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Law limits defense costs liability for design professionals

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A measure signed into law last week by California Governor Jerry Brown will significantly reduce defense costs for design professionals, including architects and engineers, and could smooth claims handling, say experts.

Senate Bill 496 provides that architects and engineers would be liable to pay only a proportionate percentage of attorney’s fees and costs if they are found at fault in connection with private contracts as of January 1, 2018.

Currently, as a result of a 2010 California appeals court ruling, a design professional who agrees to defend and indemnify its client for negligence is responsible for that defense, regardless of whether he or she is found liable for the underlying claims involving private contracts. This already applied to public contracts with nonstate agencies.

“Because of the terms and conditions on the indemnity contract you could still be forced to pay 100% of someone else’s attorney’s fees,” said Howard J. Franco Jr., an attorney with Collins Collins Muir & Stewart L.L.P. in Carlsbad, California, who represents design professionals.

“That exposure was uninsurable, and as a result, several design firms went out of business,” he said.

“For the last couple of years, attempts have been made in the California legislature to provide some relief to design professionals in view of this obligation,” Mr. Franco said.

“As a result, Senate Bill 496 creates a requirement that there be a determination of the proportional liability of the design professionals first, before there’s any payment or reimbursement of attorney’s fees and costs under an indemnity agreement,” he said.

That is significant “because it makes their obligations for any alleged errors and omissions tied to their actual fault, rather than having it simply arise out of the fact that they happened to work on a project,” Mr. Franco said.

“This legislation goes a long way towards solving a problem,” said Theodore D. Levin, a partner with Morris, Polich & Purdy L.L.P. in Los Angeles.

James Schwartz, who heads Beazley’s U.S. architect and engineers team, said while defense costs are not insurable, the law as it now stands “causes difficulty in effectively managing claims, because there is also a kind of friction in terms of what’s covered and what’s not covered, and it can make resolution of the overall claim more difficult.”

The new law “should remove a good part of that obstacle, and hopefully make the overall claim easier to resolve,” said Mr. Schwartz, who is Boston based. 

“In the long run, it’ll be advantageous to the insured” in reducing claims’ frequency and severity, “which ultimately can result in more favorable insurance terms,” Mr. Schwartz said.