How PA’s Proposed Anti-Indemnification Statute May Affect the “Belt-and-Suspenders” Approach to Risk Transfer in Construction Contracts

Cohen Seglias Pallas Greenhall & Furman PC
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How PA’s Proposed Anti-Indemnification Statute May Affect the “Belt-and-Suspenders” Approach to Risk Transfer in Construction Contracts

In a January 2021 memorandum, Pennsylvania State Representatives Todd Stevens and Michael Driscoll reintroduced a bill that, if passed, would amend 68 P.S. § 491 to significantly limit the breadth of indemnification provisions in construction contracts. As explained in a previous post, this bill was originally introduced as House Bill 1887 in September 2019 but was ultimately “laid on the table” in November 2020. Now, reintroduced as House Bill 424, the bill attempts to address Pennsylvania’s current lack of an anti-indemnity statute. According to the Representatives’ memorandum, without anti-indemnification protection, many Pennsylvania contractors face the unfair practice of having to accept liability for another party’s negligence. On December 13, 2021, this bill was officially “removed from the table,” meaning that it is available for possible consideration and may be placed on the House’s calendar soon.

Recovery in Construction Contracts

Owners and general contractors protect themselves from third-party suits for personal injury or property damage using two methods: contractual indemnification provisions and additional insured status (thus, a “belt-and-suspenders” approach).

Contractual Indemnification Provisions

Indemnification provisions are used by parties to pass the risk of certain losses to another party for losses that arise out of the other party’s work. There are three main types of indemnification provisions: broad, intermediate, and limited.

  1. A broad indemnification provision allows the indemnitee to require the indemnitor to cover the indemnitee’s entire liability, even if the indemnitee is fully at fault for a loss (or “solely” negligent).
  2. An intermediate indemnification provision permits an indemnitee to be fully compensated by the indemnitor for any loss so long as the indemnitee is found to be only partially negligent.
  3. A limited indemnity provision only requires the indemnitor to pay for the portion of the loss that is attributable to the indemnitor. If the indemnitee and indemnitor are found to be 60% and 40% negligent, respectively, the indemnitor will only have to pay for its share (40%) of the liability.

A broad or intermediate indemnification provision requires that a general contractor or subcontractor pay the indemnitee’s defense costs and any judgments against the indemnitee that are related to its work. For example, if a subcontractor’s employee is hurt on the job, the employee will likely sue both the general contractor and project owner. In this instance, a typical indemnification provision between the owner and general contractor essentially says: “As the general contractor, you were in charge here, and if someone is hurt on the project and sues me, you have to defend me (pay for the lawyers) and indemnify me (pay for any settlement or judgment), even for my own negligence.”

In practice, once a general contractor receives the owner’s indemnification demand, it will (or should) notify its commercial general liability (CGL) insurance carrier of the claim. As a result, the owner can indirectly access the general contractor’s CGL policy to cover its losses by first asserting the indemnification claim against the general contractor and then, if necessary, suing the general contractor for contractual indemnification. The same process applies to the general contractor seeking indemnification from its subcontractor.

Additional Insured Status

Along with indemnification provisions, owners and general contractors will each also seek to be added to the general contractor or subcontractor’s CGL policies respectively as an additional insured. In the above injured worker example, as an additional insured, the owner can seek coverage under the general contractor’s CGL policy and demand the insurance carrier defend and indemnify the owner for the claims asserted by the subcontractor’s employee. This adds another layer of protection for owners and general contractors because, as additional insureds, they have a contractual relationship with the insurance carrier and direct rights under the applicable CGL policy.

House Bill 424 Attempts to Prohibit Broad and Intermediate Forms of Indemnity

House Bill 424 attempts to mirror the present Delaware, New York, and Ohio laws by prohibiting both broad and intermediate forms of indemnity. This change means that parties will be left with only limited form indemnity, effectively removing the belt (indemnity) from their belt-and-suspenders toolkit. The current hold-up in the legislative process relates to the suspenders in that toolkit: the protections available to an additional insured.

The current form of the bill has language that creates ambiguity about how it might affect the ability of owners and general contractors to continue obtaining additional insured status under general contractors’ and subcontractors’ insurance policies. Lobbying from trade organizations and negotiations between legislators continue, which may hold up any movement on the bill in the short term. If the statute eliminates both the belt and the suspenders, it will be a major change that will leave owners and general contractors unable to push liability for personal injury and property damage claims “downstream” via contract provisions.

Conclusion

The attorneys at Cohen Seglias will continue to follow any developments arising from this legislation. If adopted, this legislation will significantly impact construction companies working in Pennsylvania, and general contractors and subcontractors alike will have to prepare to comply with the new legislation. 

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.

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