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Indemnity clauses: They are everywhere. Particularly in construction contracts. Everyone has negotiated these provisions, and many lawyers have actually read them from stem to stern. Nonetheless, many lawyers do not actually understand the details of indemnity clauses, or understand the true meaning of them. Understanding some basic principles with respect to indemnity clauses will give even an inexperienced attorney the ability to protect his or her clients when confronted with unfair indemnity provisions. In general, indemnities come in two forms. The most common indemnity is the indemnity that attempts to cover claims arising out of injuries to people or property (which we will call liability claims); these claims are typically covered by a contractor’s commercial general liability insurance policy. The second type of indemnity is an indemnity that seeks to recover damages arising out of the contractor’s failure to perform in accordance with the contract (which we will call performance claims). Unfortunately, in many cases, liability claims and performance claims are merged together in one broad indemnity that is hard to read, understand or enforce. In terms of indemnities for liability claims, the big battle is usually over the scope of that indemnity. Should the indemnity simply indemnify the owner for claims to the extent caused by the contractor (or trade contractor)? Or should the contractor indemnify the owner for claims caused in whole or in part by the contractor? In the former case, the contractor’s insurer need only defend and pay for claims if, and to the extent that, the contractor is responsible. In the latter case, the contractor’s insurer has to defend and pay for the entire claim, even if the owner is partially responsible. Until 1997, it was common for the contractor to agree to the “in-whole-or-in-part” formulation, because it was contained in the standard form American Insurance Association (AIA) construction contracts. That changed in 1997, and the “to-the-extent” language found in current AIA forms is the language of choice for contractors. However, at the end of the day, the debate is over the extent to which the contractor’s insurance carrier will be called upon to defend and pay claims; the contractor’s assets are generally not at issue, if the policy limits are substantial. All contract drafters should keep in mind that most states have statutes governing the enforceability of construction-contract indemnities that cover liability claims. While many states still allow in-whole-or-in-part indemnities, any indemnity clause that seeks to hold a party responsible for claims caused by the sole negligence of another party are null and void in a majority of jurisdictions. There are a few states that do not even allow in-whole-or-in-part indemnities anymore, such as Oregon and Florida (unless certain requirements are met). Therefore, every attorney should be careful of the statutory limitations on indemnities applicable in each state they do business in. Some courts simply throw out unenforceable provisions, and do not rewrite them to “save” the drafter from his or her ignorance. See, e.g., Howard Schulz & Assocs. Inc. v. Browniec, 239 Ga. 181 (Ga. 1977); Telzon Corp. v. Hoffman, 720 F. Supp. 657 (N.D. Ill. 1989); Holloway v. Faw, Casson & Co., 78 Md. App. 205 (Md. Ct. Spec. App. 1989). Performance claims When it comes to indemnities for performance claims, which simply protect a party from damages and claims arising out of the other party’s failure to perform, most state statutes do not govern these claims. However, any party to a contract will be reluctant-and rightly so-to agree to any in-whole-or-in-part responsibility when it comes to defective work or delay damages. While these types of indemnities often appear to be broad, and therefore desirable, to many owner and contractor clients, it is questionable whether they provide a great deal of protection. The common law of each state usually provides adequate remedies for a party in the event the other party to the contract breaches the contract. However, in the event a party wants to recover some costs like attorney fees or litigation costs that would not normally be recoverable under the law of a particular state, such an indemnity will be both useful and necessary. Drafters should also consider the connection between indemnity provisions and other provisions in a contract. For example, a party may want to limit its liability for delay damages or consequential damages in a construction contract. Whenever a party is trying to obtain these limits, the language of any limitation must be closely reviewed to ensure that it only covers the specific exposure at issue. For example, a limitation on consequential damages due to delay should be limited to that issue, and not consequential damages generally, since such damages also relate to liability claims covered by the insurable indemnity language. In the end, a firm grasp of the basic concepts and principles behind indemnity provisions will allow every attorney to draft a construction contract that actually achieves the protection intended, without violating the law or creating unintended consequences. Robert L. Crewdson is a partner at Atlanta’s Alston & Bird, where he has a national construction practice representing owners and contractors. He can be reached at [email protected].

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