Finding Some Clarity within Indemnity and Hold Harmless Clauses

When discussing construction or design contracts with a project participant, it isn’t too surprising to hear a question along the lines of “so what exactly does indemnify and hold harmless mean?” The terms indemnify and hold harmless are commonly used terms within construction and design contracts, but their meaning and impact often remain a confusing and foreign concept to project participants. The goal of this article is to provide more clarity on the subject of indemnification and hold harmless clauses as well as discuss the related but distinct contractual defense obligation.

For reference, a commonly used and probably familiar indemnity and hold harmless obligation is the indemnity and hold harmless obligation owed by a contractor under the AIA A201 General Conditions. The standard indemnification provision found in the current AIA A201 – 2017 edition provides in pertinent part:

§ 3.18.1 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses, and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expense is caused in part by a party indemnified hereunder.

Obligation to Indemnify and Hold Harmless

An indemnification and hold harmless clause is essentially an agreement wherein the party giving the indemnity (also referred to as the indemnitor) accepts the obligation to pay the party or parties identified in the clause as receiving the benefit of the indemnity (also referred to as an indemnitee) for any future liability that might arise and that falls within the covered language included within the indemnity clause. An indemnification provision can include payments of actual damages to a third-party as well as defense costs including attorney’s fees. One main key to indemnification is that the obligation generally does not kick in until money, such as in the form of a judgment, is due and owing.

Using the example of the above quoted Section 3.18.1 of the AIA A201 – General Conditions, the contractor is not obligated to indemnify the owner for any and all claims that may arise. Rather, the indemnity and hold harmless obligations owed by the contractor to the owner include several limitations. The claim that the owner is seeking an indemnity from the contractor must arise out of or result from the performance of the contractor’s work and must be for either bodily injury or property damage. Also and importantly, the indemnity obligation owed by the contractor is only to the extent caused by the negligence of the contractor or its subcontractors. 

Obligation To Defend

Although the AIA A201 – 2017 General Conditions does not include a duty to “defend” in Section 3.18.1, some indemnification and hold harmless clauses will also include the duty by the indemnitor to “defend” the indemnitee. It is important to note that the duty to defend is not the same as an agreement to indemnify. A duty to defend requires the indemnitor to actively defend a claim or lawsuit against the indemnitee. In other words, the indemnitee would “tender” its defense of the claim to the indemnitor who would be required to obtain and pay for counsel to actively defend the claim. Defense and indemnification clauses are oftentimes included in the same clause, but the obligations are able to be separated by the courts.

To further clarify the distinction and as an example, if an owner has an applicable defend, indemnify and hold harmless clause in its construction contract with a contractor and a lawsuit arises, the contractor would have to hire a lawyer and assume the defense of the owner. If a judgment is awarded, the contractor will also be obligated to indemnify the owner and pay the judgment (due to the separate indemnification obligation owed by the contractor). In the event the case is successfully defended and no settlement or judgment exists, the contractor would have nothing to indemnify, but would have still paid for the defense of the case.
 
Indiana Anti-Indemnity Statute
 
It is also important to note that Indiana, like most states, has what is commonly referred to as an anti-indemnity statute. Indiana’s anti-indemnity statute (Ind. Code 26-2-5) essentially provides that any indemnity clause contained in a design or construction contract that requires the indemnitor to indemnify the indemnitee from the sole negligence or willful misconduct of the indemnitee is void and unenforceable. As an example, a contractor could not be required in its construction contract to indemnify the owner for the owner’s sole negligence or willful misconduct as such a contractual requirement would be void and unenforceable. It should also be noted that at the time of the writing of this article, there is a pending Indiana bill that if passed would further restrict the enforceability of indemnity as well as defense obligations in a design contract. All project participants entering into design and construction related contracts should be cognizant of any new restrictions that may be added to the Indiana anti-indemnity statute.
 
Steven Jones is a partner with Ice Miller LLP. Ice Miller's Construction Practice Group is ranked as a National Tier 1 Practice in U.S. News & World Reports' Best Law Firms. Jones practices construction law with a focus on assisting clients in preparing and negotiating construction and design contracts as well as handling construction disputes. Jones can be reached at steven.jones@icemiller.com or (317) 236-2436.
 
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.