On The Hook

LEGAL ISSUES ANTI INDEMNITY STATUTESDo anti-indemnity statutes always protect you?

By Jeremy P. Brummond

Construction contracts often include “indemnity” provisions where the “indemnitor” agrees to be responsible for losses incurred by the “indemnitee” or claims asserted against the indemnitee such as personal injury or property damage claims. 

Indemnity provisions come in all shapes and sizes. Some indemnity provisions are relatively narrow in scope with the indemnitor agreeing to be responsible only for damages or claims to the extent they are caused by the indemnitor’s errors. Others are broader and are often referred to as “intermediary” indemnity provisions – this is when the indemnitor’s error contributed to the damages and claims and the indemnitor claims full responsibility even if the damages were not entirely the indemnitor’s fault. To go a step further, there are “broad form” indemnity provisions where an indemnitor broadly agrees to be responsible for all damages and claims relating to the work, even if caused solely by the indemnitee. Balancing Interests

Broad form indemnity provisions often appear in construction contracts between parties who don’t have the same bargaining power, such as big companies versus smaller companies. Recognizing the uneven balance of power in many construction contracts, state legislatures in most states have enacted “anti-indemnity statutes,” which generally void broad form indemnity provisions and, in some states, they void “intermediary” indemnity provisions, mandating that both parties in a construction contract only be responsible for losses and claims to the extent caused by those parties’ errors. 
Contractors and subcontractors - aware of state anti-indemnity statutes - may enter into contracts with some feeling of comfort that they will only be responsible for losses if somehow caused by their errors, and they may expect that they will have no liability or exposure to claims caused by others’ errors. Contractors and subcontractors, however, are not necessarily insulated from paying for claims and losses resulting from others’ errors, even if they are working in a state with an anti-indemnity statute. Through the insurance provisions in the agreement, an owner or upper-tier contractor may be able to avoid the purpose of the anti-indemnity statutes, and may be able to pass the financial burden of claims and losses caused by the owner or upper-tier contractor to their contractors and subcontractors.

The Additional Insured Loophole

In many states, it remains permissible for an owner or upper tier contractor, in a construction agreement, to require its contractor or subcontractor to purchase insurance covering losses or claims, even if caused by the owner’s actions. Indeed, many construction contracts include provisions requiring the contractor or subcontractor to name the owner or upper tier contractor as an “additional insured.” When the owner or upper tier contractor requires insurance be purchased by the contractor or subcontractor to cover their own errors, they have accomplished the very thing that many anti-indemnity statutes were meant to prohibit. They have received an agreement that someone else will be responsible for losses and claims on the project, even if they caused the losses or claims. That it remains legally permissible (in some states) for an owner to require their contractor or subcontractor to purchase insurance for claims resulting from the owner’s errors, but it is not legally permissible for an owner to require a contractor or subcontractor, themselves, to indemnify the owner for losses the owner caused is generally referred to as the “additional insured loophole.” 

In some states, the additional insured loophole is expressly allowed by statute. In other states, the law expresses that requiring a contractor to provide insurance for claims arising out of the owner’s errors is not allowed.  In many states, however, the additional insured loophole is not addressed in the state’s anti-indemnity law (or other statute), so the courts have been left to address whether the additional insured loophole is permitted or whether it should not be permitted as being contrary to the purpose of the anti-indemnity statute.  

It is important for contractors to be aware of the possibility that state law may allow the additional insured loophole for various reasons.  Many contractors’ commercial liability policies have very high deductibles or self-insured retention. If a contractor has a high self-insured retention and is responsible for providing additional insured protection to the owner for claims and losses arising out of the owner’s fault, the contractor could find itself paying significant money “out-of-pocket” for claims and losses it did not cause. The contractor itself could not be held liable to the owner for those losses under the state’s anti-indemnity statute. If a contractor is aware that state law may allow the additional insured loophole and allow the contractor to be responsible for procuring insurance for the owner for claims arising out of the owner’s errors, the contractor can try to eliminate the requirement to provide this insurance from its contract. The contractor can try to minimize the insurance it agrees to provide by only agreeing to provide the owner insurance for claims arising out of the contractor’s negligence or conversely, it can include sufficient money in its bid to address any increase in premium and additional assumed risk relating to the need to provide insurance for its customer’s negligence. 

Importantly, not all commercial policies are equal as to what owner-caused claims will be covered.  Some endorsements cover the additional insured (the owner) for its own independent errors and some only cover the additional insured for negligence arising out of the negligence of the named insured (the contractor). Whether the endorsement in place covers claims arising out of the independent fault of the owner depends on the language in the endorsement and how state courts interpret that language. If there is a requirement in the construction contract to insure the owner or upper tier contractor for claims arising out of, for example, the owner’s fault, and if the contractor is operating in a state that allows the additional insured loophole the contractor or subcontractor should verify with their insurance broker, agent, or legal counsel that the right insurance coverages are in place.      

Jeremy P. Brummond practices in the litigation department at Lewis Rice in St. Louis, Miss., with a focus on engineering and construction. He can be reached at [email protected]

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