By James Rudolph, Esq.
Rudolph Friedmann, LLP
Boston, Massachusetts
Owners and general contractors generally want construction site sub-contractors to bear more than their pro rata share of the legal and financial burdens arising from any personal injury or property damage associated with a construction project.
This is accomplished through the use of so-called “indemnification” clauses, “hold harmless” provisions, and “additional insured” requirements in a construction contract, which can significantly impact affected subcontractors in the following ways:
- Greatly amplifying any hikes in their annual insurance rates in the event of a large loss experience on the job;
- Significantly increasing their exposure to a catastrophic loss incident involving massive death or destruction;
- Increasing the chance that they will have to pay legal bills for themselves and other parties for whom they are contractually obligated to provide a defense; and
- Causing them to hit their per occurrence or aggregate insurance limits sooner in any given coverage period, leaving them partially uninsured for cumulative risks.
That is why construction contracts should be reviewed and negotiated by an experienced lawyer who understands both the legal rights and commercial objectives of the parties, as well as the potential gaps in insurance coverage between assumed liabilities and existing policies.
Indemnification Clauses and Hold Harmless Provisions
It is common for an owner or general contractor to ask all subcontractors to indemnify and hold harmless the Owner, Architect, General Contractor, and all agents or employees of any of them from and against all claims, damages, loss and expenses, including, but not limited to attorneys’ fees, arising out of or resulting from performance of the Work on a project.
What does that mean? Basically, it shifts the financial liability arising from any project-related claims to any subcontractor who contractually agrees, forcing that entity to pay any settlements or verdicts in any way associated with the work, regardless of the amount of fault.
There are different types of hold harmless/indemnity provisions, and it is important to know the consequences and the prevailing commercial practices with regard to each. These provisions can provide for so-called limited, intermediate, broad or comparative fault indemnities, and they shift liability to varying degrees, depending on a subcontractor’s relative fault.
Anti-Indemnity Statutes
All parties to construction contracts need to understand that there are legal limitations on what kinds of indemnity the owner or general contractor can seek, and those limitations vary by state. Some states prohibit only broad indemnity clauses, some also prohibit intermediate indemnities that force subs to cover another party’s partial fault, and a handful of states allow any kind of indemnity by contract.
In Massachusetts, Chapter 149, Section 29C of our general laws provides that an indemnity provision is void if it requires a subcontractor to indemnify any party for personal injury or property damage “not caused by the subcontractor.”
This language might appear to provide a broad protective shield, but it does not. The courts have ruled that this statute only voids indemnity provisions that shift liability to subcontractors when they have zero contributory negligence or comparative liability. Under the statute, a Massachusetts indemnity can still require a sub to indemnify an owner or third party for 100 percent of damages if the subcontractor is just one percent at fault.
Also, this law does not prohibit the practice of contractually requiring a subcontractor to name an owner or any other party as “additional insureds” on the subcontractor’s insurance policies, which has a similar but not identical effect to a full indemnity.
Additional Insured Endorsements
Fortunately for subcontractors, additional insured endorsements to insurance policies have evolved over time. The language in these endorsements at one time pertained to a sub’s responsibility for the negligence of other additional insureds, including the sole negligence of those parties. The latest form of endorsement provides more hoops for an additional insured to jump through in proving a right to coverage under the endorsement, such as demonstration of a subcontractor’s partial fault through its “acts or omissions.”
The form of additional insured endorsement that is actually used depends on what the parties negotiate and agree upon.
Bottom Line
If your company is in the construction business, you may unwittingly become involved in the insurance business or become a surety or underwriter yourself, unless you have a good advocate at your side.
Rudolph Friedmann has represented parties to many construction contracts involving a wide variety of projects over the years, and attorney Jim Rudolph is currently the Chairman and General Counsel of the Associated Builders and Contractors of Massachusetts, the largest construction trade association in the Commonwealth, representing over 400 local general contractor, subcontractor, supplier and associate companies. Member companies employ more than 22,000 workers throughout Massachusetts.
For more information about Rudolph Friedmann LLP, please visit the International Society of Primerus Law Firms.