Troublesome Contract Clauses: Indemnity Clause

RiskWe continue our look at troublesome contract clauses with the Indemnity clause. Craig Martin, Attorney with Lamson, Dugan & Murray explains that indemnity is the shifting of loss from one party to another. Every state recognizes this legal right. The duty to indemnify can arise due to a statute, common law, or by contract. Common law and statutory indemnities may transfer liability from a party that has little or no responsibility for a loss to the party that has more or all of the responsibility. By contract, the parties can agree to shift responsibility differently from how it might otherwise be handled by statute or common law. However, many states have anti-indemnity statutes that limit the parties’ freedom to shift certain risks through indemnity provisions.

In drafting indemnification agreements, Mr. Martin states the focus should be on which party is best able to control the risk involved, or best able to procure insurance to cover the risk. Despite a lower-tier party’s inability to bear the risk or obtain the necessary insurance coverage, upper-tier parties resist modification of indemnity provisions because they have already agreed to assume an identical risk upstream, or because they fear giving some type of right away to their detriment. The result is that lower-tier parties are often in a bet-the-business situation that they are unaware of and unable to control.

An example of a common Indemnity contract clause is AIA A201 Section 3.18:

3.18.1 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 which would otherwise exist as to a party or person described in this Section 3.18.

3.18.2 In claims against any person or entity indemnified under this Section 3.18 by an employee of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, the indemnification obligation under Section 3.18.1 shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for the Contractor or a Subcontractor under workers’ compensation acts, disability benefit acts or other employee benefit acts.

When you see this type of clause in any contract you are considering, you need to negotiate alternative language in the contract. Possible alternative language includes:

  • Limit the liability of the contractor or subcontractor to its insured limits required under the contract documents
  • Limit the indemnification liability of the contractor or subcontractor for bodily injury claims by their employees to their liability under the Workers’ Compensation Act.

The big issue with these clauses says Mr. Martin is – “Are you indemnifying someone else for their mistakes?”

Detailed review of any contract you are considering is very important. Knowing what terms and conditions the contract contains and understanding what they mean is key in assessing your risk with any new project contemplated. You can find more information on this and other topics at Craig’s Construction Contractor Advisor blog.

The information contained in this blog post is for educational purposes only as well as to give you general information and a general understanding of the topic, not to provide specific legal advice. For more specific information on this, please contact Craig Martin, Lamson, Dugan & Murray, LLP, (402) 397-7300.