During the process of negotiating construction contracts, contractors often use certain clauses to shift the risk of loss onto subcontractors who may have less bargaining power. How do they do this? Most commonly through the use of indemnity and waiver of subrogation clauses. While these clauses apply in a variety of situations, they are particularly concerning with regard to workers\u2019 compensation insurance.<\/p>\n
All states have mandatory workers\u2019 compensation statutes. These statutes make employers strictly liable for employee injuries on the job. Strict liability means liability without fault. Therefore, an injured employee of a subcontractor can recover damages from the subcontractor\u2019s workers\u2019 compensation carrier even if a third party is 100 percent at fault for the injury.<\/p>\n
Subrogation arises when an innocent party incurs damages attributable to the fault of another. This most commonly applies when an insurance carrier pays an insured loss and subrogates to the rights\u2014or \u201cstands in the shoes\u201d\u2014of the injured party in recovering against the responsible party. This doctrine is based on equitable principles, primarily to prevent the at-fault party from escaping liability. Makes sense, right? Then how does a subcontractor waive subrogation?<\/p>\n
Here\u2019s a sample waiver of subrogation provision:<\/b>
\nSubcontractor hereby waives all right of recovery against the Contractor, the Owner and their respective officers, directors, employees, agents and representatives with respect to claims covered by insurance obtained pursuant to insurance requirements under this Subcontract. The Subcontractor agrees to cause its Workers\u2019 Compensation, General Liability and Automobile Insurance carrier to waive their rights of subrogation against the Contractor, Owner and their respective officers, directors, employees, agents and representatives.<\/i><\/p>\n
Here\u2019s an example:<\/b>
\nA subcontractor\u2019s employee is injured by the sole negligence of the contractor. The subcontractor\u2019s workers\u2019 compensation carrier pays out statutory damages to the injured employee. Pursuant to the waiver of subrogation clause, the subcontractor and its carrier have no right to recover the losses from the contractor.<\/p>\n
What is the practical effect? The subcontractor suffers the consequences of the contractor\u2019s sole negligence. How? The subcontractor\u2019s experience modification rate (EMR) goes up. What else goes up with the EMR? Premiums!<\/p>\n
Indemnification requires one party to pay damages to another, sometimes without regard to who was actually at fault. These types of clauses often include language requiring the subcontractor to \u201cdefend and hold harmless\u201d the contractor, which puts the additional burden on the subcontractor of incurring fees and expenses for the contractor\u2019s legal defense. There are generally three types of indemnity clauses: broad, intermediate and limited.<\/p>\n
A broad indemnity clause requires the subcontractor to pay loss or damage regardless of who is at fault, even if the damage is caused by the sole negligence of the contractor. This is the most onerous type of indemnity clause because it shifts the entire risk to the subcontractor.<\/p>\n
Here\u2019s a sample broad indemnity provision:<\/b>
\nSubcontractor shall indemnify, defend and hold harmless the Contractor, Architect and Owner against all liability claims, judgment or demands for damages and expenses, including, but not limited to, reasonable attorneys\u2019 fees, arising from accidents to persons or property arising out of or resulting from the performance of the work.<\/i><\/p>\n
An intermediate indemnity clause requires the subcontractor to pay loss or damage for its own sole or partial negligence. Some intermediate indemnity provisions require the subcontractor to pay the entire loss or damage while others only require the subcontractor to pay its pro rata share of the loss or damage.<\/p>\n
Finally, a limited indemnity clause only requires the subcontractor to pay loss or damage that is the sole responsibility of the subcontractor.<\/p>\n
How do indemnity and subrogation interplay? When the subcontract has abroad indemnity clause and a waiver of subrogation clause.
\n<\/p>\n
Here\u2019s an example:<\/b>
\nThe subcontractor\u2019s employee suffers an injury caused by the sole negligence of the contractor and recovers the maximum available from the subcontractor\u2019s workers\u2019 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!<\/p>\nAvoid Injustices<\/h4>\n
How do state laws handle the injustice resulting from the application of these clauses?<\/p>\n
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.<\/p>\n
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\u2019t considered the issue or created case law relating to the enforceability of such clauses.<\/p>\n
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.<\/p>\n
In some states, including North Carolina, subcontractors are attempting to push legislation that would void waiver of subrogation clauses as they relate to workers\u2019 compensation. However, such legislation remains a hot-button issue within the industry.<\/p>\n
The moral of the story: Read your contracts carefully and know your state\u2019s 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.<\/p>\n
Disclaimer<\/b>
\nThis 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.<\/p>\n","protected":false},"excerpt":{"rendered":"
During the process of negotiating construction contracts, contractors often use certain clauses to shift the risk of loss onto subcontractors who may have less bargaining…<\/p>\n","protected":false},"author":73,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"Contractual Risk Shifting, Workers\u2019 Compensation and You","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false}}},"categories":[22],"tags":[161,3206,2841,3207,1164,1163,427,1718,3205,189],"jetpack_publicize_connections":[],"yoast_head":"\n