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Pennsylvania Anti-Indemnification Statute

27
Aug, 2019
By Bill Donato, Chief Executive Officer
Pennsylvania Anti-Indemnification Statute
  • Property & Casualty,White Papers
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A look at proposed Pennsylvania legislation that would clarify indemnification responsibility in construction contracts co-authored by Safegard Commercial Insurance department’s Doug Houck and Kelvin Zimmerman.

Overview of Anti-Indemnification Statutes

In construction contracts, indemnity clauses typically require one party (indemnitor) to indemnify, hold harmless, reimburse, or pay damages to another party (indemnitee) for losses or claims that arise.  There are three different forms of indemnity agreements which establish various levels of negligence and reimbursement requirements for each party.  Some indemnity agreements require the subcontractor to indemnify the owner or general contractor regardless of who is actually at fault.  Anti-indemnification statutes limit the enforceability of indemnification requirements by requiring each party to take responsibility for their own negligence.

Different Forms of Anti-Indemnification Statutes

Pennsylvania is currently one of only five states that does not have any anti-indemnity statutes for construction contracts, along with Alabama, Maine, North Dakota, and Vermont.  The 45 states that have anti-indemnity statutes vary regarding which form of indemnity agreements are prohibited.  The three forms of indemnity agreements are:

  1. Limited: Subcontractor is only responsible for its own negligence, and only if solely at fault. The owner or general contractor receives no indemnification if they are even partially at fault.  All states allow limited indemnity agreements.
  2. Intermediate: Subcontractor is responsible for its own negligence, as well as partial negligence. If the owner or general contractor is solely at fault, there is no indemnification from the subcontractor.  Contracts using intermediate indemnity often include the phrase “caused in part by,” which establishes that the negligence can be partially contributed by each party involved.
  3. Broad: Subcontractor is required to indemnify the owner or general contractor, regardless of who is at fault. This means the subcontractor must indemnify the general contractor for the subcontractor’s sole negligence, the owner or general contractor’s sole negligence, or any combination of negligence between the two parties.  Broad indemnity is the most favorable for owners and general contractors and puts the greatest indemnification requirement on the subcontractors.  Contracts using broad indemnity include the phrase “caused in whole or in part by…indemnified parties.” The inclusion of “in whole” establishes the sole negligence indemnification requirement, and including “indemnified parties” specifies that the sole negligence can be caused by parties other than the subcontractor or indemnitor.

In general, broad indemnity agreements favor owners and general contractors, whereas limited indemnity agreements provide protection for subcontractors.

Pennsylvania House Bill 1737

Recently, Pennsylvania State Representatives introduced House Bill 1737 which would allow for only limited indemnification within construction contracts.  The Bill would amend Act 164, which has been in force since 1970.  With this new Bill, broad and intermediate forms of indemnification would no longer be enforceable.  Any level of negligence contributed by the owner or general contractor would eliminate their right to indemnification from a subcontractor.  This Bill would make Pennsylvania’s anti-indemnity statutes similar to Delaware, New York, and Ohio.  The three other bordering states of Maryland, New Jersey, and West Virginia currently only prohibit broad form indemnity agreements; thus, intermediate indemnity agreements are still enforceable.

Additional Insured Clause

It is important to note that indemnity agreements are often interwoven with additional insured clauses in construction contracts.  Commercial General Liability policies exclude coverage for losses the insured becomes obligated to pay due to the assumption of liability in a contract.  If a contract requires a subcontractor to indemnify the owner or general contractor, subcontractors can work around this exclusion by providing additional insured status via endorsement to the insurance policy.  This endorsement might include additional costs to the subcontractor’s insurance premium, but it would satisfy the contract requirements with the indemnitee.  The issue with this approach is that most insurance companies do not provide sole negligence coverage to additional insureds.  If a loss were to occur where the indemnitee or additional insured is found to be solely negligent, the subcontractor’s policy may not respond, regardless of what the law or contract states. This could result in a lengthy and costly litigation process, and could also expose the subcontractor’s assets if they are not able to benefit from the defense and financial reimbursement they typically would receive from their insurance carrier for a covered claim.

Many states have enacted, or are in the process of enacting, legislation in conjunction with anti-indemnity statutes to avoid this coverage dilemma.  The objective is to provide consistency and synergy between legislation and insurance policy language that both agree on enforceable contract wording and requirements.

Conclusions

Pennsylvania House Bill 1737 would have large implications on both the construction and insurance industries.  The amended indemnification requirements could allow smaller subcontractors to take projects that they might have previously avoided if the contract wording was not supported by their insurance program.  The Bill’s authors also believe the current legal landscape has led to higher insurance premiums in Pennsylvania, which typically contributes to higher construction costs that are passed on to the consumer.  This new Bill could help lower costs in both industries while providing reassurance to owners and general contractors that the contracts signed by subcontractors will be honored and backed up by insurance policies.

The Bill currently has support from many local and national subcontractor associations and will be reviewed when the legislative session resumes this fall (2019).


About the Authors

About Doug Houck

Doug HouckDoug Houck joined The Safegard Group in May 2019 as an Account Executive. In his role, Doug is primarily responsible for the management and servicing of new and renewal business. His duties include reviewing contracts, policies, coverage, and billing.

Doug started full-time in the industry in December 2012. He also completed summer internships in the industry in 2011 and 2012. Doug continued to work part-time with the companies that he interned with after both of those internships. The accounts he has handled have been pretty broad, however he will be dealing with more construction accounts with Safegard. In the past, he has handled real estate, manufacturing, social services, healthcare services, food distribution, and contractors/construction.

Doug graduated from the Temple Risk Management and Insurance program in December 2012. He currently holds the CPCU and ARM designations and is in pursuit of the CRIS designation.

Outside of the office, Doug enjoys spending time with his two miniature dachshund dogs and his fiancé who he got engaged to after running the Disney marathon. Doug is currently involved with Temple University’s student mentorship program and enjoys playing hockey, running, and biking.

About Kelvin Zimmerman

Kelvin ZimmermanKelvin Zimmerman recently joined The Safegard Group in December 2018 as a Commercial Lines Account Executive. He is primarily responsible for the management and servicing of new and renewal business. His duties include reviewing contracts, policies, coverage and billing.

Prior to joining The Safegard Group, Kelvin spent 4 years in the insurance industry following three internships while in college. Kelvin worked in the past on heavy construction, including cranes and heavy hauling. He also worked on large construction projects in areas including New York, California, and Florida.

Kelvin is a graduate of Temple University’s Risk Management Program and is in pursuit of his CPCU. In his spare time, Kelvin works with the Animal Care & Control Team of Philadelphia in the foster program and volunteers onsite and at organization events.

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