Indemnity provisions, also known as hold harmless agreements, are frequently included in construction contracts to transfer the risk of third-party claims. Indemnity agreements involve a promise by which one party (the indemnitor) makes another party (the indemnitee) whole for a loss that the other party has incurred as a result of a third-party claim. Indemnity provisions offer the parties an opportunity to transfer the risk of loss to the party best-suited to bear the risk. In the same way, additional insured requirements can be used to transfer risk from a negligent party to another party’s insurance carrier. While these concept appear simple, the treatment of such provisions varies from state to state based on applicable statutes and court decisions.
While standard form indemnity provisions are available, these provisions are often negotiated and can look quite different depending on the extent of indemnification. An indemnity provision can be drafted broadly to indemnify the indemnitee for all claims, costs, losses, and damages that result from either party’s negligence, even if the indemnitee is solely responsible for the third-party’s injury. An intermediate provision will specify that the indemnitor agrees to indemnify the indemnitee for all claims, costs, and damages resulting from either parties’ negligence, except where the indemnitee is solely at fault. A more restrictive provision will provide that the indemnitor only agrees to indemnify the indemnitee if the indemnitee bears no responsibility for the claims, losses, and damages. Which option is used may be influenced by the type of anti-indemnity statute in the applicable jurisdiction.
Whether an indemnity agreement will be enforced may depend on whether the governing state law limits enforcement of indemnity agreements. The various states deal with indemnity agreements in one of the three ways: (1) the state does not have an anti-indemnity statute; (2) the state has an anti-indemnity statute that prohibits an indemnitor from indemnifying an indemnitee for the indemnitee’s sole negligence; or (3) the state prohibits an indemnitor from indemnifying an indemnitee for the indemnitee’s own negligence, regardless of degree of fault. Given the prevalence of indemnity agreements in construction contracts, all parties involved should be aware of the law governing each of their projects.
States With No Statute
While the majority of states have some form of anti-indemnity legislation governing construction contracts, there are currently eight states that do not have a true anti-indemnity statute. However, the lack of an anti-indemnity law does not mean that any and all indemnity agreements will necessarily be upheld. Courts throughout the country tend to narrowly interpret provisions which attempt to indemnify an indemnitee for its own negligence. For instance, most courts will not construe an indemnity agreement to indemnify a party for its own negligence unless such intention is expressed in “clear and unequivocal terms” as is the case in Maine, or, as in Nevada, the result is “very clearly intended.”
States Prohibiting Sole Negligence Only
There are fifteen states that prohibit an indemnitee from requiring others to indemnify the indemnitee for its own sole negligence. Unlike the states with no statute, and no matter how clearly the parties’ intentions are stated, courts in these states will invalidate any agreement by one party to indemnify another party for its own sole negligence. The reasoning behind such refusal is that to allow otherwise would be a violation of public policy.
States Prohibiting Sole And Partial Negligence
Finally, a majority of states prohibit indemnity for both sole and partial negligence of the indemnitee. In these states, an indemnitor can be required to indemnify the indemnitee only to the extent of the indemnitor’s own negligence. These states have determined that it is against public policy to require a non-negligent party to be responsible for an act or omission for which it was not at fault because an indemnitee who knows that another party is ultimately responsible for the indemnitee’s negligent acts (or omissions) may not act as carefully as it otherwise might if it knew it would be responsible for its own acts. In addition, these statutes were enacted to prevent the lower-tier party (a contractor or subcontractor), presumed to have the weaker bargaining position, from being obligated to indemnify an upper-tier party (owner or contractor) for its own wrongdoing.
Despite the restrictions of anti-indemnity statutes, many states still allow owners (and other upper-tier project participants) to be named as additional insureds under the contractor’s or subcontractor’s comprehensive general liability (“CGL”) insurance policy, which may provide greater coverage.
Insurance and Anti-indemnity Legislation
Many indemnitees attempt to secure the indemnitor’s indemnification promise by requiring that the indemnitee procure contractual liability coverage as part of the indemnitor’s CGL insurance policy. In addition to requiring insurance of the indemnification agreement, many owners and contractors also require that they be named as an additional insured on the contractor’s or subcontractor’s CGL policy.
Although an obligation to indemnify is different than an obligation to procure insurance, many of the same states that legislatively invalidate clauses purporting to indemnify another party for its own fault will nevertheless allow agreements to procure insurance that effectively provide the same kind of protection. For instance in Georgia, while an agreement that requires one party to indemnify another for a loss caused by the indemnitee's sole negligence is void and unenforceable; the law does not apply to any insurance agreement. Even in the case of willful misconduct, Hawaii allows for such coverage in CGL policies.
A clear statement of the parties’ intent is paramount to having an indemnity agreement upheld. Since indemnity provisions tend to reverse the generally preferred rule that wrongdoers should pay for their own mistakes, courts often strictly construe indemnity language. Loose language used in defining the indemnity obligations may result in a restrictive reading of the scope of the parties’ indemnity agreement. Therefore, it is essential to understand the scope of the risk that is intended to be subject to the indemnity clause and define it clearly. Even a clearly stated indemnity agreement may not be enforced if it violates a state’s anti-indemnity statute. An additional insured requirement may be enforced even though an indemnity clause is barred.