Anti-Indemnity Statutes: The Basics You Need to Know
In our previous article, “Transferring Risk: Understanding the Power of Insurance, Indemnification, and Additional Insured Endorsements”, we discussed the powerful trio of insurance, indemnity provisions, and additional insured endorsements. Think of them like parts of a risk mitigation Superman – sleek outfit, special power, and cool cape. So, what is the kryptonite? Anti-indemnity statutes. They vary by state and limit the scope and scale of indemnity agreements.
In this post, we dive deeper into how indemnity agreements save the day and the ways anti-indemnity statutes work to fight their power.
Contractual indemnity transfers risk from one party to another. A typical indemnity agreement involves an indemnitor (usually a downstream party) promising to hold an indemnitee (the upstream party) harmless for claims and losses.
For context, Real Good Builders hires Pete’s Painters for work on a construction project. The contract includes an indemnity provision requiring Pete’s Painters (indemnitor) to assume the financial liabilities for work on the project by holding Real Good Builders (indemnitee) harmless should a claim arise.
Types of Indemnity Provisions
Three indemnity provisions exist. Each creates a different level of protection for the indemnitee.
Broad Form Indemnity
Broad form translates to broad protection. This is a one-sided agreement fully favoring the indemnitee. The indemnitor contractually agrees to hold an indemnitee harmless for 100% of the liability, even if the indemnitor holds no responsibility for causing the loss. This is done through contract language “caused by … in whole.” Because of the significant financial burden placed on downstream parties, less than 10 states permit broad form indemnity. Even those jurisdictions require certain criteria to make the agreement enforceable.
Let’s say Jerry, a passerby, suffers a concussion after hitting his head on scaffolding paid for and set up by Real Good Builders for Pete’s Painters. Jerry sues for $100,000. Even though Pete’s work did not directly cause Jerry’s injury, it must assume full responsibility for the claim.
Intermediate Form Indemnity
This form also transfers full responsibility for a loss to the indemnitor, but only if it partially contributed to the loss. Even if fault is just 1%, they must assume 100% of the financial burden. The contract reads “caused by … in whole or in part.” More than half of US states allow intermediate form indemnity.
Jerry sues for $100,000. The insurer finds that Real Good Builders provided the faulty scaffolding, but Pete’s Painters was supposed to check it. Since Pete’s had a hand in the events causing the injury, it must assume full claim responsibility.
Limited Form Indemnity
This form equally favors the indemnitor and indemnitee. The parties split the liability based on degree of fault and only pay for their percentage of the damages. Limited form protects the indemnitee by stating “but only to the extent caused by [the negligent acts or omissions of] the (indemnitor)” in the contract. All states accept limited form indemnity agreements.
When Jerry takes his case to court, the judge finds Real Good Builders is 75% at fault. Pete’s Painters contributed to the injury only 25% by failing to spot the problem. Real Good Builders must pay Jerry $75,000 and Pete’s Painters covers the remaining $25,000.
The indemnitee is covered and the indemnitor assumes the risk. All is well in Metropolis. But depending on where the work occurs, a state’s anti-indemnity statute can weaken the power of the agreement just like kryptonite.
Anti-indemnity statutes use public policy to limit the amount of indemnification a contract can require. States enacted them to fight an imbalance of negotiating power between upstream and downstream entities. They protect indemnitors from taking on more than their fair share of the risk. Anti-indemnity legislation largely targets the construction industry with 45 states having statutes.
Anti-Indemnity’s Impact on Additional Insured Endorsements
Insurance is a type of indemnity agreement, but indemnity is not insurance. Rather, indemnity provides assurance. The provision is only as good as the indemnitor’s ability to comply with the agreement.
As a result, indemnity clauses often are connected to additional insured endorsements as a parallel risk-transfer strategy. Additional insureds receive coverage under a named insured’s (such as a subcontractor) insurance policy.
Since additional insured endorsements have the same goal as indemnity agreements, states now are debating if they should be regulated similarly. Court verdicts vary and so does the law.
Indemnification and additional insured endorsements are a great idea for upstream parties least capable of directly controlling risk. However, companies should check contract language to ensure legal compliance within every state in which it does business.
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