How Best to Enforce Insurance and Indemnity Clauses

by marika_gabriel | 10 September 2023 8:00 am

[1]Construction industry professionals, from manufacturers to contractors to lawyers, are aware that almost every construction contract contains insurance and indemnity clauses. At the risk of oversimplification, these contractual provisions work to shift risk for personal injury and property damage between the parties. Although they are not identical in their form or purpose, there is sufficient overlap to create a redundancy that offers more protection than each one alone when done properly. The less considered problem is what happens when a party or parties fail to meet these contractual obligations.

Be aware of provisions. For illustration purposes, assume the contract between the general contractor and the subcontractor contains a provision that requires the subcontractor to carry general liability insurance and name the general contractor as an additional insured. In addition, assume the contract contains an indemnity provision that requires the subcontractor to defend, indemnify, and hold the contractor harmless if someone gets hurt on the project site. If the contractor is sued after a worker employed by another subcontractor is injured on the job, the contractor tenders the defense and indemnity obligations to both the subcontractor and their insurance company. When the insurance company and the subcontractor refuse to defend and indemnify the contractor, the contractor faces a very practical problem.

Make sure there are multiple options. The pending lawsuit will not go away because the subcontractor’s insurance company and the subcontractor itself have refused to meet their legal obligations. A person with less knowledge of this situation might even suggest this is exactly why the carrier and subcontractor refused to meet their obligations. If they make matters difficult, the contractor may just resolve the claim and move on without any further action. In other cases, this occurs because of a differing, but legitimate view of the obligations as the facts are applied. Either way, the contractor has several options available to it.

See if the subcontractor is needed. As an option, the contractor can simply move forward to litigate the case without further involvement from the subcontractor. In some cases where the subcontractor is a party, they might even fail to respond and have a default judgment entered against the situation. In a scenario, where the contractor elects to go forward on its own, they could litigate the matter using standard crossclaims or choose to settle the case without contribution from the subcontractor. It might then simply get its release and move on with no further action.

Consider counterclaiming. Another option would be to file a counterclaim for breach of contract against the subcontractor as part of the same lawsuit. It can be argued that the subcontractor breached its obligations to buy the correct insurance (since coverage was denied) and failed to meet its contractual obligations to defend and indemnify the contractor. This would require the contractor to continue to litigate the matter while preserving the right to have all the liability allocated to the subcontractor at the end of the case. However, the practical reality of this scenario to keep in mind is the high cost associated with court and attorney fees up until the verdict is determined.

Look for other ways. The contractor could defend the claim against it in a personal injury case, as described in the option above, and then file a separate declaratory judgment action in the same or a different court asking for a “declaration” that the insurance coverage
is owed by the carrier and that the subcontractor has a defense and indemnity obligation. These cases simply ask the court to interpret the contract and do not award damages. In theory, declaratory judgment cases should move through the system faster. It is also possible for the underlying personal injury case to be slowed down to allow the declaratory judgment action to come to a conclusion first. The strategy is to have a court order the insurance company and subcontractor to meet their defense and indemnity obligations though.

Make the best out of a bad situation. Each of these scenarios are attempts to make the best out of a bad situation; none of them are inviting or economical. Although, this story unfolds in more cases than contractors would like to know. The moral of the story is to ensure the insurance and indemnity clauses are clear and precise and get the claim submitted as early as possible so any insurance and indemnity issues can be resolved before the underlying lawsuit advances or is filed. It is important to frame the facts up before anyone else does, as doing so will decrease the odds of having a tender rejected.

In short, be proactive, focus on the coverage issues, and do your best to enforce what is hopefully a relatively clear contractual obligation. Yes, it will cost you some money, but the investment on the front end will only help to save a lot more money on the back end.

In short, be proactive, focus on the coverage issues, and do your best to enforce what is hopefully a relatively clear contractual obligation.

Josh Quinter is a commercial litigation attorney, with a focus on construction law. He is also a member of the board of directors and a department chair at his law firm, Offit Kurman. Active in a number of construction trade and business organizations, Quinter is past president of the Mid-Atlantic Chapter of the Metal Building Contractors & Erectors Association (MBCEA), serves on the MBCEA national board, and is the organization’s general counsel. He can be reached at jquinter@offitkurman.com.

Source URL: https://www.metalconstructionnews.com/articles/columns/how-best-to-enforce-insurance-indemnity-clauses/

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