Case Study: The Importance of Indemnification (Hold Harmless) Clauses in Construction Contracts

Sidewalk construction

A resident trips and falls on your sidewalk, which is in the process of being replaced. He injures his back and shoulder, racking up nearly $100,000 in medical bills. The resident then files a lawsuit, alleging the construction site was not properly marked or roped off. Who’s liable for the damages, you or your contractor?

You might guess (and hope) that your contractor is liable, but the answer is “it depends.” It all hinges on whether your contract was properly executed. Let’s explore what that means and dig into the scenario above a bit more.

What is contractual indemnification?

Contractual indemnification is a legal concept that can help shield an entity (e.g., a housing organization) from liability, said Mathew Ross, a partner with law firm Wilson Elser who focuses on the defense of construction accident claims and other high-exposure premises liability claims.

Housing organizations should negotiate and include indemnification clauses in any construction-related contracts to ensure contractors defend, hold harmless, and indemnify (protect from legal liability) the housing organization for any personal injury or property damage arising from the general contractor’s work.

The housing organization should also ensure that general contractors have indemnity language in any agreements with subcontractors that may be involved in a project, Ross said.

Some jurisdictions treat contractual indemnification provisions differently, especially with a construction-related contract. There are narrow, intermediate, and broad indemnification provisions.

The narrowest form of indemnity is when the burden is on the project owner (e.g., the housing organization) to prove that a contractor was at fault.

Broader forms of indemnity take the burden off the project owner to prove that a contractor was negligent. Ross said it's prudent for housing organizations to have at least an intermediate, or middle-ground clause in construction contracts to protect against liability. 

Housing organizations should attempt to obtain a copy of all insurance policies in which they are named an additional insured. Ross said it’s critical to check for discrepancies between insurance policies and contracts.

For instance, while the contract between the general contractor and subcontractor may have broad indemnity language benefitting the housing organization, the subcontractor’s insurance policy may have limiting language that says the owner is only an additional insured to the extent that the subcontractor is found to be actively at fault or negligent for an incident. The broad indemnity doesn’t align with the limiting additional insured language and can lead to a dispute in the event of an incident.

“It’s important to resolve that discrepancy if at all possible,” Ross said.

The lack of a contractual indemnification clause could cost you

The sidewalk trip and fall scenario we mentioned at the outset of this article actually happened. It was a $4 million lawsuit, and both the housing organization and the contractor were named as defendants. Believing the contractor was at fault, HAI Group attempted to tender the claim to the contractor, which means the contractor would handle the claim under its own insurance policy. The contractor refused, which wasn’t surprising given that the contract’s indemnity provision wasn’t entirely favorable to the property owner. The case went to mediation, where HAI Group’s defense counsel and claims handler argued, with some success, that the contractor should bear all liability.

The case was settled, and the property owner was required to pay far less than the $4 million the plaintiff demanded, but it could have gone even better for the property owner if the contract had been executed properly. More specifically, if the boxes in the contract below, between the housing organization and contractor, had been checked, the outcome of the case might have been very different.

Bottom Line: Contracts are negotiable. Have your legal counsel review them before you sign to ensure they’re written in your favor and properly executed.

Is your housing organization undertaking a construction project? Let's make sure you're covered. Contact our Account Services team today. 

Contact My Account Executive

Includes copyrighted material from a company under the HAI Group family, with its permission. this post is for informational purposed only and is not intended to provide legal advice, and shall not be relied on as such. We strongly recommend consulting with legal counsel or an appropriate subject matter expert.

Leave a Comment