Construction Law – Understanding Your Indemnity
From single-family residences to mixed-use commercial developments, a lot can go wrong with any type of construction project. This makes it essential for the companies involved to protect themselves as much as possible. One of the primary means of securing protection is by carefully negotiating indemnity clauses.
What is an Indemnity Clause?
Put simply, an indemnity clause is one party promising to cover the costs of the other party in a certain situation. Typically, the party is responsible for a certain risk, or who can best manage the risk, will be the indemnifying party.
For example, let’s consider a straightforward contractor-subcontractor relationship. The contractor has been engaged to build a custom home and needs subcontractors to take care of excavation, concrete, framing, drywall, HVAC, electrical, painting, and various other aspects of the project.
Now, let’s imagine that something goes wrong. Before the homeowners take possession, they hire an inspector who discovers a flaw in the foundation. Fixing the issue will be a major undertaking, and the homeowners are not responsible for paying. So, what do they do? They don’t contact the subcontractor who poured the foundation. Instead, they contact the contractor they hired to build their home.
This is where indemnity comes into play—or should come into play if the contractor’s agreement with the subcontractor is well-written. While the contractor is at risk via its relationship with the homeowner, it should be able to shift this risk to its subcontractor through the indemnity. A typical indemnity clause in a subcontractor agreement for a construction project may say something like:
“Subcontractor agrees to indemnify and hold harmless Contractor for and against any and all claims arising out of the work Subcontractor performs pursuant to this Agreement.”
What this means is that, if the contractor faces liability due to the subcontractor’s performance, the subcontractor basically steps into the contractor’s shoes and assumes this liability. This makes sense – the subcontractor should be liable for its mistakes – but it does not happen automatically. In the absence of an appropriate indemnification clause, the contractor’s only option may be to sue the subcontractor to recover damages after providing an appropriate remedy to the homeowner. An indemnity clause streamlines this process and removes much of the risk from the equation for the contractor.
Indemnity and Insurance Go Hand-in-Hand
From a practical perspective, an indemnification clause is only valuable if it can be enforced. If the concrete subcontractor in our example doesn’t have the financial resources to indemnify the contractor, the contractor could still be out of luck. So, ideally, the parties’ agreement includes appropriate insurance provisions as well. If the subcontractor is insured for its indemnity liability, then the contractor may be able to deal with the subcontractor’s insurer rather than trying to enforce its contractual rights against the subcontractor directly.
Speak with a Construction Lawyer at GS2Law
The construction lawyers at GS2Law represent contractors and other parties in contract negotiations and indemnity enforcement matters. If you would like to speak with one of our lawyers in confidence, please contact us online to arrange an initial consultation.