Indemnity Provisions – What You Need to Know

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The indemnification clause is one of the most important provisions in a construction contract. It transfers risk from one party, the “indemnitee,” to another party, the “indemnitor.” The risk is transferred by way of the indemnitor agreeing to reimburse the indemnitee for losses resulting from a claim or claims brought by third parties relating to work performed under the contract. Accordingly, indemnity provisions are some of the most negotiated – and litigated – provisions in any construction contract.

In drafting indemnity clauses for construction contracts, the higher tiered party to the contract, whether it is an owner, contractor or subcontractor, usually wants the broadest possible indemnity clauses they can negotiate. Conversely, the lower tiered party to the contract usually wants to avoid indemnification clauses altogether or, in the alternative, limit them as much as possible. Below is a discussion of the most important issues in drafting indemnity provisions and their importance to construction contracts for educational buildings.

Education

As owners of property, public school districts and community colleges, as well as private institutions, are spending millions of dollars annually to contract with general contractors and service vendors to undertake construction projects or provide maintenance services on campus property. Each contract presents unique interpretation issues. Careful drafting works to limit liability exposure to these educational institutions. When educational institutions expend large amounts of money to improve or maintain property, especially in the public context, such institutions should be concerned with obtaining express protection or indemnification from liability and costs potentially incurred as a result of their contractor’s acts or omissions.

Savings Provision

Indemnification provisions are only as good as they are enforceable, and only as effective as they are applicable. For example, in New York, indemnification clauses are enforceable in construction contracts so long as they do not seek indemnification for the owner’s – or higher tiered party’s – own negligence or wrongdoing. New York construction contracts that purport to indemnify a party for an accident caused, in whole or in part, by the indemnitee’s own negligence are void and unenforceable as a matter of law.

To ensure that your indemnification clause is enforceable, insert the phrase “to the fullest extent permitted by law.” This term of art, or other “savings” language, is read by courts to allow for the broadest indemnification permitted limited only to the extent necessary to comply with the law.

Including savings or limiting language such as, “to the fullest extent permitted by law” simply helps to ensure that your indemnity clause isn’t found to be unenforceable as attempting to be broader or more protective than permitted under the law. Conversely, it also ensures that the indemnity clause is not less protective than what is permitted under the law.

Duty to Defend and Hold Harmless

While indemnity provisions benefit an indemnitee, they only apply to the extent an indemnitee is required to pay for a loss. Since this requirement often does not go into effect until after a claim is settled or goes to trial, the indemnitee is likely to have already spent a significant amount of money in attorney’s fees prior to resolution and reimbursement. The enormous cost of defending against a construction accident claim should not be an expenditure that an indemnitee is forced to incur throughout the life of a years-long litigation.

Attorney costs are real, immediate, and expensive. However, they may be avoided if the indemnitee can tender its defense to the indemnitor under a duty to defend clause. Therefore, indemnitees should want to include an express provision requiring the indemnitor to “defend, indemnify, and hold harmless” the indemnitee as part of their indemnification duties. They also should add attorneys’ fees and expenses to the types of costs that the indemnity clause covers. To the extent it can be agreed, indemnitees may also want to reserve the right to select their own defense counsel in the event of a claim.

It should be noted that design professionals will often push back on an owner’s request that the design professional “defend” the owner. This is because design professional’s errors and omissions insurance policies generally do not cover such “defense” costs. Nevertheless, to the extent it can be negotiated, including such requirement can greatly benefit the owner.

Covered Claims

Indemnitees usually want the indemnity to be all inclusive and cover all types of claims, from personal injury, death, and property damage, to breach of contract type damages. Indemnitors, on the other hand, want to limit indemnification provisions to the types of claims that would be covered by the indemnitor’s commercial general liability insurance (“CGL”) policy. CGL insurance generally covers bodily injury or death of a third-party, as well as damage to the property of a third-party. Therefore, indemnitors clearly want to limit indemnity clauses to “bodily injury or death and damage or destruction to property of a third-party” which allows them to pass off any amounts they are required to pay to their insurance carrier.

One issue that often comes up in New York is the New York Labor Law which essentially makes owners and general contractors strictly liable for personal injury and death on a construction site as a result of falls from a height, regardless of who, if anyone, is at fault. Thus, an indemnity clause that merely indemnifies the indemnitee “to the extent of the indemnitor’s negligence” is inadequate protection for an owner or general contractor. In this context, the indemnitee would have to prove that the accident was due to the indemnitor’s negligence in order to recover against the indemnitor. Thus, the more prudent clause for any owner or contractor would be to require that it be indemnified for all claims arising out of the work of the indemnitor, except to the extent caused by the negligence of the Indemnitee.

Conclusion

Indemnity provisions should be carefully drafted and reviewed by legal counsel and risk advisors so that the risks associated with your project can be properly allocated.

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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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