Construction Alert: Insuring Contractual Indemnity Obligations—A Lesson In Careful Contract Drafting

by Stinson Leonard Street
Contact

The Minnesota Supreme Court issued a decision last week in the case of Engineering & Construction Innovations, Inc., v. L. H. Bolduc Co., interpreting a subcontractor's agreement to indemnify a contractor, the subcontractor's contractual obligation to procure insurance to cover that indemnity agreement and the impact of the Minnesota anti-indemnification statute on such contract provisions.

Background on Anti-Indemnification Statutes

An insure-the-indemnity clause is one in which one person agrees to purchase insurance covering its obligation to indemnify another. These clauses, standard in many form construction contracts and subcontracts, became particularly significant in Minnesota after the Minnesota Legislature adopted the anti-indemnification statute in 1984. That statute restricts the scope of enforceable indemnity agreements by prohibiting indemnity agreements for claims for personal injury or property damage "except to the extent that the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission, including breach of a specific contractual duty," of the person agreeing to indemnify someone else. Minn. Stat. § 337.02. In other words, the law prohibits agreements in which one person agrees to be responsible for injuries or damages caused by another. Persons must only answer for injuries or damages that they themselves cause.

At the same time, recognizing the important risk-shifting role of insurance in the construction industry, the statute permits agreements in which one person agrees to purchase insurance "for the benefit of others." Minn. Stat. § 337.05, subd. 1. If one person purchases the specified insurance covering another's losses, then the insurer bears the loss; subrogation fights are avoided to the benefit of all. If not, the breaching person must indemnify the other person to the extent that the required insurance would have covered the loss. Id. at subd. 2. When the specified insurance is not reasonably available in the market, however, the indemnifying person can avoid liability for failing to purchase the insurance by either informing the other person before signing the agreement or by signing the agreement with a written notation that the required insurance is not reasonably available. Id. at subd. 3.

With insure-the-indemnity clauses, the scope of the indemnity obligation defines the insurance coverage that the person must provide. The scope of the required insurance is co-extensive with the indemnity obligation regardless of whether the underlying indemnity obligation is itself enforceable.

The Court Interprets the Statutes in ECI v. Bolduc

In Engineering & Construction Innovations, Inc., v. L. H. Bolduc Co., a first-tier subcontractor, ECI, entered into a subcontract with Bolduc for work on a pipeline project. In the ECI/Bolduc subcontract, Bolduc agreed to purchase "workers compensation and such other insurance that specifically covers the indemnity obligations under this paragraph," which required Bolduc to defend and indemnify ECI for all claims "arising out of injury to any persons or damages to property caused or alleged to have been caused by any act or omission of [Bolduc], its agents, employees or invitees." Travelers issued an insurance endorsement covering ECI as an additional insured under Bolduc's commercial general liability (CGL) policy.

During construction, Bolduc damaged the pipeline when it placed a cofferdam at a location expressly identified and directed by ECI. The owner and general contractor demanded that ECI repair it. ECI did and submitted a claim to Travelers. Travelers denied the claim. ECI then sued Bolduc and Travelers, alleging that Bolduc breached the subcontract by failing to perform its work properly and indemnify ECI, and that Travelers breached the insurance contract by refusing to provide coverage to ECI as an additional insured. A jury determined that Bolduc was not negligent and owed ECI nothing. Because Bolduc was not found negligent, the court also dismissed ECI's claims for breach of contract against Travelers and Bolduc.

The Minnesota Supreme Court found that the additional-insured endorsement, as written, only provided coverage for liability caused by the negligent acts or omissions of Bolduc for which ECI was liable. It was not enough that Bolduc's action damaged the pipe; that action had to be negligent. Because the jury found that Bolduc was not negligent, ECI was not covered under the endorsement. The Court restricted its decision to the language of the specific endorsement under review, noting that other additional-insured endorsements could be broad enough to cover the contractor's own negligence.

The Court also found that a person cannot be found responsible for another's fault unless they are required to purchase specific types and limits of insurance covering the other's fault and then fail to purchase that insurance. If that happens, the person is responsible to the other to the extent that the insurance would have covered the loss if it had been purchased.

In this case, the jury found that Bolduc was not at fault for the pipe damage. Thus, under the anti-indemnification statute, Bolduc could not be required to indemnify ECI because the underlying damage was not attributable to Bolduc unless the construction contract required Bolduc to obtain insurance to cover such a situation and Bolduc failed to procure that insurance. However, ECI failed to argue that Bolduc failed to procure the appropriate additional-insured coverage to cover the indemnity obligations within the contract and, essentially, agreed that Bolduc had obtained additional insured coverage that satisfied the terms of the contract. Thus, Bolduc was not required to indemnify ECI.

What Contractors Need to Know

Putting the ECI v. Bolduc case into practical application, contractors and subcontractors should be aware of several things:

  • Contractors should not rely on broad insure-the-indemnity clauses that simply require the subcontractor to insure the indemnity obligation without specifying what coverage will fulfill that requirement. If the subcontractor is left guessing what coverage will meet the requirement, the clause is not sufficiently specific.
  • The contract should identify the insurance required. For example, the clause could require the subcontractor to name the contractor as an additional insured on the subcontractor's CGL policy covering liability arising out of the subcontractor's ongoing operations and completed operations, with coverage equal to or greater than that provided by ISO Forms CG 20 10 07 04 and CG 20 37 07 04.
  • Contractors should require subcontractors to provide their additional-insured endorsement with certificates of insurance. They can then determine whether the coverage is as required.
  • Subcontractors must take care to purchase the exact insurance specified in the construction contract. If there is a later coverage dispute, it will then be between the contractor and the insurer.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Stinson Leonard Street | Attorney Advertising

Written by:

Stinson Leonard Street
Contact
more
less

Stinson Leonard Street on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.