DPLE 101 Professional Liability Risk Management - RLI Design ...

“SAY BAH HUMBUG TO
CONTRACTUAL INDEMNITY
AND THE DUTY TO DEFEND!”
Presented by:
Brian K. Stewart, Hon. AIA
Attorney at Law
of
in partnership with

RLI Design Professionals is a Registered Provider with The
American Institute of Architects Continuing Education
Systems. Credit earned on completion of this program will be
reported to CES Records for AIA members. Certificates of
Completion for non-AIA members are available on request.
This program is registered with the AIA/CES for continuing
professional education. As such, it does not include content
that may be deemed or construed to be an approval or
endorsement by the AIA of any material of construction or
any method or manner of handling, using, distributing, or
dealing in any material or product. Questions related to
specific materials, methods, and services will be addressed
at the conclusion of this presentation.

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© RLI Design Professionals

Course Description:
This program will present an
overview of some recent case law
that has received national
attention and which presents
potentially disastrous results for
the design community at large.

Learning Objectives
Participants will:
• Learn how to deal with the nuances of indemnity
clauses.
• Understand the problems inherent with the duty to
defend.
• Gain insight into dealing with the different points of
view on these issues between the design professional
and their insurer.
• Consider thoughts on combating the problems with
indemnity and the duty to defend going forward.

DISCLAIMER
NOTHING PRESENTED HEREIN IS A SUBSTITUTE FOR ACTUAL
LEGAL ADVICE THAT CAN ONLY BE PROVIDED IN THE EVENT
THAT AN ATTORNEY CLIENT RELATIONSHIP IS FORMED AND
AGREED TO BY BOTH THE ATTORNEY AND THE CLIENT.
FURTHERMORE, THE PRESENTATION INVOLVES HYPOTHETICAL
FACTS AND IS NO SUBSTITUTE FOR LEGAL ADVICE BASED ON
THE ACTUAL FACTS AND CIRCUMSTANCES OF A PARTICULAR
SITUATION.
PS – THE LAWYER MADE ME DO THIS…

STATE OF BUSINESS
• SOFT
• FLAT
• TRENDING SIDEWAYS
• CHASING RATE
• DOWN
• DEPRESSED
• A NEW WAY TO COPE…

WHY INDEMNITY/DUTY TO DEFEND AND WHY NOW?
• CURRENT
• BAD SITUATION GETTING WORSE
• IT’S THE ECONOMY….STUPID…
• CONSTANT BARRAGE OF CONTRACT REVIEW
• FUTURE
• BAD CASE LAW SPREADING CONCERN
• REAL M & A IMPLICATIONS
• TIME-BOMBS
• LEGISLATION OPTIONS

INDEMNITY - DEFINED
in-dem-ni-ty
1. a. security against loss or damage.
b. exemption from incurred or future penalties or liabilities.
2. Old English – what the right hand giveth, the left hand
taketh away!
10

INDEMNITY - DEFINED
• An agreement to shift specific liability in the
event of a loss or a claim
• A risk-shifting device
• Insurance is a classic form of indemnity
11

INDEMNITY IS A 4 LETTER WORD!!

EVEN WORSE…
…THE DUTY TO DEFEND!

INDEMNITY – COMMON LAW APPROACH
Indenco Inc. v Evans (1962) 201 Cal.App.2d 369
• In construction contracts, parties to a contract were
free to negotiate any indemnity agreement
between them
• The court would not interfere with the contractual
agreement between a contractor and subcontractor
• FREEDOM OF CONTRACT!
• …It’s a NEW WORLD…
14

INDEMNITY IN CALIFORNIA DEFINED BY STATUTE
California Civil Code Section 2772
Indemnity is a contract by which one engages to save
another from a legal consequence of the conduct of one
of the parties, or of some other person.
A very, very old concept and statute…
15

INDEMNITY – CALIFORNIA STATUTES
The main statute regarding indemnity in California is
codified in Civil Code sec. 2778
• Enacted in 1872
• Derived from the Field Code prepared by Attorney
David Dudley Field and enacted in NY in 1848. The
first U.S. uniform code of procedure
16

INDEMNITY – STATUTORY LIMITATIONS
Civil Code sec. 2778.
In the interpretation of a contract of indemnity, the
following rules are to be applied, unless a contrary
intention appears:
1. Upon an indemnity against liability, expressly, or in other
equivalent terms, the person indemnified is entitled to
recover upon becoming liable;
2. Upon an indemnity against claims, or demands, or
damages, or costs, expressly, or in other equivalent
terms, the person indemnified is not entitled to recover
without payment thereof;
17

INDEMNITY – STATUTORY LIMITATIONS
Civil Code sec. 2778 (Cont.)
3. An indemnity against claims, or demands, or liability,
expressly, or in other equivalent terms, embraces the
costs of defense against such claims, demands, or
liability incurred in good faith, and in the exercise of a
reasonable discretion;
4. The person indemnifying is bound, on request of the
person indemnified, to defend actions or proceedings
brought against the latter in respect to the matters
embraced by the indemnity, but the person indemnified
has the right to conduct such defenses, if he chooses to
do so;
18

INDEMNITY – STATUTORY LIMITATIONS
Civil Code sec. 2778 (Cont.)
5. If, after request, the person indemnifying neglects to
defend the person indemnified, a recovery against the
latter suffered by him in good faith, is conclusive in his
favor against the former;
6. If the person indemnifying, whether he is a principal or a
surety in the agreement, has not reasonable notice of
the action or proceeding against the person indemnified,
or is not allowed to control its defense, judgment against
the latter is only presumptive evidence against the
former;
19

INDEMNITY - CONSTRUCTION CONTRACTS
Civil Code sec. 2782 - Construction Contracts
● Enacted in 1967
– Two main points
• No indemnity for a person’s SOLE negligence
or willful misconduct (ONE EXCEPTION…)
• No indemnity for a public agency’s active
negligence
– Until 1990. . .
20

INDEMNITY - CONSTRUCTION CONTRACTS
Civil Code sec. 2782
• In 1990, it began to be amended by various
powerful special interest groups
– Builders
– Trial lawyers
– Insurance companies
– Design professionals
• Now a lengthy and cumbersome statute
21

CIVIL CODE SEC. 2782
Summary:
• Indemnity clauses in construction contracts
• “Construction contracts” include design services
• Cannot seek indemnity for “sole negligence” or
“willful misconduct”
• BE CAREFUL: One can seek Indemnity for all except
the “sole” negligence of that party!
• “SOLE” is a 4 LETTER WORD!
• Public agencies cannot seek indemnity from their
active negligence
22

LIMITATION OF LIABILITY
Civil Code sec. 2782.5
Nothing contained in Section 2782 shall prevent a
party to a construction contract and the owner or
other party for whose account the construction
contract is being performed from negotiating and
expressly agreeing with respect to the allocation,
release, liquidation, exclusion, or limitation as
between the parties of any liability (a) for design
defects, or (b) of the promisee to the promisor
arising out of or relating to the construction
contract.
Markborough California Inc. v. Superior Court (1991)
227 Cal App 3d 705
23

“GNARLY” NEW CALIFORNIA CASES
• CRAWFORD V. WEATHERSHIELD
• UDC V. CH2M-HILL
• WHAT ELSE IS “GNARLY” AND FROM CALIFORNIA?
• GNARLY CAN BE GOOD
• GNARLY CAN BE BAD
24

PRE-CRAWFORD/CH2M-HILL
Some believed that the duties (defense and
indemnity) were TIED TOGETHER and required
a finding of negligence by the trier of fact.

CRAWFORD V. WEATHER SHIELD (2008) 44 CAL.4
• Weather Shield supplied windows to Developer, J.M. Peters
(Peters), for a residential project in Huntington Beach
• Contract between Weather Shield (WS) and Peters required
WS to defend and indemnify Peters for “all claims. . .
growing out of” WS’s work.
• Construction defect lawsuit filed by 220 owners against
Peters, WS and others
• Peters sought indemnity from WS
• Jury found WS was not negligent BUT court ordered WS to
pay part of Peter’s defense costs
• Calif. Supreme Court found WS had an immediate duty to
defend Peters and this duty was independent of the duty to
indemnify.
• After Crawford, we argued “That’s a
contractor/subcontractor case and it doesn’t apply to
design professionals” until. . .
26

BAD FACTS MAKE BAD LAW!
• Stare decisis is Latin for “we
did it that way before so we
will continue to do it that
way”
• Otherwise known as
“precedent”
• Courts can only deal with
facts before them
• Compare the facts of the
cases we are discussing
• Corollary = good facts make
good law
27

UDC - UNIVERSAL DEVELOPMENT V. CH2M HILL (2010)
181 CAL.APP.4 TH 10
• CH2M Hill agreed to provide engineering
services for a condo complex being
developed by UDC
• Contract obligated CH2M Hill to indemnify
UDC and to defend UDC against “any suit,
action or demand” brought against UDC “on
any claim or demand herein.”
• UDC sued by homeowners and UDC tender
to CH2M Hill for defense and indemnity
• CH2M Hill found not negligent at trial
• BUT court ordered CH2M Hill to pay
$550,000 of UDC’s defense costs
28

UDC - UNIVERSAL DEVELOPMENT V. CH2M HILL (2010)
181 CAL.APP.4 TH 10
UDC Decision:
• A promise to indemnify “implicitly embraces
the cost of defense” (unless a contrary
intention appears)
• Duty to defend is separate from the
obligation to indemnify and not contingent
on a finding of negligence
• Duty to defend “necessarily arises as soon as
such claims are made”
29

AB 573
SEPT. 2006
• ACEC-CA and other professional associations
sponsored legislation
• Designed to address the unconscionable
indemnity clauses that design professionals
were seeing in contracts
• Largely successful but some continued pockets
of resistance
30

AB 573
SEPT. 2006
Civil Code sec. 2782.8. (a) For all contracts, and
amendments thereto, entered into on or after January 1,
2007, with a public agency for design professional services,
all provisions, clauses, covenants, and agreements
contained in, collateral to, or affecting any such contract,
and amendments thereto, that purport to indemnify,
including the cost to defend, the public agency by a design
professional against liability for claims against the public
agency, are unenforceable, except for claims that arise out
of, pertain to, or relate to the negligence, recklessness, or
willful misconduct of the design professional. This section
shall not be waived or modified by contractual agreement,
act, or omission of the parties. Contractual provisions,
clauses, covenants, or agreements not expressly prohibited
herein are reserved to the agreement of the parties.
31

OTHER STATES -
• Texas = Indemnity limited to DP’s
negligence on Government jobs per
statute
• Florida = Indemnity also limited to DP’s
negligence on Government jobs per
statute
• See also - Montana, North Dakota, South
Dakota, and Oklahoma for almost
identical statutes as California
32

SB 972
SEPT. 2010
• ACEC-CA sponsored legislation
• To address (partially) the UDC v. CH2M Hill case
• To address “creative” circumventions of AB 573
• Added one sentence to sec. 2782.8
• ZERO limitation on private works
• ZERO limitation on Federal or State projects
33

SB 972
SEPT. 2010
2782.8. (a) For all contracts, and amendments thereto,
entered into on or after January 1, 2011, with a public
agency for design professional services, all provisions,
clauses, covenants, and agreements contained in,
collateral to, or affecting any such contract, and
amendments thereto, that purport to indemnify, including
the duty and the cost to defend, the public agency by a
design professional against liability for claims against the
public agency, are unenforceable, except for claims that
arise out of, pertain to, or relate to the negligence,
recklessness, or willful misconduct of the design
professional. The duty to indemnify, including the duty
and the cost to defend, is limited as provided in this
section. This section shall not be waived . . .
34

CURRENT POST-CH2M-HILL CLAIM
• CIVIL ENG ON TRACT DEVELOPMENT
• NATIONAL BUILDER AND BAD CONTRACT
• ONEROUS CLAUSE ON NEXT SLIDE
• ENG BOUGHT FIRM/LIABILITIES ASSUMED
• CARRIER HAS RESERVED RIGHTS
• LARGEST PORTION OF CLAIM IS CIVIL
• EARLY TENDER BY BUILDER

ONEROUS INDEMNITY CLAUSE LANGUAGE
INDEMNITY: To the fullest extent permitted by law,
Consultant shall defend, indemnify and hold harmless
Developer…against any and all claims… including the
reasonable fees of attorneys, arising out of or in any way
connected with any act or omission of
Consultant…whether such claims, liens, demands,
damages, losses or expenses are based upon…any other
legal…theory whatsoever, and regardless of whether or
not such claim…is caused in part by a party indemnified
hereunder, including the partial negligence of any such
party.

…IF YOU THOUGHT THAT WAS BAD…
Consultant agrees, at its own expense and upon written
request by Developer, to defend any suit, action or
demand brought against Developer based in whole or in
part upon a matter covered by the foregoing indemnity.
Consultant's duty to defend applies regardless of whether
the issues of negligence, liability, default or other
obligation on the part of the Developer or Consultant
have been determined.

SAMPLE INDEMNITY CLAUSE – PRIVATE ENTITY
“Consultant agrees to indemnify Owner, but shall
not be responsible for the cost of their defense,
from liability for damages arising out of the
performance of Consultants services on this
project unless and only to the extent that such
liability is actually determined to have been
caused by the negligent acts, errors or omissions
of Consultant, its principals, employees or sub
consultants.”
38

SAMPLE INDEMNITY AGREEMENT – ANOTHER VERSION
“Consultant agrees to indemnify the Owner, from
liability for damages arising out of the
performance of Consultants services on this
project to the extent that such liability is actually
caused by the negligent acts, errors or omissions
of Consultant, its principals, employees or sub
consultants. Consultant has no obligation to pay
for any of the indemnitee’s defense related cost
prior to a final determination of liability or to pay
any amount that exceeds Consultant’s finally
determined percentage of liability based upon the
comparative fault of Consultant.”
39

SAMPLE INDEMNITY AGREEMENT–FURTHER LANGUAGE
Appended to the end of an indemnity clause:
“Notwithstanding the foregoing, for any claim alleging
Consultant’s negligent performance of professional
services, Consultant’s obligations regarding any
indemnitee’s defense under this paragraph shall be
limited solely to the reimbursement of such
indemnitee’s reasonable defense costs incurred to the
extent of Consultant’s actual indemnity obligations
hereunder.”
40

SAMPLE INDEMNITY AGREEMENT – FURTHER LANGUAGE TO
MAKE CLEAR THAT A CONTRARY INTENT CONTROLS…

SOME THOUGHTS ON HOW TO DEAL WITH
CONTRACTS IN A “POST-CH2M-HILL” WORLD!

CONTRARY INTENT?
ARTICLE 6. INDEMINIFICATION:
Consistent with California Civil Code section 2782, the
Testing Company agrees to indemnify, hold harmless,
defend and protect the District, its employees and agents
from any and all claims and expenses (including all
reasonable attorney fees) to the extent caused by the
Testing Company’s negligent or reckless performance of
this agreement.

CONTRARY INTENT WITH EXAMPLE…
The term “defend” as used in this clause will be handled
as a reimbursement of reasonable defense costs incurred
by the District in an amount equal to the percentage of
fault as ultimately determined by a court of competent
jurisdiction. For example, if there is a claim and
$100,000.00 in reasonable defense costs are thereafter
incurred after a written tender of defense by District to
Testing Company and the court determines that the
Testing Company is 60% responsible, then the Testing
Company and/or its insurance carrier shall reimburse the
District in the amount of $60,000.00.

OTHER ISSUES OF CONTINUED CONCERN
• Limitation of liability clauses
• Consequential damage waivers
• Dispute resolution options
• Mediation
• Arbitration
• Litigation
• Prevailing party clauses – HOT BUTTON ISSUE
• Incorporation by reference
45

Thank you!
Questions/Comments? (Don’t be a Scrooge!)
Brian Stewart
COLLINS COLLINS MUIR + STEWART LLP
bstewart@ccmslaw.com
Barbara Sable
AVP, Professional Enterprise Risk Solutions
RLI Design Professionals
barbara.sable@rlicorp.com
Laurel Tenuto
Client Risk Management Coordinator
RLI Design Professionals
laurel.tenuto@rlicorp.com
This concludes the American Institute of Architects Continuing Education Program