By: Jeffrey M. Kraft
Indemnification clauses are ubiquitous in construction and design contracts. This includes subcontract agreements, which generally require that the subcontractor indemnify the contractor for any claims related to the subcontractor’s work. However, when that claim arises out of a jobsite injury to the subcontractor’s employee, the contractual indemnity potentially conflicts with the immunity usually afforded to employers under workers’ compensation laws. Specifically, the contractual indemnity creates a scenario where a subcontractor can be held indirectly liable for its employee’s injury (through a contractor’s indemnity claim) even though the subcontractor would be immune from a claim for the same injury brought directly by the employee.
Because of this potential conflict, states differ on whether they will enforce contractual indemnity against a subcontractor. Below is a brief review of how Indiana and its four neighboring states (Michigan, Illinois, Kentucky, and Ohio) address contractual indemnification against a subcontractor.
Indiana permits enforcement of contractual indemnity by a contractor against a subcontractor for claims arising out of the subcontractor’s employee’s jobsite injury. See GKN Co. v. Starnes Trucking, Inc., 798 N.E.2d 548, 552-55 (Ind. Ct. App. 2003). This can include cases where the injury resulted in part from the contractor’s own negligence if the indemnification clause provides for such indemnity in clear and unequivocal terms, although Indiana will not enforce indemnification clauses that seek to indemnify a contractor for injuries caused entirely by the contractor’s own negligence. See I.C. § 26-2-5-1; GKN Co., 798 N.E.2d at 552-55; Moore Heating & Plumbing, Inc. v. Huber, Hunt & Nichols, 583 N.E.2d 142, 147-48 (Ind. Ct. App. 1991).
Like Indiana, Michigan also permits enforcement of contractual indemnity by a contractor against a subcontractor for claims arising out of the subcontractor’s employee’s jobsite injury. See Zhan v. Kroger Co. of Michigan, 764 N.W.2d 207, 211 (Mich. 2009) (“Although [subcontractor] cannot be held directly liable for negligence by its own employee by virtue of the [Worker’s Disability Compensation Act, M.C.L.A. § 418.131(1)], nothing in contract law precludes an employer from voluntarily assuming liability for negligence through a contractual arrangement. Similarly, nothing in the WDCA precludes parties from entering into such an agreement.”) Also like Indiana, the only significant limitation Michigan places on enforcing contractual indemnity is that it prohibits indemnification of a contractor by a subcontractor for injuries caused solely by the contractor’s negligence. See M.C.L.A. § 691.991; Miller-Davis Co. v. Ahrens Const., Inc., 848 N.W.2d 95, 102 (Mich. 2014).
Kentucky also permits enforcement of contractual indemnity by a contractor against a subcontractor for claims arising out of the subcontractor’s employee’s jobsite injury. See Labor Ready, Inc. v. Johnson, 289 S.W.3d 200, 208 (Ky. 2009) (holding that the exclusive remedy provision of Kentucky’s workers’ compensation statute “clearly permits employers . . . to agree to share an employer’s liability for damages in a manner different from that set forth in the statute, provided they do so by written contract”).
However, Kentucky is unique in that the expansive application of its workers’ compensation statute likely renders contractual indemnity unnecessary in this scenario. Specifically, the exclusive remedy provision of Kentucky’s workers’ compensation statute is drafted broadly, such that it extends a contractor’s workers’ compensation liability – and associated civil tort immunity – to claims made by its subcontractors’ employees as well as its own. See id. at 203-06 (citing K.R.S. 342-690(1)). Furthermore, a contractor can be liable for workers’ compensation to a subcontractor’s employee only where the subcontractor lacks workers’ compensation coverage or otherwise fails to pay, and the contractor may recover the compensation paid and necessary expenses from the subcontractor. See id. (citing K.R.S. 342.610(2), 342.700(2)).
Illinois permits enforcement of contractual indemnity by a contractor against a subcontractor for claims arising out of the subcontractor’s employee’s jobsite injury, but it imposes two significant limitations.
First, Illinois treats indemnification clauses of this kind as seeking contribution rather than full indemnification. See Virginia Sur. Co., Inc. v. Northern Ins. Company of New York, 866 N.E.2d 149, 155 (Ill. 2007). Consequently, a contractor seeking indemnity from a subcontractor can only recover the portion of the harm caused by the subcontractor’s negligence. See id.
Second, the subcontractor’s liability generally is limited to its statutory liability under the Illinois Worker’s Compensation Act. See Estate of Willis v. Kiferbaum Const. Corp. 830 N.E.2d 636, 641 (Ill. App. Ct. 2005). For a subcontractor’s liability to not be so limited, the indemnification clause must contain a clear waiver of the limitation. See id. at 642 (holding that an indemnification clause clearly waived the limitation where it stated that “the indemnification obligation under this Paragraph . . . shall not be limited in any way by any limitation on the amount or type of damages, compensation or benefits payable by or for the Subcontractor under . . . workmen’s compensation acts”).
Unlike the other states, Ohio generally prohibits enforcement of contractual indemnity by a contractor against a subcontractor for claims arising out of the subcontractor’s employee’s jobsite injury on the grounds that such agreements violate that subcontractor’s immunity under Ohio’s statutory and constitutional workers’ compensation provisions. See Pentaflex v. Express Services, Inc., 719 N.E.2d 1016, 1020 (Ohio Ct. App. 1998) (citing Ohio Const., Art. II, § 35; R.C. 4123.74). Ohio will enforce contractual indemnification in this scenario only where the indemnification clause contains an express and specific waiver of the statutory and constitutional immunity. See id.
Implications for Construction Professionals
Contractors (and their counsel) need to be mindful in drafting indemnity and choice-of-law provisions in subcontract agreements of the state-specific limits on, and requirements for, enforcing contractual indemnity against a subcontractor for claims arising out of the subcontractor’s employee’s jobsite injury. This is particularly true for contractors who operate in multiple states and thus may wish to draft separate subcontract agreements or addendums addressing each state’s specific requirements. Likewise, subcontractors (and their counsel) need to be aware of the potential loophole contractual indemnification can create in their immunity under workers’ compensation and to understand the extent to which a contractor can enforce contractual indemnity against them. Finally, both contractors and subcontractors should consider the impact on necessary insurance coverage caused by the liability burden-shifting (or lack thereof) available through contractual indemnity.
If you have questions about indemnity provisions in subcontract agreements, please contact your DSV attorney or Jeffrey M. Kraft at firstname.lastname@example.org.
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