Construction Advisory - Carefully Review Indemnity and Insurance Provisions

New Case Cautions Owners and Contractors to Carefully Review Indemnity and Insurance Provisions in Construction Contracts

By: Matthew R. Lasek, Timothy C. Quinn

Are you aware of the possible consequences of the indemnity and insurance language in your construction contract?  Will you be covered for your own or a third party's negligence?  Will you be required to indemnify another party for your acts or the acts of a third party?  Finally, how will your insurance and the insurance of others protect you?

A recent case from the Pennsylvania Superior Court serves as a stark reminder to owners and contractors alike that you should seek legal advice when drafting and reviewing the indemnity and insurance provisions in a contract.  In Burlington Coat Factory of Pa., LLC v. Constr. Mgmt. Co., LLC, 126 A.3d 1010 (Pa. Super. 2015), an employee of a subcontractor sustained injuries during renovations of a retail store.  The employee claimed that his injuries were caused by the owner's negligent maintenance of a freight elevator.  The owner settled with the employee, then sought reimbursement from the contractor under the indemnity and insurance provisions in the construction contract.  The owner claimed that the contractor was required to reimburse the owner for the entire settlement amount, including amounts that could be attributed to the negligence of the subcontractor and even to the owner itself.  When the contractor refused, the owner filed a lawsuit claiming that the contractor breached the construction contract by refusing to indemnify the owner and failing to obtain insurance coverage required by the contract which could have protected the owner.

Pivotal to the Burlington Coat Factory case was the fact that the construction contract in question had two indemnification provisions.  One required the contractor to indemnify the owner "to the extent caused in whole or in part by negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable[.]"  The second indemnity clause was stated more broadly and was not limited to "the extent caused in whole or in part by negligent acts or omissions of the contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable[.]"  Under the second, broader provision, the owner argued that, regardless of who was at fault, the contractor was required to reimburse the owner for all costs associated with the claim by the injured individual.

The court disagreed.  It held that, because the owner drafted the contract, the conflicting indemnity provisions would be interpreted against the owner and the first, more-narrow indemnity provision would prevail.  Therefore, while the contractor would be liable for its own negligence and that of its subcontractors in failing to properly train employees on the use of the freight elevator, the contractor was not responsible for costs caused by the owner's own negligence in maintaining the elevator.

The court in the Burlington Coat Factory case also addressed three topics important to construction contracts.  First, the court decided that, based on the language of the construction contract, the contractor had an obligation to obtain insurance that covered the contractor's indemnity obligations.  Second, the court decided that, contrary to the contractor's suggestion, the owner would not waive its indemnification rights by settling the case with the injured employee unless that settlement was unreasonable. Finally, the court provides a reminder of how important it is to use the correct party names in a construction contract in order to ensure that the parties can enforce the agreement.

The Burlington Coat Factory case provides owners and contractors an important warning of how the specific wording of a construction contract can dramatically alter the rights and liabilities of the parties.  The case also reminds us that more is not necessarily better, especially when it comes to the addition of potentially conflicting indemnity provisions.  In addition to the issues raised by the court in the Burlington Coat Factory case, there are many other considerations that owners and contractors should keep in mind when reviewing and revising indemnity and insurance provisions in a construction agreement.  If you are wondering how these and other rules affect your construction contract, please feel free to contact us to arrange a meeting and discuss the matter.