Unraveling the mysterious world of Indemnity and Defense
OK, unraveling may be too strong a term, but there is a lot of mystery surrounding the concepts of indemnity and defense. What is indemnity and defense and why should you care? You should care because they are in almost all commercial construction contracts and because generally the indemnity and defense obligations flow downstream from the Owner to the General to the subcontractor and beyond.
For instance, the window contractor fails to properly install the window and rain leaks inside the building and damages the drywall. Or some other trade leaves a trip hazard on an active jobsite and a worker falls and hurts him/herself. The building owner sues the GC and the GC in turn demands indemnity and defense of the subcontractor believed responsible for the damage.
First, although generally seen together, they are two separate obligations. For instance, a party can have an obligation to defend without an obligation to indemnify. And the obligation to defend generally comes before the obligation to indemnify.
So what is Indemnity?
Indemnity: the promise to step into the shoes of another based on a triggering event, like the water intrusion or the injured worker. There is no common law duty to indemnify. Instead, it is said to be a creature of contract, arising because of a promise exchanged between two parties. Its purpose is to allocate risks between parties to the contract and can result in a party without any actual liability for the wrongdoing undertaking to “pay the debt” of the other. This can commonly be seen in insurance policies where the carrier of the individual who ran a red light and struck my car is liable to pay to have my car repaired.
In the construction context, this duty can be triggered when the employee of the subcontractor is injured on the jobsite due to a hazard created by a third party over whom the subcontractor has no control, such as the owner, General, or another subcontractor. Even though the subcontractor didn’t cause the injury, the sub can still be made to indemnify the Project Owner, General, and anyone else for whom the Owner or General promised indemnity.
However, the obligation to indemnify generally doesn’t arise until the party seeking the indemnity is actually found liable for the damage. That’s why you’ll often see that an upstream party made an indemnity demand upon the downstream party (and their insurance carrier), only to see that demand go unanswered. In many instances, that’s because the indemnity obligation is not yet triggered by a finding of actual liability. Now that we’ve answered the question, “What is indemnity?” we can answer, “What is defense?”.
So what is defence?
Defense: the promise to defend a party against claims made against the party to whom the defense is owed. Assuming it is properly triggered, i.e., the claim is one for which defense was promised, it arises as soon as the claim is made and continues until the claim is satisfied or the party is released from its defense obligation. In construction contracts, this can be seen when a triggering event occurs, the Owner or General is sued, and makes demand on the party who promised to defend. Many times, the obligation further authorizes the defendee to choose its own attorney, which can become even more expensive since money is no object when you’re not the one paying the bill.
So, back to why this matters . . . Since 2012, with a few notable exceptions, the most common being injury to an employee of the indemnitee or one over whom the indemnitee exercises control, parties are generally liable for their own wrongdoing and their indemnity obligations extend only to the extent of that wrongdoing. However, the trend these days is for contracts to include ever broader indemnity and defense obligations. Generals especially have taken to requiring indemnity and defense for breach of contract, breach of warranty, violations of safety or pollution laws, and all manner of breaches that should not be the subject of indemnity or defense obligations, many of which are not covered by an insurance policy and therefore would be funded from the downstream party’s own coffers.
A few takeaways:
- Carefully review all contracts before you sign them. If you aren’t sure what they mean, and even if you think you understand them, consult an attorney before signing on for any indemnity or defense obligations.
- Negotiate the key provisions of the contract that are most likely to affect your performance on the job and your potential liability should something go wrong.
- Unless your policy covers claims for breach of contract or breach of warranty, don’t agree to indemnify and defend the upstream party for these kinds of claims.
- Have your insurance agent review the indemnity and insurance terms to ensure that you have insurance to cover the indemnity and defense obligations in the contract and to ensure that you can provide the types of insurance coverage sought.
- Don’t be too quick to agree to indemnify a party under an indemnity demand.
- Put your insurance company on notice as soon as you are served with an indemnity and/or defense demand. Generally, an insurance company can reject a claim if failure to timely notify compromises the carrier’s ability to properly evaluate the claim.
© Karen Ensley and Brian Benitez, Ensley Benitez Law, PC, 2021. All rights reserved. This article is provided for educational reasons exclusively and is not meant to be construed as legal advice. Ensley Benitez Law, PC, will represent you only after being retained and that agreement is made in writing.