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DTCI: Effective risk transfer in a contract

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Lewis Wooton By Lewis S. Wooton

For nearly every major construction project, a construction contract is entered into before construction begins. In almost all of those contracts, provisions are made for the transfer of risk. All too often the parties to the contract fail to effectively transfer their risks in accordance with their intention. As the construction law landscape has evolved, the importance of efficient risk transfer has heightened. The most common methods for transferring risk in construction contracts are indemnity provisions and additional insured provisions. This article discusses the primary considerations to be taken into account when preparing common contractual risk transfer provisions and insuring that the contractual provisions are followed.

1. Indemnity Provisions

Indemnity agreements have been in construction contracts for as long as construction contracts have existed. In its simplest form, an indemnity provision is a clause where one party agrees to answer for liability that another party might incur. Despite the relatively simple purpose of indemnity provisions, careful attention must be paid to indemnity provisions in construction contracts to insure that the provisions comply with the law of the state where the work is to occur. Most states have extensive case law and statutes related to the enforceability of indemnity provisions, and Indiana is no different.

Under Indiana law, a provision in a construction or design contract that purports to indemnify the promisee against liability for the promisee’s sole negligence or willful misconduct is void and unenforceable. See Indiana Code § 26-2-5-1 (2002). Further, a party may agree to indemnify another for the other’s own negligence (not sole negligence), only if the party knowingly and willingly agrees to the indemnification. See GKN v. Starnes, 798 N.E.2d 548, 552 (Ind. Ct. App. 2003). Indiana courts disfavor indemnity provisions because courts “are mindful that to obligate one party for the negligence of another is a harsh burden that a party would not lightly accept.” Id. Indemnity provisions are strictly construed and will not provide indemnification unless the terms of the indemnification are stated in clear and unequivocal terms. Id.

Indiana courts follow a two-step analysis to determine whether an indemnity provision is enforceable. Id. First, the indemnification clause must expressly state in clear and unequivocal terms the area of application. Id. For example, if an indemnification clause is to be applied to a negligence action, the provision must use the “language of negligence,” including words such as liability, damages, actions, omissions, duties, causation, claims, losses, and expenses. Id.

Second, the provision must state in clear and unequivocal terms that it applies to indemnification of the indemnitee by the indemnitor for the indemnitee’s own negligence. Id. There appear to be no exceptions to this rule, and absent express language indicating that the indemnitor agrees to indemnify the indemnitee for the indemnitee’s own negligence, an indemnity provision simply will not be enforced. See Hagerman Construction Corp. v. Long Electric Co., 741 N.E.2d 390 (Ind. Ct. App. 2000) (holding that indemnity provision indicating that promisor will indemnify promisee “to the fullest extent permitted by law” was insufficient language to require promisor to indemnify promisee for promisee’s own negligence where it was not explicitly stated that promisor would indemnify promisee for promisee’s own negligence).

If an indemnity provision contains a clear explanation of the area of applicability and an unequivocal statement that the promisor will indemnify the promisee for the promisee’s own negligence, the provision should be enforceable. However, because of the specific requirements under Indiana law, and the fact that indemnity provisions are disfavored and strictly construed, it makes sense to use an indemnification provision that has already been approved by an Indiana appellate court where possible. The following provision, analyzed in Starnes, was explicitly held to be enforceable:

[Subcontractor] shall indemnify and hold harmless the Owner, the Architect Engineer, and [General Contractor] and their agents and employees from and against all claims, damages, causes of action, losses and expenses, including attorney’s fees, arising out of or resulting from the performance of the work, provided that such claim, damage, loss or expense (1) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the work itself) including the loss of use resulting therefrom; and (2) is caused in whole or in part by an negligent act or omission of [Subcontractor]or any of his subcontractors, anyone directly or indirectly employed by any of them or for anyone for whose acts any of them may be liable, regardless of whether it is caused in part by a party indemnified hereunder.

Id. at 550.

If the provision shown above accurately portrays the indemnity agreement that your client wants and expects, you should review your client’s contract documents to determine whether the substantial equivalent of the above provision is in the contract. If it is not, consider inserting the indemnification agreement shown above. A little tweaking of your clients’ contracts now may lead to big savings down the road.

2. Additional Insured Provisions

The first step toward insuring that the most beneficial additional insured coverage is provided for your client is to draft a proper additional insured provision into each construction contract. A provision that states “subcontractor shall obtain commercial general liability insurance and name general contractor as an additional insured under the policy” is simply insufficient to reflect the true intent of the parties in most situations.

Additional insured endorsements come in numerous shapes and sizes. The insurance industry has created dozens of endorsements to suit a variety of purposes. Most insurance companies give contractors the option to purchase a “blanket” additional insured endorsement. Blanket additional insured endorsements generally provide additional insured coverage if it is required in a written contract or agreement. Some insurance companies provide additional insured coverage by “schedule” or “endorsement” where the additional insured is specifically named in the declarations page or on the face of the endorsement. Whether a contractor is named as an additional insured in a blanket additional insured endorsement or by schedule, there are several things that an attorney can do to insure that the contractor will be provided with the insurance coverage that he desires.

Because of the significant differences in the various additional insured endorsements used by the insurance industry, the additional insured provision in your client’s contract should specifically state what type of insurance is required. If your client wants to be covered for claims arising out of a subcontractor’s work after the subcontractor has completed the job, the additional insured provision should explicitly state that the insurance coverage must apply to “ongoing operations” and “completed operations.” Many additional insured endorsements terminate coverage for the additional insured the moment the named insured’s work for the additional insured is completed or put to use. The failure to specify that the coverage must apply to completed operations may result in your client being left without the benefit of additional insured coverage immediately upon the subcontractor’s completion of his work. Further, the additional insured provision should indicate that the additional insured coverage is to be “primary and noncontributory.” Many additional insured endorsements provide that the coverage provided to the additional insured is excess over the additional insured’s own coverage unless the contractual agreement requires that it be primary and noncontributory. Thus, unless it is specified in the construction contract that the additional insured coverage is primary and noncontributory, the additional insured coverage may not provide any coverage at all to a contractor until the contractor’s own coverage is exhausted. An additional insured provision in a construction contract should also specify the limits of the insurance to be provided. Otherwise, the available limits under the subcontractor’s policy may be far too low for the risk that will be inherent in the task to be completed. Keep in mind that the inclusion of an additional insured on a policy does not increase the limits. If there is an occurrence, the limits shown on the declaration page must be shared by the named insured and any additional insureds.

Once a proper additional insured provision has been placed in the construction contract and agreed upon by the parties, the next step is insuring that the parties adhere to the terms of the contract. The most common way that owners and general contractors insure that their subcontractors are adhering to the insurance requirements in the policy is through collection of a certificate of insurance. A certificate of insurance should be obtained before allowing the subcontractor to begin work on the project. The certificate should be carefully reviewed to insure that the dates of the respective policies cover the anticipated construction dates, the policies have adequate limits, and there is some indication that the additional insured coverage comports with the requirements of the policy (i.e., includes completed operations coverage, is primary and noncontributory, etc.) If the subcontractor is allowed to start work without providing a certificate of insurance or after providing a certificate of insurance that shows improper coverage, the obligations in the construction contract related to additional insured coverage may be waived.

Whenever possible, the actual insurance policy of the subcontractor or the additional insured endorsement should be obtained before the start of the work because certificates of insurance do not actually provide any coverage. For example, a certificate of insurance that shows an entity as an additional insured will not provide additional insured status to the entity if the insurance policy does not list the entity as an additional insured. See TIG Ins. Co. v. Sedgwick James of Washington, 276 F.3d 754 (5th Cir. 2002). The ACORD 25 form, a standard certificate of insurance form used by insurance agencies, was amended in 2009 to include the following disclaimer near the top of the form:

This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies below. This certificate of insurance does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder.

Practically speaking, it may be difficult to obtain insurance policies from every subcontractor for every construction job. The receipt and careful review of the certificate of insurance is the next best thing. However, for especially large jobs, ask to see the additional insured endorsement in the insured’s policy before allowing the subcontractor to begin work.

Finally, take a moment to think about the type of work that your client is performing and whether his work will be covered under the subcontractor’s policy. For example, if your client performs architectural or design work, being named as an additional insured on a commercial general liability policy is unlikely to provide your client with any protection because of the professional liability exclusion found in most commercial general liability policies. If your client provides, “professional services,” you must insure that any policy providing additional insured coverage contains an endorsement for professional liability coverage.

The often unpredictable liability of general contractors coupled with the tough economic times that many contractors are now facing makes effective indemnity and additional insured provisions a critical part of any contractor’s construction contract. As any attorney who has tried to sort out the risk transfer obligations in a construction contract after an event triggering liability has occurred can attest, more often than not, there is significant confusion about the parties’ rights and obligations. The last thing that a client wants to hear following an accident is that the language in his contract that he thought would protect him is meaningless. Following the principles in this article is a good start to drafting effective risk transfer provisions that will provide your client with the protection he seeks in the event of an accident.

____________

Mr. Wooton is an associate in the Indianapolis firm of Lewis Wagner and is a member of the DTCI. The opinions in this article are those of the author.

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  1. Am I the only one who sees that the City is essentially giving away the MSA site AND giving millions to build new buildings on the site when this site would be the perfect place for the Justice Complex? Across from City-County, check; keeping it centrally located, check, etc. It's my understanding that the GM site must be purchased by the City from Motors Liquidation Company. STOP WASTING WHAT WE ALREADY HAVE AND OUR TAX DOLLARS! The Ballard Administration has not been known for it's common sense...never voted for him and never will!

  2. This guy sounds like the classic molester/manipulator.

  3. Louis D. Brandeis was born in 1856. At 9 years of age it would have been 1865. The Brandeis family did not own slaves. My source Louis D. Brandeis: A Life, by Melvin L. Urofsky.

  4. My name is Matthew Lucas Major, I recently went through a jury trial in Bloomington , In. It was the week of Feb 19-21. Although I have been incarcerated since August 5, 2014. The reason I 'am writing to you sir is on the 21 of February the jury came in with a very excessive and wrongful verdict of guilty on 6 child molesting charges against my daughter who was 9 at the time I was accused. I also had 2 other Felonies one of Intimidation and 1 of Sexual Vicarious Gratification. Judge Marc Kellam on the second day of trial gave me a not guilty on those 2 felonies. The jury was sent out during that time and when brought back Judge Kellam told them to not concern themselves with the 2 Felonies that he ruled on them. They were told to not let evidence they had already heard influence there verdicts. I never in my life touched any child sexually and definitely not with my own daughter. When I was arrested Detective Shawn Karr told me I would be convicted guilty just on my daughters word even without evidence. That's just what happened. my public defender did me so wrong he never once proved to the court and jury all the lies the child told, and Jeremy Noel my public defender could of proven the lies easily. The stories in Serenity's depositions and Forensic interview changed and were not consistent as Prosecutor Darcie Fawcett claimed they were. Yet my attorney never mentioned that. The facts that the child accused me of full penetration in her vagina and rectum was proven lies. Doctor Roberta Hibbard of Riley hospital in Indianapolis confirmed Serenity's hymen intact, no scars, no tearing, no signs of rape to her. Yet my attorney didn't use that knowledge . the DNA was all in my favor. I tell you I will spend my entire life in prison going through rape and beatings etc. even Judge Kellam abused his authority by telling the jurors to listen and believe what the prosecutors side in evidence like my daughters testimony. In one interview with the detectives my daughter got flustered with her mom and said on camera " I'm saying what you told me to mom"!! Yet Mr. Noel said nor did anything to even resemble a defense attorney. Judge Kellam allowed edited version of a taped conversation between the child and her mother. Also Judge Kellam allowed the Prosecutor too bring in to my case a knife found under my seat, the knife wasn't part of my case. She was allowed by my attorney and the judge to put a huge picture of it on the screen and huge picture of my naked privates in a full courtroom and open court. Ms. Fawcett says to jury see how easy Mr. Major could reach the knife and cut his Childs throat. Even though I had no weapons charge against these cases. This gave the jurors prejudice thought against me thinking I threatened her with that knife and how scared she would of been knowing i could get it and kill her. On my sentencing court March 19, 2014 my public defender told Judge Kellam he wish to resign from being my attorney and wished for the court to give me outside council to file a error to trial or appeal. We were denied. Now after openly knowing my public defender don't want to represent me he has to. Well when as parents we make our kids clean a room when they really don't wish to, well the child will but don't mean she will do a good job, that's where I'm at with Mr. Noel. please dont ignore mine and my families pleas for your help . we have all the legal proof you could need to prove Im innocent. Please dont make my spend years in prison innocent when you can fix this wrong. Im not saying Im a perfect man or that I was a perfect dad to my 2 children none of us are. Ive made some bad choices in life and I paid for them. But I didnt ever touch or rape my daughter . I love my children with all my heart. And now through needing attention and a ex-wife who told my granny several times she wish she could put me in prison to get me out of their lives. Well my ex finally accomplished her goal. Sad part is she is destroying our daughter with all this horrific lies and things she taught my daughter to say. My daughter will need therapist to ever hope for a chance of a normal life after what she had done to her by her mom and their side of the family. My daughter told everyone even on stand she had a dream months before i supposedly molested her in this dream I was molesting her and when I finally did it matched her dream perfectly. She admitted to watching movies about little girls being molested and watching U-Tube videos about child molesting all before it happened supposedly to her. Doesn't that sound very unusual that a non molested 9 yr old would need to know so much about being molested? The only reason I could think a 9 year old would need so much information is to be prepared to know what to say and be able to say how it felt what took place etc.. So when questioned by authorities she would be prepared. And there again sir if a parent is pre grooming a 9 year old child she would need intimate details . Like telling her daughter about a couple moles on my private area. The child admitted to sneaking my cell and looking many many times at nudes of me and my girlfriend even one where my penis was entering my girlfriends vagina. In that picture my moles are obvious. Yet when prosecutor showed everyone in court my privates and pictures of the moles she said the only way the child would know about them is if she saw them for herself. My attorney once again said nothing about the pictures my child saw. Or could a ex-wife be able to describe my moles to help her case against getting rid of me? I beg you help me. This is my very existence. Ive lost everything , a good job, a wonderful girlfriend, my freedom, but worse thing Ive lost is my children. They were my reason to get up every morning and strive to be better. The wonderful bond I had with my Serenity is gone. After this I would be afraid to even hug her for fear of what next can they do to me. I'm not afraid to tell you I sit here in this cell and try to hold back my tears. Everyone knows you cant show weakness in prison. My life has already been threatened here at Wabash Valley Prison. After only 3 days of arrival. I was tricked into signing a waiver now Im in G Block General Population with 6 child molesting felony charges. Mrs. Hart as a 18 year old I almost died hooked to machines in hospital almost 1 month and now I know that fear was childish compared to this . I cant help but put emotions in this, after all Mrs. Hart Im human and God help Me I never been more afraid in my life. I didnt hurt my little girl I didnt touch her sexually. As much as it shreds me and fills my mind what Im facing I worry more about my mom and granny because of their great love for me mam they are suffering so deeply. I aint done this things but my loved ones suffering right along beside me and If you take my case you will be in essence freeing them also. I sent momma this letter and asked her to email it to you. I'm scared I have been done so unjustly by our legal system and I need you to fix this and give me freedom. I ask you please don't just ignore my pleas. Here in America its nice to be able to trust our legal justice system, well they destroyed my and my loved ones trust in our justice system . And I'm trusting in You !!! My entire family is suffering this nightmare with me. My 77 year old granny had a stroke and isn't doing so well. My single mother that raised 3 kids alone is dying from Lupus and since my arrest has stayed so sick and weary. Our lives torn to peices by a government I was taught I could trust in. my momma has tried so many innocent project and wrongfully accused and cant get anywhere. please please help me. A quote from the late Nelson Mandela: To be free is not merely to cast off ones chains, But to live in a way that respects and enhances The Freedom Of Others. I have Faith in you and your clinic to cast my chains off and give me freedom I do deserve as a wrongfully accused Man, son, brother, father, friend. Matthew Major DOC# 246179 Cause # : 53c02-1308-FA-000779 God Bless you. Please contact me with your decision so I know you made a life changing decision for me , just please at least write me so I know you care enough about your citizens to respond to cries for your help. You can speak openly with my mother Charlotte Spain (828) 476-0406: 71 Lakeview Dr. Canton, NC 28716 Thank You Matthew Major I know yall get thousands of request and inmates claiming innocence, and each person who are innocent deserve to have organizations like yours willing to fight for them and I give yall so much Thanks and I thank God everyday yall are out there caring enough to help free the innocents. Since discovering firsthand how easily lives and families can be destroyed by Poor Defense attorneys not doing their job . And Prosecutors allowed to do as they please in court

  5. Frankly, it is tragic that you are even considering going to an expensive, unaccredited "law school." It is extremely difficult to get a job with a degree from a real school. If you are going to make the investment of time, money, and tears into law school, it should not be to a place that won't actually enable you to practice law when you graduate.

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