Commercial InsuranceConstruction

Anti Indemnity Statutes and Contractors

By November 19, 2019 March 19th, 2020 No Comments
anti indemnity statutes and contractors

It’s almost impossible these days to find a construction contract that doesn’t include “hold harmless”, “indemnification”, “additional insured”, and/or “waiver of subrogation” provisions somewhere. These are clauses that attempt to hold the subcontractor legally accountable for job-site accidents and injuries.

No one would argue that a subcontractor should not be responsible for injuries it causes. The problem arises when these clauses attempt to shift liability for accidents that are not the fault of the subcontractor. Owners and general contractors have long sought to do just that by use of indemnity clauses which shift the responsibility to pay damages (often including attorney’s fees and litigation costs) to subcontractors without regard to who actually caused the loss. There are a lot of reasons why this is not a good idea for anyone other than the owner or general contractor, but given uneven negotiating power typical in these relationships, these clauses keep popping up, always to the subcontractor’s detriment.

States have an interest in seeing that the financial consequences for injury or loss fall on the responsible party, but since subcontractors typically are not in a position to insist on that, many states have enacted legislation to level the playing field and mitigate some of the more egregious abuses by upper tier owners and contractors. These are specifically intended to prevent the party with superior bargaining power (owner/general contractor) from taking advantage of the party with inferior power (the subcontractor).

These statutes deal with the three types of indemnity agreements:

Limited Indemnity, where the subcontractor assumes liability only for its own negligence; the owner/GC has no protection if it is even partially at fault.

Intermediate Indemnity, where the subcontractor has responsibility for its own sole or partial negligence. These may be full indemnity agreements, where the subcontractor is responsible for all damages even if only partially at fault, or partial indemnity, where liability is apportioned based on percentage of fault.

Finally, Broad Indemnity is where the subcontractor is responsible regardless of who is at fault. Even if the owner or GC is solely at fault, the subcontractor pays.

Broad indemnity clauses are clearly unfair, and are the target of most states anti indemnity legislation. Limited indemnity provisions are almost equally one sided since the subcontractor must be 100% liable for them to attach, and the world doesn’t really work that way in most cases. All states allow limited indemnity provisions, but they are almost never seen in real world use.

Full or partial intermediate indemnity is where most states have some say. Seventeen states prohibit broad indemnity clauses outright. Twenty four more ban broad indemnity clauses and intermediate indemnity agreements, too; owners or GC’s can’t transfer liability for their own actions to others. Conversely, six states allow broad indemnity agreements.

Of course the question of who is indemnified, and how, can’t be separated from the question of how insurance applies, since in most cases subcontractors will look to their liability policies to protect them when a claim occurs. There are two parts to the liability policy that pertain here.

The first is the contractual liability section, which protects for the liability assumed by contract, as with these indemnity agreements; the second is additional insured provisions, usually applicable since the superior party to these contracts will not only require indemnification, they’ll also want to be named on the policy.

Anti-indemnity questions are complex, governed as they are by applicable statutes in the state concerned, terms of the contract between the parties, the indemnitor’s insurance policy and the specifics of each individual claim. In cases where liability may be determined by degree of fault, conclusion must also wait for a jury to allocate fault.

This is not a topic to overlook if you have an exposure. We’ll be happy to sit down with you and go over your own specific situation.

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