Problems continue to grow with indemnifications—contractually making one party responsible for another’s damages.
They can be difficult enough to understand if one is not well versed in legal or insurance issues, but sometimes they even stump lawyers.
And as a case moving through the Minnesota state justice system illustrates, liability in construction contracts is an increasingly contentious and confusing issue.
The case, Engineering and Construction Innovations, Inc. (ECI) vs. L.H. Bolduc Co., Inc., arose from a water and sewer infrastructure project 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, Travelers Indemnity Company of America.
When both Bolduc and Travelers refused to pay, ECI sued both in district court for the $235,399.89 cost to repair the pipeline. A jury absolved Bolduc 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 (Minn. Statute §337.02), prohibits requiring construction firms to pay for damage caused by others, the court found that because Bolduc had agreed to purchase insurance that included a covered obligation to indemnify ECI from claims resulting from work performed under its contract, and named ECI as an additional insured, the subcontractor was indeed liable for the pipeline 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 Attorney Ryan Stai, a senior associate in the construction litigation practice of Leonard, Street and Denard, Minneapolis. “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-Minnesota Executive Director Mike Schmaltz, the clause and its endorsement by the appellate court represents a disturbing trend toward shifting project responsibility as far downstream as possible.
Shifting Risk Down the Contract Chain
“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 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,” says 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 out of the indemnification clause.
“That leads to an imbalance of bargaining power,” he says, noting that the scarcity of work during the recession may also be forcing subcontractors to accept these terms rather than forgo a much-needed opportunity.