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indemnification clause

indemnification clause

indemnification clause

I work for a very large firm that requires its subcontractors to indemnify us against all errors except errors for which we are solely negligent. We require the subs to name us as additionally insured and we require that the insurance certificate include a waiver of subrogation (so in cases where we are 99.9% at fault, the sub's insurance company can't come after us for our proportional share of the damages). I asked and the company attorney indicated that we expect our subs to buy the extra insurance required and build the cost into their bid (so the client ends up paying for our insurance 2.5 times once all the markups are included).

Many subs (all of the subs who have assets worth going after in a lawsuit) refuse to sign that subcontract which makes life difficult for me. I can't believe that Joe's Plumbing and Excavation of Tinytown could even get insurance that would cover a billion dollar company against its negligence and if it was easy to get, all of the subs who won't work with us because of the indemnification are fools.

Does anyone know if Joe's Plumbing really has the insurance our attorneys think they have?

Thanks Ron

RE: indemnification clause

People that adhere to contract terms won't sign it.  People who sign it won't have the assets to adhere.  Those sorts of contract terms are a pretty good trap to highlight the sleaze, but not a good way to get quality people.  I've been fighting that crap for 30 years from both sides of the table.  Today, I say "no, thank you" when a contract has language that is outside what I already have insurance for.  A couple of times big companies have come back with reasonable language, the rest they found someone else to do the work.


RE: indemnification clause

I agree with David...some companies have terms and conditions they wouldn't sign themselves, but expect others to sign.  I worked for such a company for many years.

Such a broad form indemnity is often not insurable.  As David noted, he now doesn't sign contracts that are beyond the constraints of his insurance.  Good practice.  The problem comes when there is such a disparity between the resources/insurance of the companies.  The company I worked for would admit to a couple of million in professional liability insurance.  If the project dictated, they would fess up to 5 million.  After I became an officer in the company, I found out that we had significantly more insurance...but obviously didn't want to share that with others unless compelled to do so when the lawyers came knocking.

If you are primarily an engineering firm and the subcontractors you mentioned are primarily contractor types, you have two completely different types of insurance. Contractors don't usually carry Professional Liability insurance.  They have general liability insurance, which is physical damage oriented.  Apples and Oranges.  While engineering firms also carry general liability policies, they might not have the same types of coverage as the contractors.  If your subs are mostly other engineers, then the insurance coverages are similar, but probably with different limits.

Getting someone named as an additional insured usually does not cost extra.  A waiver of subrogation can also be provided without additional cost, but some insurors will not provide this.  Both are generally problematic.  When you name an additional insured on your policy, your are extending your insurance to them without knowing their claim status, their business practices, their loss mitigation practices, and their quality assurance.  It's not a good idea to do so.  A waiver of subrogation takes away your insurance company's ability to sue your client for their misdeeds.

That leaves you to the limits of liability.  Most large firms want you to sign a contract that has unlimited liability.  Many clients want the same.  Yours is probably no different.  That's nuts!  Why should Joes' Plumbing sign a contract that has no end to its liability?  They either don't know the difference or are just "rolling the dice" that nothing will happen.

We see firms who are willing to sign such contracts.  We are not.  As David noted, at some point you just have to say "NO!".  If your firm is as cognizant of liability as you note, they probably also require certificates of insurance from those subcontractors.  Absent fraud, they know the level of insurance Joe's Plumbing has.

Attached is a brief paper on contract review for engineers.  It doesn't cover everything, but does cover the most common terms.

RE: indemnification clause

I agree with David and Ron too. The real losers are those big companies who cannot engage services of true professionals who would not put up with such bullying. Small but quality professionals can always survive on their own terms.

Too one-sided agreements in fact can work against you as they would be deemed unreasonable in a court. But it all depends how convincing the lawyers are and not what is actually written and signed.

Rafiq Bulsara

RE: indemnification clause

I always call those one-sided agreements "I win, you bleed" and truly hate being on either side of them.  If you ever need to go after someone who signed one you'll either find that they went broke or that their corporate structure is so convoluted that you get to own a file cabinet and a rotary-dial phone.

Ron, good point about the different kinds of insurance.  In my case I spend about $20k/year on Professional Liability (E&O primarily) insurance and they throw in general liability for free.  The insurance company sees their risk of my company being faced with a physical liability claim as being in the same league as the cost of a give-away desk calendar.


RE: indemnification clause

The thing I don't understand is that our attorney is quite convinced that our subs have the insurance we require. His contention is that if we tell a driller to drill somewhere (and he does) and he puts out the power to a large building whose occupants lose $1,000,000 in business because of the interruption, the driller's insurance will cover that loss even though we told the driller where to drill and probably had a private utility location service and probably hand augered to five feet. If one of our labs screws up one analysis in 30 (making him 1% responsible for a problem with our design down the road) the lab's insurance will cover the building owner's damages. I could go on.

If small companies really can get insurance to cover extremely large companies, why don't they? If small companies can get insurance to cover large companies, why are they so reluctant to sign our terms and conditions?

And why would an insurance company waive subrogation without having any idea who they're insuring?  

RE: indemnification clause

I would look for a different attorney.

Peter Stockhausen
Senior Design Analyst (Checker)
Infotech Aerospace Services

RE: indemnification clause

Well, first of all, your driller probably has a general liability policy with $1,000,000 limits.  Not unusual and doesn't cost that much.  Again, if you request a certificate of insurance, you'll be able to check that.

As for telling him where to drill, that's a different issue.  If you do that and leave the driller responsible for utility clearance, it's most likely his issue.  If you are responsible for utility clearance, then you might have greater liability, although a good attorney would be better to consult on that than another engineer.

The intent of the driller's insurance is not to cover you, but to cover him.  Even with the "additional insured" coverage, the first obligation will be to cover the driller.  To turn your argument around a bit, why should your company cover its subcontractors for every eventuality?  They shouldn't and can't.  So that's the reason they ask the subs for high insurance limits.

The determination of liability can become a convoluted legal argument that even some attorneys screw up.  It's a moving target per project and within the project.  There are no hard and fast rules except those defined by civil procedure and precedent.  Your obligation is to meet the standard of care for your practice and leave meeting the respective standards of care for other practices to them.

RE: indemnification clause

Hi Ron

thanks for getting back to me. I still don't understand why the driller's insurance company would want to insure us. But if they name us as additional insured and waive subrogation, they are insuring us. If we tell a driller to drill at X and he drills right through a 12-inch fiber optic cable and shuts down Dell Computer for three days, according to our lawyer, hey, that's his problem (and his insurance company's).

I can understand why we want to do that - if the claim is against someone elses insurance, our rates don't go up. What I don't understand is why the driller's insurance company is ok with it and why (if insurance companies are ok with it) all the other little subs we might use scream bloody murder and refuse to sign our contract.

RE: indemnification clause

Your lawyer is naive...first it's your problem.  Second, you might be able to recover from the driller, but not necessarily so.  Your client is looking to YOU first! That's the contractual route.  Assuming successful litigation, you would pay, then your sub MIGHT pay you based on the subrogation clause.

RE: indemnification clause

Also to think that


we require that the insurance certificate include a waiver of subrogation (so in cases where we are 99.9% at fault, the sub's insurance company can't come after us for our proportional share of the damages)

is naive, in any court in the world. If it can be shown that you are at fault, there is no escaping. Regardless of choice of words in the agreement.

Rafiq Bulsara

RE: indemnification clause

Rafiq...well, sort of!  There is an issue of comparative negligence, where in some cases, they have to prove your percentage of negligence or they have all the burden.  Comparative negligence can also apply to several parties, not just the two contracted parties.

RE: indemnification clause

"is naive, in any court in the world. If it can be shown that you are at fault, there is no escaping. Regardless of choice of words in the agreement."

Yeah, but that's why we have insurance. We're at fault, our insurance company pays up and jacks our rates and life goes on. If we have a contract with our driller's insurance company (they named us as additional insured and waived subrogation) they're insuring us the same as they're insuring the driller. I just don't understand why they would do that.

RE: indemnification clause

howardoark...to get the job.

RE: indemnification clause

Yes, but the insurance company didn't get the job. Why is the insurance company willing to insure someone they know nothing about doing work they know nothing about with liabilities they know nothing about?

RE: indemnification clause

To the insurance company, it's just risk management vs. coverage fee.  They are counting on their client to not screw up...if he does, well, then they'll try to obfuscate the issues, point fingers in other directions, bluff, and settle for pennies on the dollar.  Happens every day.

RE: indemnification clause

A professional can still sign anything, even against the advise of the insurance company or the attorney, to get a job.

Unless you have your own lawyer, remember that insurance company is interested in protecting themselves in the end. If time comes, they would have no issue saying, "oh my client may have screwed up but it was not insurable...."

Insurance companies also have lawyers, perhaps better ones....so as I said, it matters very little as to what was signed or written, but it is a matter of who is better at convincing the jury or a judge.

Most big company lawyers do not understand that it is not in their best interest to keep uninsurable clauses, but they do and it may be a blessing in disguise for small fishes.


Rafiq Bulsara

RE: indemnification clause


Most big company lawyers do not understand that it is not in their best interest to keep uninsurable clauses

I've thought about this - attorneys have only one goal in mind and that's to protect their clients. I don't think they see that protecting their client is costing their client money. Our attorneys are costing us a lot of money. If the protection they were giving us actually protected us, it might be worth it. But I have my doubts that we're getting any protection.

RE: indemnification clause

"attorneys have only one goal in mind and that's to protect their clients."

Really? If there really were one goal in mind I would have thought it would be more self-interested than that. That applies to all humans, not just attorneys.

-- MechEng2005

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