What are the 3 Levels of Indemnification?

May 26, 2020

indemnity insurance form on wooden desk with books and glasses

image credit: Vitalii Vodolazskyi/shutterstock.com

If you stop and think about it for a moment, why does anyone refer back to a contract? It’s, unfortunately, when a problem arises. Depending on what the issue is, different contract articles may come into play. So before signing any contract, it’s best to understand what each article is about and how it can affect your ability to do the work. Let’s take a deep dive into one of the articles—Indemnification—as this article appears in almost all contracts in one form or another.

Indemnification is a mystery to most Contractors—what it does, and, when enforced, why they have to pay for someone else’s negligence and the ensuing liability. Over simplified, indemnification means “who pays, for what and when.” First, some nomenclature: if you are a Contractor that has signed a contract with the Owner or General Contractor, you usually must indemnify the Owner and possibly other parties (i.e. pay for liabilities); you are the “Indemnitor.” The Owner (and other parties, if any) is the “Indemnitee.”

There are 3 levels of indemnification: broad form, intermediate form, and limited form. 

1. Broad Form Indemnification

This requires the indemnitor to pay not only for its liabilities but also for the indemnitee’s liability whether the indemnitee is solely (i.e. 100%) at fault or partially at fault. The indemnification language in the contract usually contains the phrase “… in whole or in part…”  This means if the indemnitee was liable—whether for 1%, 99%, or 100% of the incident which caused the loss—the indemnitor must pay the full value of the liabilities regardless of who was at fault.

For construction contracts, many states have made the Broad Form Indemnification void as against public policy. A Contractor cannot be held liable for the sole (i.e. 100%) negligence of the Owner or any of the Indemnities. However, as business people, you have agreements with other non-construction types of businesses (ex. consultants, vendors, suppliers, banks) where the Broad Form Indemnification is still permitted. One state may permit the Broad Form, but another may not. It’s important to know the laws in the state(s) you operate.

2. Intermediate Form Indemnification

This is very similar to the Broad Form in that the indemnitor will pay for the for the indemnitee’s negligence as long as the indemnitee is NOT solely (i.e. 100%) negligent.  So, if the indemnitee is up to 99.99% negligent, and the indemnitor is 0.01% negligent, the indemnitor pays for the liability of the indemnitee as well as for its own negligence. Only when the indemnitee is 100% negligent does the indemnitor not have to pay. The indemnification language in the contract usually would contain the phrase “… caused in part…”

As with the Broad Form Indemnification, some states have now made the Intermediate Form Indemnification void. All the more, you should know what Form of indemnity can/cannot be used in the states you operate. 

3. Limited Form Indemnification

This means, “I’ll pay for my negligence, you pay for yours.” Take the situation where the Contractor (indemnitor) is found to be 60% negligent, and the Owner (indemnitee) is 40% negligent. The Contractor would pay 60% of the liabilities costs (its portion), and the Owner pays the remaining 40%. Essentially, this is not a form of indemnity since neither party is paying for the liability of the other.  The indemnification language in the contract usually would contain the phrase “…to the extent of…”

Reading any contract can be time consuming and appear daunting. However, it is in your best interest to have a functional understanding of what your contract is requesting and what your responsibilities are. If you have any questions regarding the language in your contracts, reach out to your Broker or contact TSIB today!

Understanding Contractual Risk Transfer

Topics: Contracts

Written by The TSIB Team