Caitlin Kicklighter and Bill Shaughnessy | ConsensusDocs
Risk allocation between the parties is a critical component of any construction contract. Indemnity obligations can be some of the important risk-shifting provisions of any design or construction contract. Indemnity provisions typically require one party, the Indemnitor, to agree to “hold harmless,” and/or reimburse another party, the indemnitee, from claims and liability arising out of the party’s work. Considering the financial consequences that an indemnity provision can have on a construction project, it is critical that all parties to a construction contract know the legal implications of the contract indemnity provisions and understand any limitations in enforcing the indemnity provisions depending on the controlling jurisdiction. While most indemnity clauses and obligations are enforceable, many states have enacted anti-indemnity statutes prohibiting or restricting specific indemnification provisions. These anti-indemnity statutes afford protection to contractors and subcontractors not generally in a position to protect themselves from overly extensive indemnity obligations.
This article highlights several examples of indemnity provisions typically seen in construction contracts, the measures are taken by a growing number of states to protect parties with less bargaining power in the form of anti-indemnity statutes, and offers practical considerations when negotiating or drafting indemnity provisions.
Indemnity Provisions: Many Shapes and Many Sizes.
Indemnity clauses can come in various forms and transfer different risks. Common indemnification clauses include indemnification of economic losses, payment, insured contracts, and indemnification for breach of contract. Generally speaking, broad indemnification clauses require the Indemnitor to bear the financial risk for all damages or losses incurred by the indemnitee. More narrow/limited clauses may only require the Indemnitor to be responsible to the indemnitee for losses or harm it caused.
ConsensusDocs, as one example, employs a more limited or narrow indemnification provision whereby a party is only responsible for its negligence and not the negligence of others. ConsensusDocs also includes reciprocal indemnity language, meaning that both parties to the contract are required to indemnify one another. Example language of the reciprocal indemnity clause contained in ConsensusDocs 200 “Standard Agreement and General Conditions Between Owner and Constructor,” Article 10, INDEMNITY, INSURANCE AND BONDS is set forth below:
10.1.1 To the fullest extent permitted by law, the Constructor shall indemnify and hold harmless the Owner, the Owner’s officers, directors, members, consultants, agents and employees, the Design Professional, and Others (the Indemnitees) from all claims for bodily injury and property damage, other than to the Work itself and other property insured, including reasonable attorney’s fees, costs, and expenses, that may arise from the performance of the work, but only to the extent caused by the negligent acts or omissions of the Constructor, Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Constructor shall be entitled to reimbursement of any defense costs paid above the Constructor’s percentage of liability for the underlying claim to the extent provided for by the subsection below.
10.1.2 To the fullest extent permitted by law, the Owner shall indemnify and hold harmless the Constructor, its officers, directors, members, consultants, agents, and employees, Subcontractors, or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable from all claims for bodily injury and property damage, other than property insured, including reasonable attorneys fees, costs, and expenses, that may arise from the performance of work by the Owner, the Design Professional, or Others, but only to the extent caused by the negligent acts or omissions of the Owner, the Design Professional, or Others. The Owner shall be entitled to reimbursement of any defense costs paid above the Owner’s percentage of liability for the underlying claim to the extent provided for by the subsection above.
Therefore, under the ConsensusDocs 200, contractors and owners are responsible for their negligence, and the indemnification obligations cover insurable risks such as personal injury and property damage. Also, either party is entitled to reimbursement of defense costs paid in excess of that parties’ percentage of liability for their underlying claim.
While AIA contracts also include a limited or narrow indemnification provision, limiting liability to only the contractor (or architect’s) negligence, the contractor’s indemnity obligations are not reciprocated by the owner. The standard indemnification in the current AIA A201 – 2017 edition provides in the relevant part:
§ 3.18.1 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, 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 attorneys’ fees, 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, 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.
Under this provision of the AIA, the contractor is not required to indemnify the owner for every possible claim that may arise. Rather, the contractor’s indemnity obligations are limited such that the claim must arise from the contractor’s work, must be for bodily injury or property damage, and only to the extent caused by the negligence of the contractor or its subcontractors.
Enforceable Provisions While Ensuring Maximum Protection.
Anti-indemnity statutes vary from state to state based on the contract type and the restrictions in place. There are essentially three categories of anti-indemnity statutes:
- Statutes barring indemnification for indemnitee’s sole negligence
- Statutes barring indemnification for indemnitee’s negligence
- Statutes barring indemnification of design professionals
The first category of anti-indemnity statutes prohibits an indemnitee from being indemnified for its sole negligence. California’s anti-indemnity statute, for example, states that “any provision that indemnifies a party for a loss arising from its sole negligence, willful misconduct, or for defects in a design furnished by the indemnitee is void and unenforceable.” Cal Civ. Code § 2782(a). Under this provision, the Indemnitor in a construction project cannot be held responsible for the damages caused solely by the indemnitee’s own negligence.
However, some anti-indemnity statutes that fall under this category may provide special circumstances where indemnification would still be allowed. For example, unlike California’s statute, indemnitors in Florida may be liable for the indemnitee’s sole wrongdoing if certain circumstances exist, despite no wrongdoing of their own. Florida’s anti-indemnity statute provides, that “any provision that requires a party to indemnify another for a liability caused by an act, omission, or default of the indemnitee is void and unenforceable unless the contract both contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents.” Fla. Stat. § 725.06(1).
North Carolina’s anti-indemnity statute is an example of a statute that bans the indemnitee from being indemnified for losses if the indemnitee partly or wholly contributes to the loss. North Carolina’s anti-indemnity statute reads in relevant part, “any agreement that seeks to indemnify a party against liability resulting from its own negligence (in whole or in part) is against public policy and is void and unenforceable.” N.C.G.S. § 22B-1. This particular statute significantly limits what indemnity provisions are enforceable in North Carolina.
Some anti-indemnity statutes ban design professionals from an indemnification for their negligence in providing their services. New York’s anti-indemnity provision is an example of such a targeted statute. New York’s anti-indemnity statute reads in relevant part, “an agreement by an owner, contractor, subcontractor, or supplier to indemnify an architect, engineer, or surveyor from a liability for bodily injury or property damage arising out of a design defect is void and unenforceable.” N.Y. Gen. Oblig. Law § 5-324.
Some states do not have an anti-indemnity statute in place. However, this does not translate to indemnity provisions being free reign. States such as Alabama, Maine, and North Dakota typically rely on court-made law that the language in indemnification provisions be clear and unequivocal; the contract must explicitly state indemnification.
Drafting and Reviewing Indemnity Provisions: Things to Consider
All parties must have a clear understanding of the contract language when reviewing and negotiating indemnity provisions, as well as industry standards when faced with negotiating indemnity provisions. While indemnity provisions have customarily shifted risk down the contract chain, the reciprocal obligations utilized in ConsensusDocs are becoming more universally accepted in the industry. Below are some practical considerations for next time your company may be faced with negotiating or drafting indemnity provisions:
- Does the indemnity obligation only apply to the contractor? Or does the provision include other named parties such as the design professional? It is important to consider the protected class defined under the provision.
- Does the provision cover specific claims and damages? Are damages limited in any capacity? Reflecting on the scope of the damages covered is critical for each party involved.
- Does an insurance policy exist that may mitigate any type of risks assigned to parties through the indemnity clause? Parties frequently fail to assess and compare the risks associated with indemnity clauses and their insurance coverage.
- Does an anti-indemnity statute or judge-created law exist in the jurisdiction where the work is being performed? These limitations can vary from state to state, affecting indemnity provisions’ enforceability.
 It is important to note that indemnity clauses may also include the duty to defend by the indemnitor. This is a different duty requiring the indemnitor to defend a claim or lawsuit against the indemnitee, which is not addressed in this article.
 To read additional materials regarding indemnification provisions in ConsensusDocs, see:
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email email@example.com.