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From time to time, we will be posting excerpts from the Malecki on Insurance monthly newsletter.

To subscribe to the Malecki on Insurance monthly newsletter, please contact Malecki Communications Company at (859) 441-4045. Here is an excerpt which may be very interesting.

Question:  From time-to-time, we hear that most states now have anti-indemnity statutes. The ones that hold void and unenforceable any sole or partial fault assumptions of liability imposed upon subcontractors by owners (developers) and/or general contractors. We understand that, while most hold harmless agreements may not mandate sole or partial fault transfers of liability, some contractual assumptions could fall between the cracks and end up not being covered by insurance.

Our question is this: What do we have to be careful about when dealing with contractors insofar as their liability insurance needs having to do with contractual liability?  Any assistance you can provide would be appreciated.

Answer: You are right that insofar as rumors go; that is, many people are under the assumption that most states hold void and unenforceable the sole or partial fault of others that result in third party injury or damage. You need to be careful, however, about rumors because they seldom, if ever, are true.

Before we answer your question, we need to explain a few basics. The first is that the two parties to a contractual liability agreement are the indemnitee and indemnitor. The indemnitee is the person or organization that is attempting to impose its contractual terms upon the other party, who is the indemnitor.
One way to remember the difference between these two terms is that the indemnitor either has to accept the indemnitee’s contractual terms or the indemnitor will not be awarded the work. The indemnitor, in other words, does not have the bargaining power. That is possessed by the indemnitee.

The second item that needs to be made clear is that indemnitor does not assume the indemnitee’s liability. The indemnitee still is answerable for its torts leading to a third party’s injury or damage. What the indemnitor is assuming is the financial consequences of the indemnitee’s tort liability. So, for example, if the indemnitee causes an accident that results in injury to a person, the indemnitor will have to assume the damages, provided, of course, the assumption of sole or partial fault was accepted and is otherwise permitted by statute.

The third item that needs to be pointed out is the steps in determining contractual liability coverage. The first step is to determine the degree of financial consequences being assumed in a contract. (1) Limited or the sole fault of the indemnitor; (2) Intermediate or the sole fault of the indemnitor and partial fault of the indemnitee; or (3) Broad or the sole fault of the indemnitee.  The second step is to determine if that assumption is permitted by statute. The third step is to determine if the assumption is permitted by law, and if the CGL policy covers that liability.

These steps were largely ignored because indemnitees commonly requested to be additional insureds and the endorsements issued were broad in scope. Today, these endorsements can be very limited so that contractual liability may be broader than additional insured status. The problem today is to make sure that the CGL policy is not modified with a more limiting contractual liability endorsement. One such endorsement is Contractual Liability Limitation CG 2239 which deletes coverage for any partial or sole fault of the indemnitee. Amendment of Insured Contract Definition CG 24 26 limits coverage to the joint fault of the indemnitee and indemnitor. Thus, unless the CGL policy is not endorsed, it could provide coverage for the sole fault of the indemnitee.

Accompanying this answer are some charts prepared by Malecki Communications Company dealing with the status of the various states having to do with whether sole and/or partial fault is void and unenforceable. When reviewing these, keep in mind the following:

• The fact that a state may hold void and unenforceable sole or partial fault assumptions may be tempered by an exception. In other words, some state statutes make exceptions where, if insurance is provided, these assumption can still be covered.
• Some states do not have statutes. The status of some states is based on case law, rather than statute.
• Other states clearly state that no contractual assumptions are permitted other than those limited to the sole fault of the indemnitor. On that score, it does not matter whether an indemnitor agrees in a written contract or not to be responsible for its own acts or omissions, it is still responsible at common law. In other words, everyone is responsible for his or her own acts or omissions, whether such responsibility is reduced to contract or not.
• These charts are for information purposes only. They were not prepared by an attorney and do not profess to be legal documents. They also were prepared this year and may be undergoing change. They also are abbreviated for purposes of singling out the status insofar as construction work is concerned.  These charts nonetheless should give readers the opportunity to conduct their own research on them to determine what these laws prescribe.

After reviewing these charts, one of the conclusions should quell the rumor that most states hold void and unenforceable sole and/or partial fault assumptions of liability, given the exceptions. Equally as important to remember is that many insurers today are issued CGL policies with contractual liability limitation endorsements. If endorsement CG 22 39 applies, and an indemnitor has assumed the sole or partial fault of the indemnitee, they may be a gap. The same holds true if CG 24 26 applies and indemnitor has assumed the sole fault of the indemnitee.  In other words, potential gaps in coverage are still possible and having an indemnitor’s CGL policy modified with an additional insured endorsement for the indemnitee may not help—given how limited they can be.

States Where Sole Or Partial Fault Is Void,   
Subject to Insurance Exceptions

• Section 22-9-214 applies to public construction work. Section 4-56-104 is similar but makes no reference to public construction work 
• Any indemnification imposed on any subcontractor having to do with residential

construction work is void and unenforceable. For other construction work, the statute does not affect the validity of any insurance contract issued by an admitted insurer.

• This statute does not apply to workers compensation, project specific insurance,

owners and contractors protective liability, builders risk, installation coverage,
project management protective liability, owner-controlled  insurance and
contractor-controlled insurance programs.

• Additional insured status for sole fault is void and unenforceable.
• Prohibition does not apply to a additional insured or indemnity agreements subject to specified limits of insurance. Pending Senate Bill 1077 seeks to make anti-indemnification inapplicable to project-specific insurance, and owners and contractors protective liability insurance, project management protective liability insurance or builders risk.
• Statute permits contract to provide project-specific insurance, owners and contractors protective insurance, project management protective liability insurance or builders risk insurance.
• This law does not apply to the Department of Transportation, railroads, and public utilities, as defined in the law.
• Based on a split of two court decisions, the status of whether an additional insured naming the indemnitee is permitted is in limbo. The statute, itself, is silent with this matter. 
• Prohibition does not apply to construction bonds, project specific insurance, owner and contractors protective liability insurance, project management protective liability insurance, or builders risk.

    (10)  Section 2252.902 applies to public work projects.

Researched and Prepared by Donald S. Malecki, CPCU
For Informational Purposes Only
The comments and observations are not intended to be legal opinions nor the practice of law. No action or inaction should be taken on the basis of these comments or observations without review of these statutes or proposed legislation or by appropriate legal counsel

11/08

 

States With or Without Anti-Indemnity Statutes Not Voiding HH Provisions

(1)  McNally & Nimergood v. Neumann/Kiewit Constructors, Inc. 648 N.W.2d 564 (2002).
(2)  International Paper Co. v. A & A Brochu, 899 F. Supp. 715 (1995).
(3)  Aetna C&S Co. v. L.K. Comstock & Co., 488 F. Supp. 732 (1980)
(4)  Simpson Paper Co. v. Vescom Corp., 702 A.2d 86 (1997)
(5)  Dykstra v. McKee & Co., 301 N.W.2d 201 (1981)
(6)  Wyoming Johnson, Inc. v. Stag Industries, Inc., 662 P.2d 96 (1983)

States With Anti-Indemnity Statutes Holding Void Sole Negligence

Researched and Prepared by Donald S. Malecki, CPCU
For Informational Purposes Only
The comments and observations are not intended to be legal opinions nor the practice of law. No action or inaction should be taken on the basis of these comments or observations without review of these statutes or proposed legislation or by appropriate legal counsel

11/08

                States With Anti-Indemnity Statutes and No Insurance Exceptions

• Section 32-1159 applies to private construction and design services and permits concurrent negligence of both parties. Section 34-226 applies to public construction and design services and hold unenforceable both sole and partial fault of the indemnitee.

     (2)    Section 13-50.5-102 applies to construction work with public entities.
While it does not apply to insurance, such insurance cannot be used to
insure a public entities negligence.  Section 13-21-111.5.  While sole or
partial fault transfers are void and unenforceable, and there is an
insurance exception and additional insured coverage is limited solely to
the acts or omissions of the named insured.    

•    Section 725.06  Sole or partial fault of the indemnitee is void and

 unenforceable—except for a monetary limitation in the contract that
bears a reasonable relationship to the contract. Section 725.08 applies
solely to design services with public agencies and holds void and
unenforceable both sole and partial fault of the indemnitee. While the
statute is silent as to any insurance exception, case law has held the
statute inapplicable to insurance . See Cone Bros. Contracting  v.
Ashland-Warren, Inc., 458 S.2d 851 (1984).

(4)    Does not permit issuance of additional insured endorsement covering
any liability of the indemnitee.

•    Case law has permitted insurance for the indemnitee’s sole fault.  

Researched and Prepared by Donald S. Malecki, CPCU
For Informational Purposes Only

11/08

The MCS-90 Book:
Truckers Versus Insurers and the Government Makes Three, Gregory G.
Deimling and others.
International Risk Management Institute, Inc.: Dallas, TX, First Edition,
2004. Telephone: 1-800-827-4242

The Additional Insured Book, Donald S. Malecki and others,
International Risk Management Institute, Inc., Dallas, TX, Fifth Edition, 2004. Telephone:1-800-827-4242.

The Commercial General Liability Book, Donald S. Malecki and Arthur Flitner,
National Underwriter Company, Erlanger, KY, Eighth Edition, 2005.
Telephone: (859) 692-2100