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Why You Should Never Minimize the Significance of Client Driven Indemnity Provisions

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Picture of Mark Bassingthwaighte, Risk Manager Mark Bassingthwaighte, Risk Manager : Apr 2, 2024 12:00:42 PM

Law Practice Management

Why You Should Never Minimize the Significance of Client Driven Indemnity Provisions

I continue to get the occasional call from a lawyer wanting to know my thoughts about a new business opportunity. It’s a call that often starts out with the lawyer sharing that so and so company wants the lawyer to be their exclusive local point person and the lawyer is hoping I’ll give the idea my risk manager’s stamp of approval. After talking through the issues, I always ask the one question most callers rarely seem to think about. Is there an indemnification provision in the contract? I have yet to hear any lawyer tell me no.

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Truth be told, a number of the lawyers who call about various types of contracts they are considering signing seem surprised when I ask about the presence of any indemnification language. Apparently, they just gloss over certain sections of the contract. Trust me, that’s a misstep. Indemnification provisions are not something to be ignored because they raise very real and potentially significant insurance coverage concerns.

Have you ever stopped to consider how a malpractice insurer might view client driven indemnity provisions? The language often used significantly expands what the lawyer may ultimately be liable for. Absent said language, the lawyer would be liable for any attorney negligence. However, depending upon the specific language at issue, by agreeing to an indemnity provision the lawyer can become liable for all kinds of client losses that are not the result of any attorney negligence.

This is what creates the coverage problem. In short, by voluntarily agreeing to contractually expand your exposure, you can create a coverage gap because your malpractice insurance company isn’t going to be subject to the terms of this agreement. In addition, malpractice polices routinely contain language that will exclude coverage for obligations assumed by contract that go beyond the obligation to provide professional services. Often, however, signing an agreement that contains an indemnity provision does exactly that.

Unfortunately, this concern isn’t limited to contracts a lawyer is thinking about entering into. Suppose a client inserts an indemnification clause into the boiler plate language of their guidelines and sends that to you. Might your continued representation after receiving the guidelines constitute an acceptance of that clause? I certainly wouldn’t want to be the one who ends up having to find out the hard way.

Today, when more and more lawyers are being treated like general service providers as opposed to trusted advisors, what can you do to avoid this problem? At the outset, read client guidelines and contract proposals front to back. Don’t continue with the representation or sign anything without understanding what your true exposure will be. If you are not comfortable with that exposure, see if the client will remove the problematic language. In the alternative, you could see if inserting language along the lines of “but only to the extent covered by my malpractice insurance policy” at the end of any indemnity clause would be acceptable. Hopefully some clients (your good clients) will understand that the risk they are asking you to take is unfair and they will work to make the agreement acceptable. On the other hand, if any client responds by telling you everyone else signs this so if you want the work, you will too, then I guess you have a decision to make. At least now you know it’s going to boil down to how comfortable you are in self-insuring that risk.

Authored by: Mark Bassingthwaighte, Risk Manager

Since 1998, Mark Bassingthwaighte, Esq. has been a Risk Manager with ALPS, an attorney’s professional liability insurance carrier. In his tenure with the company, Mr. Bassingthwaighte has conducted over 1200 law firm risk management assessment visits, presented over 600 continuing legal education seminars throughout the United States, and written extensively on risk management, ethics, and technology. Mr. Bassingthwaighte is a member of the State Bar of Montana as well as the American Bar Association where he currently sits on the ABA Center for Professional Responsibility’s Conference Planning Committee. He received his J.D. from Drake University Law School.

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Why You Should Never Minimize the Significance of Client Driven Indemnity Provisions