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Indemnification – Let the Punishment Fit the Crime

Author: Karl A. Berg, Jr., Esq.

During the most recent legislative session the bill which received most of the builders’ attention was the “Homeowner Protection Act of 2007.” However, the General Assembly also enacted legislation regarding indemnification provisions contained in construction contracts, both commercial and residential.  This column will discuss the new indemnification statute and its impact on construction contracts.

Indemnity provisions require one party to hold someone else harmless from any damages suffered by that person as a result of the first party’s negligent acts, errors or omissions. Indemnity provisions are a common feature in design and construction contracts.  For instance, if a subcontractor fails to properly perform its work and the contractor is sued by the owner as a result of the subcontractor’s defective work, an indemnification agreement would require the subcontractor to reimburse, or pay, the contractor any amounts the contractor was required to pay the owner as a result of the subcontractor’s poor work.  Thus, indemnification provisions shift the loss from a party who was obligated to pay (typically based on a contractual obligation) to the party actually responsible for the loss.

While most people do not have any difficulty with the notion that a party who actually causes a loss should pay it, in the construction setting indemnification provisions have been the source of anxiety and conflict for many years.  The problem with indemnification provisions is that in many instances the provisions no longer merely provide that one party will reimburse another for the damages caused by the party.  Instead, many indemnification provisions require that a party indemnify someone else even if the party being indemnified partially caused the damage.  These broad indemnity provisions require an innocent party to pay damages caused by someone else. Predictably, these provisions have been frowned upon by the Courts and have been rarely enforced.

It is the “unfairness” of requiring someone to pay for damages caused by someone else that the new statute addresses.  The new statute explicitly provides that indemnification provisions in construction agreements which require a party to indemnify another party against damages caused by the other person’s own negligence are void and unenforceable.  However, indemnification provisions which only require a party to indemnify another party for any damage actually caused by the negligent party remain valid and enforceable.  Thus, the statute does not bar all indemnification provisions.  The statute applies to contracts and subcontracts, including design agreements.  The statute applies to all construction contracts entered into after July 1, 2007. Based upon Colorado Courts’ historic reluctance and/or refusal to enforce indemnification provisions which indemnify parties against their own negligence, the impact of the new statute should be minimal.  However, those drafting contracts and subcontracts should nevertheless review and revise the indemnification provisions in their construction agreements so as to insure they comply with the new statute.

Some in the construction industry will lament the new anti-indemnity statute and suggest that builders’ liability has been increased.  However, in light of the largely illusory protection broad indemnification provisions have provided in the past, the new statute should create more certainty at the time of contracting and reduce the frequent conflicts between owners, designers, contractors, and subcontractors created by unfair and often uninsurable indemnification provisions.  Further, holding parties responsible for their own negligence rather than shifting that liability to another party is more equitable to all involved in the construction process.

The foregoing article is published in the September 2007 issue of On the Level with HBA, a supplement to the Colorado Springs Business Journal.

©2007 Karl A. Berg, Jr.   Karl Berg is a Colorado Springs construction lawyer and a partner at Mulliken Weiner Berg & Jolivet P.C.  He can be contacted at [email protected] or 719-635-8750.

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