*Disclaimer: I am not a lawyer, and this is not legal advice. Always consult a qualified attorney before signing or making any changes to a contract.*
“It’s standard language.” “No one else has complained about it.” “We’re just trying to be sure we’re protected for the work you are doing.”
These are some of the excuses often recited when phrasing in construction indemnity clauses are questioned.
You could not think up an excuse that would make the language in the title of this article acceptable under any circumstances.
I think my favorite reply is, “we don’t make changes to our contract.” Translation: “We are arrogant. We are out for our own welfare and don’t give a crap what is right or wrong, and we certainly don’t give a crap about you. Therefore, sign it and deal with it or don’t take the job.”
Oh, well why didn’t you just say so? Who wouldn’t want to sign such a horrible contract when you put it like that (sarcasm intentional.)
Why is the language so bad? Why don’t more people question it?
We’ll start with the first question.
Say you are a plumber, and you sign a “standard” contract for a large commercial project. The indemnity clause reads something to the effect of, “……Subcontractor hereby agrees to indemnify and hold harmless Owner and Contractor (etc.) for any and all loss, injury, damage, or claim arising out of, resulting from, or in any way connected to the performance of the Subcontract Work….”
What you have just agreed to is a ticking time bomb on a number of levels. Someone just handed you a grenade with the pin already pulled.
First, there may be no exceptions to this indemnity other than where a state’s statutes dictate an owner and/or general contractor cannot require indemnity from another party for the owner (if you are a GC) or general contractor’s (if you are a sub) own sole negligence.
However, you can rest assured there are exclusions in your general liability policy. So right off the bat you have signed an indemnity agreement that your insurer may not honor depending on the nature of the claim(s) in question.
Next, consider the words on the page. “Any and all loss….” “arising out of, resulting from, or in any way connected to….”
Imagine you signed such an agreement as a plumber. You could be held responsible to indemnify multiple parties for a loss in which you have no tangible responsibility or fault of any kind.
Picture this: you sink/run all the pipes, but the corresponding appliances have not yet been connected so you cap them off to prevent impalement. Later in the evening the general contractor takes a buddy onto the job site to show it off and his friend falls from height and dies from a concussion because he hit his head on one of your pipes.
Guess what? You now owe indemnity. Sounds crazy, but it’s true.
Consider the wording again, and this time consider the wording that is absent. Nowhere does it say your “negligent” work or “error” in your work. It just says it must be somehow connected to your Subcontract Work.
What did the friend hit his head on? Your pipes. Your work. The injury is officially connected to your work.
You don’t have to be at fault, but you will still be responsible to indemnify.
I know a steel contractor who paid $1.5 million in indemnity on a hotel project because water leaked through cracks in the sealing around the windows and intruded into the envelope of the building.
What does faulty window sealant have to do with structural steel? Nothing. But some “expert” went under oath saying that the weight of the steel beams contributed to the cracking around the window seals.
The truth? The window guy had lousy insurance and was not worth pursuing. So, the owner and general contractor looked for the company with the most resources they could potentially put on the hook and voila! Instant indemnity funds are available.
Now for the second question: why don’t more people question this language? Easy. They have no clue it’s there because they are too lazy/careless to pay attention to what is in their contract, they hired the wrong attorney or risk manager, or they simply have no clue what it actually means.
Result: the unwitting victims pay a bunch of money they really should not have to pay because they signed an unfair indemnity agreement that their insurance may not back up.
That throws into sharp relief the real reason some companies wish to have such wording present in the contracts they ask you to sign. They do not wish to do their due diligence making certain all their subcontractors are properly covered for the work they are assigned, and want YOU to be their scapegoat in the event other parties are unable to pay what they owe.
Oh sure, they’ll collect certificates that are supposed to prove all their subs *have* insurance – – – and then put in a clause that says they have no responsibility to make certain that insurance does what it is supposed to do.
(Don’t you just LOVE how they can take your word for anything and hold you accountable for it, and then on the flip side tell you whatever they want and NEVER be held accountable for what they said? But I digress….)
At the very least, they do not want it to be them and likely do not care where else the money may come from.
To add insult to injury, there is probably another clause in your contract that says defense is wholly separate from indemnity.
This simply means even if you do not contractually owe indemnity, and have no tangible fault at all, you’ll pay defense for the indemnitees with no exceptions.
All they have to do is write you a letter telling you to do so. Yes, you read that right. You can potentially pay millions in defense and/or indemnity for doing a perfect job exactly as you were instructed.
On top of that, there will no doubt be a waiver of subrogation in place that keeps you from getting back even a penny of any defense or indemnity you paid that you did not actually owe even if a court determines you did not owe such expense.
Are you a general contractor? Be DARN sure the contract you sign with the Owner and/or Construction Manager is super fair to you so you can issue fair terms to your subcontractors.
Think you’ll be okay with the lousy indemnity agreement with the Owner because you can shove the liability down on your subs? Think again.
When your subcontractors’ insurance fails because it won’t back up the lousy indemnity agreement you essentially forced them to sign, that bill is coming straight back to your desk and you can say a prayer that your insurance will pay.
No insurance company will provide broader liability for an additional insured than they provide to the primary named insured, so if your sub is not covered for what they are doing, YOU are not covered for what they are doing either.
Wouldn’t you rather have insurance funds on the table than possibly pay out of pocket anyway?
Working as a team is just better.
This “every man for himself” approach to construction projects just sucks for everyone and creates a needless frenzy and throat-slitting competition when claims arise.
Wrapping up here, contracts should be aimed to just be reasonable and fair when they are written. (Wow, profound, right?)
Bottom line: if you’re asked to sign a contract with this horrendous language, say no. Don’t hem and haw, don’t think of the profit (because that’ll disappear instantly when the claim gets filed anyway), and do what is best for your business.
In short: don’t sign your own death warrant because someone dangles a tasty-looking carrot over your head and offers you a pen as the price.
If any contractor won’t agree to fair contractual language, that tells you everything you need to know.
They won’t hesitate to cut you to pieces at claim time if they think it benefits them to do so.
Who wants to work with or for someone with that attitude anyway?
To Your Success,