Examining Risk Transfer in Construction Agreements

By Brian F. Mark, Esq. and Lawrence M. Ross, Esq.

Well written risk transfer clauses are essential in the defense of a construction site accident and may mean the difference between the continuation or failure of an owner’s or general contractor’s family business. Too often, however, the owner or general contractor relies on existing commercial and/or personal relationships in selecting a vendor/subcontractor, and does not think it important to pursue a written agreement with those with whom it has an established track record of success in working on a long line of projects.  In these instances, perhaps in the haste to commence work on the project or make up for unexpected construction delays, or possibly as a sign of confidence and good faith, the owner or general contractor will enter into verbal agreements or basic time and materials agreements which do not require the owner or general contractor to be properly indemnified or named as additional insureds.

The Problem is the Contract

Let’s take for example an owner that has been in business for five years and has used a family owned window installer on several past projects.  On every occasion the installation has come in on time and under budget.  This time the contract is for the installation of fixed and out-swing steel casement windows and doors for an apartment complex that are manufactured by a specific producer. The city permit will be secured by the vendor who will also be responsible for the daily cost of a flagman.  As is customary, the vendor is responsible for all advance preparation of and access to the work area and is required to carry commercial general liability insurance.  Nothing further is provided for in the contract.

This simple form of contract is never a problem until there is a problem!

The Accident

In this instance, on a bright sunny Wednesday morning in June in the Hudson River Valley, the following unfortunate series of events took place.   A 27-year-old worker, newly married and a bit tired from a gathering of friends the night before, had been attempting to unload windows from a delivery truck as part of a large-scale window replacement project.  Due to limited street parking, and perhaps to facilitate unloading, he parked the truck on an angle.  Unbeknownst to the worker, the rear passenger side tire was not flush with the street.  Looking back on things from our vantage point today, there is a dispute as to whether the truck had been parked alongside debris or was too close to the curb.

The windows were tied down with straps.  After removing one row of several stacks of windows, our newlywed took a short break to call his bride.  Afterwards, while attempting to unload the next row of windows, the stack shifted and fell on him.  Among other less-significant injuries, he broke his ankle and suffered a severe gash on his head.

Does the Labor Law Apply?

Like many others who sustain similar injuries, our newly wed retained a lawyer and initiated a lawsuit.  A dispute arose during the litigation as to whether the Labor Law applies. Often, this legal disagreement is resolved by the filing of motion papers, but even so, legal costs at this stage in litigation can easily exceed $40,000, once the costs of discovery are considered.  Not surprisingly, the lack of proper risk transfer language in the contract was a significant obstacle for the defense. New York’s highest court, the Court of Appeals, has held that, “a party is entitled to full contractual indemnification [for damages incurred in the personal injury suit] provided that the ‘intention to indemnify’ can be clearly implied from the language and purposes of the entire agreement and the surrounding facts and circumstances”.  See, Drzwiski v. Atlantic Scaffold & Ladder Co., 70 N.Y.2d 774 (1987).

A Further Complication

Another potential issue resulting from a lack of clear indemnification language is that Section 11 of the Workers’ Compensation Law bars actions by third-parties against the employer for indemnification and contribution unless the plaintiff has suffered a grave injury or there is a contractual indemnity obligation.  Thus, in our scenario, in addition to not being able to assert a valid contractual indemnification claim, the owner would not be able to seek recourse against the window vendor based on any common law claims.

Unfortunately, once this accident occurred and a lawsuit was commenced, this owner was in the unenviable position of bearing sole responsibility for the accident under the Labor Law as well as for any resultant damages.  The day after the accident it was too late to effectively transfer risk of loss to the window vendor, the person or entity responsible for the loss!

What is to be Done to Avoid Statutory Liability? 

How can we as attorneys better counsel owners and general contractors to avoid exposure to needless risk and legal liability, with the benefit of strengthening our insurance defense?  In general, favorable construction contracts and/or agreements should contain both an indemnification provision and an insurance procurement clause, effectively giving the party receiving goods or services under the contract two opportunities to transfer the risk.   When the construction agreement contains both such provisions, the party receiving the goods or services can assert two separate and distinct claims; one for contractual indemnification against the vendor and another for additional insured coverage from that entity’s insurance carrier.

The Relevant Decisions

The enforceability of an indemnification agreement will be determined by the application of the Court of Appeals’ decisions in Brown v. Two Exchange Plaza Partners, 146 A.D.2d 129, Aff’d 7 6 N.Y. 2d 172(1990) and Itri Brick & Concrete Corp. v. Aetna Cas. & Sur. Co., 89 N.Y.2d 786 (1997).   In both cases, the Court reiterated the principle that, in cases involving construction site incidents, where there is evidence of negligence on the part of a party seeking to be indemnified, General Obligation Law (GOL) §5-322.1 prohibited the enforcement of the contract.

In Dutton v. Charles Pankow Builders Ltd, 296 A.D. 2d 321 (1st Dept. 2002), the Court held an indemnification agreement was enforceable because the indemnity clause provided that the subject contractor indemnify the general contractor “to the fullest extent permitted by law.”  The Court ruled that the indemnification provision contemplated “partial not full indemnification of the general contractor for personal injuries partially caused by its negligence and is there enforceable.”  Id.  Without such savings language, indemnification agreements providing for indemnification of the owner or general contractor for their own negligence will be found to be void.

Developing this sort of effective language to be included in a client’s construction agreements should be an easy step to protect them should an accident occur and potentially save the client millions of dollars.

Has the Problem Been Resolved

Now, take a look at this second contract—note that it does contain an insurance provision:

Contractor will carry complete insurance coverage, liabilities for injury or death arising out of any one accident, property damage ($5,000,000 combined per occurrence) and Workmen’s compensation insurance protecting customer, agent and contractor. All employees are covered by surety bond.  A certificate of this coverage will be furnished to the customer upon request.

Is this adequate?  No.  It fails to require that the owner or general contractor be named as additional insureds.  The practical effect of this deficiency in the contract language is that an owner or general contractor’s tender to the contractor’s insurance carrier seeking additional insured coverage will likely be denied.  Most blanket additional insurance endorsements in use today contain language requiring that a written agreement be entered into between the insured contractor and the party seeking additional insured coverage and that the agreement contains language requiring that the owner or general contractor be named as an additional insured.

What Type of Provision is Recommended?

Having now seen two examples of ill-advised contractual language, what provision should the properly educated owner or general contractor consider?  The passage noted below is the standard general conditions of an AIA contract, which contains proper indemnity language as well as an insurance procurement clause.  The indemnification provision (3.18.1) states:

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 part by a party indemnified.

Further, the insurance procurement provision (11.1.1) requires the “Contractor” to purchase and maintain insurance naming the Owner, Architect, and Architect’s consultants as additional insureds.  Generally, the specifics of the required coverage are set forth in an exhibit to the contract.  Such requirements usually include obtaining CGL, Auto, and Workers’ Compensation insurance policies and will include language requiring that the policies apply on a primary, non-contributary basis.

Last Advice

Adding two relatively simple paragraphs to a construction related agreement could end up being the difference between losing your building or your business and having someone else’s insurance carrier paying for your defense costs and indemnifying you.  It really can be that stark of a contrast and almost always is.  Even if the suit is defensible, the defense costs could prevent you from being able to effectively litigate.  Will your construction agreements pass muster when the time comes?  Don’t wait until it is too late!  Now is a great time to review existing contract language and determine if changes are needed.

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