The indemnification clause is one of the most highly disputed provisions in every construction contract. The indemnification clause’s specific language can significantly impact a company’s risk exposure. Thus, it is critical for every contractor to understand the meaning of indemnification before executing a contract.
An indemnification provision is a contractual provision under which one party (the indemnitor) agrees to assume liability for the losses incurred by another party (the indemnitee). Indemnification provisions can be classified into three different levels. To understand each level, consider the following hypothetical: a subcontractor’s employee falls into an excavated trench and suffers severe injuries. The employee sues both the general contractor and the owner, alleging that their failure to properly supervise and maintain the site was the cause of his injuries. (The employee didn’t sue his employer, the subcontractor, because of workers’ compensation immunity. Whether an indemnitor waives workers’ compensation immunity through an indemnification provision is a complex issue for another day). If the general contractor agreed to indemnify the owner (i.e., act as an indemnitor), which party is responsible for any damages awarded under each level of indemnification?
Broad form indemnification requires the indemnitor to pay not only for losses for which it is responsible but also for losses solely caused by the indemnitee. You may be thinking: that doesn’t seem fair. Many states prohibit broad form indemnity; however, Pennsylvania courts will enforce clearly drafted broad form indemnity provisions. You can usually identify broad form indemnity by the language “in whole or in part” or “sole negligence.” Under our hypothetical, if the general contractor (the indemnitor) agreed to broad form indemnification, even if the jury found the owner’s negligence was the sole cause of the employee’s injuries, the general contractor would be responsible for all damages awarded to the employee.
Intermediate form indemnification requires the indemnitor to pay for the indemnitee’s negligence unless the indemnitee’s negligence is the sole cause of the loss. To identify these provisions, look for the language such as “even if caused in part.” This indemnification requires the indemnitee to potentially pay 100% of the loss, even if its own responsibility is minimal. If the contract in our hypothetical contained intermediate form indemnification and a jury determined that the owner was 35% responsible and the general contractor was 65% responsible, the general contractor would be responsible for payment of 100% of the damages.
Limited form indemnification provisions do not require the indemnitor to pay for the losses caused by the indemnitee. These provisions usually state indemnification is required, “but only to the extent” the losses are caused by the indemnitor’s actions. Stated more simply, limited form indemnification requires each party to pay for their own liability. If the general contractor in our hypothetical agreed to limited form indemnification, and a jury found that the owner was 5% responsible for the employee’s injuries and the general contractor was 95% responsible, each party would be responsible for their own respective percentage of damages.
As you can see, precise language can substantially change the parties’ risk exposure if a personal injury or property damage claim involving the project is commenced.
To ensure your interests are adequately protected, please reach out to the attorneys at Cohen Seglias to review your contracts before execution.
Posted Jan. 19, 2023