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Contractual obligations to indemnify and insure: The language does matter

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It's common in Minnesota for a general contractor to have a clause in its subcontract which forces a subcontractor to indemnify the general contractor for all personal injury or property damage claims without regard to whether the subcontractor is at fault in causing the injury or damage. Recently, the Minnesota Supreme Court addressed the impact of a Minnesota statute which limits such indemnification agreements in construction contracts on (1) a subcontractor's agreement to indemnify a contractor and (2) the subcontractor's contractual obligation to obtain insurance to cover such indemnity obligation.

Minnesota law prohibits indemnity agreements contained in construction contracts except to the extent the underlying injury or damage is attributable to the negligent or wrongful act or omission of the entity who has agreed to the indemnity obligation. Minn. Stat. § 337.02. In simple terms, Minnesota law prohibits an agreement in a construction contract in which one party agrees to be liable for injuries or property damage caused by someone else.

There is currently a broad exception to this general rule. Until August 1, 2013, it is acceptable for a subcontractor to purchase insurance "for the benefit of others" without regard to who caused the injury or property damage. Minn. Stat. § 337.05. If the subcontractor fails to purchase the agreed upon insurance that subcontractor may be required to indemnify the contractor to the extent the agreed upon insurance would have covered the loss. Minn. Stat. § 337.05. When the specified insurance is not reasonably available in the market, the subcontractor with the indemnity obligation can avoid liability for failing to purchase the agreed upon insurance by either informing the contractor before signing the subcontract or signing the subcontract with a written exception that the insurance is not available. Minn. Stat. § 337.05.

In Engineering & Construction Innovations, Inc. v. L.H. Bolduc Co., ECI, a first-tier subcontractor, entered into a subcontract with Bolduc under which Bolduc agreed to construct cofferdams along a pipe line project. Under the subcontract, Bolduc agreed to indemnify and defend ECI from all claims arising out of injury to any persons or damages to property caused or alleged to have been caused by any act or omission of Bolduc, its agents, employees or invitees. In addition, Bolduc agreed to purchase insurance that specifically covered the indemnity obligation and to name ECI as an additional insured on the policy.

Bolduc purchased commercial general liability insurance from Travelers and Travelers issued an endorsement to the commercial general liability policy naming ECI as an additional insured for liability caused by acts or omissions of Bolduc. While Bolduc was in charge of driving the metal sheeting into the ground necessary to construct the cofferdams, ECI was contractually obligated to tell Bolduc where to drive the sheet metal. At one of the cofferdam locations, one of Bolduc's metal sheets caused damage because it was driven through the edge of the pipeline. The owner directed ECI to repair the pipe and ECI spent over $200,000 making the repairs. ECI then refused to pay Bolduc the remaining amount due to Bolduc under the subcontract. ECI sought reimbursement from Travelers. Travelers refused to reimburse ECI claiming that Bolduc was not the cause of the damages and therefore ECI's claims did not fall within the coverage provided by the additional insured endorsement.

ECI commenced a lawsuit against Bolduc and Travelers. A jury determined that Bolduc was not at fault for causing damage to the pipeline. On appeal, the Minnesota Supreme Court determined that ECI's coverage under the additional insured endorsement could not be divorced from the concept of fault and that ECI was an additional insured under the endorsement with respect to liability for property damage. For ECI to be covered under the policy, such liability for damage must have been caused by the negligent acts or omissions of Bolduc. Because the jury determined Bolduc was not at fault for causing the pipeline damage, the Supreme Court determined ECI was not covered under the endorsement.

The Court also determined that because Bolduc was not at fault for the pipeline damage, requiring Bolduc to indemnify ECI would run afowl of the anti-indemnity provision in Minnesota Statute § 337.02. The Court determined the only way Bolduc would be required to indemnify ECI is if the construction contract required Bolduc to obtain insurance to cover the required indemnification and Bolduc failed to procure that insurance. The Court also determined that because ECI waived its claim that Bolduc breached the contract by failing to provide the type of insurance mandated by the contract, the claim could not be reasserted on appeal.

Prompted by the Court’s decision, the Minnesota legislature amended Minn. Stat. § 337.05, effective August 1, 2013, to specifically prohibit a general contractor from requiring its subcontractors to provide insurance coverage for the general contractor, for the general contractor's own negligence or intentional acts.1 Despite this broad prohibition, the legislature effectively codified the Bolduc decision by allowing general contractors to require subcontractors to provide insurance coverage for the general contractor's vicarious liability arising out of the acts or omissions of the subcontractor. Minn. Stat. § 337.05(d)

What does this means in practical terms:

    1. Contractors seeking to be indemnified in construction contracts by their subcontractors should make sure the indemnity obligation is limited to (a) personal injury or property damage caused by the negligent or wrongful acts or omissions of the subcontractor (b) and vicarious liability arising out of the acts or omissions of the subcontractor.
    2. Subcontractors who are obligated to purchase insurance must ensure that the insurance they purchase is the type of insurance specifically required by the construction contract. Doing so will minimize the change the subcontractor could be required to indemnify the contractor for failing to obtain the required insurance.

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1 "A provision that requires a party to provide insurance coverage to one or more other parties, including third parties, for the negligence or intentional acts or omissions of any of those other parties, including third parties, is against public policy and is void and unenforceable." Minn. Stat. § 337.05(b).