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All contractors know there are significant risks on every project that are inherent in the construction industry. A contractor's potential risk exposure may be significantly increased through the inclusion of an indemnification clause—also known as a hold harmless clause—in its contract with the owner.
Similarly, a subcontractor's exposure may be significantly increased by a hold harmless agreement in its subcontract that runs in favor of the general contractor. In fact, a subcontractor, under certain circumstances, may be subject to the hold harmless clause contained in the general contractor's agreement with the owner. Obviously, these hold harmless agreements can have far-reaching effects on the contractor's efforts to protect itself against liability for property damage and bodily injury arising out of its construction activities.
Indemnity provisions come in three forms—broad form indemnification, intermediate form indemnification, and limited form indemnification (sometimes referred to as comparative fault form indemnification).
Broad Form Indemnity
The indemnitor (contractor) agrees to be responsible for any and all liability arising out of the contractually provided materials, supplies, equipment or services, including liability that is the result of the sole negligence of the indemnitee. Most states prohibit, or severely limit, the use of broad form indemnity provisions in construction contracts.
Intermediate Form Indemnity
The indemnitor (contractor) agrees to be responsible for liability arising out of the contractually provided materials, supplies, equipment or services that is the result of the indemnitor's sole fault or negligence, as well as liability for which the indemnitee (owner) and indemnitor (contractor) are jointly at fault. The indemnitor is not responsible for liability incurred as a result of the sole fault or negligence of the indemnitee.
Comparative (Limited) Form Indemnity
The indemnitor (contractor) agrees to be responsible for liability arising out of the contractually provided materials, supplies, equipment or services that is the result of the indemnitor's fault or negligence, but this is only to the extent of such fault or negligence. This type of agreement mirrors the obligations imposed by tort law.
It is critically important to the success of a contractor’s risk management program that the contractor can identify the form of the indemnification agreement contained within his contract and also determine whether his insurance program will respond in support of that indemnification. Bear in mind that you may enter into a contract where the indemnification language is legal and enforceable, but your insurance program may not respond.
TSIB’s risk advisors are experienced in the review of upstream and downstream contracts as they relate to your risk management and insurance program. Contact TSIB today for a complimentary risk review and assessment!