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Construction Contracts: What You Need to Know About Indemnity and Insurance to Write and Enforceable Contract

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Rachel Osdoba

on 11 November 2014

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Transcript of Construction Contracts: What You Need to Know About Indemnity and Insurance to Write and Enforceable Contract

General
Contractor

Subcontractor
Subcontractor
Subcontractor
Subcontractor
Plaintiff
Developer
Subcontractor Carrier
Construction Contracts:

What You Need to Know About Indemnity and Insurance to Write an Enforceable Contract
History
Way Back When
1973
1979
1984
1970s: Broad-Form Indemnity Allowed
Broad-form (AGC) indemnity agreement was considered
enforceable
"even though the particular injury was caused by the negligence of [the general contractor]." Christy v. Menasha Corporation (SC 1973).
The Court uses
"fair construction"
of the contractual terms to allow broad-form indemnity. Johnson v. McGough Const. Co., Inc. (SC 1980).
Early 1980s: Strict Construction
Broad-form indemnity agreements are contrary to the policy that "each tortfeasor accept responsibility for damages commensurate with its own relative culpability." Farmington Plumbing & Heating Co. v. Fisher Sand & Aggregate, Inc. (SC 1979).
"Indemnity agreements are to be
strictly construed
when the [general contractor] seeks to be indemnified for its own negligence." Id.
1984: Chapter 337 Enacted

[I]f you’re wrong, you ought to pay for your wrong
. . . . [I]f you’re responsible, I think it’s an incentive to be more careful.” (comments of Representative Dempsey before House Subcommittee).

"The rationale [behind Chapter 337] is that it really doesn’t do us any good to have tort liability if people can actually avoid their liability. . . .
[T]he whole notion behind our tort law is that people pay for the damages they cause and . . . that keeps them from . . . acting in a negligent manner. It encourages responsible behavior, and that’s the general thrust of the bill.
"
(comments of Senator Peterson before Senate Subcommittee).
337.02 UNENFORCEABILITY OF CERTAIN AGREEMENTS.
An indemnification agreement
contained in, or executed in connection with, a building and construction contract
is unenforceable

except to the extent that: (1)

the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission
, including breach of a specific contractual duty,
of the promisor
or the promisor's independent contractors, agents, employees, or delegatees; or (2) an owner, a responsible party, or a governmental entity agrees to indemnify a contractor directly or through another contractor with respect to strict liability under environmental laws.
Chapter 337
Traditional Model
Plaintiff
General Contractor/
Developer
AI
Indemnity
Subcontractors/Carriers
Wrap Model
(a/k/a OCIPs & CCIPs)
Plaintiff
One Policy
GC
Sub
Developer
Proper Contracts
Tender & Sue
Coupling Argument
Response to Tenders
Broad-Form Indemnity is Prohibited
All that's left is...
Result:
(a) Except as otherwise provided in paragraph (b), sections 337.01 to 337.05 do not affect the validity of agreements whereby a promisor [subcontractor] agrees to provide specific insurance coverage for the benefit of others.

(b) A provision that requires a party to
provide insurance coverage
to one or more other parties, including third parties,
for the negligence or intentional acts or omissions of any of those other parties
, including third parties, is against public policy and is
void and unenforceable
.

(c) Paragraph (b) does not affect the validity of a provision that requires a party to provide or obtain workers’ compensation insurance, construction performance or payment bonds, or
project-specific insurance
, including, without limitation, builder’s risk policies or owner or contractor-controlled insurance programs or policies.

(d) Paragraph (b) does not affect the validity of a provision that requires the promisor [subcontractor] to provide or obtain insurance coverage for the promisee’s [general contractor’s]
vicarious liability
, or liability imposed by warranty, arising out of the acts or omissions of the promisor [subcontractor].

August 1, 2013 Amendment to Section 337.05, subd. 1
Construction Contracts:
What You Need to Know About Indemnity and Insurance to Write an Enforceable Contract

Contribution
Common Law!
Indemnity
Signed AGC language
Certificates of insurance
CGL coverage
AI Endorsement
Completed Operations
Remember: Tenders are contract based... must have privity of contract
Tender defense/indemnity to subcontractor pursuant to subcontract
Sue for breach if rejected
Tender defense/indemnity to AI insurer (i.e. subcontractor's carrier) pursuant to AI endorsement
Sue declaratory judgement if rejected
Broad-form indemnity agreements are permitted if accompanied by an insurance-procurement provision
"The agreement to provide insurance, therefore,
converted
Paragraph 7 [the AGC
indemnity/insurance provision
]
from an unenforceable indemnification agreement to an enforceable insurance agreement
allowed under section 337.05. Van Vickle v. C.W. Scheurer & Sons, Inc. (AC 1996).

The at-issue provision is "indeed an
indemnity provision
which is
saved
from invalidity only by its requirement that the indemnitor's [subcontractor's] contractually assumed liability be
insured
." Hurlburt v. N. States Power Co. (SC 1996).
Deny broad-form tender:
Prohibited by Section 337.02.
Almost always deny narrow-form tender
Contingent on jury determination.
What about defense tender?
There must be a
causal link
between the subcontractor's work and the plaintiff's damage. Anstine v. Lake Darling Ranch. (SC 1975).
This is rarely established at tender stage.
Engineering & Construction Innovations, Inc. v. L.H. Bolduc Co., Inc. (SC 2013)
“Determining whether [the subcontractor] is required to indemnify [the general contractor] in this case is ultimately a question of
statutory interpretation
.”
The statute “renders unenforceable indemnification agreements in which a party assumes responsibility to pay for damages that are not caused by the party’s own wrongful conduct.” (
no broad-form indemnity
)
"Therefore, when faced with questions about the enforceability of an indemnification provision in a construction contract, we must 'consider[ ] the combined effect of sections 337.02 and 337.05,' and '
even though an indemnification provision may be unenforceable under section 337.02, a promise to purchase insurance to cover any negligent acts by the promisee [general contractor] is valid and enforceable.
'"
But then...
“[W]e first consider whether indemnification in this situation would violate Minn. Stat. § 337.02 and then whether any indemnification obligation ordinarily barred by section 337.02 is
saved
by Minn. Stat. § 337.05.”
No broad-form contractual indemnity.
"Even if the language [of the subcontract] was clearly and unequivocally intended to indemnify [the general contractor] from its own negligence, section 337.02 would prohibit Minnesota courts from enforcing it." Katzner v. Kelleher Construction (SC 1996).
“[N]o party can be indemnified when its own negligent acts or omissions are the underlying cause of the injury or damages. This restriction ensures that each party remains responsible for its own negligent actions.” Seward Hous. Corp. v. Conroy Bros. (SC 1998).
“[A]n attempt to indemnify a party to a construction contract from liability for that party's own actions is unenforceable in Minnesota..." Eng'g & Const. Innovations, Inc. v. L.H. Bolduc Co., Inc. (AC 2011).
“[S]ection 337.02 prohibits indemnification of promisees . . . for their own negligence.” Seifert v. Regents of Univ. of Minnesota. (AC 1993).
Insurance agreements are okay.
"[T]he legislature both anticipated and approved

a long-standing practice in the construction industry by which the
parties to a subcontract could agree that one party would purchase insurance that would protect “others”
involved in the performance of the construction project....
[T]he parties are free to place the risk of loss upon an insurer by requiring one of the parties to insure against that risk
." Holmes v. Watson-Forsberg. (SC 1992).
“[I]ndemnity agreements pertaining to construction contracts are by statute unenforceable, except to the extent that they require one party to provide insurance coverage for another.” Lake Cable Partners v. Interstate Power Co. (AC 1997).
If subcontractor fails to get insurance, the subcontractor becomes the insurance company (sometimes).
Together, sections 337.02 and 337.05 indicate that a broad form indemnity provision is unenforceable but that an insurance-procurement provision is enforceable. Here, the subcontractor failed to obtain the requested insurance, so the general contractor could seek indemnity directly from the subcontractor. Van Vickle v. C.W. Scheurer & Sons, Inc. (AC 1996).
In Seward, the court determined that the general contractor's claim was not within the scope of specified coverage (as required under Section 337.05, subd. 2), so the Court rejected the general contractor's indemnity claim. Seward Hous. Corp. v. Conroy Bros. Co. (SC 1998).
337.05 AGREEMENTS TO INSURE.
Subd. 1.Agreements valid.
Sections 337.01 to 337.05 do not affect the validity of agreements whereby a promisor agrees to provide specific insurance coverage for the benefit of others.

Subd. 2.
Indemnification for breach of agreement.
If:
(a)
a promisor
agrees to provide
specific types and limits of insurance; and
(b)
a claim arises
within the scope
of the specified insurance;
and
(c)
the promisor
did not obtain
and keep in force the specified insurance;
then, as to that claim and regardless of section 337.02, the promisee shall have
indemnification

from the promisor
to the same extent as the specified insurance.
Senator Vicki Jensen introducing her bill (amending section 337.05, subd. 1) to the Commerce Committee
Al Gerhardt, Kraus-Anderson
Dave Speedling, Speedling Builders
Justice Anderson's Concurrence in Hurlburt (SC 1996)
I disagree with the majority’s statement that paragraph 7 is an “indemnity provision which is saved from invalidity only by its requirement that the indemnitor’s [subcontractor’s] contractually assumed liability be insured.”
... In my view, the statutory scheme enacted by the legislature in Chapter 337 relating to building and construction contracts, and supported by this court in Holmes v. Watson–Forsberg, 488 N.W.2d 473 (Minn.1992), supports the ability of the parties to contract to “provide specific insurance coverage for the benefit of others.” Minn. Stat. § 337.05, subd. 1 (1994).

The legislature has declared that agreements to indemnify for negligence beyond one’s own are unenforceable. Minn. Stat. § 337.02 (1994). But, in section 337.05, the legislature specifically provided that
the unenforceability of an agreement to indemnify for negligence beyond one’s own does not affect the validity of an agreement to provide specific insurance.
Rather than indemnity agreements and agreements to provide specific insurance being “invariably linked,” these agreements, while appearing in the same document, are treated by the legislature in vastly different ways.
Agreements to indemnify beyond one’s own negligence are disfavored, that is, rendered unenforceable. Agreements to provide specific insurance are favored, and are enforceable. Minn. Stat. § 337.05.

Heavy motion practice.
Multi-party construction cases are expensive and potentially volatile because of the risk-shifting provisions...most cases settle (creating little caselaw).
General contractors have seen success.
Previously,
30%
Now,
-10% to 10%
(according to mediator John Harens)
What is "project-specific insurance"?
In the old days...
Dan Singel
AGC Paragraph 7
CGL + AI Endorsement
Narrow-Form Indemnity
Broad-Form Indemnity
To obtain, maintain and pay for such insurance as may be required by the General Contract, the rider attached hereto, or by law, and to furnish the Contractor satisfactory evidence that it has complied with this paragraph; and to obtain and furnish to the Contractor an undertaking by the insurance company issuing each such policy that such policy will not be cancelled except after fifteen (15) days notice to the Contractor of its intention to so do.

The
Subcontractor agrees to assume entire responsibility
and liability, to the fullest extent permitted by law,
for all damages
or injury to all persons, whether employees or otherwise, and to all property,
arising out of
it, resulting from or in any manner connected with, the execution of
the work provided for in this Subcontract
or occurring or resulting from the use by the Subcontractor, his agents or employees, of materials, equipment, instrumentalities or other property, whether the same be owned by the Contractor, the Subcontractor or third parties, and the Subcontractor, to the fullest extent permitted by law,
agrees to indemnify and save harmless the Contractor
, his agents and employees from all such claims
including
, without limiting the generality of the foregoing,
claims for which the Contractor may be or may be claimed to be, liable

and legal fees and disbursements paid or incurred to enforce the provisions of this paragraph and the Subcontractor further agrees to
obtain
, maintain and pay for such
general liability insurance coverage and endorsements as will insure the provisions of this paragraph.
Sections 337.01 to 337.05 do not affect the validity of agreements whereby a promisor agrees to provide specific insurance coverage for the benefit of others.
Section 337.05, subd. 1
Contribution
Insurance
GC pursue AI
337.05, subd. 2
Subd. 2. Indemnification for breach of agreement. If:
(a) a promisor agrees to provide specific types and limits of insurance; and
(b) a claim arises within the scope of the specified insurance; and
(c) the promisor did not obtain and keep in force the specified insurance;
then, as to that claim and regardless of section 337.02, the promisee shall have indemnification from the promisor to the same extent as the specified insurance.

Section 337.05, subd. 2
AGC: Subcontractor further agrees to obtain, maintain and pay for such general liability insurance coverage and endorsements as will insure the provisions of this paragraph.
CGL + AI = ???
Tips for Drafting:
Use AGC language already vetted by the courts.
Revise the insurance-procurement provision to address the 2013 amendments.
Broadly require the subcontractor to defend the general contractor.
Be specific in the insurance the subcontractor is required to get.
Dan's read:

The anti-indemnity statute doesn't affect the validity of agreements by which a subcontractor agrees to provide specific insurance coverage for the benefit of the general contractor.

(i.e. despite prohibition on broad-form indemnity, general contractors can force subcontractors to get insurance that benefits the general contractor).
Sections 337.01 to 337.05 do not affect the validity of agreements whereby a promisor agrees to provide specific insurance coverage for the benefit of others.
Sections 337.01 to 337.05 do not affect the validity of agreements whereby a promisor agrees to provide specific insurance coverage for the benefit of others.
General contractors' read:

The anti-indemnity statute doesn't affect the validity of agreements if the subcontractor agrees to provide specific insurance coverage for the benefit of the general contractor.

(i.e. broad-form indemnity is okay if coupled with an insurance-procurement provision)
Curtis D. Smith, Attorney for Minnesota Subcontractors Association
2013 Amendment
(it's about insurance)
Senator Vicki Jensen
Sections 337.01 to 337.05 do not affect the validity of agreements whereby a promisor agrees to provide specific insurance coverage for the benefit of others.
Dan's read:

The anti-indemnity statute doesn't affect the validity of agreements
by which a
subcontractor agrees to provide specific insurance coverage for the benefit of the general contractor.

(i.e. despite prohibition on broad-form indemnity, general contractors can force subcontractors to get insurance that benefits the general contractor).
General contractors' read:

The anti-indemnity statute doesn't affect the validity of agreements
if the
subcontractor agrees to provide specific insurance coverage for the benefit of the general contractor.

(i.e. broad-form indemnity is okay if coupled with an insurance-procurement provision)
Holmes?
Full transcript