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Free Risk Management Advisory on the Use of
"Defend" in Indemnities Available at
Terra Insurance Company Website: www.terrarrg.com
Corte Madera, CA -"Hold harmless, indemnify, and defend" is an expression that engineers, other design professionals, and environmental consultants frequently encounter in contracts presented by their clients. While such indemnities often cause a number of concerns, the potential problems created by the word "defend" often go overlooked.
According to Terra Insurance Company CEO David L. J. Coduto, "The word 'defend' in an indemnity provision can make an engineer responsible for a client's legal expenses, even when the engineer has done nothing wrong. Clients have no right to expect that from their consultants, and the word is unnecessary for clients to recover what they are entitled to."
Mr. Coduto explained that, to the extent clients incur legal expenses in response to claims actually caused by design or environmental professionals' negligence, those
legal expenses constitute damages that clients can legitimately seek from their professionals, and which their professionals' professional liability insurance will cover.
However, when an indemnity calls for design or environmental professionals to "hold harmless, indemnify, and defend" their clients, the professionals could be held responsible for 100% of their client's legal expenses, even though they were responsible for only 10% of the damages. "For example," Mr. Coduto said, "consider what would happen were a court to determine that a client was 90% at fault for causing a $250,000 loss to a third-party claimant, and that the professional's negligence constituted the other 10% of fault. If the client's legal costs amounted to $100,000, the word 'defend' would mean the difference between the professional's paying $35,000 and $125,000."
In addition, Mr. Coduto said, "When a provision says that you will 'defend' your client, you could be required to cover your client's legal expenses regardless of any actual fault on your part."
A full discussion of this issue is included in a "Concerns Presented by the Word 'Defend' in an Indemnity Provision," the newest of a number of Risk Management Advisory monographs available for free download at Terra's website (www.terrarrg.com).
Terra Insurance Company is a risk retention group that provides diverse professional liability insurance products to geoprofessional, environmental, and civil engineering firms. News about Terra is also available at its website site, along with a "quick app" and other materials.
Because Terra is a risk retention group, all its insureds are also owners of the company. Since becoming a risk retention group in April 1988, Terra has set a new record high stock value at the end of each quarter; now 64 in a row.
Terra comprises some 90 owner/insureds whose gross fees range up to $150 million per year. Rated A ("Excellent") by A.M. Best Company, Terra is the nation's highest-rated risk retention group in its field. For more information, visit www.terrarrg.com, or contact Terra Insurance Company, 2 Fifer Avenue/Suite 100, Corte Madera, CA 94925; tel. 1/800-872-0077 (in CA, 415/927-2901); e-mail terra@terrarrg.com.
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