Construction Contract Clauses, Part 7 – Indemnification and Insured Contract Coverage
Indemnification provisions frequently appear in construction and commercial contracts. They operate to shift risk from the party being provided indemnification to the party providing indemnification. The principle behind such risk shifting is to shift potential risks onto the party or parties that are best able to prevent, mitigate, or insure those risks. In that respect, indemnity provisions do not necessarily need to be a source of disagreement during contract negotiation.
Consider, for example, indemnification provisions that require one party to indemnify and defend other parties from the risks relating to personal injury and property damage. At first blush, the party who is to provide such indemnity may feel that they should not assume those risks. However, agreeing to a well-drafted provision requiring indemnification for personal injury or property damage can be a benefit to all of the parties—including the party providing the indemnity. Here is how that can occur.
Most general liability policies include insured contract coverage. What that does is provide coverage for certain losses arising from the contractual agreement to indemnify a third-party. In the example above, if a claim for personal injury or property damage was asserted against an indemnified party, the indemnified party could in turn assert an indemnity claim which may trigger coverage under the indemnifying party’s general liability policy. In that scenario, the transfer of risk has ultimately allowed the contracting parties to shift the risk onto an insurer. The end result is the possibility of insurance coverage coupled with the probability being reduced that the contracting parties find themselves litigating their respective liability so they may instead focus on completing the construction project.
Properly negotiated and drafted, indemnification provisions are tools which can shift risk potential to an insurer and reduce the chances of liability litigation, benefiting all of the parties.
Mark Rysberg practices in the areas of construction law and commercial litigation having represented clients involved in the construction industry with complex matters before numerous state courts, state appellate courts, federal trial courts, federal bankruptcy courts, and federal appellate courts.
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