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

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.

 

Topics:  Anti-Indemnification Statutes, Construction Contracts, Indemnity Agreements, Insure-The-Indemnity Clauses, Liability Insurance, Negligence, Pipelines, Subcontractors

Published In: General Business Updates, Construction Updates, Energy & Utilities Updates, Insurance Updates

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

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »