Indemnity Clauses in Construction Contracts

Why Every Builder Must Have Indemnity Agreements in Contracts

IRON WORKERS WITH GIRDER IN CHICAGO
An indemnity agreement will reduce your construction risks and can control your total legal expenses. Kay Chernush / Getty Images

Indemnity Agreement in Construction Contracts

An Indemnity agreement protects you and allows others to bear the costs associated with damages. An indemnity agreement reduces your construction risks and could be a factor in controlling your total legal expenses. It is important that the agreement itself describes the types of losses being covered, including legal fees. Some states do not favor indemnity agreements and present limitations to indemnity clauses in construction contracts.

It is very important that the agreement identifies the scope and extent of the indemnification. This type of agreement works by protecting the contractor under one particular trade or series of events as explained below.

Types of Indemnity Clauses

Every indemnity agreement should be prepared accordingly to the type of project being executed. The most common indemnity clauses are:

Broad Form Indemnity - Under this clause, the Indemnitor is responsible for his own negligence as well as the negligence of a third party. This means that he or she may be liable for the sole negligence of the indemnitee. In some states, such as California, the indemnitee cannot transfer damages caused by his sole negligence or willful misconduct to the Indemnitor. 

The second type if the intermediate form of agreements. This one puts the Indemnitor assuming all the risks associated but not if the risk is the indemnitee responsibility.

It is the preferred clause in the construction industry and could hold the owner harmless from any and all claims, caused by negligent acts or omissions of the owner. It requires all-or-nothing indemnification.

The comparative form clause, the third of its type,  requires a comparison of negligence.

Under this clause, the Indemnitor is held responsible for the loss caused by their proper actions. This type of agreement is based upon common law principals commonly recognized in the United States. The Indemnitor is not liable for direct negligence committed by the indemnitee.

Other Types of Indemnity Clauses

  • A work-related clause, rarely used, doesn't require an act of negligence or omission. It only depends on whether the work was being performed by the subcontractor.

  • A mutual clause applies the same standard to each party, the Indemnitor and the indemnitee.

When Can You Use Indemnity Clause Claims?

An indemnity clause can be used for the following purposes:

  • Breach of Contract

  • Liability for negligence

  • Compensation due to injuries or property damages

  • Claims for loss

  • All types of property infringement

  • Legal costs and related expenses

  • Loss of profit

  • Taxes and interests payable by a contractor declared on default

Indemnity Clause Contract Forms

The AIA Document A201 'Standard Form of Agreement Between Contractor and Subcontractor' is one if the most used clauses on construction contracts.  On its wording, it identifies the contractor as the one responsible for protecting is subcontractors, and other parties involving in the contract, including agent, employees or any other related party against claims, damages, losses, and expenses, including but not limited to attorneys' fees.

The subcontractor is required to indemnify the contractor for all costs and expenses incurred for the remediation of material and managed by the subcontractor or where the subcontractor fails to perform its obligations. The exception to this is when the action is due to their own negligence, so they will need to cover their cost and expenses.

If you decide to use ConsensusDOCS 'Standard Form of Agreement Between Contractor and Subcontractor', ConsensusDocs 750, you will also be covered with an indemnity clause specified under section 9.1.1 and 9.1.2.

Both of these contract forms limit the subcontractor's obligation to indemnify the contractor. This last form imposes additional indemnity obligations not covered under the AIA A201 form. In addition to these clauses, it is very important to consider all other insurance requirements.

When possible the contractor should try to limit their responsibilities to items they can control and for those which we can be insured against. Sometimes mutual indemnification is needed, but a good understanding and clear scope of responsibility need to be drafted so legal counselors can address the situation.