On April 29, 2021, Alabama
Governor Kay Ivey signed a new law that prohibits certain type indemnification
provisions in professional services contracts and establishes a single standard
of care for Alabama design professionals for Alabama projects governed by
Alabama law. The new law, titled “Contract requirements for professional
services of design professionals,” went into effect on July 1, 2021, under
Alabama Code § 41-9A-3 (the “Act”), and applies to all design professional
contracts created since that date. Alabama joins states such as Georgia and
North Carolina by enacting a state law that seeks to limit financial liability
and risk allocation to design professionals in construction contracts.
Until now, owners have been
allowed to freely allocate risk to design professionals by including broad indemnity
provisions, that contractually allocate risk to the design professional,
whether the design professional acts or omissions caused or contributed to the
damage or by requiring a heighten or more stringent standard of care. The newly enacted Alabama law, designed to
address these concerns, prohibits three provisions in design professional
contracts.
First, any provision where a design
professional agrees to hold harmless or indemnify a contracting
party, an indemnitee, or a third-party for liability not arising out of the design
professional’s own “negligence, recklessness, intentional tort, intellectual
property infringement, or failure to pay a subconsultant or supplier” is void.
Second, design professional contracts are prohibited from obligating a design
professional to defend a contracting party, an indemnitee, or a
third-party for “a claim arising out of the rendering, or failure to render the
professional services” unless the design professional’s professional liability
policy covers the claim. Third, the new law prohibits design professionals from
being obligated to “list a party or any other person or entity” as an
additional insured under their professional liability insurance policy.
Contrary to the prohibitions, the
Act expressly permits three contractual provisions. First, although design
professionals cannot be obligated to list another party on their professional
liability policies, they are permitted to list other parties as additional
insureds on any other insurance policy—i.e., a general liability or automobile
policy. Second, the Act permits contract provisions that compel the design
professional to reimburse a contracting party or indemnitee for “reasonable
attorney fees, damages, losses, injuries, or other litigation costs” but only “in
proportion to the design professional’s liability.” This section of the Act
seeks to limit the recovery of attorneys’ fees proportional to the design professional’s
fault. Third, the Act permits any additional provisions as long as they do not
conflict with the three enumerated prohibitions.
The Act also establishes the design professional’s “standard of care” in Alabama. It defines the new Alabama standard of care as “the professional skill and care ordinarily provided by a competent design professional practicing under the same or similar circumstances and professional licenses as expeditiously as is prudent considering the ordinary professional skill and care of a competent design professional.” The Act provides that any standard of care set forth in a design contract that is different shall not apply, but rather the new Alabama standard of care will apply in all design contracts.
The Act does not affect
pre-existing insurance policies, workers’ compensation policies, or any other
document or agreement issued by an insurance company. However, such policies or
documents entered on or after July 1, 2021, are subject to the Act.
Design professionals doing business in Alabama, where Alabama law is going to apply to the project, should review their contracts entered on or after July 1, 2021, to ensure they have taken advantage of the new prohibitions and should make sure the limitations are heeded in any future project contracts where Alabama law will apply. The Act is a huge benefit to design professionals that limits a design professional’s liability to the design professional’s error or omission, prohibits the design professional from being saddled with broad contractual indemnity and defense obligations, and creates a single standard of care that all design professionals must meet for projects where Alabama law applies.
