Construction Contracts Indemnity Obligations
Contractors May be Liable for Indemnity Obligations Whether Negligent or Not
Ryan Stai
October 17, 2011
Indemnification provisions, which contractually make one party responsible for another party's damages, are standard in any construction contract. Minnesota's "anti-indemnification" law forbids enforcement of a provision in a construction contract that tries to indemnify a contractor (or any other party, like an owner, architect or engineer) from liability for its own negligence. However, there is an important exception to this rule: a contract can require a party to provide insurance coverage for the negligence or liability of others. The interplay of these two laws is a frequent subject of litigation activity. A new case decided by the Minnesota Court of Appeals explains how the law in this area should be interpreted.
In Engineering & Construction Innovations, Inc., v. L. H. Bolduc Co., __ N.W.2d __, 2011 WL 3903277 (Minn. App. Sept. 6, 2011), ECI, a first-tier subcontractor, entered into a subcontract with Bolduc for work on a pipeline project. The subcontract required Bolduc to indemnify, "hold harmless" and defend ECI from all claims and damages "caused or alleged to have been caused" by any act or omission of Bolduc or anyone that performed work under the subcontract. Bolduc also agreed to purchase insurance that covered its indemnity obligation and to name ECI as an additional insured. This arrangement is fairly typical in the industry. Travelers issued an insurance endorsement covering ECI as an additional insured under Bolduc's commercial general liability (CGL) policy.
Bolduc allegedly damaged the pipeline during its work, and the owner and general contractor demanded that ECI repair it. ECI did and submitted a claim to Travelers. Travelers denied the claim. ECI then sued Bolduc and Travelers. At trial, a jury determined that Bolduc was not negligent, had not breached the subcontract and owed ECI nothing. Because Bolduc was not found negligent, the court also dismissed ECI's claim against Travelers.
The Court of Appeals reversed, finding that a subcontractor can agree both to indemnify for another's negligence and to provide insurance for that risk. It did not matter that the jury found Bolduc not negligent; the language of the contract required Bolduc to indemnify ECI from any claim caused or allegedly caused by any act or omission of Bolduc. The court interpreted this to mean that Bolduc agreed to indemnify ECI without regard to fault. The jury's finding, the court said, did not equate to a finding that Bolduc did not cause damage to the pipeline. Because Bolduc agreed to indemnify and provide insurance, the fact that it was not negligent had no bearing on its obligation to indemnify ECI. Travelers, too, was liable because its insurance policy was not limited to injury or damage caused by negligent acts or omissions.
Under Bolduc and despite Minnesota's anti-indemnification law, contractors that are required to procure insurance to cover their indemnity obligations may still be liable even when they are not negligent. However, the case itself is not officially over. First, Bolduc recently asked the Minnesota Supreme Court to review the decision. If the Supreme Court decides to hear the appeal, it will have the last word. If the Supreme Court does not take the appeal, the case will return to the trial court for a finding as to whether Bolduc, in fact, damaged the pipeline. If the trial court finds that Bolduc did not actually damage the pipeline, that may affect whether it must indemnify ECI.
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