Why architects should be wary of indemnification clauses

Indemnification clause risks

An indemnification clause is a contractual commitment to pay your client—and any others identified in the clause—for any financial losses they may incur due to action or inaction on your or your consultants’ part. Client-drafted indemnity provisions almost always extend your financial obligation beyond what the law would otherwise require. As such, they likely will not be insurable under your professional liability insurance policy. That means you’ll have to make good on those financial obligations out of your pocket.

Not all indemnity clauses are uninsurable or extend your liability beyond what the law would otherwise require, but these clauses must be drafted very carefully. AIA's indemnity clause, contained in Section 8.1.3 of the B103-2017 owner-architect agreement, is an example of a carefully drafted and insurable indemnity provision. It reads as follows:

Unfortunately, you are more likely to find an indemnity clause in an owner-generated owner-architect agreement that is far broader in scope and more legally and financially problematic for you. An example might read something like the following:

Such a clause is fraught with legal and insurability issues. It is largely uninsurable and makes you liable for financial losses suffered by the owner well beyond what the law would otherwise require under the standard of care. While an owner-provided indemnity provision presents many issues for architects, three merit particular attention when compared to the insurable indemnity provision included in B103.

First, the owner’s clause includes a duty to defend whereas AIA’s clause disclaims any duty to defend. Professional liability insurance policies exclude coverage to defend the owner against claims alleging fault or neglect on the architect’s part. Defense costs are usually quite large; many times, they grow to be as much as, or more than, the amount in dispute. Defense costs alone can exceed whatever profit might have been realized on the project. If the architect is ultimately found not to be at fault, then the architect has provided a free defense to the owner.

Second, AIA’s clause limits the architect’s financial obligation to:

• (i) damages, losses, and judgments arising from claims by third parties, including reasonable attorneys’ fees and expenses,
• (ii) recoverable under applicable law, and
• (iii) only to the extent they are caused by the negligent acts or omissions of the Architect, its employees and its consultants providing professional services.

The owner’s clause does not contain the limitations in (i), (ii), and (iii). AIA’s (iii) limitation “to the extent they are caused by the negligent acts or omissions of the Architect, its employees, and its consultants in the performance of professional services” is entirely consistent with the legally imposed standard of care not to act negligently. The owner’s clause does not limit its indemnity obligation to the architect’s negligence, thus making the architect liable to the owner for any loss related to the architect’s services regardless of whether the architect acted negligently. Professional liability insurance policies only cover negligence on the part of the architect. If you contract to indemnify the owner for losses not resulting from your negligence, although they may be somehow otherwise related to your services, you will not have insurance to protect you from this.

Third, AIA’s clause also limits the indemnity obligation to the amount of insurance proceeds of the insurance coverage required by the owner-architect agreement. That protects the architect from incurring liability beyond what its available insurance coverage provides. The owner’s clause does not contain such a limitation, thus potentially exposing the architect to financial liability beyond the architect’s available insurance coverage.

Most professional liability insurance carriers and/or their agents/brokers will provide free insurability reviews of proposed owner-architect agreements. If you don’t have the in-house expertise to perform such reviews yourself, take advantage of these services.

AIA has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice. The Risk Management Program posts new materials and resources periodically.