Editor's note: Following is the second part of a two-part series of articles addressing indemnification agreements. Part one, "Scrutinizing indemnification clauses," February issue, page 16, discussed the three types of indemnification provisions and two types of anti-indemnity statutes that have been enacted in numerous states.
Although there are many court cases that could be studied with regard to indemnification agreements, the following court cases from New York, California, Indiana and Minnesota illustrate how an indemnification provision may or may not be enforced depending on an indemnification clause's scope, a state's anti-indemnity statute and specific case facts.
New York
In Itri Brick & Concrete Corp. v. Aetna Casualty & Surety Co. and Stottlar v. Ginsburg Development Corp., which were decided jointly by the New York Court of Appeals in 1997, subcontractors' employees who had been injured in job-site accidents filed suit against the respective general contractors. The general contractors, in turn, filed claims against the subcontractors. The subcontracts contained indemnification clauses that required subcontractors to indemnify the general contractors against any claims by the subcontractors' employees or claims resulting from the subcontractors' work or operations. Unlike most states that make workers' compensation an exclusive remedy, New York allows employees to file suit against third parties.
New York's anti-indemnity statute states an indemnification clause in a construction contract that requires an indemnitor to indemnify the indemnitee from claims caused by or resulting from the indemnitee's negligence (the negligence can be in whole or part) is against public policy and void and unenforceable. Therefore, New York bans intermediate- and broad-form indemnification clauses.
In the Itri Brick and Stottlar cases, the general contractors were found to be partially negligent for the injuries suffered by the subcontractors' employees. The general contractors sought indemnification from the subcontractors according to the subcontracts' indemnification clauses. The Court of Appeals—the highest court in New York—ruled that the general contractors were not entitled to any indemnification.
Because the subcontracts' indemnification clauses required the subcontractors to indemnify the general contractors for all claims relating to the work, including claims caused by the general contractors' negligence, the court concluded the clauses contravened New York's anti-indemnity statute. Had there been no negligence by the general contractors, the indemnification clauses would be enforceable. However, because the general contractors were found to be partially the cause of the injuries, the indemnification clauses were unenforceable and the general contractors were not entitled to any recovery from the subcontractors.
California
The case of Centex Golden Construction Co. v. Dale Tile Co. in California offers another example. Dale Tile was a subcontractor for Centex Golden Construction. The indemnification clause in Centex Golden Construction's subcontract form required Dale Tile to indemnify and hold Centex Golden Construction harmless from and against any claim or expense relating to Dale Tile's work, including attorney's fees, as long as the claim was not caused by the general contractor's sole negligence or willful misconduct.
The building owner made a claim against Centex Golden Construction alleging that the tile work was defective. Centex Golden Construction settled the claim with the owner and sought reimbursement from Dale Tile. Dale Tile declined to pay Centex Golden Construction on the grounds that there was no negligence by Dale Tile. Centex Golden Construction then filed suit against Dale Tile seeking indemnification for the money Centex Golden Construction had paid the owner and legal fees Centex Golden Construction had incurred by responding to the owner's claim.
The jury found no negligence by either Dale Tile or Centex Golden Construction. Nevertheless, the trial court judge ruled Dale Tile was required to indemnify Centex Golden Construction per the indemnification provision in the subcontract.
Dale Tile appealed the trial court's ruling. The company argued that it should not be required to indemnify the general contractor because there was no negligence by Dale Tile. The California Court of Appeals examined the indemnification provision in the subcontract and determined that the parties' intent, as expressed in the contract, was that the subcontractor was to indemnify the general contractor with respect to all claims relating to the subcontractor's work.
The appellate court rejected the subcontractor's argument that there must be a showing of fault by the subcontractor for the indemnification provision to apply. The only condition in the subcontract that would preclude application of the hold-harmless clause was if the general contractor's negligence were solely the claim's cause.
Unlike New York, California only bans broad-form indemnification clauses. As long as a claim arises from the indemnitor's work and is not caused by the indemnitee's sole negligence or willful misconduct, the California anti-indemnity statute does not apply. The indemnification clause in the subcontract between Centex Golden Construction and Dale Tile did not violate the California anti-indemnity statute because it specifically excluded claims that were caused by the general contractor's sole negligence or willful misconduct.
The ruling was based on the fact that the indemnification provision in the subcontract was not tied to negligence and the requirements of the California anti-indemnification statute were met; the claim was connected to the tile contractor's work and did not arise from the general contractor's sole negligence.
The case illustrates the effect of an "arising from" hold-harmless clause in the absence of a state statute that limits indemnity to situations caused by an indemnitor's negligence. Dale Tile contractually had agreed to accept liability by not limiting the indemnification provision in the general contractor's subcontract form to the extent that a claim was caused by the subcontractor's negligence. Because California law only bars broad-form hold-harmless clauses, there were no statutory grounds to void the indemnification provision.
Indiana
Another example of an indemnification ruling is Hagerman Construction Corp. v. Long Electric Co. Hagerman Construction was the general contractor in the case, and Long Electric was a subcontractor. James Scott, a Long Electric employee, was injured when struck on the head by a falling light pole. Scott made a claim for workers' compensation benefits and filed suit against Hagerman Construction, which then filed a third-party claim against Long Electric based on an indemnity clause in the subcontract between Hagerman Construction and Long Electric.
Although both Hagerman Construction and Long Electric caused the accident, Hagerman Construction argued that Long Electric had a duty to indemnify Hagerman Construction for the entire claim based on the subcontract's indemnification clause. The subcontract was the 1987 edition of The American Institute of Architects (AIA) standard subcontract form, AIA Document A401-1987.
In Indiana, there is no prohibition against a party contracting to indemnify another party against its own negligence. However, this may be done only if a party knowingly and willingly agrees to do so.
The issue addressed by the court was the scope of the subcontractor indemnification obligation in the 1987 edition of AIA Document A401, which states: "To the fullest extent permitted by law, the Subcontractor shall indemnify and hold harmless the Owner, Contractor, Architect, Architect's consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorney's fees, arising out of or resulting from performance of the Subcontractor's Work under this Subcontract, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death or to injury to or destruction of tangible property (other than the Work itself) including loss of use resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions of the Subcontractor, the Subcontractor's Sub-subcontractors, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder."
The Indiana court concluded that the AIA language did not state in clear, unequivocal language that the subcontractor was to indemnify the general contractor against its own negligence. The clause requires a subcontractor to indemnify the general contractor for losses, damages and expenses that the general contractor incurs as a result of the subcontractor's negligence. This applies even if the general contractor also was negligent. For example, if the subcontractor's negligence was 20 percent the cause of a personal injury or property damage claim, the subcontractor would be liable for 20 percent of the damages.
The uncertainty regarding the scope of the indemnification clause in the 1987 edition of the AIA A401 subcontract form was caused by the inclusion of the phrase "in whole or in part." This phrase was eliminated in the 1997 edition of the AIA standard construction contracts to make clear that the indemnification provision in standard AIA construction contracts is intended to be limited to the extent that a negligent act or omission by the indemnitor causes personal injury or property damage. Note that unlike the "arising from" indemnification provision in the Centex Golden Construction subcontract, the indemnification clause in AIA contract documents is triggered by the indemnitor's negligence.
Minnesota
Similar to New York, as well as Connecticut, Florida, Illinois, Massachusetts, North Carolina and Ohio, Minnesota has a statute that makes indemnification provisions in construction contracts unenforceable unless a claim or damage is caused by an indemnitor's negligence or wrongdoing. To avoid the application of the Minnesota anti-indemnity statute, the Associated General Contractors (AGC) of Minnesota promulgated a standard subcontract form that required a subcontractor to purchase general liability insurance to cover a broad-form indemnification obligation. The legality of the AGC contract language was examined in Holmes v. Watson-Forsberg Co.
Watson-Forsberg was a Minnesota general contractor that used AGC language in its contracts. The indemnification provision in the subcontract between Watson-Forsberg and its roofing subcontractor, Pro-Tech Roof Systems Inc., stated the following: "The Subcontractor agrees to obtain, maintain and pay for such insurance as may be required by the General Contract, the rider attached hereto, or by law ... and to assume entire responsibility and liability, to the fullest extent permitted by law for all damages or injury to all persons, whether employees or otherwise and to all property, arising out of it, resulting from or in any manner connected with, the execution of the work provided for in this Subcontract. ... And Subcontractor to the fullest extent permitted by law, agrees to indemnify and save harmless the Contractor, his agents and employees from all such claims including, without limiting the generality of the foregoing, claims for which the Contractor may be or may be claimed to be liable and legal fees. ... And Subcontractor further agrees to obtain, maintain, and pay for such general liability insurance and endorsements as will insure the provisions of this paragraph."
Thomas Holmes, a Pro-Tech Roof Systems employee, was injured when he slid down a roof and fell to the ground. Holmes received workers' compensation benefits and sued the general contractor. Holmes claimed Watson-Forsberg was negligent in failing to inspect the premises for unsafe conditions, warn him of unsafe conditions, and remove ice and snow from the roof before directing Pro-Tech Roof Systems to begin its work. Watson-Forsberg filed a third-party claim against Pro-Tech Roof Systems alleging negligence in its training, supervision and work performance and asserting a claim for contractual indemnification.
The Minnesota Court of Appeals reversed the trial court's ruling and ruled the provisions in the Watson-Forsberg subcontract constituted an unenforceable indemnification agreement and ruled the trial court erred in finding that Watson-Forsberg was entitled to indemnification to the extent of available insurance.
The Court of Appeals stated: "Requiring a subcontractor to insure its obligations under an unenforceable agreement does not convert the agreement to provide insurance."
The appeals court ruled the subcontract provision was unenforceable as an indemnification agreement and contrary to the legislative goal of ensuring that "each link in the chain of construction [is] responsible for the consequences of its own negligence."
Watson-Forsberg, with the assistance of AGC of Minnesota, appealed the Court of Appeals' decision to the Minnesota Supreme Court. The Minnesota Supreme Court found the provision to be a valid agreement and ruled the general contractor was entitled to the benefit of the subcontractor's insurance. Unlike the Court of Appeals, the Minnesota Supreme Court considered this provision as one requiring the purchase of certain insurance and found that it did not violate the Minnesota anti-indemnity statute.
By reversing the decision of the Court of Appeals, the Minnesota Supreme Court said the appellate court's decision ignored the subcontract's clear, unambiguous language that obligated the subcontractor to obtain insurance and Minnesota law recognized the validity of a contract provision requiring one party to obtain insurance for the benefit of others. The Minnesota Supreme Court also said the legislature had anticipated and approved a long-standing practice in the construction industry by which the parties to a subcontract could agree that one party would purchase insurance that would protect others involved in the performance of a construction project.
Final thoughts
Court decisions pertaining to indemnification obligations underscore the need for contractors to carefully review and limit the scope of the indemnification clauses before signing contracts.
Although some states, such as New York, disallow indemnification obligations that are not limited to damages caused by the negligence of the indemnitor, many states, such as California, only bar broad-form indemnification clauses. In those states, a contractor will have to provide indemnity according to the contract language unless the claim was caused 100 percent by the party seeking indemnification. Moreover, even in states that have strong anti-indemnity statutes, such as Minnesota, a contractor can be contractually required to purchase insurance to cover claims asserted against another party.
The language in the current standard AIA construction contract documents is a good model for contractors to follow.
Stephen M. Phillips is a partner with the law firm Hendrick, Phillips, Schemm & Salzman, Atlanta.
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