Subcontractor indemnification and "additional insured" requirements remain contentious between primes and subs, as a Minnesota case illustrates.
The case—Engineering and Construction Innovations Inc. (ECI) v. L.H. Bolduc Co. Inc.—arose from a water and sewer infrastructure project several years ago for which Bolduc served as a sheeting subcontractor to first-tier subcontractor ECI. According to the American Subcontractors Association (ASA) of Minnesota, ECI accused Bolduc of damaging a sewer line during construction and sought reimbursement for the repairs from Bolduc and its insurance company, the Travelers Indemnity Company of America.
When both Bolduc and Travelers refused to offer payment, ECI sued both in district court for the $235,399.89 cost to repair the pipeline. A jury absolved Boalduc of negligence and denied ECI's claim for reimbursement.
In September, however, the Minnesota Court of Appeals ruled 2-1 in favor of ECI. Although the state's anti-indemnity law prohibits requiring construction firms to pay for damage caused by others, the court found that Bolduc had agreed to purchase the insurance that contained two troublesome items. One included a covered obligation to indemnify ECI from claims resulting from work performed under its contract. The other named ECI as an "additional insured." As a result, the subcontractor was indeed liable for the damage. "The court agreed that while Bolduc didn't act negligently, the language of the policy did not forbid coverage for someone else's negligence," says Ryan Stai, a Minneapolis-based attorney. "The court picked up on the language of the contract, which required Bolduc to indemnify ECI from any claim 'caused or allegedly caused' by any act or omission of Bolduc."
To ASA of Minnesota Executive Director Mike Schmaltz, the clause and the appellate court's endorsement represent a disturbing trend toward shifting project responsibility as far downstream as possible. "Owners shift liability to their primes, who in turn shift it to subcontractors and their subcontractors," Schmaltz says. "It leads to the smallest company being forced to accept risk that's way out of proportion to what should be considered acceptable."
Subcontractor indemnification and the related issue of "additional insured" requirements in prime-sub contracts are a long-standing concern for the construction community, particularly since the statutes governing risk transfer through insurance vary from state to state.
"In all but a handful of states, loopholes and exceptions exist that can result in subcontractors having to assume an unfair amount of risk," according to Franklin Davis, ASA's director of government relations.
Schmaltz adds that the problem has become particularly acute in recent years, with general contractors being less willing to negotiate their way out of the indemnification clause. "That leads to an imbalance of bargaining power," Schmaltz says, noting the scarcity of work during the recession may also be forcing subcontractors to accept these terms rather than forgo a much-needed opportunity.