Construction projects are full of risk, involving numerous individuals, large machinery, hazardous chemicals, and, frequently, are relatively open to affect the public at-large. Damages and liability can be more complicated than simply the one bad actor or actors being held responsible for their own bad acts. Project participants who were not directly responsible may nonetheless be held liable. However, project participants can attempt to manage and transfer these risks through express indemnity provisions in their construction contracts.
Indemnity provisions come in all shapes and sizes but arguably fall into three different basic categories:
- Broad form: indemnitor indemnifies indemnitee for claims/losses arising from or relating to the Work, regardless of whether the claim/loss was caused by the sole negligence of the party being indemnified (i.e., 0% legal fault can still result in 100% financial responsibility).
- Intermediate form: indemnitor indemnifies indemnitee for claims/losses arising from or relating to the Work which was caused, in whole or in part, by the acts or omissions of indemnitor. Because indemnity is only triggered if the Indemnitor’s negligence was the cause, at least “in part,” the Indemnitor will not be forced to indemnify for events resulting from the Indemnitee’s sole negligence (i.e., .1% legal fault can result in 100% financial responsibility).
- Narrow form: indemnitor indemnifies indemnitee for claims/losses to the extent caused by the acts or omissions of indemnitor (i.e., financial responsibility is coextensive with legal fault).
Instinctively, parties higher up the contracting chain, such as developers and general contractors, seek to transfer as much risk as possible onto subcontractors. Many state legislatures saw this unmitigated risk transfer as anathema to a safe project site. They feared that if a project participant could shift its liability to another party, then the project participant would be insufficiently incentivized to maintain a safe job site. Enter the anti-indemnity statutes. These statutes render void indemnity provisions in construction contracts that transfer too much risk.
As of last count, 44 States have adopted an anti-indemnity statute. These statutes fall into two basic categories: statutes prohibiting broad form indemnity and statutes proscribing intermediate form indemnity. But beyond that broad categorization there are many differences between state anti-indemnity laws. For instance, the type of contracts that the anti-indemnity statutes apply to can vary. Illinois’ and Indiana’s anti-indemnity statutes do not cover equipment rental. Thus parties to equipment rental contracts are free to contract for a broad indemnity provision. By contrast, Kentucky’s anti-indemnity statute has been interpreted to encompass equipment rental agreements, and thus the freedom to contract for a broad or intermediate indemnity provision is prohibited.
Anti-indemnity statutes can also have an effect on the insurance requirements in a construction contract. Often parties higher up on the contracting chain will require those below them to procure insurance and name the higher parties as additional insureds. What the parties cannot accomplish through indemnity, they accomplish through a third party insurance contract. This is known as the additional insured loophole. Some anti-indemnity statutes prohibit additional insured provisions in construction contracts and some do not.
Express indemnity is an important tool; it is not boilerplate or a one size fits all provision. Care must be taken in drafting to ensure that the indemnity provision takes into account the differences in each applicable state’s law so that the provision is ultimately enforceable. Contact one of the experienced construction lawyers at Manion Stigger, LLP today to learn more about indemnity clauses and their impact on your construction contract.