Indemnification Clauses — Construction Contracts.
What to look for when negotiating a Construction Contract.
Indemnification, in short, is where you agree to bear the entirety of the loss of a third party who has filed a claim against you. The obligation to indemnify is created by contract, and is found in virtually every meaningful construction contract.
Practically speaking, indemnification works like this — let’s say a Plaintiff sues us for money damages. You and I have a contract, however, where you agree to indemnify me for any loss I may have to pay that third party. If it turns out that I have to pay that Plaintiff anything, I can then turn to you and demand, pursuant to our contract, that you pay me the monies I paid. This scenario is the one I want you to look out for.
Typically, though, Indemnification causes require one party to indemnify the other for their own negligence. Using the example above, if the indemnification clause was written fairly, you would only be responsible to indemnify me if you were the responsible party.
A sample indemnification clause in a construction contract may read as follows: “Contractor agrees to indemnify and hold harmless Owner for all claims or losses sustained in relation to Contractor’s performance under this agreement. Contractor also agrees to obtain sufficient insurance to protect against all such loss, hereby waives all rights to subrogation against Owner, and will deliver a copy of said policy within seven (7) days of execution of this agreement that lists Owner as a secondary insured.”
Under that scenario, Contractor will be responsible to Owner for Contractor’s performance, and not any of Owner’s actions or inactions.
So to summarize indemnification, there are two types of clauses; one makes you responsible for your and my actions, while another only makes you responsible for only your negligence. To be an effective negotiator, you’ll need to identify and recognize both. Failing to do that can adversely impact your business.
I hope this gives you a better understanding of indemnification provisions in construction contracts. If you have additional comments, concerns or questions, please consult a construction lawyer in your area. Next time, I’ll address “No Damages for Delay”. Stay tuned.