Transferring Risk in the Wake of Anti-indemnity Statutes | USA

When written correctly, contractual indemnity clauses and insurance provisions shift the burden of damages from the indemnitee to the indemnitor.  Indemnity agreements, which are commonly referred to as “hold harmless clauses”, are frequently written with complete disregard for the cause of the loss. Business operators generally demand that subcontractors and suppliers of goods and services agree to indemnity clauses in contracts as a requirement to be awarded the work/contract.

Many states have enacted legislation intended to circumvent contractual language, placing liability on the party responsible for causing the damage. The statutes in these forty-five states are commonly referred to as anti-indemnity statutes. Several states have enacted anti-indemnity statutes that limit or prohibit enforcing indemnification agreements in construction settings specifically. Specifically, several states have restricted the ability of the owner/general contractors to obtain additional insured status on the subcontractor’s liability policy for claims. While all states allow limited indemnity agreements, some place judicial restrictions on indemnity. A prime example of this type of restriction can be found within the Fair Notice Doctrine of Texas. Other states have exceptions to anti-indemnity statutes. For example, in Texas the anti-indemnity statutes do not apply to public project contracts or residential construction contracts. Ultimately, anti-indemnity statutes were created and enacted to balance the bargaining power of the parties to a contract.

There are three types of indemnity agreements: limited, intermediate, and broad.  

In limited indemnity agreements, the subcontractor assumes the responsibility solely for its own negligence. There is no protection if the owner/general contractor is at fault, even partially. All states allow limited indemnity provisions.

In intermediate indemnity agreements, the subcontractor assumes responsibility for its sole negligence or partial negligence. If the owner/general contractor is solely at fault, there is no indemnity. There are two types of intermediate indemnity: full indemnity and partial indemnity. When executing a full indemnity agreement, the subcontractor pays for all damages even if only partially at fault. Partial indemnity is determined by the extent of the subcontractor’s negligence.

When bound by a broad indemnity agreement, the subcontractor must indemnify regardless of fault. This transfers the entire risk of loss to the subcontractor. Anti-indemnity statutes generally attempt to limit the frequency of these types of agreements.

All states permit limited indemnity agreements, whereas some states, like Alaska, California, and Georgia, have prohibited broad indemnification. Other states, like Connecticut, Illinois, and New York, prohibit both broad and intermediate/limited indemnity agreements. Texas, Louisiana, Mississippi, and Florida all have construction-related anti-indemnity statutes.

All professionals in the industry should be well-versed in the notable differences between the anti-indemnity statutes of New Jersey and New York.

Properly drafted limited and intermediate indemnity agreements are normally valid under New Jersey law. However, broad indemnity agreements are “void and unenforceable” in New Jersey when such clauses attempt to provide contractual indemnification for claims arising from the indemnitee’s sole negligence. This was clarified in a recent revision in 2023. Further, in this context, New Jersey courts have construed that an agreement requiring an indemnitor to indemnify the indemnitee’s grossly negligent or willful acts can be enforceable.

New York statutes eliminate intermediate and limited indemnification agreements, and their courts strictly construe such clauses. Further, in stark contrast to similar legislation in New Jersey, New York statutes provide that an indemnification clause is void and unenforceable if it requires an indemnitor to hold harmless an indemnitee for the subcontractor’s own negligent acts. 

As states enacted anti-indemnity statutes, many industries, including the construction industry, started to rely on additional insured coverage endorsements to transfer the risk. The additional insured status reinforced the risk transfer provided in the indemnity agreement.

Additional insured clauses in contracts are separate and apart from indemnity clauses; however, they are often intertwined. That is because most Commercial General Liability (CGL) policies exclude coverage for “bodily injury” or “property damage” for which the insured is contractually obligated to pay due to the assumption of liability in the contract or agreement. Many contracts require the subcontractor to purchase insurance that names the owner/general contractor as an “additional insured”. Further, most policies also require an additional insured endorsement to the policy of the subcontractor. When the owner/general contractor is named as an additional insured, the subcontractor’s policy benefits extend to the owner/general contractor. In some jurisdictions (Kansas, Oregon, and Ohio), limited additional insured status is permitted, as with indemnity clauses, and such additional insured coverage is severely limited. Contractually required insurance is not limited and has been used as another way to transfer the risk to the subcontractor.

In Texas, and other jurisdictions that are governed by a similar anti-indemnity statute, such statute prohibits any contractual provision requiring insurance coverage for indemnification clauses prohibited by the anti-indemnity statute. Stated differently, additional insurance coverage can be void if an anti-indemnity statute prohibits it. For example, Arizona, Colorado, Georgia, Kansas, Montana, and Oregon void additional insurance coverage for sole negligence. Despite the restrictions of the anti-indemnity statutes, there are exceptions as discussed above.

A careful review of the policy language and/or additional insured endorsement is required to understand the limitations, if any, of the indemnification obligations of the subcontractor. In some policies, coverage may be limited to the scope of contractual indemnification. In other instances, coverage may be beyond the contract indemnification (possibly beyond the sole negligence of the additional insured). And in some states, it may be possible to not have any form of broad or intermediate contractual indemnity, but one could still obtain relief as an additional insured under the subcontractor’s liability policy.

In Texas, Louisiana, New Mexico, and Wyoming, there are anti-indemnity statutes specifically addressing the oilfield services industry.

As stated above, the State Anti-Indemnity Acts have a substantial impact on contracts and insurance policies subject to them, as they can void indemnity language and additional coverage in some cases. It is imperative to review both the state anti-indemnity statutes, the contract, and the additional insured provisions and/or endorsements to the policy to accurately and legally transfer risk.