One of the most important provisions in a construction contract is the indemnity provision. An indemnity
provision, which usually includes a requirement to hold harmless and defend another party, is included in
nearly all construction contracts. Generally speaking, the upstream party (a general contractor or owner
for example) is attempting to shift risk to a downstream party (the general contractor or a subcontractor).
In simple terms, subject to certain parameters, the downstream party is agreeing to be responsible for the
upstream parties’ mistakes.
As an insurance broker focused on development and construction businesses, we get asked frequently:
“If we sign this, are we insured?” It would be great if this could be answered “Yes” or “No,” but life is rarely
that straightforward. In order to understand whether or not a specific indemnification is insurable, we have
to drill down on the actual provision. Let’s look at a typical indemnification below.
“To the fullest extent permitted by law the Contractor shall indemnify, defend and hold harmless the
owner, architect, architect’s consultants and agents and employees of any of them from and against any
claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or
resulting from performance of the work whether caused in whole or in part by the contractor, a subcontractor,
anyone directly or indirectly employed by them or anyone for whose acts they may be liable.”
This type of provision requires the contractor (downstream party) to indemnify, defend and hold harmless
the owner (upstream party). In layman’s terms:
- Indemnify means that the contractor will compensate the upstream party for a loss.
- Defend means the contractor will provide the upstream party with a legal defense.
- Hold Harmless means the contractor will relieve the upstream party from liability for a loss.
The next question is to whom the contractor owes this obligation? The provision is clear, the contractor
has an obligation to “the owner, architect, architect’s consultants and agents and employees of any of
them…” Needless to say, this is overly broad. You should avoid indemnifying anyone but your client if
possible, and you never want to indemnify unknown third parties (agents).
Having determined what the contractor’s obligations are, and to whom they are owed, we now need to
determine when the obligation arises. In this agreement the obligation arises when there are “any claims,
damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from
performance of the work…” The challenge with this provision is twofold. First of all, “any claims damages,
losses or expenses” is overly broad. The provision could extend to “any claim” the owner or another
upstream party may have against the contractor. This, for example, could make the contractor
responsible for legal fees that he might not have been otherwise responsible for. Secondly, the phrase
that reads “resulting from performance of the work…” does not require any link to the contractor’s
negligence or fault. All it requires is that it results from the work.
The final phrase of the provision “whether caused in whole or in part by the contractor, a subcontractor,
anyone directly or indirectly employed by them or anyone for whose acts they may be liable” makes it
clear that so long as the contractor is even remotely at fault, that they will be responsible for 100% of the
Although each state may have specific indemnity laws that prohibit an indemnity this broad, the first part
of this provision makes it clear that if the indemnity in question is broader than what is allowed under
current law, that this indemnity will be interpreted “to the fullest extent permitted by law.”
Our construction clients are asked to sign provisions like this all the time and, as mentioned above, it is
not uncommon for them to ask us if such provisions are insurable. In order to determine if a provision is
insurable, you need to understand the coverage provided by a contractor’s commercial general liability
policy. In classic insurance industry style, contractual liability coverage is provided by an exception to an
exclusion. Here is the Contractual Liability Exclusion included in the standard Commercial General
Liability form published by the Insurance Services Office (Form #CG 0001).
Contractual Liability- “Bodily injury” or “property damage” for which the insured is obligated to pay
damages by reason of the assumption of liability in a contract or agreement. This exclusion does not
apply to liability for damages:
1. That the insured would have in the absence of the contract or agreement; or
2. Assumed in a contract or agreement that is an “insured contract”, provided the “bodily injury” or
“property damage” occurs subsequent to the execution of the contract or agreement. Solely for the
purposes of liability assumed in an “insured contract,” reasonable attorneys’ fees and necessary
litigation expenses incurred by or for a party other than an insured are deemed to be damages
because of “bodily injury” or “property damage”, provided:
a) Liability to such party for, or for the cost of, that party’s defense has also been assumed in the
same “insured contract”; and
b) Such attorneys’ fees and litigation expenses are for defense of that party against a civil or
alternative dispute resolution proceeding in which damages to which this insurance applies are
Based on a review of the exclusion, we know that contractual assumptions of liability are not covered,
unless the insured would have been responsible anyway (even in the absence of the contract) or if the
contract is considered an “Insured Contract.” The applicable section of the definition of
“Insured Contract” reads as follows:
9. “Insured contract” means:
f) That part of any other contract or agreement pertaining to your business (including an
indemnification of a municipality in connection with work performed for a municipality) under
which you assume the tort liability of another party to pay for “bodily injury” or “property damage”
to a third person or organization. Tort liability means a liability that would be imposed by law in
the absence of any contract or agreement.
So back to the question that started this discussion: “If I sign this indemnity, am I insured?” Well I know
what I would say (I’ll tell you in a minute) but I wanted to find out what the insurance companies who
specialize in construction would say. The typical response was something like “Every situation is different
and has to be evaluated on its merits.” Unfortunately, the underwriters are correct, the answer isn’t black
and white. Contractual coverage is often amended by endorsements restricting coverage. You need to
understand the specific coverage you have under your commercial general liability policy. In addition,
there are indemnity laws in every state that affect this coverage. For example, in California (in most
cases) it is illegal to require a subcontractor to indemnify an upstream party for their sole or active
negligence. It is acceptable, however, to indemnify that same party for their passive negligence. Also, in
California and this is not common in other states, “indemnify” includes the duty to defend…in other words
if the agreement only says “indemnify and hold harmless,” in California the duty to defend is included.
“OK, great, but we still want to know if the above indemnity is insurable?” Fair enough, if you’ve read this
far, you are entitled to one man’s opinion and here it is: Subject to the qualifiers above, if you are covered
by the standard ISO Commercial General Liability Policy (CG 0001) and the contractual coverage has not
been modified, you should have coverage for the contractual assumption of another’s partial liability. The
reason I use the word “should” is because other terms and conditions of the policy will apply and they are
all subject to interpretation.
There are two key caveats built in to this statement. First of all, the indemnitee (the owner in this case)
must have been at least partially at fault (negligent). Secondly, the damages must involve either bodily
injury or property damage.
Final Comments: Just because an indemnity is legal and may be insurable, doesn’t mean it’s fair. While
occasionally we come across reasonable indemnification agreements, most, like the one above, are
written to strongly favor the upstream party who drafted the contract. The good news is that every
contract can be negotiated (okay, most contracts can be negotiated…some clients may tell you to “take it
or leave it”) and we strongly suggest when faced with an onerous indemnity that you seek to negotiate a
more equitable agreement. The benefits of a good contract attorney and a knowledgeable insurance
broker should not be overlooked.