In construction, a key legal question is who is responsible if something goes wrong. This is where indemnification comes into play.
Most construction contracts contain indemnity clauses that require one of the parties to indemnify and hold the other party harmless. This means that if there is a claim or lawsuit, one of the parties to the contract will need to step up and accept responsibility —even if the claim remains uncertain or a lawsuit has yet to be filed. Indemnification may be required even if the claim is made against the other party to the contract!
A few fundamentals
To better understand indemnification, let’s start with the basics.
The indemnitor is an individual or company who agrees to assume certain responsibility outlined in the contract.
The indemnitee is the person held harmless in a contract by the indemnitor.
In construction, indemnity clauses are normally applied at all responsibility levels. The prime contractor (indemnitor) is generally required to indemnify the owner (indemnitee). In turn, the subcontractor is then expected to indemnify the prime contractor and usually the owner. Indemnity clauses can be used for a variety of purposes, including claims for loss, liability for negligence, and breach of contract.
A typical indemnity clause required by an owner from a contractor will read something like this:
To the fullest extent permitted by law, contractor shall indemnify and hold harmless owner and architect and their agents and employees from and against all claims, damages, losses, and expenses including but not limited to attorneys’ fees arising out of or resulting from the performance of the work, provided that such claim, damage, loss, or expense (a) is attributable to bodily injury, sickness, disease or death . . . and (b) is caused in whole or part by any negligent act or omission of contractor, any subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder.
Contractors should always try to limit their responsibilities outlined in indemnity clauses to what they can control or what their insurance can cover. For example, subcontractors should include language that limits both their liability and their indemnification requirements “to only those claims or costs resulting from or attributable directly and solely to subcontractor’s own misconduct or negligent acts or omissions.” In the contract, it’s also important to clearly describe the losses being covered by indemnity.
Some states have laws that limit the scope of contractual indemnification provisions. In Florida, for instance, the law invalidates any indemnification clause unless the contract contains a monetary limitation that “bears a reasonable commercial relationship” to the contract and “is part of the project specifications or bid documents, if any.” If these monetary limitations are not met, the indemnification clause will be unenforceable.
If you are drafting a subcontract, make sure you understand any indemnity limitations in the state where the work will be performed. Statutes could contain limitations as to the types of parties, acts, and omissions that may be subject to indemnification clauses. Always review indemnity clauses with an attorney knowledgeable in this area to make sure the contract contains the language required by law.
What to watch out for
When entering into a contract with an indemnification provision, keep in mind several key factors:
- Who is indemnifying whom?
- Does the contract clearly express an intent to indemnify a party against its own negligence?
- Do the terms of the agreement determine whether the indemnitor is obligated to reimburse the indemnitee for a particular claim?
- What is being indemnified (personal injury, property damage, attorney’s fees and costs of defense, economic loss, etc.)?
- Are there monetary or other indemnity limitations required by law?
- Is there a provision requiring that the risk be covered by insurance such that the indemnity is limited to the amount of the insurance coverage?
A poorly written indemnity provision could lead to the erroneous presumption of protection when none actually exists. Make sure the indemnity clause you agree on is one you also truly understand and one that can be enforced. Only then can you be assured you’ve taken the right steps to prevent a litigation nightmare.