One of the most important risk-shifting devices in a construction contract is the indemnification provision because it protects one party from financial loss and damages arising from future problems occurring during the project. Indemnification is a promise that one party will make good on any loss, damage, or liability incurred by another. There are two parties in an indemnity relationship – an indemnitor and an indemnitee. An indemnitor gives indemnity while the indemnitee receives indemnity. When a duty to indemnify is triggered, the indemnitor undertakes the obligation to cover the loss or damage that has been or might be incurred by the indemnitee. The indemnitor also agrees to assume the responsibility for liability resulting from third-party claims against the indemnitee. For example, an indemnification clause may require a general contractor to indemnify the owner for a claim for damages asserted by a subcontractor’s employee who was injured on the jobsite.
If the indemnification clause is not carefully drafted, the indemnitor stands to incur a substantial loss by assuming a responsibility for all risks, including damages arising from the sole negligence of the indemnitee. On the other hand, if an indemnification clause is too broad, it may be declared void and unenforceable under a state’s anti-indemnity law. For example, a state court may decline to enforce an indemnity clause that purports to indemnify a person’s loss from that person’s intentional or willful misconduct.
State anti-indemnity legislation emerged to protect subcontractors, lower-tiered subcontractors, and suppliers who are often in a much weaker bargaining position in the negotiation process. These states take the position that overreaching indemnification clauses are against public policy, and thus anti-indemnity statutes place limits on the powerful protections afforded by an indemnification provision.
Two common examples of indemnification clauses are contained in standard contract documents called the AIA A201-2007 and ConsensusDocs 200. In section 3.18.1 of AIA A201-2007 (General Conditions), the indemnification provision states in pertinent part:
To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section 3.18.
In other words, under section 3.18.1, the contractor must indemnify and “hold harmless” the owner against claims arising out of the performance of the work by the contractor, a subcontractor, or anyone employed by them and covers the owner’s loss only to the extent that it was caused by such act or omission.
Another example of an indemnity clause in contained in ConsensusDocs 200 “Standard Agreement and General Conditions Between Owner and Constructor,” Article 10, INDEMNITY, INSURANCE AND BONDS which is significantly different from the indemnity clause in AIA A201-2007.
ConsensusDocs 200, section 10.1.1 states:
To the fullest extent permitted by law, the Constructor shall indemnify and hold harmless the Owner, the Owner’s officers, directors, members, consultants, agents and employees, the Design Professional, and Others (the Indemnitees) from all claims for bodily injury and property damage, other than to the Work itself and other property insured, including reasonable attorney’s fees, costs and expenses, that may arise from the performance of the work, but only to the extent caused by the negligent acts or omissions of the Constructor, Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Constructor shall be entitled to reimbursement of any defense costs paid above the Constructor’s percentage of liability for the underlying claim to the extent provided for by the subsection below.
10.1.2 To the fullest extent permitted by law, the Owner shall indemnify and hold harmless the Constructor, its officers, directors, members, consultants, agents, and employees, Subcontractors or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable from all claims for bodily injury and property damage, other than property insured, including reasonable attorneys fees, costs and expenses, that may arise from the performance of work by the Owner, the Design Professional, or Others, but only to the extent caused by the negligent acts or omissions of the Owner, the Design Professional, or Others. The Owner shall be entitled to reimbursement of any defense costs paid above the Owner’s percentage of liability for the underlying claim to the extent provided for by the subsection above.
The ConsensusDocs 200 indemnity obligation is vastly different from the indemnity clause 3.18.1 in AIA A201-2007 in several ways. First, the duty to indemnify is reciprocal between the contractor and the owner. Contractors and owners are responsible for their own negligence and it covers only insurable risks such as personal injury and property damage. Also, either party is entitled to reimbursement of defense costs paid in excess of that parties’ percentage of liability for their underlying claim.
Although often confused for each other, an obligation to provide “additional insured coverage” is not equivalent to an indemnity obligation. Since the ability to indemnify the indemnitee is tied to the indemnitor’s financial ability to pay such losses in the future, standard contract forms contain an added protection in detailed insurance clauses requiring a party to procure insurance coverage.
In AIA A201-2007, Article 11 sets forth the contractor’s requirement to purchase and maintain insurance to protect the contractor from claims arising out of its operations and completed operations for which it may be legally liable. Article 11 also requires the contractor to provide commercial general liability (CGL) insurance and identify the owner, owner’s lender, owner’s landlord, the architect, and the architect’s consultants as “additional insureds” for claims caused in whole or in part by the contractor’s negligent acts or omissions. Obtaining additional insured status is accomplished by a written endorsement or amendment to the named insured’s policy. An additional insured may receive the benefits of the coverage and make a claim directly against the named insured’s insurance company. Companies who are named as additional insureds under a policy are subject to the same policy exclusions and exceptions as the policy holder.
In ConsensusDocs 200, the insurance clauses are found under Article 10 under “Indemnity, Insurance, and Bonds.” ConsensusDocs 200 requires that the parties purchase and maintain CGL insurance, employers’ liability insurance, and business automobile liability insurance. However, in contrast with A201, ConsensusDocs 200 contains no requirement to identify any party as an “additional insured.” Rather, the owner has the option to require that the contractor maintain additional liability coverage in the form of providing additional insured status under the CGL policy or an Owners’ and Contractors’ Protective Liability insurance policy at the owner’s expense.
Construction projects are risky financial endeavors for all project participants. Both indemnification clauses and additional insured status are a means to manage those risks. A party subject to either of these two devices should consult an attorney to review the contractual language and the applicable insurance policies. An indemnity obligation may be restricted or deemed unenforceable by a state’s anti-indemnity law. Also, an additional insured may be unpleasantly surprised when a claim is denied under a policy exclusion or exception. One thing that is certain is that no one wants to be left holding the bag long after the project is over.