California Construction Indemnity Clauses: A Simplified Overview

CALIFORNIA CONSTRUCTION INDEMNITY CLAUSES: A Simplified Overview

By
William C. Last, Jr.
Attorney at Law

Contracts are intentionally drafted to allocate the risk associated with a construction contract between the parties to the project. While in theory, the higher the risk the greater the reward should be for the party who is taking the risk, the realities of the construction industry are to the contrary. In any event, every contractor should decide exactly how much risk he or she is willing take before signing the contract.

The general categories of "risk shifting" clauses in a construction contract include: (a) liability for negligence and construction defects; (b) performance; (c) cost or financial; and (d) scheduling. The remainder of this article will focus on clauses that shift the risk for liability associated with negligence and construction defects.

1. What is an express indemnity clause?

Simply stated, indemnity clauses are a contractual device to shift the common law and statutory risk associated with a party's negligent acts from one party to another. In essence, one party promises (indemnitor) to pay the other parties (indemnitee) attorney's fees and any judgment that may result from both parties' wrongful conduct. If there is not an indemnity clause in a contract the liability and resulting damages for a parties negligent acts of multiple parties will be allocated according to the comparative fault of the respective parties.

In the construction industry, the owner wants to allocate the responsibility for negligent acts from itself to the design professionals and the contractor. In turn, the contractor wants to shift that risk to the subcontractors and suppliers. The party that seeks to shift that risk wants to include in the contract between himself and the other party a clause that clearly and expressly obligates the other party to defend the developer from liability and pay any damages that may result from his negligence.

However, under California law there is a limitation as to how much of that risk can be shifted. By statute, you cannot have another party indemnify you against damages that result your sole negligent or willful acts. If such a clause is in a contract it is void. Thus under California law, the person seeking indemnity from the other party must have some degree of fault for the harm that results in the liability.

2. What types of indemnity clauses are there?

Due to the increase in construction defect and worker related lawsuits insurance carriers have sought to limit their risk for such claims. The insurance carriers have recognized that express indemnity clauses are one method for limiting their insured's liability and thus their exposure. As a result, many carriers will condition the issuance of liability insurance on the contractor including certain types of indemnity clauses or indemnity language in their contracts.

Since 1973, the California courts have categorized indemnity clauses into three basics types. For the purposes of explaining the types of clauses, this article will assume that the general contractor is the one seeks indemnity ( Indemnitee) from the subcontractor (Indemnitor).

A Type I clause is one which expressly and unequivocally provides that the sub-contractor (indemnitor) is to indemnify the general contractor (indemnitee) for the negligence of the general contractor (indemnitee). Under this type of clause the general contractor is indemnified irrespective of whether or not the liability results from his negligence alone or if it results from his co-negligence with third parties.

A typical Type I clause is as follows:

The Subcontractor agrees to save the General Contractor free and harmless of and from any loss or liability, of any nature whatsoever arising out of or in any way connected with the subcontractor's performance of this Agreement, including loss or liability caused by the General Contractor's active negligence, except loss or liability caused by the General Contractor's sole willful conduct or active negligence.

A Type II clause is one which provides that sub-contractor (indemnitor) is to indemnify the general contractor (indemnitee) for the negligence of the general contractor (indemnitee) liability "however same may be caused ....." or "arising from the use of the premises, facilities, or services of (the indemnitee)..."or "which might arise in connection with agreed work...." or "caused by or happening with the equipment or the condition, maintenance, possession or operation or use thereof..." or "from any and all claims for damages to personal property by reason of the use of leased property."

Under these types of clauses the general contractor (indemnitee) is indemnified for her own acts of "passive negligence." Passive negligence is when there is a mere nonfeasance; and active negligence is when the party participates in the affirmative act of negligence. The crux of the determination is whether or not the party has some direct participation in the negligence act that resulted in the liability for which indemnity is being sought. As a result, if the general contractor participated in the negligent act he would not be able to seek indemnity.

A typical Type II clause is as follows:

The Subcontractor agrees to save the General Contractor free and harmless of and from any loss or liability except that caused solely by the General Contractor's negligence of any nature whatsoever.

The third type of indemnity clause, Type III clause, provides that subcontractor (indemnitor) is to indemnify the general contractor (indemnitee) for the general contractor's liability ( indemnitee) if caused by the subcontractor (indemnitor), but excludes indemnification for liability that was caused by someone other than the subcontractor (indemnitor). Under a Type III clause any negligence on the part of the general contractor (indemnitee), either active or passive, will eliminate indemnification against the subcontractor (indemnitor) whether or not he or she has caused the general contractors liability.

A typical Type III clause is as follows:

Subcontractor promises to indemnify the General Contractor from liabilities caused by subcontractor arising directly or indirectly from the performance of the contract or work, regardless of responsibility for such negligence; provided, however, that nothing in this agreement purports to or should be understood to provide for indemnity of a General Contractor for its sole negligence or willful conduct.

3. Why should I care about the type of clause?

The major concern that is expressed by the party that must indemnify the other party is the percentage of the amount of damages that must be paid in relationship to the degree of culpability for the actual liability that exists. Simply stated, a subcontractor can be liable for indemnifying the general contractor for 100% of his damages and attorney's fees yet the subcontractor's degree of culpability is less than 1%.

Ideally, a contractor wants to shift the risk to the other party he or she is contracting with for the project. But if you are bargaining from a position of weakness you may not be able to resist the imposition of an indemnity clause that results in you paying 100% of the loss despite the fact that you only share 1% of liability. By reducing your contractual indemnity risk you may be able to avoid liability for attorney fees and damages for to which you are not responsible. Since insurance carriers also recognize this fact, the right type of clause may have an impact on your insurance premiums.

4. What should I do about the clause?

Using the previous examples, which refer to the general contractor as the indemnitee and the subcontractor as the indemnitor, subcontractors should seek a Type III clause and not a Type I clause. Furthermore, if you are a subcontractor or supplier you may prefer no indemnity clause in the contract. By deleting the indemnity clause the subcontractor's liability is based on the comparative fault of the negligent parties. However, you should discuss this with your attorney. Generally, if you are a general contractor drafting a subcontract or developer drafting a prime contract you would prefer a Type I clause.

A form of indemnity based on comparative fault is found in the American Institute of Architects Form A-201 (1997). That clause is as follows:

"INDEMNIFICATION: 3.18.1 To the fullest extent permitted by law and to the extent claims, damages, losses or expenses are not covered by Project Management Protective Liability insurance purchased by the Contractor in accordance with Paragraph 11.3, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect's consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorney's fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity which would otherwise exist as to a party or person described in this Paragraph 3.18.

3.18.2 In claims against any person or entity indemnified under this Paragraph 3.18 by an employee of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, the indemnification obligation under Subparagraph 3.18.1 shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for the Contractor or a Subcontractor under workers' compensation acts, disability benefit acts or other employee benefit acts."

Th key language in the AIA clause is "only to the extent caused by the negligent acts or omission of the subcontractor." In fact, the author understands that American Subcontractors Association endorses the American Institute of Architects AIA-201 (1997) general conditions.

Since a number of insurance carriers have conditioned the issuance of a liability clause on the contractor's use of a certain of indemnity clause, it is difficult to convince a contractor to change the clause. Alternatively, if you have a stronger economic position to bargain from, you may be able to either deleted the indemnity clause as a whole or modify the clause.

It should be noted that one other construction contract section that is used to shift the risk for negligence is the insurance section. Typically, the owner will include clauses that require the general contractor and its subcontractors to be provided policy endorsements that add the owner as an additional insured under the general and subcontractors' liability policy. The insurance provisions may also include other provisions that significantly increase your insurer's risk and as a result increase your premiums.

Conclusion

Indemnity clauses by their very nature are complex. The correlation of a type of indemnity clause to the insurance premiums that a contract may pay are also a concern. Indemnity clauses should be reviewed with a great degree of care to avoid any adverse affect. It is also recommended that you have your attorney and insurance professionals review the clauses.

This article, 2001, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.