To whom should you extend your indemnity obligations?

It seems that indemnity provisions are increasingly less likely to limit a design professional’s obligation to only the design professional’s client. We regularly review indemnity provisions that include the client’s parent company, affiliates, subsidiaries, successors and assigns, officers, employees, representatives and agents, the project’s owners, a county client, a state client, lenders, contractors, subcontractors, and even other design professionals. So how many parties can you agree to indemnify without losing the benefit of your insurance coverage?

The AIA documents limit the indemnification obligation to “the Owner and the Owner’s officers and employees.” The EJCDC documents limit it to “Owner, and Owner’s officers, directors, members, partners, agents, consultants, and employees.”

A good rule of thumb is to limit the obligation to your client, although the answer really depends upon the laws of the local jurisdiction. Professional liability insurance only pays on the policyholder’s behalf to those to whom the policyholder is legally liable under state law for rectification of the harm caused by negligently performed professional services. Contractually assumed obligations that extend beyond the normal legal liability of a professional are not covered by professional liability insurance. Since “normal legal liability” is established on a state-by-state basis, only the narrowest contractual obligation should be considered unless there is assistance from local legal counsel that can evaluate the contractual obligations in conjunction with a firm’s “normal legal liability.”

For more information on issues related to indemnification obligations, see our Management Advisory, “Indemnification Issues” (limited to current policyholders and brokers only).

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