NSPE's Gateway to Private Practice PEPP Talk October 2010 

Defending and Indemnifying a Client

A 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.

Professional 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.

Indemnity 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 professional services.

Clients need to understand the limitations of professional liability insurance coverage. 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:

  • A 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 policyholder’s client.
  • 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 the client.

Contractual 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 if:

  • It relates to the professional services being provided by the firm or the firm’s subconsultants;
  • 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 negligence;
  • 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.

Each 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.

It is prudent to state that the firm is not assuming any obligation to defend the client. 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.

A 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

I’m 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.

PEPP’s 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 both groups.

The Sustainability and LEED Team discussed 3 potential goals for NSPE/PEPP:

1.  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 process.

2.   EXPAND—Expand 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.

3.   EDUCATE—Educate 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 anything change?

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 site.

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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.

Contact George.Boldarini@Schinnerer.com 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 traditional credit.

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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Fall Webinars

NSPE Fall Ethics Forum

Part II: What Do Millennials, Gen X'ers, and Boomers Think?

October 13, 12:30-1:30 p.m. (E.D.T.)

Part III: What is the Impact of the Ongoing Economic Crisis on Engineering Ethics?

November 10, 12:30-1:30 p.m. (E.S.T.)

Health, Safety, and Welfare: The Social Responsibility of Construction Quality Assurance

October 14, 12:30-1:30 p.m. (E.D.T.)

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 are abandoned.

Wind-Generated Electricity and the Engineering of Wind Machines

October 21, 12:30-1:30 p.m. (E.D.T.)

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. (E.D.T.)

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. (E.D.T.)

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 complimentary. 

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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PEPP 2010-11
Executive Board

Mark Davy, P.E.
La Crosse, WI

Andrea Martinez-Graves,
Tampa, FL

Dawn Edgell, P.E.
Chicago, IL

Immediate Past Chair
Bill Clarke, P.E., F.NSPE
St. Louis, MO 

Vice Chair, Northeast Region
Randy Petersen,
Washington, DC

Vice Chair, Southeast Region
Charlotte Maddox, P.E., F.NSPE
Tampa, FL

Vice Chair, Central Region
Kent Buehrer, P.E., F.NSPE
Maumee, OH 

Vice Chair, North Central Region 
Karen Stelling, P.E.
Kansas City, MO

Vice Chair, Southwest Region
Chris Richard, P.E.
Lafayette, LA

Vice Chair, Western and Pacific Region 
Wes Segawa, P.E.
Hilo, HI 

Young Engineer Representative 
Carlos Gittens, P.E.
Deltona, FL

SSEC Representative
Pat Christians
Birmingham, AL

PEPP Staff
Kim Granados, CAE
1420 King Street
Alexandria, VA 22314
tel: 703-684-2857
fax: 703-836-4875


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