Indemnification or Damnification

One of the more complex areas of law involves the doctrine of indemnification. Simply put, indemnification is the legal process by which one party (the “indemnitor”) is required to reimburse another (the “indemnitee”) for payments made by the indemnitee in the resolution of a third party’s claim and perhaps for expenses incurred in defending against that claim as well.

One may legally be entitled to indemnification when

(1) legal rules allow such recovery under the circumstances involved, or

(2) when that party is, entitled to indemnification under the terms of a contract. The first type is known as common law indemnity, and the second is contractual indemnity. A third but less common right to indemnification may be provided by federal or state statute governing special circumstances.

Indemnification plays a vital role in the construction industry. Owners may be entitled to indemnification by their contractors. Architects may be entitled to indemnification by engineering consultants, and contractors may be entitled to indemnification from either their subcontractors or suppliers. 1

For example, if a suit is successfully prosecuted against an architect because of a design deficiency in the plans or specifications, the architect may recover the amount of the judgment against him from his engineering consultant who actually prepared the defective plans or specifications. Similarly, an owner may be responsible to an adjacent property owner for damage done to his neighbor’s building, but the owner may be entitled to indemnification from his contractor who is responsible for the damage resulting, for example, from dozing the neighbor’s garage.

In that example, the contractors might also be entitled to indemnification against his subcontractor whose operator actually did the bulldozing. Mercifully, we end this example with the subcontractor recovering indemnification from his employee who operated the bulldozer, without delving into the responsibility of the architect who instructed him to bulldoze.

In the American Institute of Architect owner-contractor general conditions forms the AIA has inserted a provision requiring the contractor to also indemnify the architect. Interesting?

G-17 The law in most states allows indemnification recoveries by parties who are only secondarily or passively responsible against those parties who are primarily and actively at fault for the injury which has precipitated the claim. This common law principal is based upon the notion that the loss should justly fall upon the real wrongdoer, even though others may have legal liability-such as an employer’s liability for the negligence of his employee while in the course of his employment, or the owner’s liability for injuries to others on or near his property.

Most construction contracts provide for indemnification. For instance, the American Institute of Architects general conditions (AIA Document A201-1976) require that the contractor indemnify both the owner and architect from losses resulting from negligence of the contractor, his subcontractors or their employees. Losses involved would include claims for personal injuries or property damage, other than damage to the work itself. Under that provision, the architect would not be indemnified against losses resulting from his professional activities.

However, under the above-mentioned general conditions provision, the owner and architect would be entitled to indemnification even though they themselves were partially at fault. This type of contractual indemnification has been the subject of much criticism and some legislation. Presently, there are about 20 states that have adopted laws making indemnity clauses attempting to protect parties against their own negligent or wrongful conduct unenforceable. Courts of a number of other states similarly refuse enforcement of such provisions or interpret them so strictly that enforcement is virtually impossible. The Colorado rule on this issue is presently unclear.

Since indemnification may indeed be both a sword and a shield in the construction industry, those involved in negotiating contracts and claims should be well aware if its benefits and possible disadvantages. Naturally, they should avoid undertaking to indemnify another party against claims resulting from the other’s fault, whether it be partial or total.

Second, if faced with an indemnification clause in a contract which cannot be altered (such as a bid situation), available insurance coverage should be investigated. While the comprehensive general liability insurance coverage usually maintained by contractors does not cover contractually – assumed liability, such coverage may be obtained by special endorsement for an additional premium.

Parties against whom claims are made should promptly review both their contracts and the applicable law to determine whether they may be eligible for indemnification from other parties.

Like most other legal situations, a general understanding of the law of indemnification will usually prevent surprise, disappointment or loss.

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