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Types of Indemnity Agreements

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Types of Indemnity Agreements Indemnitee (e.g. General Contractor) Seeks indemnity agreement that protects company as much as legally possible Broadest* Broad Intermediate Limited Indemnitor is 100% Indemnitor 100% Indemnitor All parties liable, even when liable, even when 100% liable for 100% liable indemnitee 100% indemnitee 100% at indemnitee’s for own at fault fault—as long as passive negligence fault is not willful negligence Indemnitor (e.g. Sub Contractor) Seeks reasonable indemnity agreement that does not compel indemnity for any liabilities not its own *This type of agreement is illegal in most states. Types of Indemnity Agreements: Similarities and Differences Under the common law, each party is liable for its own negligent conduct, but contractual indemnity provisions shift liability to another party. There are several different types of indemnity agreements, and it’s important to understand how each type works. Before we proceed, however, a note on terminology: Indemnitee: a party to whom indemnity is owed, a party that is to be indemnified. Indemnitor: a party that owes the indemnity, the party that must make the indemnitee whole. As a matter of practice, indemnity flows downhill, most often from a general contractor to a subcontractor, meaning general contractors and subcontractors often have competing interests when it comes to indemnity. As a general contractor, you seek an indemnity agreement that protects your company as much as possible, while not running afoul of the law and risking a court voiding your indemnity agreement. As a subcontractor, you seek a reasonable indemnity agreement, one that does not compel your company to indemnify any party for liabilities not its own. Some indemnity agreements are more comprehensive than others. That is, the threshold at which the indemnitor will indemnify the indemnitee is lower, and the indemnification more extensive. Others are narrow enough that they approximate the common law. Broadest indemnity agreements The broadest indemnity agreements are those in which the indemnitor agrees to indemnify the indemnitee for all negligence, even if the indemnitee is solely and actively negligent and the indemnitor is free of negligence. In many states, indemnity agreements of this type are prohibited by statute or case law. Though it is less common every year, some states have not explicitly prohibited indemnity agreements in construction contracts that purport to indemnify an indemnitee for damage caused by the sole negligence of the indemnitee. Broad indemnity agreements Under a broad indemnity agreement, the indemnitor is to indemnify the indemnitee for the negligence of the indemnitee, even if the indemnitee’s liability arises from its active or passive negligence. For example, a subcontractor indemnifies a general contractor on a workplace accident, even though that accident was deemed to be caused in part by inadequate investment in safety equipment by the general contractor. As long as the indemnitee is not solely negligent, and its misconduct is not willful, the indemnitor has a duty to indemnify all of the indemnitee’s negligent conduct. This means that the obligation to indemnify exists even if the indemnitee is 99% passively or actively negligent. Even if the indemnitor is only 1% negligent, the indemnitor is still obligated to indemnify the indemnitee 100%. Here’s an example of a comprehensive indemnity provision between a general contractor and a subcontractor: All work covered by the Subcontract done at the site of construction or in preparing or delivering materials or equipment, or any or all of them, to or from the site shall be at the risk of Subcontractor exclusively. To the fullest extent permitted by law, Subcontractor shall, with respect to all work which is covered by or incidental to the Subcontract, defend and indemnify Contractor from and against any and all allegations, losses, claims, actions, demands, damages, liabilities, or expenses (including costs, expenses and attorneys’ fees), arising from or relating to the death or bodily injury to persons, injury to property, design defects (if design originated by Subcontractor), or other loss, damage or expense. Subcontractor’s duty to indemnify shall include all damages caused or alleged to be caused in whole or in part by any negligent act or omission, whether active or passive, of: (a) Subcontractor; (b) anyone directly or indirectly employed by Subcontractor; (c) anyone for whose acts Subcontractor may be liable; or (d) Contractor. Subcontractor shall not be obligated to indemnify Contractor with respect to the sole negligence or willful misconduct of Contractor, its agents, servants or subcontractors who are directly responsible to Contractor, excluding Subcontractor. Intermediate indemnity agreements Intermediate indemnity agreements can vary, but the one that is most commonly seen provides that the indemnitor is to indemnify the indemnitee for the negligence of the indemnitee, be it sole or contributory, but only if the indemnitee’s liability arises from its passive negligence and not its active negligence. As a general matter, if the indemnitee was actively negligent, the indemnity provision will not apply and the liability will be apportioned according to percentage of fault. This avoids the prohibition that exists in many states against indemnifying a party for its sole negligence by narrowing the conditions under which it can happen to those where the indemnitee’s sole negligence is passive. Intermediate indemnity agreements are similar to the example of the broad indemnity agreement above, but omit the phrase “caused in whole or in part” and often include the phrase “caused in part.” Limited indemnity agreements, or “your negligence, my negligence” This type of indemnity agreement most closely mirrors the common law. Put simply, it does not obligate any party to indemnify another for the other party’s negligence. Under it, the indemnitor is to indemnify the indemnitee for the indemnitor’s own negligence but the indemnitor has no duty to indemnify the indemnitee if the indemnitee was in any way negligent, either actively or passively, regardless of whether the indemnitor was also negligent. Here’s an example, between a general contractor and subcontractor: To the fullest extent permitted by law, the subcontractor shall indemnify the general contractor, its consultants and agents and employees 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 subcontractor, anyone directly or indirectly employed by it 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. Business records Whether you are a general contractor or a subcontractor, always read and understand the contracts you sign. Exchange signed copies and keep them in a safe place. Your insurer will need them to properly protect you in the event of a claim. It is worth having a lawyer review your standard form contract, if you have one. It’s also worth having your lawyer review any contract you’re asked to sign that departs from what you know and have already reviewed. Insurance considerations 1. Additional Insured: a) Obtain and review: When work is subcontracted, demand that the company that you subcontract work to add your company as an additional insured on its policy. The liability limits of the subcontractor’s insurance policy should be a minimum of $1 million. b) Ask for and get a copy of the resulting additional insured endorsement naming your company as an additional insured under the subcontractor’s policy. That endorsement should show insurer and policy number, and it often shows the policy term. 2. Certificates of Insurance: Remember that a certificate of insurance is only evidence that some entity (in this case, your subcontractor) has the insurance that it says it does. On its own, it does not achieve the same effect as an additional insured endorsement. A certificate of insurance does not give your company any legal rights under it, because the certificate simply establishes that an insurance policy exists. The C&F logo, C&F and Crum & Forster are registered trademarks of United States Fire Insurance Company. This material is provided for information purposes only and is not intended to be a representation of coverage that may exist in any particular situation under a policy issued by one of the companies within Crum & Forster. All conditions of coverage, terms, and limitations are defined and provided for in the policy. This material was developed as a general guide to safety from sources believed to be reliable and is not intended to provide legal, technical or other professional advice. These materials are not intended to replace any training or education that users may wish or need to provide to their personnel. Crum & Forster does not endorse any of the vendors listed in this publication, nor does it endorse the information, products or services that they offer or provide. Compliance with all Federal, State or local laws and regulations remain the policyholder’s responsibility..
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