Making sure you take adequate risk-shifting precautions is a crucial step in the construction process. A common mechanism used in the risk management endeavor is an indemnification clause. But if it’s not drafted properly, such a provision will be unenforceable. In this article, we’ll go over indemnification clause basics.
Understanding Indemnity
Indemnification clauses (sometimes referred to as hold harmless clauses) come standard in most prime and subcontract agreements as boilerplate language, transferring liability from one party to another. The indemnification clause meaning—it’s essentially a promise by one party to cover any losses by another party if something happens that causes you harm—including if someone sues you.
This risk transfer usually flows downstream from the owner to the general contractor, down to the subcontractors. Although this language is often considered standard, it should still be reviewed carefully and revised to suit the needs of the parties. This may take some negotiation, which can be worrisome to a general contractor or subcontractor itching for a particular job, but it is necessary to ensure you do not find yourself biting off more than you expected.
Texas Anti-Indemnity Statute
Most states have implemented various forms of anti-indemnity laws in an effort to promote fairness and reduce the obligation of lower-tier contractors to the power players on the construction site. The primary purpose of these laws is to eliminate so-called “board indemnification” clauses which would obligate a lower-tier contractor to indemnify the owner or general contractor for all claims, costs, losses, and damages that result from either party’s negligence (even the sole negligence of the other party). Although the parties do have the freedom to contract, anti-indemnity laws recognize the inequality of bargaining power between typical construction players and operates to void board indemnity clause as against public policy. The Texas anti-indemnity statute can be found in Insurance Code Chapter 151 and applies to all commercial construction contracts entered on or before January 1, 2012.
Duty to Defend
Most indemnity clauses do not include the duty to defend, thus requiring the indemnitee to fund the defense of third-party claims and seek reimbursement later. Although including the duty to defend could ease cashflow concerns upfront, if not drafted properly, you could forfeit control over defense strategy and settlement options. Such terms should be negotiated carefully and outlined explicitly in the contract.
Conclusion
Engaging the services of an experienced attorney to draft or review a prime or subcontract agreement containing an indemnity clause can significantly reduce your exposure. If you require legal help, contact one of the qualified attorneys at our office for assistance.