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Construction Contract Risk Shifting: Indemnification and Insurance

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Construction Contract Risk Shifting: Indemnification and Insurance

This course is designed to review the two primary methods for shifting risk between the parties to a construction contract. Those methods are indemnification provisions and insurance. This course will discuss the various forms of indemnification and the scope. Insurance will be addressed as it relates to indemnification and as a stand-alone protection. This course will include suggestions to be included in both the substantive and procedural aspects of an indemnification. For example, whether the indemnification applies to the fault of one party or all parties related to the project. There will also be a discussion on how to avoid conflicts with the enforcement of the indemnification provision. The effects of various statutory provisions that relate to permitted indemnifications will be reviewed. The program also covers the duty to defend, and scope of that duty. The course is designed to alert an attendee of the various contractual issues that arise with indemnification provisions and various insurance products, and the relationship between indemnification and insurance in order to draft construction contracts that better protects the client. Pertinent case law will also be reviewed.

Presenters

John Snow
Shareholder
Parsons Behle & Latimer

Transcript

John Snow: Hello, my name is John Snow, and I'm an attorney with the law firm of Parsons, Behle & Latimer. We have various offices in the Western states and what I do for a living is litigation and a significant portion of the litigation I do is related to construction litigation. As a result, I regularly end up reviewing construction contracts in a litigation context. However, I also will review contracts for a contractor because the same issues seem to come up frequently and you can even as a litigator, you can somewhat catch some of the issues. I don't draft. I leave that for real lawyers. But I do review contracts and look for specific issues that may arise in a construction contract. Then with the experience with litigation, you learn what is and is not going to be an issue as far as litigation goes.

  And because this presentation is called construction risk, shifting through indemnification and insurance, this is particularly oriented to litigation because of indemnification and insurance, generally being related to litigation. I think I have, well, I think, I know I have the background to perhaps provide some insights to people regarding risk shifting in construction contracts. So, to get started, all contracts are basically risk shifting, even if it's how you're going to get paid. There's a risk shifting in that. For example, a pay to be paid provision saying that the general contractor doesn't pay the subs, unless the general contractor is paid. That's shifting the financial risk from the general contractor to the subcontractors. Basically all contracts are doing is shifting risk, or even the scope of the work is a risk shifting device. But one of the big things in construction contracts, because it seems to occur on a regular basis, is shifting the risk related to liabilities, not only just breach of contract liabilities, but also tort liabilities.

  For example, if somebody is injured on a project who is going to be responsible for that injury? The property owner, the owner of the project, the general contractor, who is responsible for the safety of the entire project, the subcontractor, which created the hazard, or the supplier who provided the defective equipment. We don't know and you don't know. You end up having litigation between four parties, just to determine who has liability ultimately to the injured party. One of the ways the complexity of that relationship is reduced, or the uncertainty of that relationship is reduced, is to include in a construction contract, such things as risk shifting through indemnification and insurance. Frequently, well generally, you will see indemnification and insurance going hand in glove, and there's a reason for that. One of the of reasons is the indemnification isn't worth much if the party giving the indemnification doesn't have the financial capability of fulfilling its contractual obligations of indemnification. Those are some of the things to consider when you're drafting a contract or litigating a contract, is what are the indemnification and insurance provisions?

  Indemnification is actually a common law concept, but common law indemnification, as you can see from the case that's cited here, the Duffy versus County of Essex case, that the predicate for common law indemnification is vicarious liability without any fault attributable to the party to be indemnified or the indemnity. For example, if the subcontractor or the one to cause the condition that resulted in injury, but the general is liable because it was supervising the subcontractor, then the general contractor would have an indemnification claim against the wrongdoer, which would be the subcontractor. However, one of the defenses that frequently arise in those common law indemnification claims is that the general contractor had an obligation of supervision and was in a position to correct the condition that caused the injury to the third party. As a result, common law indemnification may not apply. But the standard is high to get common law indemnification.

  Now there's another tort principle, not tort, common law principle regarding indemnification. That is implied indemnification. Implied indemnification is not as stringent as common law indemnification on whether or not the indemnity can be indemnified if the indemnity had involvement in the injury, wrongful involvement. And the rule for implied indemnity is to maintain a claim, the plaintiff must establish the injury to a party, and that the party's right to assert a cause of action against the defendant and settlement of the injured party's claims by the plaintiff who itself was legally obligated to pay the claim. The idea here is that it can be apportioned somewhat. Even if the party paying the claim had some fault, it can be allocated or apportioned between the parties. It's not nearly as restrictive as common law indemnification.

  Now you don't see, and there's a lot of cases, a lot meaning a handful of cases, that do make the distinction between implied indemnification and common law indemnification and you wonder why anybody would assert common law indemnification as opposed to implied. But frequently you'll the claim asserted together in the reported case law. To resolve the lack of certainty of the application of either implied indemnity or common law indemnity, one when drafting a contract or litigating a contract would actually want to look at the indemnification provisions of the contract itself. The contract should in fact, and especially in a construction project, but it's true with any contract, make the allocation of risk and who is going to be responsible. For example, in a construction contract, you'll have the subcontractor indemnifying the general contractor for any harms that are caused by the subcontractor. Then you have the general contractor indemnifying the owner, and generally the owner's agents and representatives, such as the design professional. That way you have clarity with respect to who is going to be responsible for what.

  Now, as we'll talk about in a few minutes, state law varies from state to state regarding who can be indemnified in the scope of indemnification and even the obligation to procure insurance, to cover the obligation indemnification. You need to be aware of those issues when you're drafting a contract or trying to enforce the contract, that there are statutory provisions that may render the indemnification provision unenforceable. And if that's the case, then you might need to go back and look at common law indemnification, or implied indemnification to get around some of the contractual prohibitions, excuse me, statutory prohibitions on contracts. Frequently the statutes in these states, in the various states, and there's about 30 states that have it, directly relate to construction. Not necessarily all contracts generally, but when dealing with construction contracts.

  If you're in a state that has these types of limitations, you need to be familiar with them when you're drafting, so you can draft around the limitations contained in the contract, or some states will prohibit indemnification, but not prohibit a requirement to obtain insurance. So, in lieu of getting indemnification, you require the party that is to be the indemnitor to actually procure insurance for the benefit of the party that would've otherwise been indemnified. But we'll get to that a little bit more in a minute. When you're drafting or looking at an indemnification clause or interpreting it, you want to find out, first of all, what are the potential losses and cause of losses are you looking for and you're trying to indemnify? Well, if you're representing the owner, you want everything covered. So, in your contract with the general contractor, you add a clause that you shall indemnify me, me the owner, for anything related to the project in any way, shape or form, including failures of my own, or neglect of my own, or fault of my own. So that the general contractor is providing a generalized indemnification to the owner.

  That's just an example. I'm not saying that's what you always do because frequently you can't, by statute or by negotiation. But then you go to the next level and you need to indemnify the general contractor from the actions of the subcontractor. General contractors will frequently try to have an indemnification provision that is much broader than the subcontractor realizes. For example, a subcontractor can sign a contract that says you indemnify the general contractor for any injury relating to the project and project would be defined as the entire project, not just the portion of work being performed by the subcontractor. Now, you could argue ambiguity and try to get the contract limited to just that work of the subcontractor, because that is inherently reasonable that the subcontractor wouldn't indemnify the general contractor for faults by other subcontractors. But you will see contracts from time to time where a general contractor has included that broad of indemnification provision.

  So when you're negotiating the indemnification provision, be aware of that. When you're defending the indemnification or prosecuting the indemnification, remember you can argue ambiguity when it's that broad, because it arguably does not make sense. And even though the exact words of the contract would suggest that the subcontractors indemnifying everybody, you can say that using a context rule that that just doesn't make sense. You also are worried about third party negligence and the allocation of fault by a third party. For example, somebody that has no direct privy of contract with anybody on the project may be the manufacturer of a product that is then sold to a vendor who then sells it to the subcontractor and it gets onto the project. Who is going to be responsible for that? Who is going to be responsible for injuries on the project?

  You can go through your indemnification provision and attempt to make the allocation between each and every one of the potential issues that can arise. One that is somewhat ambiguously covered by construction contracts that you see from time to time is indemnification for breach and including breach of the indemnification provision. You'll see that you'll have a provision that says the subcontractor agrees to indemnify the owner for breach and the owner is entitled to recover attorney's fees. Well, it's not clear if that relates to indemnification or enforcement of the indemnification, because you can in turn incur attorney's fees defending the claim. You might be able to recover that under one of the exceptions to the American rule on attorney's fees in any event. But to make it clear, so you don't have to fight whether or not this is a foreseeable cost or not, is you just stick it in the indemnification provision that the attorney's fees cover not only the harm that is being indemnified, but also the cost that could be incurred by the indemnity to enforce the indemnification provision.

  Likewise, another thing to consider when drafting or considering a indemnification provision is consequential damages. Consequential damages can be the single most devastating type of damages that are available. Now, when you breach a contract, the direct damages are the direct damages related to breach. The consequential damages are additional damages, not related to the contract, but are foreseeable damages resulting from the breach. They're constructing a hotel. There are delays. The delays are a breach of the contract. As a resort, the hotel is not completed in a timely basis and they miss the high season and results in significant loss of income. Those are consequential damages. The lost income could exceed the contract of the supplier or the subcontractor that caused the delay. It could be a devastating loss. So consider whether or not consequential damages are going to be recoverable in connection with the construction contract.

  Typically, at least in today's world, typically you will see consequential damages specifically waived because they are unknown. You have no, well, that's not true. I was going to say, you have no way of predicting, but that's not true, you can predict. But they can be so uncertain that to make them certain, you want to include a waiver of consequential damages if you're the supplier. On the other hand if you're the owner, you probably would want to keep consequential damages. Most forms of construction contract by the AIA and consensus documents now waive consequential damages. But in lieu of consequential damages, you can have a liquidated damage provision. Now, a lot of contractors don't like liquidated damage provisions because they're damages. However, they are predictable and you can control them. If you're going to be hit with liquidated damages, you can put the labor force necessary on the project to get completed. You can also make an evaluation of whether or not putting the additional labor on site is worth it. Much more certainty with liquidated damages than with consequential damages.

  Another thing to consider is whether or not the drafted or looking at an identification provision is whether or not the indemnitee, the party to be indemnified, is going to be indemnified for its own negligence or fault. In most, if not all states, that has to be very expressly stated. And then in a lot of states, even if it's expressly stated it's unenforceable because of statutory provisions, which provide that an indemnitee cannot be indemnified for the indemnitee's own fault. Now, fault is defined differently in these statutes. For example, it could be negligence, or it could be fault. Fault would include a much broader actions by the indemnitee than just simply negligence. But if you're going to have it, if that's your intent in the construction contract, you have to specifically state that the indemnitee is going to be indemnified for the indemnitee's own negligence or fault.

  You also may want to include specific topics in the indemnification. For example, having indemnification for faulty design, specifically designed. Now you can have a general indemnification provision and then insert these specific issues. For example, I hereby indemnify you against all harm, loss or damage related to the project, including, but not limited to issues related to design, delays, soil conditions. Soil conditions are frequently a issue in construction where the parties do not do soil tests and, or do soil tests and don't get good results and they encounter soil conditions that are unbuildable and therefore you have delays and they can be significant delays and you have significant increase in costs. Again, those can be significant. You also want to consider unforeseeable conditions, which could be soil conditions frequently, but it could also be other things such as interference by governmental agencies, or entering into an environmentally sensitive area, or a protected area of some kind. And then of course, you may want to deal with foreseeable conditions, where you recognize those conditions may arise, and you want to address those as well.

  Another matter to consider is simple language and I started on this a little bit and I want to go to it a little bit further. That is when you talk about the cause, there are two phrases that are commonly used sometimes together, but these are the clauses you need to look for in indemnification provision. It's caused by or related to. If you're having indemnification and it says that I agree to indemnify you for all harm caused by me, that's much narrower than all damages related to me because what I actually cause may not be the approximate cause of the injury, but it could certainly be related to the approximate cause of the injury. When you talk in terms of a broad indemnification provision, using the phrase related to, or similar language, I'm not saying these are [inaudible 00:19:54] provisions, but the concepts are, something that's related. You'd say for example, related to or concerning, that would be much broader than caused by blank. So you need to consider that when you're looking at an indemnification provision.

  Then finally attorney's fees, for some reason, I got carried away earlier in talking about the scope of identification and included and discussed attorney's fees already. But again, just because it's that way in the outline, remember you can incur attorney's fees, defending or prosecuting a claim against the third party, which may be an exception to the American rule, but you still want to include that in the indemnification provision. And then in addition, you want to make clear that you will be able to recover attorney's fees for enforcing the indemnification provision. Now that may not necessarily need to be in the indemnification, it could be in a general attorney's fees provision in the contract. However, since I'm talking about attorney's fees, drafting lawyers knee jerk reaction, put in a provision for attorneys' fees is just common.

  Now putting it in the indemnification provision where you have one party indemnifying the other., There's no risk generally that is going to be reversed back. Although there are statutes in many states about risk, attorney's fees sharing that if one party has a right to recover attorney's fees, then the other party does as well. You can't have a unilateral grant of fees to one party. Now that's statutory and most states, or a lot of states in any event, have that type of provision. When you're drafting a contract and before you put in an attorney's fees provision, think about who it's going to benefit. If the company you are representing is fully capitalized as a strong financial company and the other side or the other party to the contract is thinly capitalized, does not have the resources to do anything more than the current job, doesn't own assets, is a small company, indemnification or an attorney's fees provision may do you no good whatsoever.

  So, when you start putting in an attorney's fees provision, consider the fact that if there is an award, award of attorney's fees, are they likely to be recovered? Because if you put that provision in there, then you're exposing your client to attorney's fees in the event your client loses the litigation. So a little forethought on whether or not to include an attorney's fees provision, as opposed to just simply a knee jerk reaction can be of some assistance. Now, another thing to consider when you're dealing with indemnification provisions is limitations on the indemnification, in addition to what damages you're trying to recover or protect yourself against.

  One of the limitations on cation that frequently occurs is a cap where you say, for example, the full amount of liability that the indemnitor may have under this contract is the amount of the contract, between the general contractor and the subcontractor or the general and the owner. It's just simply a cap and this Mississippi case that's in the materials Thrash versus Commercial Contractors, the court noted that the statutory provisions regarding indemnification do not validate the use of a cap. The court notes by its terms, the statute only renders void is against public policy and agreement to indemnify or hold harmless another person for that person's own negligence. It does not purport to invalidated agreement between parties to limit one party's liability to the other for breach of contract. So, having a cap in the recoverable damages for breach of contract or in the indemnification provision, are ways to protect one of the parties from an unreasonably large award of damages.

  The contractors generally are the ones exposed to the liability by construction defects, delays in performance, design deficiencies frequently. This is to help or protect the contractor enter into a contract. Again, I mentioned this again on limitations of consequential damages waived or covered, because that is a significant. And then another issue with indemnification is the duty to defend the right to settle and control. Now, I'm going to talk about that a little bit in more detail in a minute, but I just want to mention here that the duty to defend is a totally different obligation than the duty to indemnify. With insurance, for example, and insurance is an indemnification. The carrier will always, not always, frequently, well generally most often will include the duty to defend. But it doesn't then go on and say, what right does the insured have to settle or control or even be involved in the litigation? It does, the policy will say you have a duty of cooperation, but other than that, you're out of the picture.

  Now some contracts, especially insurance contracts, especially with professionals, do have a consent provision. So that the professional does have the right to consent to a settlement. But then the policies will have hammer provisions so that they will prepay the settlement amount to the professional and tell the professional, go defend yourself. But I got off track. But the duty to defend is different and distinct and it's something to consider, whether or not you want it. Now, you can also agree to pay and you do when you cover attorney's fees, the attorney fees incurred in connection with the indemnification, but the duty to defend is actually doing the defense yourself, as opposed to paying for the defense and there's a distinction there.

  The benefits of a detailed indemnification provision and procedures, as I indicated at the beginning, you're allocating risk. There is no uncertainty as to who is going to bear what risk. The reason why you don't want uncertainty is so that the party who is assuming the risk can get insurance to protect themselves against the risk. When it's a known risk, you know what to get for insurance. When you have a known indemnification, you know what to get for insurance. It also avoids disputes regarding who is covered by the indemnification provision or not when you have a well written indemnification provisions with procedures on enforcement and control of the indemnification. You avoid disputes in that regard. You also eliminate need proof issues between the parties when you have an indemnification provision. And by that, I mean who's more at fault, so that you don't have to deal with apportionment of fault. It's a single united front defending this claim.

  Insurance is another matter that I've mentioned a couple of times, but it should go hand in glove with indemnification. So the party providing the indemnification gets the insurance, so that they're protected. It also protects the indemnitee. If the indemnitor is getting insurance and in fact, most contracts will require that the, or should require, that the indemnitor will get insurance to protect the indemnitee and name the indemnitee as an additional insured or beneficiary of the policy. Another aspect of indemnification is making it clear that that's the sole remedy between the parties, to resolve any dispute that may arise. There will not be any other remedy available to the parties so that everything is controlled within the scope of the indemnification. And then a limitation period is also something to consider, although it's not necessarily always idea. But having the indemnification period only run for a period of two or three years.

  Basically what you're doing is shortening the statute of limitations. And the reason for that is so that you know, your risk for a defined period of time, and you can get insurance for that defined period of time. Whereas if you are relying on a statute repose in connection with construction defect claims, or construction claims, that could be a 10 year, eight year, six year period, where you have uncertainty for a significant period of time. Having a limitation in the indemnification provision will give you, or give the parties at least some short term resolution of potential disputes. But on the other hand, you may want the identification period for the entire life of the project or foreseeable future, so that you have some certainty. There's an old concept about once the contractor has completed their work and left the project and turn it over to the owner, that the contractor is no longer liable for construction defects.

  I mean, that legal theory has been rejected in all states through statute or case law. But, it's an old theory. However, there is some language in the restatement of the law of contracts that provides that if the owner is actually in control and operating, what is the defective condition and knew about the defect or should have known about the defect, the contractor is not necessarily liable. That is a concept that you could actually insert in an indemnification provision, that you're not going to indemnify the owner for its actions regarding known open and obvious defects. The idea there is that you can further limit the obligations of the indemnification.

  Let's see, the next item is dispute resolution procedures. If there is an issue of indemnification and who's going to do what to whom, you may want to have that done quickly. You might want to put in a specific expedited arbitration provision regarding duties under the indemnification provision, so that the appropriate party can take over the defense and pay the cost of defense. It's just something to consider. It's another layer of litigation, but on the other hand, it can get to a quicker resolution and you can have it on a fast track. Limit the amount of available discovery to one deposition, unless it's a large claim over a specific dollar amount, for example. But you can't have that resolution procedure in your indemnification, depending on your contract. I mean, this is, none of this is what you should include in every agreement because every agreement or every project is different. Your risks are going to be generally specifically different. Although generally as conceptually, these things should be considered in connection with drafting a contract or reviewing the contract.

  When we talk about defining indemnification procedures, I'm talking about enforcement of the indemnification and the idea of having these procedures is so that you can get the right party with the resources to defend the claim. One of the things you consider, how do you present the claim? When do you present the claim? How quickly do you have to present the claim? If a claim is covered by the identification provisions, you may want to include something that is included in insurance policies, that the indemnitee, the party to be indemnified, must give immediate notice or give notice within a certain amount of time. Now, immediate notice may make more sense because you never know what's going to happen and having a specific time period, the claim may not be reasonably articulated, except on hindsight.

  At the time you may not realize fully that a claim is being made and therefore you have to notify the indemnitor. Using some type of generalized language or broader language is probably more reasonable, but that doesn't preclude you from a date certain that once you know of a claim, you have to give us notice within 24 hours, or some other reasonable or unreasonable period of time. Then you also, we should put in there's such things as the relationship of the parties on a third party complaint, or third party claim, such as it there a issue regarding cooperation that the indemnitee has the duty to cooperate, provide assistance, turn over documents, make witnesses available, outline what they have to do or otherwise the indemnification provision is rendered void. Deal with the statute limitations issues that may arise, discuss whether or not there's a duty to defend.

  And if so, what rights does the indemnitor have in the defense? For example, can it approve counsel? Can it have its own counsel? Does it have a right to be involved in this settlement? Does the indemnitor have the right to agree to the settlement before the settlement can occur? Does the indemnitor have an obligation or a right to participate in settlement negotiations? Those things can be considered and sometimes are important. Some contractors don't care how you settle it, just get it resolved. Others want to be involved and they have a reason to be involved for one reason or another. For example, protecting their reputation in the industry may be one reason to stay involved. Another issue is the indemnitee's right to just simply assume the defense and select their own counsel and proceed. What effect does that have on the duty to defend? Does the indemnitor have the obligation to pay reasonable cost or not?

  And then another issue that can come up that can be included in the indemnification procedures of indemnification is the sharing of cost. And that is where, for example, you have multiple claims. Some claims are covered by the indemnification, some are not. How do you share costs under those circumstances? And that does happen frequently. Insurance companies will take over the entire defense, will not assert claims on behalf of the indemnified party, but will defend the party on all claims. That may not work in your construction project. So you may want to have a cost sharing provision. You may want to have a sole attorney provision, or you may want to have a provision that your attorney is going to defend the case and just be compensated for the defense. There's a lot of different ways to deal with the involvement, where there's involved in the case multiple claims, some of which are not covered to the indemnification.

  But those things you should think about before you enter into the agreement or advise your client, so that your client's aware of these issues, and at least give some lip service to how you're going to deal with them. The next topic is duty to defend. And although we've been about it conceptually, I want to drill down a little bit further on it. The obligation to defend, obligation to indemnify for damages and the obligation to defend as I've indicated, are separate and distinct. The indemnification provision must explicitly provide a duty to defend, or there is no duty to defend. You'll see the case law that is cited, which makes that clear. I had a case where the language was agreed to indemnify and hold harmless and the lawyer was trying to argue that hold harmless actually included a duty to defend. The case law is clear that a duty to defend is different than indemnification and hold harmless. And in fact, there is case law, not a lot, but some case law defining difference between indemnification and hold harmless. To me, the general rule is that they mean the same thing.

  There's one case, and I don't know if I've got it cited in these materials or not, but there's a case that cites Black's Law dictionary, which defines indemnification as to hold harmless and defines the phrase to hold harmless as to indemnify. The terms are simply interchangeable in that one case, the court just says, lawyers are so used to writing everything twice that they use indemnify and hold harmless, although they mean exactly the same thing. I'm just afraid that if you were to draft something and not include both terms, somebody would think that you're trying to do something different than what the general case law it provides. Probably better practices to use both indemnify and hold harmless, although it may be a redundancy. But one thing that is not a redundancy is the duty to defend. That must be specifically stated.

  The obligation of a duty to defend arises when a claim is made, that is potentially covered by the indemnification. Even though you know the claim, the facts don't support the claim, but it's a non-meritorious claim, but it relates to something that is covered by the indemnification. If the indemnification includes a duty to defend, then the duty arises and the indemnitor has the obligation to defend. You'll see, in some of these cases that talk about the duty to defend, means the insurer will defend the insured in any lawsuit that alleges and seeks damages for an event potentially covered by the policy. Now, as I indicated earlier, insurance is indemnification. And so the insurance case law does apply to contractually assumed obligations of indemnifications between non-insurance parties.

  Then in another case, a contractual duty to defend becomes enforceable. When the allegations of the complaint against the indemnitee alleges facts that show the indemnitor may have liability. It doesn't have to be a meritorious claim and for the duty to arise. However, that being said, one of the things that you can do if you do not believe there is coverage and you are the indemnitor, is you can file a parallel lawsuit and seek a declaratory judgment, whether or not indemnification is applicable. Insurance companies will do this when they agree to defend a claim subject to a reservation of determination of coverage, they then immediately file. Well, not sometimes not immediately, but then they file a declaratory judgment action to have a determination of coverage. And the problem is if there are factual issues that would preclude summary judgment in the underlying case, you may not be able to get a judgment in the declaratory judgment action any quicker, because it's not going to be clear if the duty to defend exists until the lawsuit is over and then that's too bad.

  The duty to defend, by the way, can be a high money issue. As we all know today, attorney's fees can exceed the amount of the claim in a lot of construction contracts very easily. Who is going to pay for those attorney's fees, or who's going to pay for the cost of defense, needs to be sure that they're being compensated or they're going to be compensated by having clear express language on the duty to the defense defense. I've already talked a little bit about this because I wander off when I'm giving these presentations. But I've already talked about issues regarding the indemnitor's control over the defense and what right the indemnitor has. There's lots of ways to handle it. For example, control of expenses. I mean, reasons for it be control of expenses, control of reputation, control of liabilities control of additional insurance costs. I mean, there's reasons for the indemnitor to want to be involved.

  Consider that when you're drafting or looking at an indemnification provision. I mean the indemnification provision may be there, but when litigation starts that doesn't preclude the parties from doing some additional talking and trying to work out a different procedure so that the indemnitor can protect themselves at the cost of the indemnitor. I've already stated this, but you need to clearly state that there is duty of cooperation, but don't just say duty of cooperation. I mean, go ahead and say that you're entitled to access to documentation, to witnesses. In construction litigation, there's pass through claims where the subcontractor will sue the general for a claim that was actually created by the owner.

  The subcontractor cannot bring the claim because they don't have privy of contract with the owner. They will pass through a claim where the general will pursue the claim. Well, the general has a good relationship with the owner, so therefore doesn't really want to pursue the claim. They'll do everything to undermine the claim and actually defend against the claim. Under those circumstances, like with indemnification provisions, you want to make sure that you have language that makes it clear that both parties will act in good faith and pursue the claim reasonably, including the indemnitor, excuse me, the indemnitee. Even though the indemnitee is being indemnified, they may have reasons to resist the indemnification because of a relationship of some kind. Again, make sure that there are duties established in the indemnification.

  We've already discussed sole remedies, but one of the things to also consider is do you want cumulative remedies in addition to indemnification? Again, that will sometimes be dictated by the ability of the other party to respond to a claim or have available insurance. A limitation of liability provisions, we've already talked about consequential damages. We've also talked about monetary caps, lost profits. We've talked about these things, but only because I went further than I normally would. I'm not going to go back and revisit those. Now, I've talked about the form of indemnification. Oh, I did cite that case on the difference between the meaning of indemnification and hold harmless. It's this Delaware case where the court cites Black's Law dictionary defines hold harm by using the word indemnify, it defines hold harmless by using the word indemnify, therefore meaning the same.

  But a broad form is the indemnitor is responsible for its fault and the fault of any other party, which can include a third party related to the subject contract, as opposed to just the wrongdoing of the indemnitor. Now this is a simple form. I'm not suggesting you ever use this form because it's so simple. For example, where it says related to you would also want to include related to or concerning, or in any other way involving. I mean, you want to broaden it up as much as possible. And then in the broad form, you also want to include the indemnification relates to whether it's sole or primary fault of the indemnitee. Because as I stated earlier, you have to specifically state if the indemnitee's fault is going to be involved. And the reason why you say sole or primary is because some state statutes deal, use the term and primary as part of the exclusion. So we'll get to that in a minute.

  All risks are covered. Another form is all risks are covered, but that of the indemnitee and this is under this type of indemnification, the indemnitor assumes all the risk associated with or related to the contract or the project, however you want to say it. But it specifically excludes the fault of the owner and whether it's partial or sole fault of the owner. And then the narrower form is where the indemnitor is only indemnifying for its own fault. And it just says, I'm going to indemnify you for any harm I cause you, basically. Now we've talked about the anti-indemnification statutes. I'm not going to go through all 33 states, but I'm going to give you some examples so that you know what you're dealing with in other states and, or you can look at your own state.

  But in Illinois, it states, and again, these are all construction related. These are not general provisions rely applying to any identification provision, but in a construction setting. The Illinois statute says with respect to contractor agreements, for construction. Every promise covenant agreement to indemnify or hold harm as another person from that person's own fault, it actually says negligence, is void is against public policy and wholly unenforceable. The Arizona statute, on the other hand, says to hold harm or to defend the promisee from or against liability for loss or damage resulting from the sole negligence of the promisee. The question arises when you have statutes like this is, does that mean if it's solely caused by the indemnitee, that there is no indemnification. But if it's partially caused by the indemnitee, then you can still have the indemnification. Basically it just says, if it's the sole negligence, no indemnification. If it's partial negligence, there can be indemnification.

  That's why when I was talking about forms of indemnification, you clarify whether or not you're talking about sole fault or partial fault, so that it's clear and you can make the appropriate argument under your state's provision. New Mexico is another example and then I like this one because it deals with insurance. And it says that a contract is unenforceable, is enforceable only to the extent that the liability, the damages lost or cost are caused by a rise out of the actual omissions of the indemnitor. This statute only allows indemnification by the wrongdoer and only to the extent of the wrongdoer's actions. But then goes and says, or requires a party to contract, to purchase a project specific insurance policy, including an owners or contractors protective insurance, management protective liability insurance, or builders risk insurance. In other words, you can require the subcontractor or general contractor to get project specific insurance. That is not the same as indemnification. It permits the party, the contractor to require insurance, but not indemnification.

  Then this Tyson case, which is cited, it notes that so that while indemnification agreement may be void by statute, a separate promise to procure insurance to design to shift the same risk is enforceable and unaffected by statutory bars. The point here is that if you're in a state that has limitations on indemnification, supplement it with insurance. You should probably get insurance anyway, be in case the indemnitor is unable to respond. But the point here is that the two concepts are distinct. The Oregon statute requires that a person or surety to identify another against liability for damages caused in whole or in part by the negligence of the indemnitee is void. So in this instance, you cannot get insurance that will protect the wrongdoer from fault. So what you do to protect yourself is you get out your own policy and then pass the premium onto the subcontractor as part of, or reduce, as part of the contract price. There's other ways to do that. And I'll talk about it in just a minute.

  Utah, which is where I practice mostly, has a unique provision in that it prohibits, only indemnification is to certain parties, but then requires that party's proportionate share to be included in determining fault. Although you can exclude by identification a party, you still have to consider that party's fault when you're allocating fault between the parties. Now insurance coverage, we've talked about. There are some states that do prohibit this, so be aware that you may not be able to require insurance, but there's ways to draft around that. There's ways to get around that. When you're drafting these contracts or looking at these contracts, you need to be aware of the statutory provisions.

  In many insurance contracts, there is a provision that says it does not cover, the insurance policy does not cover contractually assumed obligations. However, and then the argument is made that indemnification agreement is a contractually assumed obligation. However, the case law pretty much says that you're going to be liable anyway and therefore, it's not a contractually assumed obligation because you had the existing liability, regardless of the indemnification provision. What this is basically trying to do, these provisions, are to preclude insurance company for defective work, which is a contractually assumed obligation. But do still allow protection against third party claims, but not claims of defective work and that's the idea of excluding contractually assumed obligations. But when you see that in an insurance contract, it doesn't necessarily void an indemnification provision. And so I've cited the Olympic case and the [Herring 00:54:40] Construction case, as examples of that.

  Let's go on. Now, some of the general types of insurance to consider is first of all, you're looking at a commercial general liability policy. These are the types of insurance that cover third party claims that you have caused, or the parties subject to the contract, or the insurance contract, have caused. These are liability policies, so that if you're liable, you are covered or protected against the claim through a general liability insurance policy. These are always on, or should be always on construction contracts because there's always somebody getting hurt. The standard policy will provide the company will pay on behalf of the insured all sums that the insured shall become legally obligated to pay as damages because of bodily injury or property damage, to which this insurance supplies. Simple enough. You'll notice that it says we'll pay when it's determined that it is owed, that's the indemnification provision. The contract will also say that they have a duty to defend, so that they're doing both the defense and the indemnification.

   Property damage is different than liability coverage. Property damage is where you have damage that is owned by the insured and that is damaged through an occurrence, not just simply wear and tear. On a contract or on a project, you want property insurance to protect against equipment that can be injured or materials that can be damaged. So you have those two basic forms of insurance. Now, you also may want to consider professional design insurance so that the designer of the project has made sure that they're covered. You also want to make sure that there's workman's compensation coverage. You also want to make sure that there's automobile insurance coverage, because some of these policies don't cover those types of things. So you go through your lists of potential injuries and you can make sure that there is insurance for all of those.

  Now, one of the ways I was talking about passing along the cost is through what is referred to as a wrap, an OCIP or CCIP insurance. What's that mean? A wrap is where all of the parties, and this is also true about OC, which is owner controlled insurance policy and CCIP is contractor controlled insurance policy. So what you do is you have one policy and it covers everybody on the project. This is a great idea because it avoids internal arguments as who's most really responsible because there is going to be now just one paying source and that's the insurance company. What happens is the owner or the general contractor buys the single policy and then apportions the cost of that policy to each of the participants, based on the amount of the policy, amount of the project. So if one subcontractor has a 10% portion of the policy based on cost, and another has a 20%, the first will pay 10% of the premium, the second will pay 20% of the premium. It's based upon cost.

  Then this policy then can convert when you have a finished project to a longterm policy for the owner. Now, if it's a contractor controlled policy, it doesn't convert obviously. But the owner then would get their own insurance going forward. But these are types of policies that are beneficial in that they make it a single payment source, and so there is no attempts to allocate fault between the various subcontractors. It avoids finger pointing and you can have a common front. Now, I've mentioned liquidated damages in lieu of consequential damages. This is not technically part of the indemnification provision, but since we just have a short period of time left, I want to mention it. The older rule and the rule has been around forever, is that an agreement for liquidated damages generally must be reasonable at the time it was entered into. It must be based upon some reasonable basis. It can't be a penalty, otherwise it's a penalty. And then some states actually had a rule that said that the ultimate damages had to approximate the liquidated damages that were actually incurred.

  Then the other aspect of liquidated damages is that the amount of damages would otherwise be difficult to determine. So in this case, this Michigan case says where the harm caused by breach is difficult or impossible to estimate and where the amount fixed is reasonable forecast of fair compensation for the harm caused, the liquidated amount recoverable under, the liquidated damages are recoverable under a collective bargaining agreement. Okay, that's fine. However, some cases and surprisingly Utah, have now done away with that test on liquidated damages and now are simply enforcing liquidated damage clauses as if there are any other type of contract. If the parties agree to it, it's going to be enforced unless it's unconscionable. You're dealing about two commercial entities, so unconscionability is generally going to be difficult to find.

  Now to summarize in the last minute, all of these things are good and dandy to have an insurance policy. But remember when you're drafting these provisions and no matter how draconian they may be, if the party doesn't have the ability to respond, they do you no good. You make sure that the party who is agreeing to indemnify, does indemnify. That the party who agrees to get insurance, does get the insurance and it's required by the contract, that they provide proof of insurance protecting your client or the parties to be protected. But the ability to respond is critical. If they can't respond, the indemnification provision is insignificant. Therefore you always want to make sure that whoever you're passing the obligation onto has the ability to respond. Okay, thank you very much. Again, my name is John Snow and I'm with the firm of Parsons, Behle & Latimer. I'm more than happy to answer questions if you have any. You can send me an email and I'll respond. Okay, thank you.


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