be some discussion of the economics of wind energy.
Energy Star: Benchmarking and the
Role of PEs, FREE
October 28, 12:30-1:30 p.m.
We will provide an overview of
the Energy Star program tools and resources, a tutorial on using Portfolio
Manager to obtain an energy performance score for buildings, and describe the
role of professional engineers in applying for the Energy Star label.
What Happens When Green Becomes
Code: Do Buildings Get Better or Do Lawyers Get Richer
November 4, 12:30-1:30 p.m.
The inevitable is about to happen
and most people don't even know it is coming--green buildings are going to
become, by codification, the law of the land. For some firms, this will just
mean business as usual. For other firms, this change will be cataclysmic. Learn
more about the coming changes and how to prepare.
Find these, and many more,
excellent education opportunities online at www.nspe.org.
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COFPAES Hosting QBS Workshop
The Council on Federal Procurement of Architecture & Engineering
Services (COFPAES), of which NSPE is a member, will host an all-day workshop on
“Qualification Based Selection (QBS) Contracting for A/E Services” on Tuesday,
November 9 in Washington, D.C.
This class, to be taught by Bruce Ware, U.S. Army Corps of Engineers, will
provide the elements of the acquisition of firms via the 40 USC 1101, 10 USC
2855, and FAR part 36.6 QBS processes. Registration for government employees is
There is a fee for registrants of private firms to attend this workshop.
Lunch is included. Visit the COFPAES
Web site for complete details on this educational opportunity. The workshop
will be held at The American Institute
of Architects, 1735 New York Ave., NW, Washington, D.C.
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