Imagine having to pay insurance on your neighbor’s car — one you didn’t purchase, maintain or even drive. You have no say in where they go, how they drive or the risks they take on the road.
Imagine the neighbor drinks too much and hits someone, then the victim sues you.
Engineering leaders say that’s the exact situation they are facing for a growing number of contracts, mostly in the public sector, as municipalities try to cut costs and push liability off on them.
Engineering and architectural firms are being asked to insure all negligence of all parties involved in some projects — including construction and government oversight, said Jay Simson, president of The American Council of Engineering Companies of New York. Engineering firms usually pay for an insurance that covers the liability of their work, but no insurance company offers insurance with that scope. Many of these firms are facing hard economic times and have no choice but to take on the risk, Simson said.
“If you wanted insurance for everything in your life, you couldn’t get it or it would cost you a trillion dollars,” he said. “There’s no reason to be held accountable for things beyond our control. … What companies are doing, because of this economy, some say they will take on the risk and hope nothing goes wrong.”
If something went wrong during construction, or if a government or other agency made changes to the original design work and it ended up being flawed, it could come back to a law suit against the design firm.
Mark McAnany is president of the Rochester Region of the American Council of Engineering Companies of New York and transportation manager at Bergmann Associates Inc., a firm specializing in architectural and planning services for the building, civil and transportation markets. He said firms are being told they have to accept the indemnity language or they won’t get the work.
“Sometimes we’re successful in getting the clauses struck, but other times they’re like ‘Well, do you want the work?’” he said. “People are trying to deflect costs, and legal fees are expensive, but we’re getting where the risk of these cases are far greater than the reward of the contract. … The way the contract is worded, we’re going to pay. It’s a little tough.”
Simson said the number of contracts with indemnity clauses are not at a very high rate, but the number is growing. He said The American Council of Engineering Companies of New York is gathering information to see just how serious the situation is. He said most of the instances have occurred at the county level and state contracts have not included indemnities for engineering and architectural firms.
Contractual indemnity is a risk allocation device whereby the parties to a contract use indemnity provisions to apportion, or in some instances completely shift, the responsibility for future third-party claims, according to a report by the American Bar Association.
As a part of the development and adoption of comparative fault or modified comparative negligence statutes, most states have enacted statutes that modify or in some way limit the scope of indemnity provisions insofar as they attempt to shift responsibility for the sole negligence of one party to another. There are 42 states that have enacted some form of so-called “anti-indemnity” statute applicable to all or part of the construction industry.
Simson said they are trying to work with local and state officials to not include indemnity clauses.
“The contracts seem to come up more often with newer county attorneys who think they’re getting rid of risk, but they’re just creating more problems for carriers and others,” Simson said.
A great deal of public funding has dried up, which has cut business for some area engineering firms. Funding for infrastructure has been slashed during budget cuts and when the state budget’s approval was delayed for months, it froze many projects. That hurt engineering firms across the state, including many in the region, which laid workers off.
Mary-Beth Rumble, a senior associate with Poole Professional, said the economy has plaid a large part in municipalities putting indemnity clauses in contracts. Poole Professional provides insurance, loss prevention and risk management services to the architectural, engineering, environmental, legal and accounting professions. She said in some cases, firms could be putting themselves at risk of going out of business.
“They’re like everyone else — they’re trying to reduce cost and had to reduce head count,” she said. “They’re trying to do the same amount of work with less people and less money and had to figure out one way to cut costs.”
Rumble said she worked for 18 months negotiating with Erie County for some a group of firms that are now doing road and highway design. Erie County wanted the indemnity clause, but Rumble was able to negotiate that it be struck.
“I don’t think they were trying to personally harm (firms). They were trying to figure out a way to spend less,” she said. “(Firms are) really being asked to go beyond being responsible for the things they do. They’re happy to be responsible for what they do. But this goes beyond that. This is providing coverage for the public entities, even when (firms are) not to be found at fault or alleged to be at fault.”
Calls to Erie County officials were not returned.