The language of construction contracts is often complex, nuanced and in many cases, difficult to understand. That’s especially true for indemnification clauses.
This part of the contract basically describes who is responsible in the event of a loss to a third party—such as a bodily injury or damage to property. Indemnification is a risk-shifting strategy that protects owners, contractors and sometimes subcontractors from the negligent actions and/or omissions negligence of one party
Let’s take a closer look.
3 types of indemnification
In short, it means everything…In a broad form indemnification, the subcontractor will indemnify the general contractor (GC) and the owner for all claims arising out of the subcontractor’s work, whether the cause was in whole or in part by the GC. Here, the subcontractor could be putting themselves on the hook for someone else’s negligence, taking on complete responsibility for any injury or damage. In some states, like New Jersey, there are anti-indemnity statutes that prohibit one company accepting sole negligence for someone else’s mistakes. In Pennsylvania this is still allowed…for now.
In short, it means everything but…Intermediate indemnification means that if the GC is 100% responsible for the injury or damage, the subcontractor is not liable. Anything less than sole negligence of the GC, even .01%, the subcontractor is responsible.
In short, I’ll pay for my negligence, you pay for yours. Here, the subcontractor will indemnify and defend only to the extent caused by their own negligence.
Translating the legal language
Construction contracts have all sorts of legal language written and if not completely understood, it could make a subcontractor agree to more risk than they are willing to take on. There could also be key phrases missing that can change the nature of the contract. What isn’t included is just as important as what is.
Here are some of the key contractual terms that need to be understood.
“Defend”– think of attorneys. The duty to defend language creates or requires the duty to defend the other party to an agreement in certain circumstances including preparing for and defending a lawsuit. The party with a duty to defend will control the defense. This obligation is typically triggered as soon as there is a claim rather than after a judgment is entered or loss has been proven, like an indemnification clause. The duty to indemnify is independent from the duty to defend.
“Indemnify ”– think of actual dollars. The duty to indemnify obligates a party (or both parties) to compensate the other party for losses or damages set out in the provision.
“Hold harmless” – think of a release of liability. This clause effectively bars the party responsible for indemnification from bringing suit against the indemnified party.
“Additional insured on a primary and non-contributory basis”
What this means is that the GC is insured under the subcontractor’s policy and that the subcontractor’s policy will be primary and will not seek contribution from the GC’s insurance. If there is a claim, the subcontractor’s insurance must be exhausted before the GC’s insurance would potentially respond. In essence, the GC’s insurance would potentially be last in line.
How your insurance broker can help navigate indemnification clauses
For general contractors, work with your broker and your attorney to make sure your contracts have tight indemnification language in place to protect you as fully as possible from any exposure, and that subcontractor’s insurance includes additional insured language. Know that you don’t have to hire a subcontractor if they are unwilling to accept the wording in your contract.
On the subcontractor side, your broker and your attorney should review indemnification clauses in each new contract. They can recommend areas where you can request changes, and offer language that matches your liability with your responsibility. Ultimately, be aware that the indemnification you are willing to accept is a business decision balancing revenue generation, relationship matters and risk factors.
What else can you expect from your broker?
One of the challenges with indemnification clauses is making sure subcontractors have the right coverage in place. Work with your broker to make sure your insurance coverage matches contract requirements. This includes reviewing your insurance limits.
Whether you are the general contractor or subcontractor, your insurance broker and your attorney should make sure the indemnification clause in place provides you the most complete protection. The broker should also ensure that the language of these clauses is as precise and clear as possible, leaving little room for interpretation.
Your broker is a great resource to walk you through all aspects of indemnification as well as corresponding insurance coverage to ensure that your insurance will respond to what you are agreeing to in your agreement. They can help you understand your potential exposure and the exact meaning of what it is you’re agreeing to in each contract. It all adds up to equipping you to make the best possible decision for you and your business.