An Indemnification Provision – What does it mean?

The notion of shifting liability for personal injury or damage to property from one party to another has become commonplace, especially within construction contracts. In its most basic sense, contractual indemnity has someone agreeing to hold another harmless for certain specified claims, losses or damages. While governed by the terms of a given contract, such indemnification provisions may be further defined through judicial interpretation. This article examines a number of key cases, recent statutory implications and the likelihood of enforcement. Indemnity and hold harmless clauses are normally applied at all responsibility levels. The contractor is generally required to indemnify the owner, the subcontractor is then expected to indemnify the contractor and usually the owner, and even the sub-subcontractor may be asked to hold parties harmless. A good starting point in understanding the significance of these often confusing and esoteric clauses is to review how the courts have construed them.

In Camp, Dresser & McKee, Inc. v. Paul N. Howard Co., an engineering firm, after settling a claim brought against it by a subcontractor’s injured employee, sought indemnification from the general contractor.

The indemnity provisions at issue provided:

To the fullest extent permitted by law, CONTRACTOR shall indemnify and hold harmless OWNER and ENGINEER and their agents and employees from and against all claims, damages, losses, and expenses including but not limited to attorneys’ fees arising out of or resulting from the performance of the work, provided that such claim, damage, loss or expense (a) is attributable to bodily injury, sickness, disease or death . . . and (b) is caused in whole or part by any negligent act or omission of CONTRACTOR, any Subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder. (emphasis added).

The obligations of CONTRACTOR under paragraph above shall not extend to the liability of ENGINEER, his agents or employees arising out of the preparation or approval of maps, drawings, opinions, reports, surveys, Change Orders, designs or specifications.

The engineer also sued the surety which had issued a performance bond for the project. The bond contained a provision indemnifying the owner and engineer, as follows:

[Surety] shall indemnify and save harmless the said Owner and the Engineer and his agents against payments of any and all damages that may happen to persons or property. arising out of any act, neglect or omission of said principal [Contractor], his or its agents, suppliers, subcontractors or employees with relation to the work.

The Court concluded that if the engineer paid all or part of the $3.55 million to settle the claims of the subcontractor’s employee based on potential liability for negligence that was unrelated to design (the exclusion within the contract), then the engineer would be entitled to indemnity from the contractor and its surety for monies paid to the subcontractor’s employee, even if some of the fault could be attributed to the engineer. While indemnifying a party for its own negligence might seem unreasonable or unfair, such clauses are certainly enforceable as long as they clearly express this intent.

Even the Florida Supreme Court has addressed the issue. In Charles Poe Masonry, Inc. v. Spring Lock Scaffolding Rental Equip. Co., a contractor’s employee sued the lessor- manufacturer of scaffolding when he was injured in a fall from the scaffold. The lessor- manufacturer, in turn, sued the lessee-subcontractor, the contractor, and owner for indemnity. The relevant provision at issue stated:

The LESSEE assumes all responsibility for claims asserted by any person whatever growing out of the erection and maintenance, use or possession of said equipment, and agrees to hold the COMPANY harmless from all such claims.

The Court found that such general terms demonstrated nothing more than an undertaking by the lessee (subcontractor) to hold the lessor (manufacturer) harmless from any vicarious liability that resulted from the lessee’s erection, maintenance or use of the scaffold. Courts have found that general language purporting to indemnify someone for his or her own negligence is not sufficient. Therefore, an indemnification clause that includes a general provision indemnifying the indemnitee “against any and all claims” does not sufficiently express an intent to indemnify for consequences solely from the negligence of the indemnitee.

Examples of how Indemnification Clauses Played Out in Court

In Winn Dixie Stores v. D & J Constr., Winn Dixie sought contractual indemnity from D&J for injuries sustained by the contractor’s employee. The employee had fallen in a puddle caused by a roof leak, something not part of the contractor’s work. The indemnity agreement covered

any claim or loss arising in any manner out of the presence or activity of D & J [the contractor] or any of our servants, agents or employees or representatives or out of the presence of such equipment when such persons or equipment are on your premises for the purposes of performing services . . . notwithstanding such accident or damage may have been caused in whole or in part or negligence of you [Winn Dixie] or any of your servants, agents or employees.

Based upon the above language, the Court found that Winn Dixie was entitled to indemnity from the contractor even though the contractor was not at fault, simply because the contractor was on the owner’s premises when the accident occurred.

Since 1972, Florida has had statutorily provided criteria for an indemnification clause in a construction contract.[2] In George’s Crane Serv., Inc. v. Signal Serv. Indus., Inc.,  the Court found that an indemnification agreement which did not meet the criteria of Fla. Stat. 725.06(2)(1999). Specifically, there was no “specific consideration” for the indemnification that was “provided for” in the contract. The Court had earlier concluded that a construction contract which allocated a percentage of the contract,i.e., 1% of the contract price for the contractor’s indemnification obligation satisfied the statutory requirement that indemnification be supported by specific consideration. However, these cases addressed the prior versions of the statute which required either a monetary limitation or specific consideration from the person indemnified.

The current version of the indemnification statute provides that a construction contract which permits one party to indemnify another party for the other party’s own negligence shall be void and unenforceable unless:

(1) there is a monetary limitation on the extent of the indemnification that bears a reasonably commercial relationship to the contract [note: the monetary limitation on the extent of the indemnification provided to the owner of real property by any party in privity of contract with the owner shall not be less than $1 million per occurrence, unless otherwise agreed to by the parties]; and

(2) is part of the project specifications or bid documents.

As well, the current version of the statute provides that a contract which requires one party to indemnify a public agency for that agency’s negligence is void, illegal and unenforceable. Perhaps the fact that most public contracts are not negotiable, while private contracts are, is the reason for this distinction. Also unenforceable are claims or damages resulting from gross negligence or willful, wanton or intentional misconduct of the indemnitee, its officers, directors, agents or employees or for any statutory violation or punitive damages (unless the statutory violation or punitive damages are caused or result from the acts or omissions of the indemnitor or its agents, employees or those working under it).

When entering into a contract with an indemnification provision, several issues should be kept in mind, namely:

• who is indemnifying whom;
• does the contract clearly express an intent to indemnify a party against its own negligence;
• do the terms of the agreement determine whether the indemnitor is obligated to reimburse the indemnitee for a particular claim;
• what is being indemnified, i.e., personal injury, property damage, attorneys’ fees and costs of defense, economic loss;
• is there a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is such monetary limitation part of the project specifications or bid documents, if any;
• is there a provision requiring that the risk be covered by insurance such that the indemnity is limited to the amount of the insurance coverage (contractual liability insurance).
• With such clauses becoming standard issue in construction contracts, it is especially important to understand how much or how little can be negotiated in or out in this regard.

A poorly written provision could lead to the erroneous presumption of protection when none actually exists. Worse, it could result in a litigation nightmare or a very costly claim. Because indemnification is both a sword and a shield, be sure the clause you agree on is one you also truly understand.

[1] Contractual indemnity is distinguished from common law indemnity which is an equitable remedy arising out of obligations imposed through special relationships. In order to prevail on a common law indemnity claim, the following two-pronged test must be satisfied: (1) the party seeking indemnity (the indemnitee) must be without fault and its liability must be solely vicarious for the wrongdoing of another, and (2) the party against whom indemnity is sought (the indemnitor) must be wholly at fault.

[2] The current version was amended, effective as of July 1, 2001, Fla. Stat. § 725.06 (2001).

[3] Fla. Stat. § 725.06 (1987 and 1999), provided that: “Any portion of any agreement or contract for, or in connection with, any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating connected with it, or any guarantee of, or in connection with, any of them, between an owner of real property and an architect, engineer, general contractor, subcontractor, sub-subcontractor, or materialman, or between any combination thereof, wherein any party referred to herein obtains indemnification from liability for damages to persons or property caused in whole or in part by any act, omission, or default of that party arising from the contract or its performance shall be void and unenforceable unless:

(1) The contract contains a monetary limitation on the extent of the indemnification and shall be a part of the project specifications or bid documents, if any, or

(2) The person indemnified by the contract gives a specific consideration to the indemnitor for the indemnification that shall be provided for in his [or her (added in 1997 in order to remove gender-specific references)] contract and section of the project specifications or bid documents, if any.”

[4] Fla. Stat. § 725.06(1) (2001) provides that “Any portion of any agreement or contract for or in connection with, or any guarantee of or in connection with, any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating associated therewith, between an owner of real property and an architect, engineer, general contractor, subcontractor, sub-subcontractor, or materialman or any combination thereof wherein any party referred to herein promises to indemnify or hold harmless the other party to the agreement, contract, or guarantee for liability for damages to persons or property caused in whole or in party by any act, omission, or default of the indemnitee arising from the contract or its performance, shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any. Notwithstanding the foregoing, the monetary limitation on the extent of the indemnification provided to the owner of real property by any party in privity of contract with such owner shall not be less than $1 million per occurrence, unless otherwise agreed by the parties. Indemnification provisions in any such agreements, contracts, or guarantees may not require that the indemnitor indemnify the indemnitee for damages to persons or property caused in whole or in part by any act, omission, or default of a party other than:

(a) The indemnitor;

(b) Any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees; or

(c) The indemnitee or its officers, directors, agents, or employees. However, such indemnification shall not include claims of, or damages resulting from, gross negligence, or willful, wanton or intentional misconduct of the indemnitee or its officers, directors, agents or employees, or for statutory violation or punitive damages except and to the extent the statutory violation or punitive damages are caused by or result from the acts or omissions of the indemnitor or any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees.

Indemnification More Available Than You Might Think

Indemnity is a term familiar to those in construction. Basically, indemnity shifts fault for damages or losses from one party to another. It is generally contractual, where one party agrees to assume responsibility by means of a written agreement, holding another harmless from the consequences of its actions or omissions. And for those contractual indemnification agreements to be enforceable, they generally have to be written very precisely with no ambiguous terms. However, what is not as well known is the legal fact that indemnity may also be available outside of any contract in what is called common law indemnity.

To be entitled to common law indemnity, one must show it is without fault while showing and shifting liability to another who is actually negligent or culpable.

Here’s an example. When a fire occurred inside a building, the owner sued both the general contractor and its painting subcontractor. The owner alleged that the contractor was negligent in performing its work and failing to properly supervise its subcontracted painter, who it asserted was negligent in storing its paints and solvents. Apparently, the painter placed one of its rags soaked with an oil based stain in a plastic bin left inside one of the areas being renovated. This was clearly contrary to the painter’s safety protocol which called for all oil and paint soaked rags to be rinsed and placed in a garbage bag and then removed and disposed of at the painter’s place of business. The rags left in the work space spontaneously ignited and started the fire.

These facts allowed the court to determine that the general contractor’s negligence was merely passive and therefore it was entitled to common law indemnification from the painter who was the party actively negligent party in this circumstance.

The painter went on the argue that because the general contractor had actually settled with the owner, its claim of common law indemnity could no longer be raised. Not so, said the court. Offers of settlement or actual settlements are not considered admissions against interest and do not rule out common law indemnity claims.

To be clear, common law indemnity is not a common place remedy, specifically because a party must be entirely faultless to attempt to shift any liability. And finding a situation where one can be seen to be totally without fault is generally rare. Especially within the setting of a construction project, where multiple disciplines are often working at the same place and at the same time, it is difficult to show that one hasn’t participated to some extent in the matter which has generated the claim.

Indemnification shall always be a critical element in construction. Contractors would therefore do well to understand the significance of any indemnity applicable to their potential exposures on a given job, be it contractual or common law.

The Indemnification Dance – Everyone is Doing It

Indemnity clauses are normally applied at all responsibility levels. The contractor is generally required to indemnify the owner and the subcontractor is then expected to indemnify the contractor and usually the owner. A typical clause looks something like this:

While indemnifying a party for its own negligence might seem unreasonable or unfair, such clauses are certainly enforceable as long as they clearly express this intent. However, an indemnification clause that includes a general provision indemnifying the indemnitee “against any and all claims” does not sufficiently express that intent to indemnify for consequences solely from the negligence of the indemnitee and would not be enforceable.

The current version of Florida’s indemnification statute provides that a construction contract which permits one party to indemnify another party for the other party’s own negligence shall be void and unenforceable unless:

As well, the current version of the statute provides that a contract which requires one party to indemnify a public agency for that agency’s negligence is void, illegal and unenforceable. Perhaps the fact that most public contracts are not negotiable, while private contracts are, is the reason for this distinction.

Also unenforceable are claims or damages resulting from gross negligence or willful, wanton or intentional misconduct of the indemnitee, its officers, directors, agents or employees or for any statutory violation or punitive damages (unless the statutory violation or punitive damages are caused or result from the acts or omissions of the indemnitor or its agents, employees or those working under it).

When entering into a contract with an indemnification provision, several issues should be kept in mind, namely:

With such clauses becoming standard issue in most construction contracts, it is especially important to understand how much or how little can be negotiated in or out in this regard. A poorly written provision could lead to the erroneous presumption of protection when none actually exists. Worse, it could result in a litigation nightmare or a very costly claim. Indemnification is both a sword and a shield; be sure the clause you agree on is one you also truly understand.

Indemnification is both a sword and a shield; be sure the clause you agree on is one you also truly understand.

Drafter Beware – Indemnification Clauses Are Not Always Enforceable

A standard clause in many construction related contracts often requires one of the parties to indemnify and hold the other harmless. This means that if something goes wrong and there is a claim or a lawsuit, one of the parties to the contract will need to be responsible – even if the claim or lawsuit is made against the other party to the contract! Persons who draft such contracts should be forewarned though that there may be statutory requirements that could render the clause void and unenforceable absent certain restrictive language.

For example, one statute in Florida invalidates any indemnification clause unless the contract contains a monetary limitation that “bears a reasonable commercial relationship” to the contract and “is part of the project specifications or bid documents, if any.” If these monetary limitations are not met, the indemnification clause will be useless and have no legal effect.

The statute also holds that the indemnification may not indemnify for acts, omissions or defaults of anybody other than the indemnitor (the one providing the benefit), its contractors, subcontracts and agents or the indemnitee (the one receiving the benefit), its directors, officers, agents or employees. As to contract language that indemnifies for acts, omissions or defaults of the person actually benefiting from the clause, such clauses may not indemnify for their own gross negligence or intentionally wrongful acts.

When are Indemnification Clauses Permitted

Regarding construction contracts with public agencies, indemnification clauses are permitted only to indemnify a party from wrongful acts of the indemnifying party in performance of the contract (as opposed to wrongful acts of other persons). Otherwise, such indemnification clauses are deemed void as against public policy.

To some extent, the cases that interpret the statute serve to limit its scope. These cases generally rule that either the person seeking indemnification did not fall within the class of those types of parties covered by the statute, or that the type of contract under which a party seeks indemnification was not covered under the statute. In each of these cases, the indemnification language in the contract at issue did not contain the required restrictive language.

When an individual plaintiff was injured due to an alleged elevator malfunction and sued the owner who in turn sued an insurance company for indemnification, the court ruled that the statute restricting application of indemnification clauses did not apply because the contract at issue was a service contract, as opposed to a construction-related contract.

In another case, the court held that when an engineering firm was a third party beneficiary (i.e., receiving a benefit in a contract between two other parties) it could sue for indemnification even if the contract did not otherwise comply with statutory requirements. The third-party beneficiary was not bound by the limitations in the statute.

A third case held that the statute would not apply if the party seeking indemnification was not looking to be indemnified for its own active negligence. These interpretations reinforce that parties to construction contracts must be careful to comply when seeking indemnification for another’s wrongdoing. A contractor must have clauses it can enforce, and be sure that all statutory requirements are met. The indemnification must contain a monetary limitation that bears a reasonable commercial relationship to the contract.

Applicable statutes contain limitations as to the types of parties, acts, and omissions that may be subject to indemnification clauses. For example, a statute that has undergone several revisions over the years may contain language that is confusing at first glance.

Always take care to review such clauses with an attorney knowledgeable in this area of the law. Otherwise, a contractor may suffer a painful lesson when faced with claims or litigation for which it thought it was protected under an indemnification clause.