What You Should Know About an Indemnity Clause
As you take on your next construction project, you may wonder about the need for an indemnity clause in the contract. Such a clause is a legally binding agreement between two parties. It specifies that one party (the indemnitor) will compensate the other (the indemnitee) for any damages or losses resulting from a particular circumstance or event. The Indemnitor is obligated to protect the indemnitee from financial harm and must cover the costs of any losses incurred. That may sound straightforward, but there are several factors for you to consider.
Reviewing the Contract
As you read the contract, look for language related to indemnity and determine the following:
- Whether the contract language provides coverage for first-party losses or third-party claims—or both
- If anything should be excluded from the indemnity obligation
- If the contract explicitly states what triggers the indemnity obligation
- If there is a limit on the indemnity obligation
- If there is insurance for the indemnity obligation
- Whether there is a duty to defend included in the contract, and if so, how the defense counsel is chosen
You may discover that your contract includes obligations for both insurance and indemnity. These responsibilities may seem to be separate from one another, but they can actually conflict. For instance, if you have an insured loss or claim, an agreement to procure insurance for a specific loss may limit the obligations between you and other parties named in the contract.
For construction contracts, owners often are required to have builder’s risk or property insurance, while contractors have liability insurance. The builder’s risk insurance may also cover the contractors, while the liability insurance may protect the owner and other contractors.
If the contracts and insurance policies contain waivers of subrogation and a loss occurs, it may be unclear which insurance applies. It is also possible that some parties could be liable outside of the insurance coverage.
Many courts have ruled that for these contracts, the applicable insurance bears all the risk for loss. The insured party is not liable. In addition, the insurance company is not allowed subrogation against other parties in the contract or against their insurance companies. This means that insurance may be the only remedy for a loss, even if the insurance payout cannot cover the entire loss. There can be additional complications based on what caused the damage and if negligence was involved.
Understanding the Indemnity Factor
When there are problems during a construction project, various parties might make claims for losses or request indemnity from others. Sorting out all the rights and responsibilities can be a significant task. Also, the duty to defend is a broader obligation than the duty to indemnify. That means multiple parties and their insurers could have a duty to defend other parties named in the contract.
The requirement for triggering an insurance company’s duty to defend varies by state. Some states only require notice, but others may demand formal tender. Insurance policies may have different deductibles, self-insured retentions, or other provisions that affect the coverage. If you are an indemnitee, you must know how to protect your indemnification rights. If you wait for a claim to be resolved or if you take a conflicting position, you can jeopardize your position.
Remember, in Florida, Section 725.06, Florida Statutes places restriction on construction indemnification where you are seeking to indemnify yourself for you own negligence. If you are reviewing a contract that contains such language, seek to revise it accordingly.
If you are an indemnitee, consider these guidelines:
- Tender your defense.
- Involve your indemnitor in any settlement discussions.
- Check the contract to determine whether you can choose counsel and control the defense.
- Decide if there is a need for you to control the claim through a reservation of rights.
The concept of indemnity is relatively simple, but it can prove more complicated in practice. Depending on what parties are involved and what insurance policies are in place, determining the obligations of all parties can be complex.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.