By: Thad Schurter
Construction and design contracts typically include several risk shifting provisions that operate to transfer risk to the party that is best equipped to minimize that risk. Indemnity and additional insured provisions are two common examples of such provisions. The basic function of an indemnity provision is to allow the party receiving the benefit of the provision, the indemnitee, to be protected and held harmless for claims and losses caused by either a negligent act or breach of contract by the indemnitor that results in personal injury or damage to property. Typically, general contractors or design professionals will agree to indemnify a project owner, but it is equally common for prime contractors and designers to include indemnity provisions in their subcontract and subconsultant agreements.
Wilhelm and the Indiana Anti-Indemnity Statute
Although Indiana courts have historically enforced contractual indemnity obligations, an unpublished opinion from the Indiana Court of Appeals in 2017, Wilhelm Construction, Inc. v. Secura Insurance, 2017 WL 2265402 (Ind. Ct. App. 2017), appeared to jeopardize this trend. Wilhelm involved a work-place injury to the employee of a sub-subcontractor on a construction project in Indianapolis. The employee was injured while dismantling scaffold after a co-worker using a fork-truck to remove a section of the scaffold caused it to collapse. The injured employee sued the general contractor and its subcontractor for negligence and asserted that both had assumed a contractual non-delegable duty to provide a safe work environment to individuals working on the site. In turn, the general contractor and subcontractor sought indemnity from the sub-subcontractor and its insurer for the worker’s claim.
Before Wilhelm was decided, Indiana’s Anti-Indemnity Statute, Indiana Code § 26-2-5-1, provided that any provision in a construction or design contract that purported to indemnify the indemnitee against liability for 1) death or bodily injury to persons; 2) injury to property; or 3) design defects; from the sole negligence or willful misconduct of the promise or its agents, servants or independent contractors who are directly responsible to the promisee, was void as against public policy and unenforceable. In other words, a party that was 100% at fault for a death, damage to persons or property, or design defects could not pursue a claim for indemnity against one of its downstream contract partners.
While the “sole negligence” concept is straightforward, the Anti-Indemnity Statute was less clear on the issue of “nondelegable duties”. Typically, nondelegable duties arise because the law imposes a duty that cannot be legally transferred to another party. While one party may not have been 100% “at fault” or “solely negligent” for an injury, if the claim arose out of one of these “nondelegable duties”, Indiana’s Anti-Indemnity Statute would void any indemnity agreement that attempted to shift that burden onto another party. The Wilhelm opinion contemplated that a party like Wilhelm could be considered solely negligent for purposes of the Anti-Indemnity Statute where it was vicariously liable for the negligence of a downstream contract partner, like the sub-subcontractor who employed the injured worker, because it had assumed a non-delegable duty of safety through its contract.
Noting that the purpose of the Anti-Indemnity Statute was to increase safety at construction sites, the Wilhelm court explained that Indiana’s General Assembly had inserted broad language “which extend[ed] application of the statute to not only the sole negligence of the promisee, but also the sole negligence of promisee’s agents, servants, and independent contractors who [were] directly responsible to the promisee.” The Wilhelm Court held that the sub-subcontractor was an independent contractor to the general contractor and was therefore within the class of entities covered by the statute. The Court then concluded that the parties’ respective indemnity clauses (that were intended to transfer risk down to the sub-subcontractor) were rendered void because the statute disallowed indemnity for both the sole negligence of the promisee and the sole negligence of the promisee’s independent contractors. As a result, neither the sub-subcontractor nor its insurance company were obligated to indemnify Wilhelm, notwithstanding the parties’ indemnity agreements.
Senate Enrolled Act 230
If Wilhelm had been a published decision, it might have undermined or invalidated a countless number of construction contracts that rely on indemnity provisions to manage and transfer risk. Fortunately, in the two-years since Wilhelm, several legislative efforts were made to amend the Anti-Indemnity Statute. On July 1, 2019, and largely in response to the Wilhelm decision, Governor Holcombe signed Senate Enrolled Act 230 into law and amended the Anti-Indemnity Statute. The amendment operates to restore the more traditional approach to enforcing indemnity agreements between construction project participants. As a result, the statute no longer includes references to “agents”, “servants”, or “independent contractors.” It also now provides that “sole negligence does not include vicarious liability, imputed negligence, or assumption of non-delegable duty.”
Senate Enrolled Act 230 also included several smaller, yet significant changes to Indiana law. First, it clarified that the Anti-Indemnity Statute expressly applies to design-build contracts. Second, it provided that Indiana design professionals cannot be required to defend another party (their client, for example) against claims of negligence arising out of their work. More specifically, the amended statute provides that contract provisions that require a design professional to defend its client against professional liability claims are void and unenforceable. Finally, it also provided that a design professional also cannot be required to indemnify another party for liability other than liability for damages and losses arising out of third-party claims to the extent that those damages and losses are caused by the professional’s negligence or willful misconduct.
How Does This Affect You?
These changes are significant for several reasons. The most noteworthy and practical application of the amendment for contractors and subcontractors is that the negligence of a subcontractor or sub-subcontractor is no longer imputed to upstream contractors as “sole negligence” for purposes of the Anti-Indemnity Statute. Therefore, when an upstream contractor is sued by the injured employee of one of its downstream party, it is free to seek contractual indemnification provided it was not solely negligent for the underlying injury or damage.
With regard to the changes impacting the defense and indemnity obligations of design professionals, the new language raises numerous additional legal issues for owners, design professionals and contractors that warrant their own newsletter article. The most immediate impact for design professionals pertains to the cost of defending claims. Recall that unlike the general liability coverage carried by most contractors, professional liability insurance procured by design professionals does not include coverage for the costs associated with defending others. As a result, if these provisions were enforceable, a design professional would be obligated to pay the cost of defending its client regardless of whether it was found to be at fault for the claimed loss. The amendment also prevents a client from holding a design professional responsible for 100% of the fault where the client was responsible for causing a majority of the damages for which it was seeking indemnity. These and other issues will be explored by DSV in future newsletters.
Ultimately, the amended Anti-Indemnity Statute helps to ensure that the traditional contractual allocation of risk on Indiana construction projects remains enforceable and also helps to protect Indiana design professionals from incurring risks that are unbalanced and uninsurable.