Contractual Indemnity Provisions: Certain Provisions in Construction Contracts Void

05/02/2014

As many know, construction contract indemnity provisions are one of the few examples of Virginia not strictly holding parties to their contracts because of the statutory override in Virginia Code Sec. 11-41. Discussing some related issues within our Construction Department reminded me of a very good summary of the issues prepared by my law partner, Pat Genzler, summarizing the Virginia Supreme Court’s 2011 review of the issue in Uniwest Construction, Inc. v. Amtech Elevator Services, Inc., 280 Va. 428, 699 S.E.2d 223 (2010), modified on rehearing 281 Va. 509, 714 S.E.2d 560 (2011). I have included Pat’s summary below:

CONTRACTUAL INDEMNIFICATION AND THE “UNIWEST v. AMTECH” CASE

Pat Genzler, Vandeventer Black LLP

1. As a general rule, Virginia is one of states that generally allows parties to contractually obtain indemnification for losses and claims caused by the indemnitee’s own negligence, so long as the indemnity provision is clear and explicit. Estes Exp. Lines, Inc. v. Chopper Exp. Inc., 273 Va. 358, 641 S.E.2d 476 (2007). In the Estes case, the Virginia Court held that it was not against public policy of Virginia for parties to “… pre-determine how potential losses incurred during the course of a contractual relationship will be distributed between the potentially liable parties.” The Court held that agreements to indemnify a party against claims for personal injury or property damage, even to the extent of the indemnitee’s own negligence, were not against public policy and were enforceable.

2. However, the general rule allowing contractual indemnity agreements that will indemnify an indemnitee for its own negligence has been limited or abolished for most construction-related contracts. Va. Code §11-4.1 provides:

§ 11-4.1. Certain indemnification provisions in construction contracts declared void.

Any provision 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 by which the contractor performing such work purports to indemnify or hold harmless another party to the contract against 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, is against public policy and is void and unenforceable. This section applies to such contracts between contractors and any public body, as defined in § 2.2-4301.

This section shall not affect the validity of any insurance contract, workers’ compensation, or any agreement issued by an admitted insurer.

In Uniwest Construction, Inc. v Amtech Elevator Services, Inc., 280 Va. 428, 699 S.E.2d 223 (2010), modified on rehearing 281 Va. 509, 714 S.E.2d 560 (2011), the Supreme Court reviewed both the express indemnity provisions in a subcontract, and those indemnity provisions in the general contract of construction that were “flowed down” or incorporated into the subcontract by reference. The case arose when one employee of an elevator installation subcontractor was killed, and another injured, and the estate of the deceased man and the injured man sued the general contractor in negligence. The Supreme Court held that

(a) An indemnity agreement arising out of a construction contract that purports to indemnify or hold a party harmless for a claim due to the indemnitee’s own negligence – whether the sole cause or partial cause of the injury — is void pursuant to §11-4.1. [1]

(b) If the indemnification language in the clause violates §11-4.1, the entire clause was void. The Court would not rewrite or “carve out” of the clause the offending language, so as to leave those provisions that did not violate §11-4.1. Thus, an indemnity provision that violates §11-4.1 is likely to be void in its entirety.

(c) A broad and general “flow down” of the prime construction contract into a subcontract[2] was broad enough to flow down the general contractor’s obligation to indemnify the owner, into the subcontract, obligating the subcontractor to indemnify the general contractor to the same extent. Thus, even if the specific indemnity clause in the subcontract was void, the indemnification provisions of the general contract of construction, including its indemnity provisions, did not violate §11-4.1 and therefore obligated the subcontractor to indemnify the general contractor for the claims made by the subcontractor’s employees.

3. The Uniwest case also illustrates some of real risks in broad indemnity agreements and flow down provisions. Ultimately the dispute was about insurance coverage, and whether the subcontractor, Amwest, was obligated to include the general contractor, Uniwest, as an additional insured on the subcontractor’s general liability and umbrella liability policies. The contract specifications required the subcontractor to name the general contractor as an additional insured under its liability insurance policies. Ultimately even though Uniwest was not expressly named as an additional insured on the general liability insurance policy, an endorsement to the policy granted “additional insured status” to any indemnified party. Further, the umbrella liability policy also extended additional insured status to any person who was required to be insured by the underlying general liability policy. However, this decision turned on the specific language of the policies, and in other circumstances, there could very well be no coverage for an assumed indemnification obligation.

CONCLUSION

The Uniwest case is the Supreme Court’s most recent decision on the validity of indemnification agreements on construction contracts and so we must regard the decision as the latest statement of the law. Clearly, any indemnification clause in a construction contract that expressly purports to indemnify another party for damages arising from the indemnitee’s own negligence – whether the sole cause of the loss or a partial cause — is likely to be found void under Va. Code §11-4.1.

Another question is whether you can “draft around” this issue by simply saying that the subcontractor will indemnify the general contractor “… to the maximum extent permitted by law …” or “consistent with applicable law.” Such clauses have been upheld in some cases, but each clause stands on its own.

Finally, the area where there is real cause for concern is the effect of insurance coverage and broad flow down provisions in subcontracts on the subcontractor’s indemnity obligations. Without careful reading of the general contract (“prime contract”) and a review of the insurance policies, a subcontractor can be put into the situation of having to honor an unexpected indemnity obligation, and one that is not insured.

[1] The void indemnity agreement stated:
[Subcontractor] hereby assumes entire responsibility for any and all damage or injury of any kind or nature whatever, including death resulting therefrom, to all persons, whether employees of [Subcontractor], its subcontractors or agents. If any claims for such damage or injury be made or asserted, whether or not such claim(s) are based upon the negligence of General Contractor or [Owner], [Subcontractor] agrees to indemnify and save harmless General Contractor from any and all such claims, and further from any and all loss, costs, expense, liability, damage or injury, including legal fees and disbursements, that General Contractor may sustain, suffer or incur as a result thereof. Further [Subcontractor] agrees to and does hereby assume the defense of any action at law or in equity which may be brought against General Contractor or [Owner] arising by reason of such claims.
[2] The flow down provision stated:
[Amtech] agrees to be bound to Uniwest by all the terms of the [Prime Contract] and to assume towards Uniwest all of the obligations and responsibilities that Uniwest has by the [Prime Contract] assumed toward [Owner]. All terms and conditions contained in the [Prime Contract] which, by the [Prime Contract] or by operation of law, are required to be placed in [the] Subcontract[ ] are hereby incorporated herein as if they were specifically written herein.
The Prime Contract contained the following indemnity language, which the Court held obligated the Subcontractor to indemnify the General Contractor:
[Prime Contractor shall indemnify Owner to] the fullest extent permitted by law … 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 injury to or destruction of tangible property, (other than the Work itself) including loss of use resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions of [Prime 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 here under.

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