Indemnification Clauses

One of the thorniest problems in construction contracting today involves indemnification clauses in general contracts and in subcontracts.

"Indemnification" means protection and, in the context of construction contracting, is the protection provided by the contractor or subcontractor for the benefit of the owner or general contractor against claims made by others.

Owners and contractors may properly require their generals and subs to protect them against claims made by third parties for injuries caused by the other. For example, if the subcontractor's backhoe operator backs into the building next door to the construction project and causes damage, the subcontractor should be required to protect the general contractor and owner against liability for claims asserted by the neighbor.

The problem, however, involves the use of indemnification clauses where a party is required to protect not only against claims for which he is at fault but also against claims where he is only partially at fault, sharing the blame with the party protected (indemnified) as well.

The courts of some states have ruled that parties cannot be indemnified against claims arising for injuries for which they were partially at fault. Other courts, however, have ruled that if the contract so requires the indemnified party is entitled to be fully protected-even if he was also at fault.

Probably lurking behind those court decisions favorable to protected parties is the theory that if the other party was dumb enough to sign a contract agreeing to indemnify against claims arising out of the other party's own dereliction, the provision should be enforced. More politely, however, the courts announce that a party is bound by whatever he has agreed to do.

Rather than becoming embroiled in a legal battle or being stuck for unexpected risks, contractors and subcontractors should:

1. Carefully study the provisions of any indemnification clauses expected to be used in their contracts,

2. Fully understand the extent and meaning of such clauses,

3. Consult with insurance counselors to determine whether insurance coverage will protect them to the full extent provided by the intended indemnification provisions,

4. Seek a rewriting of the language to limit the extent of the indemnification provision, or

5. If still in doubt, consult your attorney.

A broadly drafted or misunderstood indemnification clause could cause serious financial risk. In reviewing contract agreements, pay particular attention to provisions containing the words indemnity, indemnification, hold harmless, defend against and words or phrases of similar import. Make sure those provisions are well understood before signing.