iStock_000003390628XSmall[1]Most construction contracts require downstream contractors to indemnify or insure upstream contractors.  Isn’t that just a way of saying the same thing twice?  No, under Nebraska law, and most states, a duty to indemnify may be void as against public policy, while naming an upstream contractor as an additional insured will provide more certainty that the downstream contractor’s insurer will cover a claim.

An indemnity clause requires one party to pay any sums the other party might otherwise be legally required to pay to a third party.Nebraska has adopted an anti-indemnity statute that sets out the circumstances under which an agreement to indemnify another party for the other’s own negligence is void as against public policy.   In essence, an upstream contractor cannot make a downstream contractor indemnify the upstream contractor for its negligence.  This statute is based on public policy that we want parties to a contract to exercise care and if a party can be indemnified for its negligence, it will have no incentive to act carefully.

Agreements to insure another party are, however, specifically excluded from Nebraska’ anti-indemnity statute.  So, an upstream contractor can require a downstream contractor to name the upstream contractor as an additional insured under the downstream contractor’s insurance policy.  By doing so, the insurance the downstream contractor purchases may very well provide coverage for the upstream contractor’s negligence.

As the Nebraska Supreme Court has acknowledged:

It is common practice in construction contracts for owners and general contractors to shift the risk of liability for injuries sustained by a subordinate party’s employees to the subordinate party’s insurer.  They usually accomplish this by contractually requiring the subordinate party to make the owner or general contractor an additional insured on the subordinate party’s CGL coverage.

Federated Service Ins. Co. v. Alliance Const., LLC, 282 Neb. 638 (2011).

The main reason for including additional insured language in a construction contract is so that the upstream contractor, now named as an additional insured, will not be limited to the coverage that the insurer owes for the downstream contractor’s liability under an indemnity agreement in the construction contract.  If the indemnity agreement is declared invalid under an anti-indemnity statute, then the downstream contractor’s insurer will not be liable for the downstream contractor’s liability under the indemnity agreement. But, with the additional insured language, even if the indemnity agreement is invalid, its invalidity does not impact the coverage extended under an additional insured endorsement.

Indemnity and being named as an additional insured are not the same thing.  Indemnity clauses are subject to challenges that they may not be enforceable under a state’s anti-indemnity statute.  Being named as an additional insured avoids this problem and provides more certainty that the downstream contractor’s insurer will provide coverage for a claim.