It seems that every construction contract now-a-days, contains an indemnity clause. Contractors should be reviewing these indemnity clauses very carefully to understand the potential scope of an indemnity obligation and your opportunity to negotiate changes.
What is an indemnity Clause?
An indemnity clause transfers risk from one party to another. When a contractor signs an indemnity agreement, it is agreeing to pay for damages for which another party could be liable.
What is a Typical Indemnity Clause?
The AIA A-201 contains a common indemnity clause:
3.18.1 To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section 3.18.
What are the Key Provisions to an Indemnity Clause?
- Scope: “indemnify and hold harmless from and against claims, damages, losses and expenses, including attorneys’ fees”—this language may make the contractor responsible to pay for all damages arising out of the incident.
- Basis: “provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself)”—this language limits the situations covered to which indemnity applies, in essence eliminating claims to replace the contractor’s work itself. This limitation is intended to follow applicable insurance coverage.
- Limit: “but only to the extent caused by the negligent acts or omissions of the Contractor, . . . regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified” This language limits the indemnity obligation to the negligent acts of the contractor, but also makes clear that negligence by a party indemnified will not eliminate the contractor’s indemnity obligation. In essence, if the contractor and the party indemnified are both negligent, the contractor will still have to indemnify the other party.
Negotiating Changes to Indemnity Clauses
Knowing full well that some upstream contractors may not negotiate indemnity obligations, here are some negotiating tips.
- Make the Indemnity Obligation Mutual.
- Contractor will indemnify [upstream contractor] for all claims, but only to the extent caused by its negligence. [Upstream Contractor] will indemnify Contractor for all claims, but only to the extent caused by its negligence.
- Limit Indemnity to Insurance Limits.
- Contractor’s liability under this provision shall not exceed the limits of insurance coverage required to be carried by the Contractor.
- Limit Indemnity to Actual Insurance Coverage.
- Contractor’s liability under this provision shall not exceed the amount of insurance coverage actually paid by insurer.
- Limit Bodily Injury Claims to Workers’ Compensation
- Contractor’s liability for bodily injury claims shall be limited to the amount payable by or for the Contractor under applicable workers’ compensation act.
Take Away: Understanding indemnity clauses is crucial to limiting your liability under these clauses. Having a better understanding of these clauses may allow you to better negotiate a limit to your potential liability.