Risks of Indemnification Clauses

07/11/2013 by Attorney Patrick A. Genzler

Authored by attorney Patrick A. Genzler

Virtually all construction contracts and subcontracts contain an “indemnification” provision, which obligates one party to the agreement – the “indemnitor” — to “indemnify” or to pay certain liabilities that the other party – called the “indemnitee” – may incur during the contracted work.  Indemnification agreements are one of the most common ways of ‘shifting risks’ from one party to the other.  If those risks are within the control of, or otherwise the fault of, the “indemnitor” that is appropriate.  Sometimes, however, contracts will require indemnification for losses, claims or damages that are not the fault of, or within the control of, the indemnitor.  Are these clauses valid ?  How can a contractor or subcontractor protect itself from unplanned liabilities that come from indemnification agreements ?

First, Virginia law limits the scope of indemnification agreements that are contained in:

“ …any contract relating to the construction, alteration, repair or maintenance of a building, structure or appurtenance thereto, including moving, demolition and excavation connected therewith, or any provision contained in any contract relating to the construction of projects other than buildings …” See Va. Code §11-4.1.

Indemnity agreements in these construction-related contracts cannot require indemnification of:

“ …liability for damage arising out of bodily injury to persons or damage to property suffered in the course of performance of the contract, caused by or resulting solely from the negligence of such other party or his agents or employees .…”.  §11-4.1.

Any agreement that provides for indemnification of losses due to the indemnitee’s “sole or partial negligence” in causing the injury is against public policy and unenforceable.  See Uniwest Construction, Inc. v Amtech Elevator Services, Inc., 280 Va. 428, 699 S.E.2d 223 (2010).  However, an indemnification agreement that holds a party harmless for the negligence of others, including unrelated third parties, is enforceable.  So it is critical that you read indemnification agreements carefully and understand what risks they transfer.

The Uniwest case was significant for another point – the court held that an indemnification agreement in the “prime contract” was incorporated into a subcontract by general “flow down” and incorporation by reference provisions, and therefore the subcontractor ended up being liable to indemnify the general contractor under an indemnification clause the general contractor had negotiated with the project owner.

Finally, a critical concern is whether or not any liabilities that you assume under an indemnification agreement are covered by your insurance.  Most standard general liability insurance forms contain an “insured contract” provision that provides coverage for indemnification claims.  However, insurers sometimes change or limit the coverage for insured contracts by endorsement – so this should be carefully checked.

Indemnification obligations can represent a significant financial risk.  Before agreeing to one, you should understand the risks being assumed and what insurance coverage exists to cover this liability.

These articles are meant to bring awareness to these topics and are not intended to be used as legal advice.

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