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Understanding indemnity clauses and related issues in design contracts

No matter what kind of design professional you are, you need to understand how indemnity clauses in your contracts work. Otherwise, you run the risk of being taken by surprise by your financial and legal liability when something goes wrong.

What is an indemnity clause?

Contracts are all about establishing expectations and allocating risk. Indemnity clauses, in particular, pay attention to the potential problems and contractually transfer risk and loss between two parties whenever specified events occur.

What conflicts can arise due to indemnity clauses?

In theory, an indemnity clause is about fairness. In practice, an indemnity clause can be anything but fair — especially when the agreement broadly shifts liability your way by not excluding negligence by the other party.

For example, if your contract on a project has a clause wherein you agree to indemnify and hold an owner harmless for both your negligence and theirs, you can end up paying 100% of any damages involved if there’s a problem — even if the owner was 90% or more at fault. (This can be particularly problematic if your professional liability insurance limits its coverage to only what you would owe in the absence of such a contract.)

How can you protect yourself from making a bad deal?

An indemnity clause has to be written very carefully. Unfortunately, this area of the law is growing increasingly complicated over the years. Indemnity clauses in any contract involving design professionals should be reviewed carefully before they are signed. It’s always wisest to ask an experienced attorney to examine a proposed contract to assess your vulnerability if something goes wrong.