Indemnities and Additional Insured Status—Danger!
When it comes to construction contracts, dealing with indemnities and requests for additional insured status can be a serious risk for contractors. Both terms can transfer significant financial liability to your company for incidents caused by your client’s negligence, leaving you exposed to claims, legal costs, and even bankruptcy. Here’s what contractors need to know about how to protect their business from these dangerous contract provisions.
Indemnities in Construction Contracts
Indemnity clauses are designed to transfer financial liability from one party to another. If you're not careful, these clauses can make your company financially responsible for claims arising from your client’s negligence, as well as their legal defense costs. There are three main types of indemnities you might encounter:
1. Broad Form Indemnity
A broad form indemnity transfers all liability for bodily injury, death, and property damage to your company, even when the claim is caused by your client’s sole negligence. This means that even if your client is 100% responsible, your company pays for everything—including legal defense costs. Agreeing to this could lead to bankruptcy or the loss of your insurance coverage.
This type of indemnity is often void in states with strong anti-indemnity laws.
2. Intermediate Form Indemnity
An intermediate form indemnity excludes claims caused by the sole negligence of the client but still holds your company responsible if the client is partially negligent. Even if the client is 99% responsible, your company must pay the claim, plus the client’s legal defense costs. Like the broad form, this type of indemnity can expose your business to severe financial risk.
This type may also be void in certain states.
3. Limited Form Indemnity
A limited form indemnity is the most reasonable and fair. It makes each party responsible for their own negligence and their own share of any liability. This type of indemnity is more likely to be insurable under your general liability policy and is a better alternative for contractors.
Why Broad and Intermediate Indemnities Are Dangerous
The difference between a broad form and an intermediate form indemnity is minimal. Both expose your company to paying 100% of the claim, even if your client is mostly or entirely at fault. Here’s how these indemnities can play out:
Broad Form Indemnity Example: Your client is solely responsible for a $1,000,000 claim, with $250,000 in legal defense costs. Because of the broad form indemnity, your company reimburses the client for the full $1,250,000.
Intermediate Form Indemnity Example: Your client is 99% responsible for a $1,000,000 claim. Your company pays $990,000 for the claim, $250,000 in legal defense costs, and $10,000 for your 1% share—totaling $1,240,000.
In both cases, the client gets off the hook, while your company faces massive financial losses.
How to Protect Your Company from Indemnities
Here are some strategies to deal with broad or intermediate indemnities in construction contracts:
Negotiate for a Limited Form Indemnity: This makes each party responsible for their share of liability. Example wording:
Subcontractor shall defend, indemnify, and save Client harmless from all claims arising from bodily injury or property damage, but only to the extent caused by the negligence of Subcontractor.
Limit Liability with a Separate Clause: Add a limitation of liability clause to cap your exposure. Example wording:
Subcontractor’s total liability, including defense costs, shall be limited to $500,000 (or another reasonable amount).
Include a Clause for Uninsurable Conditions: State that you cannot agree to any conditions that are uninsurable and must renegotiate if such conditions arise.
Consider Walking Away: If the client insists on broad or intermediate indemnities, it may be wise to walk away from the contract. A client unwilling to take responsibility for their own negligence may not be running a safe project.
Gross Negligence and Willful Misconduct: Red Herrings
Clients may try to comfort you by excluding gross negligence and willful misconduct from the indemnity, claiming that they won’t hold you responsible for these extreme situations. However, this is often a red herring designed to distract you from the real issue: the broad or intermediate indemnity they still want you to accept. Don’t fall for it—most jurisdictions won’t allow the transfer of liability for gross negligence anyway.
Additional Insured Status: Protecting Your Insurance
It’s common for clients to request that they be added as an additional insured on your general liability policy. While it might seem harmless, this can give your client full access to your insurance—for free. Here’s how it can hurt you:
Free Access to Your Policy: The client can use your insurance to cover claims arising from their own negligence.
Defense Costs Covered: Your insurance may end up paying for the client’s legal defense, even for claims they caused.
Deductibles: If there’s a deductible on your policy, you pay it—not the client.
Exhausted Limits: If the client uses up the limits on your policy, there may be nothing left for other claims your company may face.
Higher Premiums: Your insurance premiums may increase due to claims filed by the client, and this can impact your ability to secure future coverage.
How to Handle Additional Insured Requests
Here are strategies to deal with requests for additional insured status:
Delete the Requirement: Try to remove the additional insured requirement from the contract. Remind the client that you’re in the construction business, not the insurance business.
Suggest Project-Specific Insurance: Recommend the client buy their own project-specific general liability insurance to cover their needs. This is commonly done with "wrap-up" insurance policies.
Offer an Owners and Contractors Protective Policy (OCP): An OCP policy protects the client without affecting your own general liability policy. The client is the named insured, there’s no deductible, and they don’t share coverage with anyone.
Include an Uninsurable Conditions Clause: Add a clause stating that your company cannot agree to uninsurable terms and must renegotiate if they arise.
Final Thoughts: Protect Your Assets
Both broad and intermediate form indemnities and additional insured requests present significant risks for contractors. They can expose you to unmanageable liabilities and insurance costs that can cripple your business. Protect your company by negotiating fair contract terms, setting clear liability limits, and ensuring that your insurance is used for your company’s benefit, not your client’s.
It’s also wise to support local subcontractor groups and lobby for strong anti-indemnity legislation in your state. Protect your business—your insurance is an asset, and it shouldn’t be given away.
