The Indemnity Clause and the Condo
Your firm is negotiating a $385,000 fee for a 14-month, $4.5 million condominium renovation. The client’s 60-page agreement requires the firm to indemnify the owner and its lender for “any and all claims arising from or relating to the project,” name both as additional insureds on the firm’s general liability and professional liability policies, waive subrogation, and accept liquidated damages of $2,500 per day for late delivery of drawings. There is no limitation of liability. The firm carries $2 million/$4 million claims-made professional liability with a $50,000 deductible; the policy excludes contractual liability, liquidated damages, and penalties. The client says the terms are “market” and will not redline. The project would use about 30% of the firm’s available staff time next year.
1. Identify the clauses that are uninsurable or unacceptable and explain why.
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The broad indemnity for “any and all claims” is unacceptable because it can require the firm to pay for the owner’s or lender’s own negligence, and it may violate state anti-indemnity law. Additional-insured status on professional liability is generally unavailable and conflicts with the purpose of professional liability coverage, which insures the architect’s own professional acts. Liquidated damages for late drawings are a contractual penalty, usually excluded from professional liability and disproportionate to the $385,000 fee. No limitation of liability leaves the firm exposed to construction-cost damages far beyond its fee-$4.5 million in project value versus $385,000 in revenue. Waiver of subrogation may be negotiable, but it should not be accepted without understanding its effect on the firm’s insurer. The claims-made policy also means a late claim after policy expiration may not be covered.
2. What redlines and fallback positions would you propose?
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Propose mutual indemnity limited to each party’s negligent acts or omissions. Delete additional-insured status on professional liability; if the lender requires additional insured, offer it only on general liability and only for bodily injury or property damage, not professional services. Delete liquidated damages or convert them to a fee reduction capped at the fee. Insert a limitation of liability equal to the fee or $1 million, whichever is greater, with carve-outs for gross negligence and willful misconduct. Define the standard of care as the skill and care ordinarily provided by architects under similar circumstances. Tie the schedule to timely owner decisions and make consequential damages mutually waived. If the client refuses all movement on indemnity and limitation of liability, the firm should decline the project; those risks cannot be priced into a $385,000 fee.
3. What insurance and risk-management steps should the firm take before signing?
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Send the proposed contract to the firm’s broker and insurer for a coverage opinion before signing. Confirm whether the additional-insured and contractual-liability provisions are covered, whether the claims-made retroactive date covers the project, and whether a tail is needed. Ask about project-specific professional liability if the condo is high-risk. Evaluate the $50,000 deductible against the firm’s cash position. Check the client’s and lender’s financial strength and payment history. Assess backlog concentration: using 30% of available staff time for 14 months may crowd out better work. Involve construction counsel, document the negotiation, and keep a written record that the firm refused uninsurable terms. If coverage is uncertain, do not sign and hope; either negotiate the terms or walk away.