Indemnification provisions are ubiquitous in construction contracts and provide legal and financial protection to one party while transferring risk and liability to another party. One sentence in a multipage contract can drastically affect your potential liability. When you sign a contract with an indemnification provision, you are agreeing to accept liability and reimburse or make payments to the parties named in the contract whom you have agreed to indemnify.
Terms
First, let's define the terms. The indemnitor is the party who has the obligation to indemnify another party. The indemnitee will receive the benefit of the indemnification obligation. In a typical construction subcontract, the general contractor is the indemnitee and the subcontractor is the indemnitor. General contractors invariably include indemnification provisions in their subcontract forms. Building owners who use their own contract forms often include indemnification provisions. Standard construction contract documents, such as the construction contracts promulgated by The American Institute of Architects (AIA), also include indemnification provisions.
Other than perhaps contract amount and scope of work, the indemnification provision is the most critical term in a construction contract. An indemnification provision that applies to claims, losses or damages that are the indemnitor's fault are reasonable and justified. A broad indemnification provision that seeks to transfer all contractual risk and liability from the indemnitor to the indemnitee poses an enormous liability risk to the indemnitor and should be deleted or modified before contract execution. The party seeking indemnification typically has superior bargaining power.
Contractual provisions
General contractors, particularly national or regional general contractors, employ attorneys who draft subcontract forms that are intended to place the general contractor in a commanding legal position. A subcontractor who signs a general contractor's subcontract form without identifying, scrutinizing and revising the indemnification and hold harmless provisions may well be exposing himself or herself to unfair and unlimited risk that makes him or her liable for claims, losses and damages that were not his or her fault.
Given general contractors' universal use of indemnity clauses in subcontracts, the general contractor is the indemnitee and the subcontractor is the indemnitor for the balance of this article.
Contractual indemnification provisions historically have been classified into the following three categories:
Often, an indemnification clause will not explicitly fall into one of these categories because a provision states the subcontractor indemnifies the general contractor (and other parties) for any loss, claim or injury that arises from, results from or is incurred in connection with the subcontractor's work. This type of indemnification provision, similar to a Type I or Type II indemnity clause, exposes the subcontractor to an overly broad indemnification liability because the loss may not be the result of any negligence or wrongdoing by the subcontractor and may, in fact, be caused by the negligence of the general contractor, other subcontractors or third parties.
Unfortunately, though the contract between an owner and general contractor may use an AIA contract form, general contractors invariably draft their own one-sided subcontract forms that contain broad indemnification provisions and seek to have subcontractors sign the self-serving subcontracts without modification. Subcontractors need to identify broad indemnification provisions and modify them so the subcontractor's liability to indemnify, defend and hold the indemnitees harmless is limited to the extent that the indemnitor's negligence is the cause of the claim, damage or loss.
Anti-indemnity statutes
If a subcontractor fails or is unable to modify a broad indemnification provision, should an overly broad, Type I or Type II indemnification provision be enforced? This question poses a conflict between freedom of contract, allowing parties to contract as they agree and compelling them to live by and suffer the consequences of the bargain they struck, versus trying to advance an equitable division of liability based on fault rather than, as is often the case in construction contracts, the power to impose contractual terms.
Historically, there have been relatively few statutes dealing with indemnification provisions and the role of courts was generally limited to enforcing indemnification provisions as written. However, during the past decade, more state legislatures, frequently pushed by the American Subcontractors Association, have enacted statutes making broad indemnification provisions in construction contracts unenforceable. These statutes, known as anti-indemnity statutes, typically come into play when a general contractor tries to make a subcontractor indemnify it for its negligence if a claim, loss or damage relates to the subcontractor's work.
Forty-three states have adopted some form of anti-indemnity statute applicable to construction contracts. In addition to the District of Columbia, the only states that have not enacted anti-indemnity statutes are Alabama, Maine, Nevada, North Dakota, Pennsylvania, Vermont and Wyoming.
However, 16 states severely limit the reach of their anti-indemnity statutes. In these states, the statutes only apply to broad form indemnification provisions that would require the subcontractor to indemnify the general contractor in situations where the general contractor's negligence was the sole cause of the claim, damage or injury. In other words, if the claim, damage or injury was 100 percent caused by the negligence of a general contractor who had included an indemnification provision in its subcontract, the indemnification provision requiring the subcontractor to indemnify the general contractor would be considered void as against public policy and not enforced.
States with such anti-indemnity statutes are Alaska, Arizona (private construction contracts), Florida (private construction contracts), Georgia, Hawaii, Idaho, Indiana, Maryland, Massachusetts (based on a court decision interpreting the statute), Michigan, New Jersey, South Carolina, South Dakota, Tennessee, Virginia and West Virginia.
Because of the anti-indemnity statutes in these states, you often will see in general contractor-drafted subcontract forms an indemnification provision requiring the subcontractor to indemnify the general contractor, owner and others in all situations unless the claim, damage or injury is a result of the general contractor's sole negligence. From a practical perspective, this type of anti-indemnity statute tends to have minimal practical application because rarely will there be a construction accident or claim where there is a finding that one party's negligence was the sole cause.
For instance, assume a general contractor made an opening in a roof deck and failed to adequately secure and cover the opening; then, an employee of the roofing subcontractor tripped and fell through the opening while transporting materials across the roof. The injured employee, in addition to recovering workers' compensation benefits, brings suit against the general contractor. The jury finds the general contractor's negligence is 90 percent the cause of the accident and the roofing subcontractor is found to be 10 percent negligent because of failing to keep the employee away from the opening or otherwise safeguarding against a fall through the opening.
In the states that prohibit only broad form indemnification provisions, the anti-indemnity statute has no applicability because the general contractor's negligence was not the accident's sole cause; therefore, because of the indemnification provision in the contract, the subcontractor still will be liable to indemnify the general contractor for 100 percent of the damages awarded by the jury and the legal costs of defending the claim.
Twenty-seven states have enacted anti-indemnity statutes that make intermediate form indemnification provisions in construction contracts unenforceable. Such forms require the subcontractor to provide 100 percent indemnification to the general contractor in situations where the subcontractor and general contractor were negligent. In these states, if the general contractor is partially at fault, the general contractor cannot require the subcontractor to pay the entire claim. The subcontractor only would be liable to indemnify the general contractor to the extent the general contractor had incurred damages because of the negligence of the subcontractor or someone for whose acts the subcontractor was liable.
California, Colorado, Texas and Washington recently enacted this type of anti-indemnity statute. Other states with similar statutes are Arizona (public projects), Connecticut, Delaware, Florida (public contracts), Illinois, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana (public contracts), Nebraska, New Hampshire, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island and Utah.
Regardless of how an anti-indemnity statute is classified, in any situation the text of the applicable statute needs to be examined to determine its application in different situations. A state's anti-indemnity statute may apply only to certain types of claims, such as personal injury and property damage claims; may apply only to subcontracts rather than all construction contracts; may exclude single-family home construction; or may not apply to a duty to defend the general contractor. State court decisions also will determine how a statute is applied.
Massachusetts' anti-indemnity statute is limited to subcontractors and states any contract provision related to construction, installation, remodeling, repair, demolition or maintenance work that requires a subcontractor to indemnify any party for injury not caused by the subcontractor or its employees, agents or subcontractors shall be void. However, Massachusetts' courts have interpreted the statute to apply only to situations where the general contractor is solely at fault.
Texas' anti-indemnity statute, which became effective Jan. 1, 2012, applies to all construction projects and contracts except single-family homes. It voids an indemnification provision in a construction contract to the extent the provision requires a party to indemnify or defend another party against the indemnitee's sole or partial negligence. However, the Texas statute does not apply to a claim arising from bodily injury or death of any employee of the indemnitor, its agent or its subcontractor.
Washington's anti-indemnity statute applies to private and public contracts, design and professional service contracts, and sole and concurrent negligence of indemnitees. It extends not only to personal injury and property damage claims, but also to all damages arising out of the indemnitor's services.
Arizona, Florida and Louisiana have different anti-indemnity statutes for public and private contracts. For instance, in Florida, a general contractor can require a subcontractor to indemnify it for concurrent negligence if the subcontract includes a monetary limitation that bears a reasonable commercial relationship to the contract and the indemnity provision is included in the project specifications or bid documents.
Additional insured loophole
In addition to indemnification provisions, general contractors routinely include contract provisions in their subcontracts requiring the subcontractor to name the general contractor and others as additional insureds on the subcontractor's liability insurance policies.
Similarly, owners frequently request general contractors to name owners as additional insureds on general contractors' liability insurance policies. To the extent the general contractor or owner seeks only to be an additional insured with regard to a claim against them that was a result of the negligence of the subcontractor or general contractor, respectively, these additional insured provisions are reasonable.
However, if a general contractor requires a subcontractor to name the general contractor as an additional insured on the subcontractor's liability insurance policies (often coupled with a waiver of subrogation rights provision), it can be used as a mechanism to transfer liability resulting from the general contractor's negligence to the subcontractor's insurance carrier.
By requiring the subcontractor to name the general contractor and others as additional insureds on the subcontractor's liability policies, a general contractor might get around an anti-indemnity statute.
General contractors who seek to make subcontractors' general liability insurance carriers defend and cover them not only will require a subcontractor to name the general contractor as an additional insured, but also may go on to state the subcontractor must use a particular additional insured endorsement form, CG 20 10 11 85. This broad, outdated endorsement form makes the general contractor (and others) additional insureds on the subcontractor's general liability policy for any claim arising out of the subcontractor's work even though the claim, damage or loss may not have been the subcontractor's fault and may have been caused by the negligence of the general contractor or other additional insureds.
Seven states have enacted statutes that close this so-called "additional insured loophole" by expressly making contract provisions that require one party to provide insurance covering the negligent acts of the other party unenforceable. These states are Colorado, Georgia, Montana, New Mexico, Oklahoma, Oregon and Texas.
Wrapping up
To avoid overly extending your liability, be vigilant when evaluating the scope and reasonableness of indemnification provisions in all contracts. According to the principles incorporated in AIA construction contract documents, an indemnification provision should be limited to claims for personal injury and property damage to the extent caused by your negligence or the negligence of someone for whose acts you are responsible.
When required to name a general contractor and others (typically the owner and architect) as additional insureds, clarify in your contract that doing so is not intended to provide insurance coverage from your insurance carrier for claims and losses caused by the additional insureds' negligence but rather is intended to cover claims against them and losses sustained by them caused by your fault.
If you find yourself responding to an indemnification demand and have inadvertently or were compelled to sign a contract with a broad indemnification clause, check to see whether your state's anti-indemnity statute makes the indemnification provision void and unenforceable as against public policy.
By taking these steps, you may be able to save yourself and your insurance carrier from defending and paying for a claim that was not your fault.
Stephen M. Phillips is a partner with Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.
For an article related to this topic, see "Risky business," August 2009 issue.
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