Contractual Risk Shifting, Workers’ Compensation and You

Here’s an example:
The subcontractor’s employee suffers an injury caused by the sole negligence of the contractor and recovers the maximum available from the subcontractor’s workers’ compensation carrier. In a typical scenario, nothing necessarily prevents the employee from pursuing a claim against the contractor for losses suffered in excess of the statutory maximum. What happens when the claim is brought against the contractor? The contractor will enforce the indemnity provision and require the subcontractor to defend, hold harmless and indemnify it. The result? The subcontractor loses twice!

Avoid Injustices

How do state laws handle the injustice resulting from the application of these clauses?

While almost all states allow limited indemnity provisions, approximately 45 state legislatures have enacted some form of anti-indemnity statutes, which prohibit or restrict the enforceability of more onerous intermediate or broad indemnity provisions.

The legislatures of Alabama, Maine, Nevada, Vermont and Wyoming have yet to speak to the enforceability of indemnity provisions in construction contracts but this is not to say that the courts of those states haven’t considered the issue or created case law relating to the enforceability of such clauses.

By contrast, very few state legislatures have addressed the enforceability of waiver of subrogation clauses, and a majority of state courts enforce waivers of subrogation in construction contracts. Kentucky, Missouri, New Hampshire and New Jersey are among the few states with statutes that void waiver of subrogation clauses as against public policy. State courts that currently enforce waivers of subrogation include Florida, Georgia, Illinois, Maryland, Michigan, New York, North Carolina, Ohio, Tennessee, Virginia and Washington.

In some states, including North Carolina, subcontractors are attempting to push legislation that would void waiver of subrogation clauses as they relate to workers’ compensation. However, such legislation remains a hot-button issue within the industry.

The moral of the story: Read your contracts carefully and know your state’s laws regarding waiver and indemnity provisions. Use your knowledge of the law to write out onerous contractual risk-shifting provisions before they are signed. Always remember, an ounce of prevention is worth a pound of cure.

Disclaimer
This article is not intended to constitute legal advice. Readers are encouraged to seek legal counsel in their state to discuss the law relating to enforceability of these clauses and their practical effect.