Top 10 Construction Contract Provisions - Indemnity
This is the second post in the “Top 10 Construction Provisions Blog.” This blog article pertains to indemnification. We probably receive more calls concerning indemnification provision than any other single contract clause, and therefore, believe it is an important one for our readers to understand and appreciate in contract negotiations.
Indemnification provisions play an important role in managing the risks associated with construction contracting. Indemnity clauses require one party to take on the obligation to cover the loss or damage that has been or might be incurred by another party. Basically, one party to the contract agrees to assume responsibility for certain liability resulting from third-party claims against the other party to the contract. As many of our readers have undoubtedly experienced, there is a tendency for the party with the superior bargaining power to seek the broadest possible indemnification from a lower-tier contractor or subcontractor involved in the negotiation process. Since the public benefits from limits on overreaching indemnity clauses, many states, such as Washington, Oregon, and Alaska, have enacted “anti-indemnity” statutes that void indemnity agreements if they go too far. For example, language requiring Party A to indemnify Party B for losses caused solely by the negligence of Party B is generally prohibited by public policy (statute).
2. Typical Indemnification Provision
An example of an indemnity clause is found in the AIA A201-2007 (General Conditions), ¶ 3.18.l, which states in pertinent part that:
The Contractor shall indemnify and hold harmless the Owner ... from and against claims, damages, losses and expenses ... arising out of or resulting from the performance of the Work, 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), but only to the extent caused by the negligent acts or omissions of the Contractor, a subcontractor, or anyone directly or indirectly employed by or anyone for whose acts they may be liable.
Thus, under Article 3.18.1, if a subcontractor’s employee is injured due to some act or omission of the contractor, the contractor must indemnify and “hold harmless” the owner against resulting claims.[i] In addition, the contractor may be asked to indemnify the owner against claims for property damage, copyright, or intellectual property infringements, liens, and hazardous materials. Contractors are also often required by the prime contract to “flowdown” such provisions in their subcontracts.
3. Elements of a Balanced Indemnification Clause – A Balanced Indemnity Clause Generally Addresses Three Major Issues
• Limit Indemnity to Personal Injury and Property Damage
Whenever possible, the contractor or subcontractor should strive to limit its indemnity and hold harmless obligations to items for which it can obtain insurance. Generally, insured obligations involve the concepts of personal injury or property damage. The AIA ¶ 3.18.1 clause limits the indemnification obligation to personal injury and property damage (other provisions pertain to other AIA general condition provisions addressing copyright infringements, liens, and hazardous materials). Broad all-encompassing clauses that require the contractor to indemnify the owner from “all claims arising out of the performance of the contract” or “all claims alleged to have been caused by the acts or omissions of the contractor” are simply too broad and uninsurable. The contractor should carefully scrutinize indemnification provisions to ensure that the clauses in owner contracts are narrowly drafted to come within the insurable concepts of personal injury and property damage.
• Limit Indemnity to Third-Party Claims
Another common indemnity provision that contractors should be aware of is that the indemnity clause should be limited to third-party claims, and not include the claims of the parties (the owner’s claims) to the contract. Again, by limiting the indemnity obligation to third-party claims, the indemnity obligation should be insurable.
• Narrow the Obligation to Negligence
Finally, as set forth in the AIA example above, limiting the indemnity obligation to claims “caused by the negligent acts or omissions of the contractor or others for whom the contractor is responsible” provides further protection to the contractor. Contract claims are thus excluded, and the contractor must be negligent (a tort concept) for the indemnity provision to be triggered. The contractor should not be responsible for the payment of claims if those claims do not arise out of the contractor’s negligence.
4. Sample Balanced Owner / Contractor Cross-Indemnity Clauses
Contractor to Owner: Contractor shall indemnify, defend, and hold Owner, its employees, officers, directors, and affiliates harmless from any loss, cost, expense, or damage claimed by third parties for property damage and/or bodily injury, including death, to the proportionate extent such loss, cost, expense, or damage arises from the negligence or willful misconduct of Contractor, its employees, officers, or directors in connection with the Contract or project.
Owner to Contractor: Owner shall indemnify, defend, and hold Contractor, its employees, officers, directors, and affiliates harmless from any loss, cost, expense, or damage claimed by third parties for property damage and/or bodily injury, including death, to the proportionate extent such loss, cost, expense, or damage arises from the negligence or willful misconduct of Owner, its employees, officers, or directors in connection with the Contract or project.
5. Flowdown Provisions
The contractor ideally wants to “flowdown” the indemnity obligations/risks to its subcontractors; however, that strategy does not always provide protection to the contractor. Multiple subcontractors may be working in the same area and it can be difficult to assign degrees at fault for a given act of negligence. In Washington, public policy (statutes) prohibits a solely negligent owner from seeking indemnification from the contractor for property damage or injury. However, a partially negligent owner may seek indemnification from the contractor if the other parties have contributed to or have some fault or negligence in the act giving rise to the claim.[ii]
Comment: Many contract negotiations bog down on the issue of indemnity provisions, and frequently, it is wasteful because the clauses at issue may very well be unenforceable. Generally, if a party is going to take advantage of the indemnity, it must generally show that the party providing the indemnity obligation did something wrong (was negligent in some manner). Judges, juries, and arbitrators are reluctant to enforce an indemnity clause when they know that the damage arose from some fault on the part of the person or entity seeking the indemnity obligation. For an excellent discussion of a subcontract indemnification see Paul R. Cressman, Jr.’s post, Limitations on Defense and Indemnification Obligations, which also addresses some recent changes in Washington statutes. Our next post will discuss a case which illustrates the courts’ reluctance to enforce an indemnity when the entity from which indemnity is sought is not negligent.
[i] There is some question among lawyers as to whether the AIA indemnification clause should include the word “defend” to trigger the contractor’s defense obligation. That issue has not been decided by the courts in Washington, Oregon, or Alaska in a reported decision.
[ii] RCW 4.24.115
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