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Most contractors take for granted that the standard indemnity and insurance flowdown language in their subcontracts will protect them from claims of third parties. However, as a recent case in Minnesota demonstrates, it is critical to
remember that state laws differ on the issues of enforceability and interpretation of these clauses.
Interpreting Insurance & Indemnity.
In Katzner v. Kelleher Construction, 545 N.W. 2d 378 (Minn. 1996), the Minnesota Supreme Court was asked to interpret the insurance and indemnity provisions of a design–build subcontract. The provisions were triggered by injuries suffered at the jobsite by Katzner, a masonry worker who stepped on, and fell through, a large piece of Styrofoam that was covering a 20 foot deep hole. After recovering worker's compensation benefits from his employer (Gresser), Katzner sued Ellerbe Becket (the design–builder) and Kelleher Construction (Ellerbe's masonry subcontractor) on grounds that they had negligently maintained an unsafe worksite. Ellerbe and Kelleher cross–claimed against each other and brought third party contribution and indemnity actions against Spancrete (Ellerbe's precast subcontractor) and Gresser (Kelleher's subcontractor).
Contractual Responsibilities.
At the trial court level, Ellerbe moved for summary judgment on its cross–claims against Kelleher and Spancrete, arguing that each was contractually required to defend and indemnify Ellerbe from all
potential liability for Katzner's injuries, including claims arising out of Ellerbe's negligence. The relevant contract provision, virtually identical to Subparagraph 3.18.1 of AIA Document A201, required the subcontractor to indemnify Ellerbe (among others) from claims "caused in whole or in part by any negligent act or omission" of the subcontractor. Ellerbe further argued that the contract required each subcontractor to obtain comprehensive general liability insurance to protect Ellerbe, among others, from any personal injury damages which may arise out of or result from the subcontractor's operations under the contract.
Dividing The Liability.
The trial court rejected Ellerbe's position and concluded that neither Kelleher nor Spancrete had an obligation to indemnify and defend Ellerbe. The jury apportioned liability and found Katzner, Ellerbe, Gresser and Spancrete to be 5%, 20%, 65% and 10% negligent respectively, with Kelleher being found to be without negligence. After reviewing the statutory history in Minnesota of the enforceability of indemnity provisions in construction contracts, the Minnesota Supreme Court concluded that Minnesota's anti–indemnity statute precluded a party to a construction contract from being indemnified for its own negligent acts or omissions and denied Ellerbe's appeal.
The court also provided some interesting insight into the interpretation of the indemnity clause. It found that the clause could be read two ways—"either as an agreement to indemnify Ellerbe from all claims regardless of who is at fault or as an agreement to indemnify Ellerbe from claims caused 'in whole or in part' by any negligent act or omission of [the subcontractor]." Thus, even if it did not violate the anti–indemnity statute, it still did not clearly shift the indemnity risk to Kelleher and Spancrete.
Requiring Insurance Coverage.
Although the court found Ellerbe's indemnity claim to be in violation of the
anti–indemnity statute, it did note that the anti–indemnity statute did not affect the validity of agreements requiring subcontractors to provide insurance coverage for damages which the general contractor may be or may be claimed
liable. However, it found that Ellerbe's insurance clause did not require Kelleher and Spancrete to procure such insurance and that they were only required to have insurance for their own operations and for subcontractors working downstream from them.
A Lesson to General Contractors. This case provides a clear lesson to general contractors about the way in which indemnity and insurance clauses are construed by courts. To make this language "clear and unequivocal," the court suggested that Ellerbe's subcontract should have specifically stated that Kelleher and Spancrete would protect Ellerbe from all claims, "including claims for which Ellerbe may or may not be claimed to be liable."
Even more effective would have been more precise wording of the contract provision intended to require Ellerbe's subcontractors to procure CGL insurance protecting Ellerbe from bodily injury claims. In most instances, this can be accomplished by contract language requiring subcontractors to name the general contractor as an additional insured on their CGL policies, or by requiring the purchase of an owners and contractors protective liability policy.
This information is provided by Victor O. Schinnerer & Company, Inc. as the program administrator for the CNA Professional Liability Insurance Policy for Design Professionals. The CNA/Schinnerer Program is the Commended Program of The American Institute of Architects and the National Society of Professional Engineers.
In each issue of Constructive Comments we answer questions on important contractor issues. Do you have a question you would like answered? Please submit all questions to: Attention: Constructive Comments, at info@schinnerer.com or fax to 301-951-5444.
This article is taken from Constructive Comments, Vol. 1, No. 1. The contributing editors are Michael C. Loulakis and Owen J. Shean,shareholders in the Washington D.C. area law firm of Wickwire Gavin, P.C. They can be reached by phone at (703) 790-8750, or by fax at (703) 448-1801. E-mail can be sent to bmoison@wickwire.com.
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