On Aug. 1, 2013, a significant overhaul of the Minnesota statute governing indemnification and risk-shifting in construction contracts went into effect. Generally, the amendment eliminates a long-standing exception to a prohibition against risk-shifting in the construction context. However, some language in the statute leaves lingering doubt regarding the ultimate impact of the amendment.
Since 1984, Minnesota law has prohibited risk-shifting agreements in construction contracts which require one party to indemnify another from that party’s own negligence. See Minn. Stat. § 337.02 (2012). However, the pre-amendment version of Minn Stat. § 337.05, Subd. 1 carved out a huge exception to this general prohibition by allowing contracting parties to procure insurance for the benefit of one another, stating that § 337.02 does “not affect the validity of agreements whereby a promisor agrees to provide specific insurance coverage for the benefit of others.” In the event of a failure to procure the promised insurance policy, the statute went further, stating, “…regardless of section 337.02, the promisee shall have indemnification from the promisor to the same extent as the specified insurance.” Id. Practically speaking, the exception swallowed the rule. As a matter of course, subcontractors were contractually required to procure insurance indemnifying general contractors for the generals’ own negligence.
As you might expect, subcontractors were not in favor of this law and lobbied for a change. Effective August 1, 2013, Minn. Stat. § 337.05, Subd. 1 is significantly amended. The statute now states:
(b) A provision that requires a party to provide insurance coverage to one or more other parties, including third parties, for the negligence or intentional acts or omissions of any of those other parties, including third parties, is against public policy and is void and unenforceable.
Minn. Stat. § 337.05, Subd. 1(b) (2013). If the amendment stopped here, there would be little question that the law had changed and that it was no longer possible to require one party to procure insurance which in effect obtained indemnification for one’s own negligence.
Some doubt remains as to the impact of the prohibitions contained in (b), however, because of the subsequent paragraph:
(c) Paragraph (b) does not affect the validity of a provision that requires a party to provide or obtain workers compensation insurance, construction performance or payment bonds, or project-specific insurance, including, without limitation, builder’s risk policies or owner or contractor-controlled insurance programs or policies.
Minn. Stat. § 337.05, Subd. 1(c) (2013) (emphasis added). While builder’s risk policies and owner or contractor-controlled insurance clauses are readily understandable industry terms, ambiguity exists as to the meaning of “project-specific insurance.” This term is undefined in the statute and is not a term of art in either the insurance or construction contexts. Already, some have argued that this term refers to commercial general liability (CGL) policies for a given project, an interpretation which would render the amendment meaningless and return to the pre-amendment status quo. This is not a logical conclusion - surely the Legislature did not intend a largely meaningless amendment. But until Minnesota courts have had the opportunity to interpret the meaning of “project-specific insurance,” there will likely be litigation regarding its meaning.
In the meantime, construction contracts that rely on the pre-amendment version of Minn. Stat. § 337.05 should be reworked in an attempt to comply with the new statute and to maintain desired outcomes, which either impose or avoid the risk-shifting indemnification requirement.