Protect yourself from litigation by following these steps to avoid paying for construction claims that arise during construction projects.
The planning stages of a multi-million dollar project generally include the analysis and development of contract language designed to protect the owner from paying for claims that arise during the course of the project. All too often, when our firm meets with a client to review the contract’s content after a loss has occurred, we find that he or she did not take the steps to protect the company from consequences. This is frequently because the client thought there was not sufficient leverage to require additional protections in the trade contract.
With careful planning, contractors can protect themselves from paying for claims that arise. Just as you would not undertake a project without ensuring the work complies with the local building code’s requirements, you should also not start a project without knowing your rights and ensuring your contractors have agreed to answer for a loss should one occur.
Contractors can take two basic steps to insulate themselves and their insurance policies from paying for claims that occur from someone else. One step is the inclusion of an indemnification provision running in your favor in all contracts, and the second is a contractual requirement for all contractors and trades to name your company as an additional insured on all general liability and property insurance policies. These two steps are essential regardless of whether you are the construction manager, general contractor or subcontractor.
As you review the language in your contracts, learn from the construction litigation arising in New York. New York is the last state in the country with absolute liability statutes on its books for personal injuries occurring during excavation, renovation or construction projects. Because of the penalties imposed by New York’s Labor Law section 240(1), an absolute liability statute, and section 241(6), a strict liability statute, a contractor must craft the contract language in a way that provides the most protection available under the law to keep from paying for injuries that arise from another’s negligence.
When a loss occurs on the project and a lawsuit begins, local laws may prohibit the plaintiff from suing the culpable party. The injured party will expect those responsible for the project to pay for the injuries and damages. When that occurs, the project owner will in turn start an action seeking indemnification and/or contribution from the construction manager, general contractor and subcontractor.
Understand Contract Language
The concepts of contribution and indemnification find their roots in the common law. While contribution emerged from the notion of indemnification, significant distinctions exist between the two principles. Contribution permits an apportionment of the loss between those whose active negligence was the proximate cause of the loss. Conversely, indemnification only permits a “passive” tortfeasor (a person committing a wrongful act) to seek recovery from the one who was actively negligent. The right to indemnification originates from a contract, whether expressed or implied.
However, a party’s right to contractual indemnification is often regulated by law. For example, New York’s General Obligations Law prohibits a construction contract party from requiring another to indemnify it for its own negligence. If there is a statutory prohibition in the jurisdiction in which the construction project is located, the contract must be carefully drafted to include appropriate language to avoid a court deeming the indemnification void as a matter of law.
To understand the implications of the contract language, you must first know the difference between an indemnification provision that requires another to indemnify you for your own negligence and one which does not.
For example, in the following provision, the contractor expressly assumes the indemnitee’s liability:
The contractor agrees to defend and hold the owner harmless from all liability, loss or damage from claims for injuries or death from any cause, while on or near the project, of its employees or the employees of its subcontractors, or by reason or claims of any person or persons for injuries to person or property, from any cause occasioned in whole or in part by any act or omissions of the second party [contractor], its representatives, employees, subcontractors or suppliers and whether or not it is contended the first party [owner or general contractor] contributed thereto in whole or in part, or was responsible, therefore, by reason of non-delegable duty.
However, by inserting additional language in the contract’s indemnification provision, you can limit the indemnification obligation to your negligence and not of others. This provision may state:
To the fullest extent permitted by law, the contractor shall indemnify and hold harmless the owner, architect, architect’s consultant, its agents, servants and employees of any of them from and against claims, damages, losses and expenses, including, but not limited to, attorney’s fees, arising out of or resulting from performance of the work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or injury to or destruction of tangible property (other than the work itself) including loss of use resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions of the contractor, subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.
By making subtle changes to the indemnification clause and inserting saving language that specifies the contract will apply “to the fullest extent permitted by law,” you have taken the steps necessary to ensure your indemnification right is fully protected and that you have not assumed liability for someone else’s negligence.
Require Your Construction Company to Be Named an Additional Insured
The second way to protect your company’s interests and assets is requiring your subcontractors to name your company as an insured on their insurance policies. The insurance procurement provision should stand alone and not be incorporated into the indemnification clause. The insurance clause should also include the obligation to provide insurance for every entity you have agreed to provide insurance for in your contract and specify that the insurance obtained be deemed primary.
However, these steps alone may not be enough for the subcontractor’s insurance policy to answer any lawsuit that arises from an accident that occurs on the project on your company’s behalf. Rather, you must require the subcontractor to provide you with the actual insurance policies, including the additional insured endorsements contained within them. Too often, a contractor simply requires the subcontractor to provide a certificate of insurance as evidence that the requisite insurance policy is in effect. However, the language on the certificate of insurance is never followed. If the subcontractor secures a certificate of insurance from his or her broker, the top of the certificate specifically states:
This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below.
This language clearly states that the certificate does nothing more than identify insurers who issue policies to the named insured and each policy’s limits. The certificate does not provide evidence that insurance coverage for the certificate holder (your company) has actually been procured. Because courts have relied on the qualifying language in the certificate of insurance to deny an additional insured’s right to coverage, the only way to know if the other party has satisfied its contractual obligation is by reviewing the actual additional insured endorsement issued. You must ask for and receive a copy of the additional insured endorsement. Only then will you know whether the language included is sufficient to provide you with insurance coverage if a loss occurs on the project.
Many contractors believe that if a subcontractor is required to procure insurance on his or her behalf and an additional insured endorsement is procured, then those actions are sufficient to provide the contractor with insurance coverage for any loss that occurs on the project. Again, this is not true. Due to the high construction litigation costs, insurers have limited their exposure should a loss occur on the project. Now, insurers have amended their additional insured endorsements to include language that provides insurance coverage only to the additional insured if the loss arises from the insured’s own negligence.
For example, the additional insured endorsement may contain the following language:
The insurance afforded by this policy for “bodily injury,” “property damage” and/or “personal injury” shall also apply to the “additional insured” listed below for claims, suits and/or damages made against the “additional insured” but only to the extent the “additional insured” is being held responsible for the acts, omissions and/or negligence of the “named insured.”
Thus, the owner, with whom the contractor may have agreed to obtain insurance for, would not be entitled to coverage under this additional insured endorsement for any loss that arose from a subcontractor’s work that was not the result of the contractor’s negligence. If this endorsement is contained in your insurance policy, and the loss occurred as a result of a subcontractor’s negligence, your company may find itself defending against a breach of contract claim. Significantly, breach of contract claims are not covered by standard commercial general liability insurance policies.
Yes, your subcontractor and his or her insurance broker may balk at your request to see a copy of the actual policy or additional insured endorsement. However, reading the language in the endorsement is the only way to know if it contains limitations that may leave you and your insurance company standing alone to cover a loss that arose on the project.
Develop Construction Contracts Carefully
Use the same careful planning in developing your contracts that you use in project development—this will ensure you have done everything to minimize the impact of a loss on your company and insurance premiums. Review every provision in the contract to ensure that, if a loss arises, your rights to indemnification, contribution and insurance coverage are enforceable and available to respond to the loss.
Just as you use tradespeople with expertise to perform project work, you must also use the knowledge and resources provided by attorneys who are actively engaged in construction litigation to assist you in the development of your contracts and insurance programs. This collaborative process can help you not only limit your company’s exposure if a lawsuit occurs, but it may reduce your company’s cost of doing business by potentially reducing insurance premiums.
Construction Business Owner, February 2011
