The Construction "Anti-Indemnity" Statute The Construction "Anti-Indemnity" Statute

The Construction "Anti-Indemnity" Statute

Introduction

An indemnity agreement involves “a promise by one party (the indemnitor) to reimburse another party (the indemnitee) for the indemnitee's loss, damage, or liability.” Henthorne v. Legacy Healthcare, Inc., 764 N.E.2d 751, 756 (Ind.Ct.App.2002).  Nearly every construction contract contains some sort of provision addressing the parties' indemnity obligations. The indemnitee, of course, wants broad indemnity, and often requires the indemnitor to assume liability for the indemnitee’s fault even in situations where only the indemnitee is at fault. States handle these provisions in three different ways. In a handful of states, such as Nevada and Pennsylvania, an indemnitee can be forced to pay for damages even if the damages are 100% the fault of the indemnitor.

Most states have limited the enforceability of provisions in construction contracts providing one party must pay for the sole fault of another. They do this for two reasons. First, it is bad public policy - if a party does not have to pay for its bad acts, then it has no incentive to prevent injuries and damages. Second, often there is a disparity in bargaining power between the parties to a construction contract, leading to onerous obligations such as full indemnity when the indemnitor has no fault.

States that have enacted restrictions generally fall into two categories. First, states like Indiana's neighbors Illinois, Ohio, and Kentucky completely ban indemnity clauses in construction contracts that call for indemnity for another's fault. These clauses apply even if both the indemnitee and indemnitor were at fault. So, in these states, even if the indemnitor was 90% at fault and the indemnitee was 10% at fault, the indemnitor cannot be forced to pay for the damages caused by the indemnitee's 10% fault.
           
Other states, like Indiana and Michigan, ban indemnity only if the indemnitee is "solely" at fault. Indiana's anti-indemnity statute, located at Indiana Code § 26-2-5-1, states:
All provisions, clauses, covenants, or agreements contained in, collateral to, or affecting any construction or design contract except those pertaining to highway contracts, which purport to indemnify the promisee against liability for:
 
(1) death or bodily injury to persons;
(2) injury to property;
(3) design defects; or
(4) any other loss, damage or expense arising under either (1), (2) or (3);
 
from the sole negligence or willful misconduct of the promisee or the promisee’s agents, servants or independent contractors who are directly responsible to the promisee, are against public policy and are void and unenforceable.
 
Under this statute and similar statutes in other states, if the indemnitor is 10% at fault and the indemnitee is 90% at fault for some damage, the indemnitor can be compelled to pay for all of the damages despite the fact its fault is much less than that of the indemnitee.
 
When does the statute apply?
 
A frequent issue that arises is whether Indiana Code § 26-2-5-1 applies to a particular contract. It only applies to construction and design contracts, and those wanting to avoid the application of the statute sometimes argue the work falls outside of the realm of construction or design. In LTV Steel Co., Inc. v. Northwest Engineering & Const., Inc., contractor agreed to perform “general maintenance repairs” at owner’s steel mill. 845 F.Supp. 1295 (N.D.Ind. 1994). This work included, for example, replacing wearplates in the coal hopper of a blast furnace. The contract provided that contractor would indemnify owner for owner’s sole negligence. One of contractor’s employees was injured on the job and sued owner. Owner settled the lawsuit then sought indemnity against contractor.
 
Contractor argued that the contract was for construction work and thus Indiana Code § 26-2-5-1 barred indemnity for owner’s sole negligence, and the Indiana Court of Appeals agreed. It rejected owner’s argument that the statute applied only to new construction projects. The Court analyzed various definitions of “construction,” including definitions in other sections of the Indiana Code, in reaching its conclusion that the maintenance work the contractor performed was construction work covered by the statute.
 
In Portside Energy Corporation, Inc. v. Northern Indiana Commuter Tramps. Dist., the operator of a railroad entered into an agreement allowing a company to cross its railroad. 913 N.E.2d 221 (Ind.Ct.App. 2009). It provided company would fully indemnify the operator, including for its sole negligence. The agreement also contemplated the company would perform some construction, design, and maintenance work, but no such work had occurred up to the time of the incident leading to the indemnification claim. Based on these facts, the Court determined the agreement was a licensing agreement, not a construction or design contract, and thus Indiana Code § 26-2-5-1 did not apply.
 
In McMunn v. Hertz Equipment Rental Corp., lessor leased a loader to contractor. The lease agreement stated contractor would fully indemnify the lessor. 791 F.2d 88 (7th Cir. 1986). After the lessor was sued for injuries allegedly caused by the loader it sought indemnity from the contractor. The Court declined to apply Indiana Code § 26-2-5-1, finding that a loader could be used for various sorts of non-construction work and there was no evidence that the lessor knew the loader was going to be used for construction work. The Court concluded, “the supplier of a nonspecialized good who has no (other) basis for thinking that the good will be used in construction is not within the scope of the statute.”
 
What happens if the statute voids an indemnity provision?
 
In a few cases Indiana courts have applied Indiana Code § 26-2-5-1 in situations where the contract required indemnity for the indemnitee’s sole negligence. In Williams v. Southern Indiana Gas and Elec. Co., Inc., the indemnity provision stated the contractor would indemnify the owner regardless of whether the claim was "DUE IN WHOLE OR IN PART TO THE NEGLIGENCE OF OWNER." 551 F.Supp.2d 751 (S.D.Ind. 2008). The Court chose not to strike the entire provision, instead reading out of the provision the words "in whole" and enforcing the remainder of the provision.
 
A similar issue arose in Progressive Const. and Engineering Co., Inc. v. Indiana and Michigan Elec. Co., Inc., 533 N.E.2d 1279 (Ind. Ct. App. 1989). There the indemnity provision stated the contractor indemnified the owner even if the damages related solely from the negligence of owner, but the provision went on to say, “... except insofar as such indemnity arising out of such injury or damage caused by the sole negligence of Owner or such representatives or employees may be found to be contrary to law, in which case this agreement of indemnity shall in all other respects be and remain effecting and binding.” The Court stated this showed the parties were aware of the limits on indemnity imposed by Indiana Code § 26-2-5-1, and thus determined the statute was not violated.
 
Conclusion
 
Anti-indemnity statutes should be taken into consideration when reviewing your indemnity obligations in contracts. At the outset contractors need to consider whether the statute applies to the work they are performing. While courts will generally reform the language of an indemnity provision that violates the statute to conform with its limits, it is important to make sure the indemnity obligations in the contract comply with the statute so that both parties are aware of their obligations and the parties do not have to rely on a court to reform the language to make indemnity obligations are enforceable.
 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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