{"id":891114,"date":"2016-10-14T11:25:30","date_gmt":"2016-10-14T17:25:30","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=891114"},"modified":"2016-10-14T11:25:30","modified_gmt":"2016-10-14T17:25:30","slug":"practical-advice-indemnification-additional-insured-issues-revisited","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/practical-advice-indemnification-additional-insured-issues-revisited\/","title":{"rendered":"Practical Advice: Indemnification and Additional Insured Issues Revisited"},"content":{"rendered":"

John P. Ahlers | Ahlers & Cressman<\/a> | August 24, 2016<\/p>\n

Lawyers love writing about indemnification.\u00a0 There are seventeen blog articles on our website alone that deal with the subject.\u00a0 Before you click out of this email in disgust that we are rehashing a stale topic, this post contains some practical advice for contractors and subcontractors dealing with the perplexing issues of indemnification and additional insured provisions.<\/p>\n

The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for the potential losses or damages caused by the other party.\u00a0 To indemnify someone means to protect that person or entity by promising to pay the cost of possible future damage, loss, or injury. When signing a contract, you should identify the indemnity obligations that could cost your business money.\u00a0 Finding the words \u201chold harmless\u201d or \u201cindemnify\u201d in a proposed contract is not enough.\u00a0 The terms \u201chold harmless,\u201d \u201csave harmless,\u201d or \u201cindemnify\u201d are a big part of the indemnification obligation. \u00a0Although insurance requirements (\u201cadditional insured\u201d clauses) accomplish virtually the same thing as very broad, unfair, or unlimited indemnity terms do, they result in an \u201cend run\u201d around the effort to limit the indemnification obligation.<\/p>\n

Indemnification<\/b><\/p>\n

Of course modifying the \u201chold harmless\u201d terms in a contract is very important to limit your risk, which can be very challenging when there are a number of different, overlapping \u201chold harmless\u201d terms scattered throughout a particular contract or subcontract which greatly complicate the task of negotiating or limiting all of them.\u00a0 The easiest solution is to prepare an addendum to a proposed contract providing that any<\/b> \u201chold harmless\u201d obligation in the contract is limited to the proportion of the contractor\u2019s (subcontractor\u2019s) fault or fault of its subtier subcontractors and suppliers.\u00a0 Something along the following lines is advisable:<\/p>\n

To the fullest extent permitted by law, contractor [subcontractor] shall indemnify, defend, and hold [Customer], 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 agents, officers, or directors in connection with the agreement [contract or subcontract] or project.<\/p>\n

The suggested language limits the indemnity obligation to property damage and bodily injury, which is insurable.\u00a0 The indemnity obligation only applies to the extent of the contractor\u2019s negligence or willful misconduct consistent with tort reform statutes in various states.<\/p>\n

This takes care of the indemnity obligation, but we cannot stop there because you should also consider the insurance requirements, particularly any requirements to name your customer as an \u201cadditional insured.\u201d<\/p>\n

Additional Insured<\/b><\/p>\n

Another way that parties in a contract shift the risk of certain types of losses between each other is that one party requires the other to list it as a protected party, an \u201cadditional insured\u201d on its own purchased insurance policy thereby giving the protected party [customer] access to insurance coverage.\u00a0 The additional insured status allows the protected party [customer] direct access to the other party\u2019s [contractor\u2019s] insurance coverage for losses within the scope of the additional insured designation.\u00a0 The protected party\u2019s [customer\u2019s] recourse is directly to the insurance coverage, rather than through a claim against the contractor.\u00a0 The protected party [customer] has a source of recovery for a covered loss that does not depend entirely on the financial condition of the contractor.\u00a0 Thus, there is an advantage to have a large insurance company provide a liability policy with a duty to defend (which is broader than the duty to indemnify\/pay).\u00a0 The additional insured is entitled to coverage of its defense under the broad standards of an insurance policy, rather than the stricter standards found in many indemnity provisions.\u00a0 The problem for contractors is if claims are made against the contractor\u2019s insurance policy by additional insureds, the contractor\u2019s cost of insurance will increase in terms of higher premiums based on the contractor\u2019s experience rating.\u00a0 Thus, listing an additional insured comes with a cost which the contractor bears.\u00a0 As outlined in the Comments section below, sometimes a contractor can obtain the protections sought by the customer in the form of an Owner\u2019s and Contractor\u2019s Protective Liability Insurance Policy.\u00a0 Generally, we have found it difficult to negotiate an additional insured provision out of the contract.<\/p>\n

It is also important to properly designate the party being named as an \u201cadditional insured.\u201d\u00a0 Obtaining the additional insured status occurs in two general ways:<\/p>\n