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By: Kamy Molavi
It is quite common for parties involved in construction projects to include indemnity provisions within their construction contracts. In recent years, a majority of states have enacted anti-indemnity statutes that restrict, modify, or invalidate indemnification agreements in construction contracts. With respect to the degree of fault against which indemnity may be barred, two types of anti-indemnity statutes have emerged across the nation. We refer to them as “sole negligence” statutes and “any negligence” statues.
Nearly half of the state anti-indemnity laws void provisions that attempt to require the indemnitor to indemnify the indemnitee for the indemnitee’s sole negligence or willful misconduct. Indemnity in “sole negligence” states is allowed when the indemnitor and indemnitee are each partially at fault, or a portion of fault can be attributed to a third person. Stated another way, under these statutes an indemnitor may have to pay for the injury even if the indemnitee is 99 percent responsible for the injury. Further, in most states that only invalidate “sole negligence” provisions in indemnity contracts, workers compensation and insurance agreements are not affected by the “sole negligence” indemnity prohibition in the statute. However, several state statutes are silent on these issues. Examples of typical “sole negligence” anti-indemnity statutes are those enacted in Alaska and Georgia.
Several states have enacted versions of a different variety of anti-indemnity statute, referred to as “any negligence” states. This type of anti-indemnity statute voids contract provisions that require indemnification for losses or damages arising out of the indemnitee’s negligence, whether sole or partial. Thus, this type of anti-indemnity statute would necessarily include “sole negligence” prohibitions. In states that have “any negligence” anti-indemnity statutes, the indemnitee is more restricted from shifting the risk onto a non-negligent party than in “sole negligence” states.
Recent case law addressing anti-indemnity laws has highlighted some of the fine points in the statutes and public policies of the states. One current issue is whether the contract qualifies as a “construction contract” and thus is subject to the state’s anti-indemnity statute. All of the states that have analyzed this issue recently have decided that the term “construction contract” in the anti-indemnity statutes should be interpreted broadly. Georgia courts, for example, have interpreted the anti-indemnity statute broadly to apply to assignment agreement transferring the maintenance and repair of a residential subdivision to the homeowners association. Likewise, New Mexico has interpreted the applicability of its anti-indemnity statute to encompass maintenance activities in improving a property and agreements for rental equipment to be used in construction activities.
Another recent trend involves the interplay between indemnity and insurance, and specifically those statutes which contain an “insurance savings” clause. These situations arise in states where the anti-indemnity statute expressly prohibits contractual provisions that require the indemnitor to indemnify the indemnitee for the indemnitee’s negligence, and also expressly state that the code section does not affect the validity of an insurance contract and/or any other agreement issued by an insurer. An example of an insurance savings clause is in the Alaska statute that states it does not affect the validity of insurance policies. The interplay between these two statutory provisions has not uniformly interpreted among the various jurisdictions. As one example in a coverage dispute, the Delaware Supreme Court found that despite the public policy against indemnification for someone else’s negligence, whether the indemnification is direct or indirect, the “insurance savings provision” is enforceable. The Delaware Supreme Court stated that insurance companies are sophisticated and should not be able to use the anti-indemnity statute as a shield to decline coverage after it is purchased.
Some states are statutorily silent with respect to the validity of indemnity agreements in construction contracts, but their courts recently have addressed the issue. For example, the Nevada Supreme Court recently found that a party can be contractually required to indemnify another for the indemnitee’s negligence, but only if the contract for indemnity contains “an express or explicit reference to the indemnitee’s own negligence.” Thus, a general statement requiring the indemnitor to indemnify the indemnitee for “any and all claims” is not sufficient in Nevada.
In summary, if a loss arises and any applicable contract contains an indemnification clause, it is imperative for construction contractors and designers, as well as their claims adjusters and attorneys, to carefully review governing statutes and court opinions in order to determine whether the indemnification clause is enforceable, and if so, to establish the types of claims and damages to which the clause may apply.
This article is excerpted from materials for a Defense Research Institute seminar presented in Phoenix, AZ, in September of 2012. For a copy of the complete article, including a chart of various statutes, click here.