The 800 Pound Gorilla in the Contract: the Indemnity Provisions

One of the most frequent inquiries I receive from contractors and subcontractors alike is what does this indemnity provision really mean, and is there any way to reduce my exposure?

Generally, “indemnity” is the obligation resting on one party to make good a loss or damage another party has incurred, which obligation may be expressly provided for by contract, implied from a contract not specifically mentioning indemnity, or may arise from the equities of particular circumstances.  In California, indemnity is defined at Civil Code § 2772:  “Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or some other person.”  The party being required to provide the indemnity is called the “indemnitor.”  The person receiving the benefit of the indemnity is the “indemnitee.” 

In the construction arena, indemnity is a contractual provision that shifts the risk.  By way of example, an insurance policy is nothing more than an indemnification contract (shifting the risk) subject to the specific terms, conditions and exclusions contained within the policy agreement.  The same goes here:  the indemnity provision in your construction prime contract or subcontract seeks to shift the risk subject to the specific terms, conditions and exclusions contained within the agreement.  Lawyers typically refer to the contractual indemnity provisions contained in your average construction contract as being of one of three different types:  Type I, Type II or Type III (…original, I know).

A Type I provision requires indemnification for the indemnitee’s damages from tort liability, including the active or passive negligence of the indemnitee (in other words, what he/she did or didn’t do), and strict liability.  To be enforced in a court of law, a Type I agreement must be explicit, clear and unequivocal.  A case famous (or infamous) in legal circles known as Continental Heller ’97 declared a finding of fault or even a causal connection between the indemnitee’s conduct and the harm is not required to enforce the terms of a Type I agreement.  The court opined the parties are at “great freedom of action in allocating risk,” and the parties were “expected to review, understand and bargain over their indemnity agreement.”  Under a Type I agreement, the only exceptions to an obligation to indemnify is if the indemnitee is solely responsible for the harm, or committed a willful wrongful act.  In other words, if you are the subcontractor in a contract with a general contractor with a Type I agreement, you must pay the general contractor (and usually the owner) for all damages and claims, regardless of whether the general contractor (or owner) contributed to causing the damage to a substantial degree, and regardless of the minimal nature of your contribution to the harm. 

A Type II provision is less onerous than a Type I from the subcontractor’s perspective, and requires indemnification for the passive, but not active liability of the indemnitee.  In other words, as the subcontractor in a contract with a general contractor with a Type II agreement, you must pay the general contractor (and usually the owner) for all damages and claims caused by an omission (failure to act) of the general contractor (or owner), but not for the active negligence of the general contractor (or owner).

A Type III provision is the least onerous indemnity obligation from the subcontractor’s perspective.  A Type III provision requires indemnification only for the liabilities caused by the indemnitor, not the liabilities caused by anyone else.  In other words, as the subcontractor in a contract with a general contractor with a Type III agreement, you are required only to pay the general contractor (and usually the owner) for damages and claims caused by your own conduct.

The basic components of indemnification include (i) the obligation to hold the indemnitee harmless, defend and indemnify the indemnitee, and waive subrogation claims; (ii) the length of the obligation, generally during construction and after completion; (iii) provide an additional insured endorsement, noting the indemnity provision may require indemnity regardless of the limits of insurance coverage.  In fact, most standard ISO CGL policies exclude coverage for liability assumed in a contract.

Clear as mud?  Here are some questions you can ask yourself when reading the indemnity provision in your contract:

1.         How broad is the indemnification provision in the subcontract - e.g., does it require you (the subcontractor) to indemnify under all conditions except when the general contractor is solely negligent?

2.         Does the indemnity clause match that included in the contract between the prime contractor and the owner?

3.         Does your (subcontractor's) insurance provide coverage for contractual liabilities, including indemnification obligations assumed under subcontract indemnification clauses?

It is critical to first understand the obligations being imposed upon you (the indemnitor), so that you are in the best position to try to negotiate the terms of that provision with the proposed indemnitee.  Questions?  Call me to discuss the particulars of your situation.

Nothing in this blog is intended to create an attorney-client relationship.  This article is intended to provide a general overview of the current status of the law for informational purposes only, and is not intended to constitute, or serve as a substitute for, a professional legal consultation.  Laws change every day; please consult an attorney regarding the current status of the law, and how the law affects your specific circumstances. Thank you.