Indemnification: The Ultimate Risk Shifter

One of the simplest ways to define a written contract is that it is a risk shifting device. When you think about it, everything beyond the terms of the consideration to be exchanged between the parties, which is essentially all that is required to form an enforceable contract, are more or less risk shifting provisions. For example, with respect to construction contracts, beyond the scope of work a contractor promises to complete, and the amount of money the owner promises to pay the contractor for the completed scope of work (the exchange of consideration), all other terms can pretty much be characterized as risk shifting terms. Payment timing terms, insurance terms, warranties and exculpatory clauses, such as no damages for delay clauses, are among the most common examples of these risk shifters, all of which shift not only the risk but also its associated costs, both known and unknown, from one party to the other.

One of the most sweeping and powerful risk shifting devices found in construction contracts is known as indemnity, also commonly referred to in construction parlance as an indemnification clause. These indemnification clauses are included in the various form contracts utilized in the construction industry including the AIA family of documents as well as the Consensus Docs® for example. They are also often seen in contract documents created by owners or contractors and their counsel.

So what is indemnification?  Various dictionaries define the term to mean to reimburse or compensate one for a loss, injury or expense. 

In the context of a construction project, an indemnification clause is an owner-contractor contract, which generally obligates the indemnitor/contractor to pay the indemnitee/owner for any damages or legal liability incurred by the indemnitee/owner as a result of claims brought by third parties (for example an action brought by a subcontractor or a personal injury claim brought by a visitor to the Project.)

Indemnification clauses can be limited or extremely broad in defining the scope of a contractor or subcontractor’s indemnification obligations. The most broad indemnification clauses would even have the indemnitor obligated to indemnify the indemnitee for the indemnitee’s own negligence.   Contractors should have their attorney and their insurance agent review indemnification clauses.  The attorney can explain the legal ramifications of agreeing to the provision and assist in negotiating a narrower or less onerous revision to the indemnification clause – and, the insurance agent can advise the contractor of coverage issues and gaps resulting from an overly broad indemnity provision. 

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Please contact the author of this article, Thomas O. Williams, should you have any questions about your rights and obligations with respect to indemnification by calling (717) 763-1383 or via email at TWIlliams@ReagerAdlerPC.com. 

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Harrisburg Magazine Readers' Choice 2011