Allocating risk: Advice for the `astute' contractor

By JOHN AHLERS
Barokas Martin

The hold harmless/indemnity provisions contained in construction subcontracts prompt more questions of legal counsel than any other single subcontract provision. Indemnity clauses take many forms but they have the general purpose of allocating the risk by personal injury and property damage on construction projects. A clear exposition on the subject is found in State v. P. B. M. C., Inc.

Our Washington Supreme Court found that responsibility for safety for all workers on a construction site rests with the general contractor. The Court reasoned that a general contractor with supervisory authority is in the best position to ensure compliance with safety regulations.

A combination of the Stute decision and the Tort Reform Act has the potential to place a general contractor in the unenviable position of having to pay 100 percent of a subcontractors employees damages even if the general contractor has very little fault in the accident. A well drafted indemnity clause can improve the general contractors position by proportioning the risk to an at-fault subcontractor.

Fundamentals

The contract liability created by a hold harmless or indemnity clause is the contractual assumption by one (the subcontractor), of another's (the general contractors) liability. The Indemnitor (subcontractor) is the party to the contractual agreement which assumes the obligation to hold the Indemnitee (general contractor) harmless from liability.

A hold harmless agreement is a contract for indemnity which protects the Indemnitee (general contractor) against the consequences of an act. In general, hold harmless provisions are legal and enforceable as long as they do not require indemnification for a crime and are not contrary to public policy by either a court or the legislature.

Blanket hold harmless clauses which purport to relieve the general contract of all liability by transferring the entire risk regardless of fault to the subcontractor conflict with the common law concept that a party must be responsible for its own wrongdoing. As a consequence, our courts have determined that it is against public policy for subcontractors to agree to indemnify and hold harmless general contractors and owners for damages which are caused solely by the negligence of others.

Job site injuries of subcontractor employees

Questions concerning the rights and obligations to indemnify are often triggered by a construction site accident in which a subcontractors worker is injured. Unable to bring a suit against its employer due to the provisions of the Workers Compensation Act, the injured worker looks to other sources for recovery. The injured employee will usually sue the general contractor and frequently the owner and/or architect/engineer. The general contractor will then tender its defense back down the line of contractual privity until the liability ends up in the employer/subcontractors lap.

The Construction Indemnity Statute provides that:

1. workers compensation immunity must be expressly waived;
   
2. indemnification where the loss is due to the Indemnitee's (general contractors) sole negligence is void and unenforceable; and
   
3. the scope of the indemnity agreement is limited to liability for the Indemnitor's (subcontractors) concurrent negligence (e.g., the Indemnitor can only be required to provide indemnification for its own fault). By its terms, the Construction Indemnity Statute applies only to construction contracts, and to liability for damages arising out of bodily injury to persons or damage to property. Also, even in a construction setting, the statute should not affect indemnification obligations where the loss does not result from bodily injury or property damage (i.e., economic or delay-related damages).

Joint wrongdoers

The Washington Contributory Fault statute provides that in certain instances liability is joint and several. This is the case when:

1. the tort-feasors (wrongdoers) acted in concert or were in an agency relationship; or
   
2. the claimant had no contributory fault.

In the latter situation, the liability is joint and several only among the defendants in the suit against whom judgment is entered. Under the statute, the judge or jury determines the percentage of total fault which is attributable to every entity which caused the claimants damages, including . . . entities immune from immunity to the claimant . . . Although an immune employers (subcontractors) percentage of fault is determined, no judgment is entered and the employer retains statutory immunity (under the Workers Compensation Act). The statute limits situations in which concurrent or successive tort-feasors can be held jointly and severally liable to situations where the claimant or person suffering damages was totally without fault.

Effect on indemnity rights

A general contractor under the Construction Indemnity Statute before the legislature amended the Tort Reform Act, could obtain, at most, only indemnification for the proportion of loss attributable to the subcontractors negligence. The subcontractors proportion of negligence was determined by the judge or jury. If the subcontractor, however, was an immune employer (under the Workers Compensation Act), the proportion of negligence (and thus damages) attributed to the subcontractor by the trier of fact could not be recovered by the injured worker.

Consequently, the general contractor has not suffered any loss as a result of the subcontractors proportion of the causal negligence, and the Construction Indemnity Statute prevented the general contractor from obtaining any indemnification from the subcontractor. The conclusion, therefore, would be that an immune subcontractor/employer would never have to indemnify the general contractor in instances involving concurrent negligence.

The Washington legislature in 1993 amended the Tort Reform. The determination of fault of the parties in a suit brought by an injured worker must now exclude the fault of the parties immune from liability under the Workers Compensation Act. Any fault attributable to the employer or the employees co-worker can no longer be considered and the sum of fault is attributable to the remaining at-fault parties. Thus, the at-fault parties may end up paying for damages which were actually caused by the fault of the injured workers employer or co-worker.

An example best illustrates the Tort Reform Act. Assume that a worker is injured on a project site and suffers personal injuries and damages in the amount of $1 million. If the employer (subcontractor) is responsible for 80 percent of the injuries and the owner and general contractor are each responsible for 10 percent, under the pre-1993 amendment, the owner and general contractor would be responsible for $200,000 of the workers damages (i.e., 20 percent of $1 million). The court would apportion liability among all the parties who caused the workers injury regardless of who they were.

The amendments to the Tort Reform Act now entitles the injured worker to recovery of the entire $1 million from the owner and general contractor! This risk to the general contractor highlights the importance of carefully drafted indemnification clauses and subcontracts. In the cited example, assuming the employer is a subcontractor and the two other parties are the general contractor and owner, the general contractor and owner will be responsible for the entire $1 million of the workers damages for which they were not primarily responsible.

A properly drafted indemnity provision in the subcontract will require the at-fault subcontractor to indemnify the general contractor for the share of the workers damages attributable to the subcontractors fault, and the general contractor will only be responsible to the worker for the fault attributable to it. Therefore, the subcontractor will pay the $800,000 for which it is responsible under a properly drafted hold harmless provision.

Solace for the parties: Insurance

Subcontracts generally obligate the subcontractor to obtain and keep in force during the term of the subcontract comprehensive general liability insurance with dollar limits and coverages equal to or greater than, the minimum specified in the prime contract between the contractor and the owner.

Insurance clauses generally require that the subcontractor name the general contractor and owner as additional insureds under the subcontract or policy and that the comprehensive general liability insurance include contractual liability coverage applicable to the indemnification provisions of the subcontract. Subcontractors should obtain insurance to cover the risk they assume by virtue of the indemnification provision.

---

djc home | top | special issues index