Scary Contract Terms 101: Indemnification Clauses

As I have mentioned before (Paid when Paid), (Paid if Paid), I have more than a little bit of experience reading construction contracts.

Aside from the payment timing clauses, another common but potentially scary topic that comes up in almost every construction contract is what’s called an Indemnification Clause.

Much like the dreaded Paid when Paid clause, the indemnification clause is another method that GCs use for shifting risk.

In this case, however, the risk being shifted is not that of payment, but rather of tort claims and insurance liability.

In short, depending on the precise language, an indemnification clause means that your commercial liability carrier will be held responsible for claims against the general contractor.

For obvious reasons, this is a clause that can have a pretty big impact on your financial security:  The key is, navigating everything carefully, and making sure that you have the right insurance coverage.

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There are, essentially, three categories of indemnity provisions:  Limited, Intermediate, and Broad.

Limited indemnity provisions aren’t really scary all.  In essence, they only hold you liable to reimburse the GC for any actions brought against them by your negligence.  For instance, if you improperly install a window that falls on somebody, and that person sues the GC, the GC can come after you to reimburse them for what they had to pay out to the person.

Makes sense, right?

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The second type of indemnity provision is an intermediate indemnity provision.

This provision means that you will have to reimburse the GC for any claims against them that arise at least in part out of your actions.

To go back to the falling window scenario, let’s say that the GC and architect provided faulty plans for installing the window, but you then did a shoddy of installation, making the situation worse than it already was.  As such, this falling window was kind of everybody’s fault.

If this happens, and the governing contract was one with an intermediate indemnity provision, you’re on the hook for reimbursing the GC for the entire value of the claim against them, even though their crappy plans played a role in the whole thing.

Or, to go back to childhood, remember that time when you were eight, and you and your brother decided to play football in the house, and you ended up breaking Mom’s favorite lamp?  And then Mom punished you, even though Stupid Chad was the one who came up with the idea?

An intermediate indemnity clause is the GC’s way of ensuring that they’ll be Chad.

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Finally, the third time of indemnity clause is the broad indemnity provision.

This is Chad and his even stupider friend Brad playing football in the house, while you’re upstairs in your room doing homework.  You had nothing to do with this stupid idea.  And yet, low and behold, when they break the lamp, your parents still somehow decide to ground you, while letting stupid Chad off scot free.

Or, to go back to the adult world, you installed the window correctly.  When you left the job site, those were the safest windows this side of the Mississippi, installed to standards that no engineer would ever argue.

Then some other idiot came in adjusted the frame, causing it to fall on an innocent pedestrian.

You did absolutely nothing wrong, but under a broad indemnity provision, when that pedestrian sues the GC, he’s going to come back after you to reimburse him for a mistake that you were no party to.

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For obvious policy reasons, some states limit the power of broad indemnity provisions.  Other states, however, do not, and as such, it’s a good idea to read through the indemnity section of each contract.

Know what you’re liable for.  Make sure that your coverage is sufficient to cover your liability exposure.  If need be, ensure that your GC is listed as an ‘additional insured’ on your policy to cover any issues that might come up.

Ninety nine percent of the time, those indemnification clauses will never matter.  The one percent of the time that they do, though, can have a huge impact on your livelihood.  As such, it’s wise to make sure that you’re protected against Brad and Chad.