The Four Legs of Good Anti-Indemnity Legislation
Not all anti-indemnity legislation (a state statute) in
the US is created equal. Some state statutes are toothless and
aren’t worth the paper they are written on. Some state statutes look
good on the surface but have loopholes that render them basically
worthless. A few state statutes are very good and exemplary models
of anti-indemnity legislation.
By Kit Werremeyer
President, Southernstar Consultants, LLC
For a contractor, the most dangerous risk transfer agreement in a construction contract is the indemnity. Simply put, an indemnity can transfer the liability for bodily injury, including death, and property damage arising out of the negligence of one party to the other party to the contract.
There are three types of indemnities typically found in construction contracts:
1. Broad Form: A broad form indemnity transfers the liability for bodily injury, including death, and/or property damage arising out of an accident attributable to the negligence of one party, including that party’s sole negligence, to the other party to the contract.
2. Intermediate Form: An intermediate form indemnity transfers the liability for personal injury, including death, and/or property damage arising out of an accident attributable to the negligence of one party, but excluding that party’s sole negligence, to the other party to the contract.
3. Limited Form: A limited form indemnity makes each party to the contract responsible only to the extent of each party’s negligence for the liability arising out of an accident that causes bodily injury, including death, and/or property damage.
For practical risk management purposes there is no difference between a broad form and an intermediate form indemnity. With an intermediate form indemnity, the negligent party could be 99% (not solely, or 100%) responsible for the accident and the other party would have to assume the liability that arises out of that accident, plus pay the remaining 1%.
Broad form and intermediate form indemnities are, without a reasonable financial cap—limitation of liability—on them, uninsurable obligations and, as such, can bankrupt a contractor.
A limited form indemnity is the only fair indemnity. Basically, a limited form indemnity requires each party to the contract to clean up his proportionate share of the mess. Absent a written indemnity in the construction contract, this is typically the common law solution in all the states.
The blatant unfairness of broad and intermediate form indemnities in construction contracts has attracted the attention of lawmakers in a number of the states. Laws—statutes—have, as of the date of this article, been enacted in 37 states that provide some degree of unenforceability of broad and/or intermediate indemnities in public and private construction contracts.
However, not all anti-indemnity legislation is created equal:
• Some anti-indemnity legislation only outlaws broad form indemnities (intermediate form indemnities are okay)
• Some anti-indemnity legislation outlaws both broad form and intermediate form indemnities, but allows insurance to cover the indemnity obligation (this is the obligation to provide additional insured status on contractor’s general liability insurance policy)
• Some anti-indemnity legislation outlaws both broad form and intermediate form indemnities and also outlaws the contractual obligation to provide additional insured status to cover the indemnity obligation with a contractor’s general liability insurance policy.
• Some anti-indemnity legislation outlaws broad form and intermediate form indemnities as well as the contractual requirement to allow insurance to cover the obligation, but allows, or is silent on, change of venue and applicable state law. (allows going to pursue a claim in another state with no anti-indemnity legislation or poorly written legislation)
• Some anti-indemnity legislation outlaws broad form and intermediate form indemnities, outlaws requiring additional insured status to cover the indemnity obligation, and outlaws going to another state and using the laws of that state to pursue a claim.
On a scale of 0 to 10 with zero being the worst legislation and ten being the best legislation:
• The first four bullets above get a big 0. Nice try, though.
• Bullet five, the last one, gets a 10. Gold star legislation!!«
The Four Legs of Good Anti-Indemnity Legislation
The four legs of good anti-indemnity legislation are as follows:
1. Broad form indemnities in construction contracts are against public policy and are therefore void and unenforceable.
2. Intermediate form indemnities in construction contracts are against public policy and therefore void and unenforceable.
3. Insurance required to cover broad or intermediate form indemnities in construction contracts is against public policy and therefore void and unenforceable. (Note 1)
4. Change of venue/choice of law from the State in which the construction project is located to another State is against public policy and therefore void and unenforceable.
Note 1: This is the requirement for a contractor to provide client with additional insured status on contractor’s general liability insurance policy with the additional requirement to provide contractual liability insurance. This specific prohibition closes the so-called “insurance loophole.”
As of the date of this article the following states have some form of anti-indemnity legislation in effect.
|Nebraska||New Jersey||New Mexico||New York|
|North Carolina||Ohio||Oregon||Rhode Island|
|South Carolina||South Dakota||Tennessee||Texas|
When negotiating the commercial terms and conditions of a construction contract make sure you take the time to become knowledgeable about the state anti-indemnity statutes and venue and choice of law statutes that may apply to the contract in the state in which the project is located.
Anti-indemnity legislation and common law decisions against indemnities are constantly being interpreted and changing. This is one very important area where your in-house attorney or a retained attorney or a contract professional can better advise you on their current status prior to begin negotiating better terms and conditions in a construction contract.
©Southernstar Consultants, LLC March 2012, Revised January 2014