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Understanding Indemnification Clauses

Construction Teamwork

The scariest clause a subcontractor can face in a subcontract agreement is the dreaded indemnification clause. But an enforceable indemnification clause can also act to protect you against lower-level subcontractors. In addition, the language in the indemnification clause—like the whole contract—is negotiable! In this article, we’ll give you some basics of indemnification clauses.

Why do you need an indemnification clause?

An indemnification clause or indemnity clause is a contractual provision where one party undertakes to indemnify (guard, secure, or compensate) the other for damage or loss. Businesses in all industries use indemnification clauses, but they are a fundamental part of many construction contacts because they allow parties such as contractors to control the risk of liability when the other party, such as subcontractors, assumes responsibility.

Of course, it’s understandable that a subcontractor eager to accept a particular job may not want to risk losing it trying to negotiate the terms of an indemnification clause. However, failure to do so could cost you so much more. Luckily, Texas offers some protections, but it is always better to negotiate beneficial terms upfront. After all, it could be very expensive having Texas law enforced in court.

Indemnity Clauses in Texas

Texas is one of the many states that have special laws to protect individuals and businesses from overbroad indemnity clauses. In the past, general contractors would often attempt to place all of the risks on its subcontractors—even for the general contractor’s mistakes! Recognizing what an unfair deal that is, Texas stepped up and created a law to limit such indemnification clauses.

The Texas Anti-Indemnity Statute (Texas Insurance Code § 151.102) took effect in January 2012 after HB 2093 passed. This law impacts Texas cases because it limits and prohibits certain agreements to shift liability risks for negligence and similar torts from the indemnitee to a third party—especially those related to construction.

The flip side to this means that any overbroad indemnification clauses you have your sub-subs sign may be ruled void. In other words, if one party is obliged to compensate the other for a claim arising out of the claimant’s fault, any provision relating to compensation will also be void.

What should you do?

Have a qualified attorney review your subcontract agreements! An experienced attorney can provide you with helpful negotiation strategies or negotiate directly on your behalf for a fair contract. The general contractor may not be aware that its subcontract agreement contains an unenforceable indemnification clause and should appreciate the heads up. Additionally, having an attorney review and/or draft a subcontract agreement for your subs will help ensure its enforceability. If you require legal help, contact one of the qualified attorneys at our office for assistance.

Karalynn Cromeens

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