Is Your Indemnity Agreement Enforceable? How to Not Miss Out on this Critical Step in Risk Management 

September 30, 2019
Generally, indemnity agreements in construction contracts are a promise by which one party (the indemnitor) agrees to defend, indemnify, or hold harmless the other party (the indemnitee) for acts or omissions related to the project. The enforceability of indemnity agreements is a battle that will likely ignite, if construction litigation arises. This article is intended to map out the legislative landscape of indemnity statutes across the country, as a resource to determine whether the indemnification provision in your construction contract is enforceable. 
 
As an initial matter, there are generally three forms of indemnification agreements: (1) the broad form, which includes the sole negligence of the indemnitee; (2) the moderate form, which includes all negligence, but the sole negligence of the indemnitee; and (3) the narrow form, which includes only the negligence of the indemnitor. Today, most of the states have adopted statutes that determine which type of indemnity agreements are enforceable within their jurisdiction. 
 

No Anti-Indemnity Statute

The following states do not have a statute that limits the enforceability of indemnification provisions in construction contracts, or have a provision that only applies in very limited circumstances: Alabama, Maine, Nevada, North Dakota, Pennsylvania, Vermont, Wisconsin, and Wyoming. Nonetheless, even in many of these states, courts have narrowly interpreted provisions that indemnify an indemnitee for its own negligence. 
 
For example, Pennsylvania does not have a general anti-indemnity statute for construction contracts but it does provide a statute that prohibits the indemnity of design professionals. 68 Pa. Stat. Ann. § 491. As noted above, Pennsylvania courts are cautious when interpreting indemnification clauses, in an effort to avoid infinite liability. In fact, for the last 100 years, the Pennsylvania Supreme Court has held, “if parties intend to include within the scope of their indemnity agreement a provision that covers losses due to the indemnitee’s own negligence, they must do so in clear and unequivocal language. No inference from words of general import can establish such indemnification.” Perry v. Payne, 66 A. 553 (1907). 
 

“Broad Form” Prohibitions

The following 15 states prohibit the broadest form of indemnity agreements, for the sole negligence of the indemnitee: Alaska, Arizona, Arkansas, Georgia, Hawaii, Idaho, Indiana, Maryland, Michigan, New Jersey, South Carolina, South Dakota, Tennessee, Virginia, and West Virginia.1 These states’ statutes prohibit an indemnitee from requiring others to indemnify the indemnitee for its own sole negligence. 
 
Eight of these states, including Alaska, Georgia, Hawaii, Maryland, New Jersey, South Carolina, Virginia, and West Virginia, include a statutory provision that clarifies that the indemnification statute does not affect the validity of an agreement to procure insurance. This is called an “insurance savings clause.”
 

“Broad Form” and “Moderate Form”  Prohibitions

The following states prohibit broad and moderate forms of indemnity agreements. In these states, the indemnitor can only be required to indemnify the indemnitee to the extent of the indemnitor’s own negligence.2
  
Arizona Iowa Missouri Ohio
California Kansas Montana Oklahoma
Colorado Kentucky Nebraska Oregon
Connecticut Louisiana New Hampshire Rhode Island
Delaware Massachusetts New Mexico Utah
Illinois Mississippi New York Washington
    North Carolina  
 

Additional Insured Coverage

Oftentimes, contractors operating in states that prohibit Party A from indemnifying Party B for Party B’s negligence will try to circumvent the statutes by requiring Party A to name Party B as an additional insured on its insurance policy. The strategy is based on the theory that additional insured coverage is separate from indemnity, and agreements to procure insurance are not subject to statutory limitations applicable to indemnity provisions. 
 
Both the Insurance Services Organization’s 2004 and 2013 AI endorsements extend coverage to an AI’s partial (but not sole) negligence. However, the 2013 endorsement provides that additional insurance coverage will only apply to the extent permitted by law. ISO CG 20 37 04 13 (“the insurance afforded to such additional insured applies to the extent permitted by law”). Therefore, the success of this strategy is difficult to predict and contingent upon what type of indemnification statute the state has enacted.
 
Clearly, understanding the applicable indemnity statute is of great value to any risk management strategy. Depending on the jurisdiction, courts have made various rulings on this concept, so it would be best to consult the jurisprudence in your state to anticipate the exposure to liability you may face through your indemnity agreement. 
 
1  See Alaska Stat. § 45.45.900; Ariz. Rev. Stat. § 32-1159 (private contracts); Ark. Code Ann. § 4-56-104 (private contracts); Ark. Code Ann. § 22-9-214 (public contracts); Ga. Code Ann. § 13-8-2; Haw. Rev. Stat. § 431:10-222; Idaho Code Ann. § 29-114; Ind. Code Ann. § 26-2-5; Md. Code Ann., Cts. & Jud. Proc. § 5-401; Mich. Comp. Laws Ann. § 691.991; N.J. Stat. Ann. 2A:40A-1; S.C. Code Ann. § 32-2-10; S.D. Codified Laws § 56-3-18; Tenn. Code Ann. § 62-6-123; Va. Code Ann. § 11-4-1; W. Va. Code Ann. § 55-8-14.
 
2  See Ariz. Rev. Stat. § 34-226 (public contracts); Ariz. Rev. Stat. § 41-2586 (public contracts); Cal. Civ. Code § 2782.05; Colo. Rev. Stat. § 13-21-111.5 (private contracts); Colo. Rev. Stat. § 13-50.5-102 (public contracts); Conn. Gen. Stat. § 52-572k; Del. Code Ann. tit. 6, § 2704; Fla. Stat. Ann. § 725.06; 740 Ill.Comp. Stat. 35/1-3; Kan. Stat. Ann. § 16-121; Ky. Rev. Stat. Ann. § 371.180; La. Rev. Stat. Ann. § 38:2216G (prime contractors on public projects); Mass. Gen. Laws Ann. Ch. 149, § 29C; Minn. Stat. Ann. § 337; Miss. Code Ann. § 31-5-41; Mo. Rev. Stat. § 434.100; Mont. Rev. Code Ann. § 28-2-2111; Neb. Rev. Stat. §§ 25-21, 187; N.H. Rev. Stat. Ann. §§ 338-A:1, 338-A:2 (design professionals); N.M. Stat. Ann. § 56-7-1; N.Y. Gen. Oblig. Law § 5-322.1; N.C. Gen. Stat. Ann. § 22B-1; Ohio Rev. Code Ann. § 2305.31; Okla. Stat. Ann. tit. 15, § 221; Or. Rev. Stat. Ann. § 30.140; R.I. Gen. Laws § 6-34-1; Tex. Ins. Code Ann. § 151; Utah Code Ann. § 13-8-1; Wash. Rev. Code Ann. § 4.24.115.
 

 


Authors

Maura L. Winters

Associate

mwinters@cozen.com

(412) 620-6487

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