Construction Contractors: Beware Of Over-Indemnification (A Gentle Reminder)

• Published date: 09 November 2021
• Subject Matter: Government, Public Sector, Real Estate and Construction, Government Contracts, Procurement & PPP, Construction & Planning
• Law Firm: Potomac Law Group
• Author: Ms Tamara McNulty

Like an alligator in the swamp, every few years this issue resurfaces ready to take a bite out of unsuspecting contractors; namely the abuse of the indemnification clause to shift inappropriate risk.

Indemnification provisions play an important role in managing the risks associated with construction contracting. Indemnity clauses require one party to take on the obligation to cover the loss or damage that has been or might be incurred by another party. Basically, one party to the contract agrees to assume responsibility for certain liability resulting from third-party claims against the other party to the contract. The indemnification agreement may be a separate agreement, or more typically in construction projects, is embedded into the contract.

Contract clauses limiting liability were quite rare in design and construction contracts until the late 1970's. 3 PHILIP L. BRUNER & PATRICK J. O'CONNOR, JR., BRUNER & O'CONNOR ON CONSTRUCTION LAW ' 10:85 (West 2018). Limitation of liability and indemnity clauses, however, have become more commonplace over the years.

Historically, indemnity provisions have been typically interpreted to apply to only third-party claims. Id. at ' 10:39; Am.Jur.2d 415, Indemnity ' 1 (2005) ('In general, indemnity is a form of compensation in which a first party is liable to pay a second party for a loss or damage the second party incurs to a third party'); C.J.S. 94, Indemnity ' 1 (2007)(emphasis added); ('In a contract of indemnity, the indemnitor, for a consideration, promises *1048 to indemnify and save harmless indemnitee against liability of indemnitee to a third person or against loss resulting from such liability') (emphasis added). See also, e.g., Kodiak Elec. Ass'n, Inc. v. DeLaval Turbine, Inc., 694 P.2d 150, 40 U.C.C. Rep. Serv. 155 (Alaska 1984); Schiavone Const. Co. v. Nassau Cty., 717 F.2d 747, 751 (2d Cir. 1983); L.H. Controls, Inc. v. Custom Conveyor, Inc., 974

N.E.2d 1031, 1047-48 (Ind. Ct. App. 2012).

Some states, however, have interpreted broad indemnity provisions to apply to first-party claims, in addition to third-party claims. In large part, this is due to the fact that indemnity provisions are often not drafted in a way that expressly limits the application to only cases of third-party liability. As a consequence, courts will occasionally interpret indemnity language to apply to claims or losses other than those arising from injury to a third party. Wal-Mart Stores, Inc. v. Qore, Inc., 647 F.3d 237, 243 (5th Cir. 2011) (holding that, upon a plain reading of the contract, the indemnity provision authorized an award of attorneys' fees in the first-party dispute between Wal-Mart and Qore).

A. Anti-Indemnity Statutes

Because the common law did not void broad indemnity agreements on public policy grounds, anti-indemnity laws were enacted to afford protection to those contracting parties generally not in a position to bargain away...