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What Are Indemnity Agreements in Construction Contracts?

Contractors, subcontractors and all those involved in the construction industry have heard the term indemnity. It is also important that any construction professional understand what it means and the benefits or drawbacks that come with it.

Indemnity clauses, in general, shift responsibility for damages or losses that are incurred in connection with a construction project.

Sample Indemnity Clause

To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in party by a party indemnified hereunder.

For example, when a general contractor hires a framing subcontractor, the general contractor expects its subcontractor to perform in accordance with the building plans and specifications. A general contractor doesn’t expect to incur damages or costs because of potentially defect or negligent work performed by the subcontractor. Thus, an indemnity clause would shift any and all liability to the subcontractor in the event that the owner or other third-parties were damaged by work associated with the subcontractor.

Indemnity agreements are permitted by law as Louisiana allows one party to agree to pay for the damages caused by the fault of the other, if this intention is sufficiently expressed.

However, a relatively new law put in place in 2011 can lead to the clauses being deemed null and unenforceable. Contractors need to be aware of this.

Louisiana Revised Statute §9:2780.1

An indemnity clause is likely to be found in every construction contract. However, in Louisiana, what exactly one party can indemnify another for is limited.  Indemnity clauses come in three forms:

  • Broad form indemnity: Indemnitor assumes an obligation to hold the indemnitee harmless from all liability regardless of which party was actually at fault, even if the indemnitee was solely negligent.
  • Intermediate form indemnity: Indemnitor assumes all liabilities of the indemnitee relating to the subject matter of the contract, except for the injury or damages caused by the indemnitee’s sole negligence.
  • Limited form indemnity: Indemnitor indemnifies the indemnitee only to the extent of the indemnitor’s own fault in contributing to the loss.

Louisiana Revised Statute § 9:2780.1(B) places certain restrictions on what extent one party may indemnify another and the result makes Louisiana somewhat of a “limited form indemnity” state.

When enacted, La. R.S. 9:2780.1 declared invalid any indemnity provision where a party seeks indemnity from another for its own fault, but what does this mean?  In short, parties cannot rely on all-encompassing indemnity provisions any longer.  Parties cannot be indemnified when the indemnitor had no control over the wrongdoer’s actions, however, there are exceptions if the indemnitor obtained insurance covering the potential indemnitee.

In relevant part, La. Rev. Stat. § 9:2780.1(B) states that any “clause … affecting a … construction contract which purports to indemnify … the indemnitee from and against any liability for loss or damage resulting from the negligence or intentional acts or omissions of the indemnitee, … or a third party over which the indemnitor has no control is contrary to the public policy and is null, void, and unenforceable.”

In other words, Louisiana’s anti-indemnity statute prohibits broad and intermediate form indemnity provisions. For example, a subcontractor cannot be required to indemnify the general contractor for the general contractor’s negligence or intentional misconduct. Similarly, the statute does not permit indemnification for the negligence or intentional acts of a third party over whom the indemnitor has no control.

Other statutes relating specifically to public contracts contain the same prohibitions. For example, La. Rev. Stat. § 38:2195 states that public entities are prohibited from assuming liability for damages caused by others with whom the public entity contracts. Conversely, La. Rev. Stat. § 38:2216(G) voids any indemnity agreement that requires a contractor to protect the public entity from third party claims caused by the public entity.

Limit of Liability Provisions

The obvious intent of the anti-indemnity law is to avoid shifting liability away from a party at fault to another person. To this end, the language in the statute nullifies any agreement that has “the effect of holding the person at fault harmless.” But what about “limit of liability” provisions?

One court recently held that R.S. 9:2780.1 does not prohibit a limit of liability provision in a construction contract. In Patriot Contracting, LLC v. Star Insurance Company, a construction contract contained a provision that excluded liability of the architect for good faith decisions made during contract administration. The plaintiff/contractor alleged that the architect was negligent in its contract administration duties and caused it to suffer economic loss. The court dismissed the claim, rejecting the contractor’s argument that the provision violated the anti-indemnity law.

The Patriot court explained that the statute prohibits an indemnity agreement, i.e., where one party agrees to reimburse a second party for damages for which the second party becomes liable to a third party. However, the anti-indemnity law did not impact the provision that excluded the contractor’s right to recover from the architect. Thus, at least according to one court, parties in construction contracts are still free to include limit of liability provisions.

Should you have any questions or you would like to discuss this issue in further detail, please do not hesitate to contact us to schedule a free consultation.

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