A New Statute Protects Design Professionals from “Duty to Defend” in North Carolina

Duty to Defend

Two landmark California appellate court cases reiterated that the “duty to defend” was separate from the “duty to indemnify” and that an indemnitor could be responsible for paying the indemnitee’s legal fees even if the indemnitor was determined to have done nothing wrong.  In both Crawford v. Weather Shield Mfg. Inc. (2008) and UDC Universal Dev. v. CH2M Hill (2010), the court held that the defense obligation was triggered before an indemnitor or indemnitee were found liable in a court.  In other words, “duty to defend” was not merely an obligation to indemnify for the indemnitee’s damages and cost of defense, but rather a duty to assume the defense of the indemnitee’s claim at the allegations stage.

A design professional’s Commercial General Liability insurance would respond in the event of a bodily injury claim relating to the design professional’s onsite activities to the extent the owner indemnitee was an additional insured.  However, even if the underlying third party claim arises from bodily injury or property damage, if the party alleges a design issue caused the injury or harm, then professional liability insurance applies and professional liability insurance will not cover the claim until causation and damages have been proven.  This issue presents significant risk of uninsured legal defense costs and uncertainty with respect to fielding defense of the owner’s third party claims well past project completion.  Even in states where case law is not established, if the tender of defense arises, it’s already too late.  The design professional is incurring uninsured defense costs even to fight whether the duty to defend is a separate duty from the duty to indemnify.

Seeking a Legislative Remedy

North Carolina design professionals decided they did not want to wait to test the issue in the courts.  They opted to seek a legislative remedy in the form of modifications to an existing anti-indemnity statute to further protect design professionals from an unwelcomed interpretation by the courts that “duty to defend” meant a separate duty from a duty to indemnify plus the cost of defense.  One of the drivers motivating the coalition of architects and engineers seeking the statutory protection was that North Carolina cities and towns have contract forms with “duty to defend” in their indemnity provisions.  Some cities have verbalized in contract discussions with designers that their form is non-negotiable and their intent would be exactly to tender a defense of third party claims, effectively offloading their fully insurable risk as a property owner to their design professional.  This intent is at odds with the cities’ and towns’ small and minority business goals.  How could it be in the public interest to contract with small and minority businesses under contract terms and conditions that are uninsurable and risk putting the very businesses they wish to promote out of business without any liability having been proven?

HB 871 drafters adopted the name “An Act to Protect the Interests of Designers, Particularly Small and WMBE Entities, From Unfair Contracting and Duty to Defend Requirements That Violate the Existing Public Policy of North Carolina.”  They worked with existing statute N.C.G.S. 22B-1, focusing narrowly on the mission of making contract provisions purporting to require a design professional to defend a promisee void and unenforceable.  Finding sympathetic and motivated bill sponsors in the legislature was key.  Senator Newton and Representative Arp, both with backgrounds in design and construction, understood the issue and developed a passion to enact protections.  Senator Newton even championed subtext making indemnity obligations void and unenforceable unless “the fault of the promisor or its derivative parties is a proximate cause of the loss, damage, or expense indemnified." 

The coalition’s efforts resulted in the unanimous passage of HB 871, with the law becoming effective 8/1/2019.  The revised statute applies to contracts “entered into, amended, or renewed on or after that date.”

Bill Summary

The bill retains the key focus of the existing statute N.C.G.S. 22B-1, which directed courts not to enforce indemnification provisions in construction and design contracts that would require the indemnitor to indemnify the indemnitee against the indemnitee’s negligence (in whole or in part).  However, that only applied to claims for damages involving personal injury/wrongful death and damage to “tangible property” and most lawyers interpreted the statute not to apply to claims for economic or contractual losses.

Two new provisions were added under HB 871.  The first addresses the need for a causal link and extends to all indemnity clauses in both design and construction contracts.  It establishes that a contract cannot require an indemnitor to indemnify an indemnitee unless the “fault” of the indemnitor or its derivative parties are a cause of the loss.  The statute defines “fault” for the purpose of the statute only as breach of contract, negligent, reckless or intentional tort, or violation of statutes or regulations. “Derivative Party” is defined in the statute as an employee or subcontractor of any tier, including design consultants.

The second new provision applies to design agreements only and prohibits inclusion of a duty to defend in a design contract.  The statute defines “Defend” as furnishing or paying for a lawyer to defend an indemnitee before a court or arbitration panel has determined that the indemnitor is at fault.  It does not prohibit reimbursement of attorneys’ fees of indemnitee, but timing must be after trial and limited to when indemnitee is found to be at fault.

The drafters retained the existing statute’s exemptions for insurance contracts and workers’ compensation and added an exemption for lien claims under N.C.G.S. Chapter 44A.  They also removed the statute’s exceptions for public utilities, DOT, and railroads.

What is the impact on the construction law industry?

If your client engages in projects in North Carolina or a state with its own anti-indemnity statute, the indemnity provision will either be blue-penciled or tossed out entirely. It is important to know the local statutes and application by the courts related to your client’s form contracts or your standard indemnity provisions.

If you practice law in a state without statutory protections against “duty to defend” and you represent design professionals, think about lobbying your state legislature.  AIA and ACEC are keen to build off the momentum of HB 871. If you represent owners, it is important to discuss the effect of this bill on the client’s risk management expectations.  In North Carolina, building owners should be advised to insure or self-insure this risk.  Beyond North Carolina, the bill has gotten a significant amount of press.  A bill like it may be heading to your legislature soon.