Congratulations, you have done everything right. You have made the right contacts, you have been invited to bid the job, you have submitted your proposal, you have survived the interview process and you have just been notified that you will be awarded the project. This is what we are all in business for — to get the work.
Now that you have been awarded the project, the fun stuff begins. You get with your project design and installation team and turn the project over to them so they can begin ordering material, developing installation drawings and allocating manpower. The contractor tells you the project is moving along and he/she needs your submittals ASAP. This is the scenario of most projects that your company does.
As your company begins to expend resources in design, materials and manpower, you are still thrilled at being selected as the systems contractor for the project. Then, the mailman shows up and there is a thick manila envelope from the general or electrical contractor — whoever you are to be working for — with your subcontract for the project.
As you read through the contract, you see the usual information regarding scope of work, project schedule and, most importantly, billing schedules. However, there is a potential danger lurking in the contract.
There is usually a clause tucked in the contract called Indemnification or Hold Harmless. This small paragraph can potentially be catastrophic to a systems contractor or anyone else who blindly signs a contract without examining the exposure to which they are subjecting themselves. Knowing your options can make a world of difference.
Do Not Fall Prey to Legalese; You Have Power of Change or Denial
Indemnification, or indemnify, is defined by Webster’s as 1) to insure against loss, damage, etc. 2) to repay for (loss or damage). This sounds pretty routine and something we should all be onboard with. However, the clauses in some contracts are loaded with wording that can leave you holding the bag for the negligence or fault of others.
Here is an actual excerpt from a subcontract we were recently asked to sign:
To the fullest extent permitted by law, the subcontractor shall defend, indemnify and hold harmless the Contractor, Owner, and its officers, agents and employees, from and against claims, demands, losses, and expenses, including but not limited to consultant fees and expenses, court costs, and attorneys’ fees, arising out of or resulting from (1) performance of the Work, or (2) a breach of Subcontractor’s warranty that is attributable to or that is claimed to have caused bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself) including loss of use resulting therein.
Subcontractor’s duty to defend and indemnify applies to any conduct whether or not characterized as negligence, intentional or willful, malicious or unlawful, and regardless of whether the resulting injury is alleged to have been caused in whole or in part by negligent acts or omissions of the Subcontractor, Contractor, Architect, Owner, anyone directly or indirectly employed by any of them, or anyone for whose acts any of them may be liable, it being the express intent of the parties that the Subcontractor indemnify Contractor and Owner from their own negligence.
Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity, which would otherwise exist as to a party or person described in this subparagraph 5.11. Subcontractor’s obligations pursuant to the foregoing warranty and indemnity shall survive the expiration or earlier termination of this Subcontractor Agreement. Subcontractor shall maintain liability insurance so that its warranty and indemnity duties under this Subcontractor Agreement are an insured contract.
Now if that does not scare the pants off of you, nothing will! In addition to it being an incredible amount of legalese, it is opening you up as a potential party to a lawsuit at a site you may not have even set foot on.
Let me clarify that I am not a lawyer. I am a systems contractor who has had many contracts with similar indemnity clauses presented to me to sign. In most cases, I have struck out the paragraph and have had mixed reactions from the contractor that has presented it to me.
Indemnification Clauses Add to Costs, Undermine Bidding Process
First, let’s look at the exposure from the insurance aspect. You really need to have a discussion with your insurance agent. In some cases, depending on the coverage you have, you could be nullifying your insurance policy and, therefore, assuming the responsibility yourself.
Self-insurance is a huge thing to consider for anyone other than Fortune 500 companies. You do not want to be left holding the bag in a lawsuit when your insurance carrier informs you that you have no coverage — then tells you it was because you signed a contract with an indemnification clause that obligates you to indemnify and defend another party.
Because you signed that contract, it does not obligate your insurance carrier, who could be off the hook to pay any resulting claim.
Indemnity clauses in some construction contracts, in both the public and private sectors, put unrealistic liability demands on subcontractors. Some insurance carriers are restricting or denying coverage based on indemnification clauses like the one previously reviewed. Some contractors may find as they shop for insurance coverage that the scope and verbiage of the indemnification clause makes them virtually uninsurable.
Because of this lack of insurability and the decision not to assume the risk in-house, many excellent contractors are electing not to bid projects with general contractors whose subcontractor agreements contain unreasonable indemnification clauses.
This leads to a decrease in competitive bidding and the work being taken by a “hungry” contractor who is either uninformed or willing to assume undue risk to be awarded the work. These clauses also add costs in increased insurance premiums being paid by all subs on the project that are subject to the indemnification.
Original Intent of Coverage Twisted in Favor of General Contractors
Let’s look at it from a legal standpoint. Indemnification is not a nasty word and the original intentions for including indemnification clauses in subcontracts were good ones.
The clauses were designed to place the risk on the party who was responsible for a claim. The clauses have been contorted to distribute risk to subcontractors for the benefit of the general contractor and owner. Subcontractors are regularly required, by the contract clause, to indemnify the general contractor for anything that the general contractor was not 100-percent responsible, whether or not the subcontractor had any fault at all.
Indemnification is essentially reassigning the risk, from the top down, from the owner, developer or general contractor down to the project subcontractors. This shift of the risk is designed to protect the owner, etc. from their own negligence. While it is certainly reasonable for the subcontractor to be held liable for its own negligence, it is totally unreasonable for that subcontractor to be required by the contract to be held liable for the negligence of others.
Unfortunately, the cost of these indemnification clauses has fallen to the subcontractors. These are the parties to the project that have the least ability and resources to shoulder the burden, and no ability to shift the burden onto others. These subcontractors are victims of the Golden Rule: He who has the gold makes the rules.
It is the general contractors that place these clauses in their subcontracts. They know that if one contractor will not agree to their terms that there is another out there that will.
Know What You Sign! Consult Your Attorney, Insurance Agent
What can we do to rectify a situation that seems to have gotten out of hand? First and foremost, never sign a contract without full and complete knowledge of what you are signing. Consult a lawyer, your insurance carrier or whoever is necessary to protect you and your company. These clauses could potentially wipe out your company and even you depending on how your company is set up.
Subcontracts are written by general contractors and their team of lawyers not only to spell out and clarify responsibilities and obligations of the parties of the contract, but also to protect their own interests. You must look out for your own interests!
Amend the language or delete a clause in a contract that is unfair to all parties involved. If the general contractor refuses to allow any changes to the contract, you need to give very serious consideration as to whether or not you want to work for them. Is it really worth putting the company that you worked so hard to build on the line for a single job? That is potentially what you are doing if you do not protect yourself from these unfair contract provisions.
Once you have the contract language ironed out and signed, get with your insurance provider and make sure you have proper and complete coverage. There is coverage available called Professional Indemnity Policies. While these policies may provide additional coverage, they may not provide all of the coverage required of the contract. In order to protect yourself, you must confirm with your provider that you are covered for all of your obligations under the contract that you have signed.