Construction contractors seeking indemnification from, and the transfer of liability to, others would do well to sharpen the language of their written agreements.
Over the years, general contractors in the construction industry have been developing and testing indemnification language in their subcontract agreements with the intent of transferring liability for the general contractor’s own negligence onto its subcontractors. Sometimes they have been successful in obtaining indemnification from their subcontractors and sometime they have not.
In the wake of Engineering & Construction Innovations, Inc. vs. L.H. Bolduc Co., Inc.,1 commonly referred to by construction defect attorneys as Bolduc, Minnesota courts’ analysis of these agreements will turn on the clarity and specificity of the language used in the relevant clauses of the key documents.
In simple terms, an indemnification agreement is an agreement where one party agrees to reimburse another party for losses or damages suffered by a claimant. The most common types of indemnification agreements are found in insurance policies—where an insurance company agrees to indemnify the policyholder against various covered claims of an injured party.
General contractors seeking to protect themselves not only rely on their own insurance policies (which often contain large deductibles or self-insured retention amounts) but frequently also seek additional protection by including indemnification clauses in their contracts with subcontractors. These indemnification clauses require the subcontractors (such as the excavator, framer, or roofer, etc.) to reimburse the general contractor for a loss suffered or claimed to be suffered by a claimant (usually a homeowner or homeowners’ association).2
Indemnification in Minnesota
Minnesota law generally disfavors indemnification agreements and especially disfavors indemnifying another party for one’s own negligence.3 Minnesota’s anti-indemnification statute is found in Minn. Stat. §337.02 (2012), which in relevant part states that:
An indemnification agreement contained in, or executed in connection with, a building and construction contract is unenforceable except to the extent that: (1) the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission, including breach of a specific contractual duty, of the promisor or the promisor’s independent contractors, agents, employees, or delegatees … . (Emphasis added).
The language of the statutory exception expressed above clearly bars indemnification agreements unless the injury is attributable to either some negligent or wrongful conduct on the part of the promisor (which is usually the subcontractor).
In Katzner v. Kelleher Construction, the Minnesota Supreme Court determined that indemnification agreements in which a party assumes responsibility to pay for damages that are not caused by the party’s own wrongful conduct are unenforceable in Minnesota under section 337.02.4 The court wrote that
“[t]his provision ensures that each party will remain responsible for its own negligent acts or omissions.”5 But Katzner does not completely bar general contractors from seeking indemnification for their own fault or negligence. Rather, Katzner only has required them to be more careful in how they craft their indemnification clauses and more creative in how they bring and prove their claims.
“Agreement to Insure”
An exception to Minnesota’s anti-indemnification statute is contained in Minn. Stat. §337.05. This exception provides that section 337.02 “do[es] not affect the validity of [indemnity] agreements whereby a promisor agrees to provide specific insurance coverage for the benefits of others.”6
While indemnification agreements for a general contractor’s alleged fault are generally unenforceable, those agreements can become enforceable when backed by the subcontractor’s agreement to procure insurance that will cover the indemnity obligation. This is true even if the subcontractor fails to actually purchase the contractually agreed upon insurance.7
This exception has previously been referred to by the Minnesota Supreme Court as the “narrow exception to the general prohibition of indemnification from the indemnitee’s own negligence.”8 However, general contractors have been writing tighter indemnification clauses backed by agreements to insure, so that more and more indemnification agreements are subject to the “narrow” exception. In its opinion in Bolduc, the majority opinion of the Minnesota Court of Appeals observed that this “‘narrow exception’ appears to have swallowed the rule.”9
According to the Minnesota Supreme Court, section 337.05 “embodies the Legislature’s approval of the construction industry’s ‘practical response to [risk allocation] problems inherent in the performance of a subcontract’ whereby ‘the parties are free to place the risk of loss upon an insurer by requiring one of the parties to insure against that risk.’”10
So, despite the general statutory rule that indemnification agreements contained in construction contracts are unenforceable without some fault on the part of the promisor, construction contracts now include agreements to insure the indemnification obligation.
Many courts have found the indemnification agreements, when backed by a specific agreement to insure, to be enforceable. The key is that the contractual provisions (including the insurance requirements) are clear, unambiguous, and specific.
The Bolduc Decision
In January 2013 the Minnesota Supreme Court carved a small layer away from the growing allowance of exceptions that have threatened to swallow Minnesota’s general anti-indemnification rule. To truly understand the court’s holdings requires knowledge of the specific facts of the case, including knowledge of the language of the contractual clauses involved.
In Bolduc, ECI hired Bolduc as a subcontractor, and the parties entered into a subcontract agreement drafted by ECI. During construction of a lift station, a part of the main pipeline was broken when Bolduc’s lateral support panels damaged the pipeline. Both Bolduc and ECI agreed that ECI was responsible for establishing the locations to place the panels and to provide the location of the underground pipeline. ECI paid to repair the pipeline. ECI then sued Bolduc, claiming negligence and breach of contract, including a breach of the duty to indemnify under the subcontract. ECI also sued Bolduc’s insurer, Travelers, claiming that ECI was an additional insured on Bolduc’s policy.
The district court bifurcated the negligence claims and contract claims and submitted the issue of Bolduc’s negligence and liability for ECI’s damages to the jury. The jury found that Bolduc was not negligent and awarded zero dollars ($0) to ECI. The jury did not determine whether ECI was negligent. After the jury returned its verdict, both ECI and Bolduc submitted the contract claims to the district court on cross-motions for summary judgment. The district court granted Bolduc’s summary-judgment motion and denied ECI’s summary-judgment motion. It also granted Travelers’ motion, holding that ECI was not an additional insured under Bolduc’s policy because a jury found that Bolduc was not negligent.
The court of appeals reversed. It determined that ECI was entitled to coverage as an additional insured without regard to Bolduc’s fault, and that Bolduc was required to indemnify ECI under the subcontract agreement.
The Minnesota Supreme Court made a detailed analysis of the language of the insurance policy and the subcontract agreement and then held that:
- An endorsement in a subcontractor’s insurance policy making a contractor an additional insured for liability “caused by the acts or omissions” of the subcontractor limits the additional insured’s coverage to instances of vicarious liability for the subcontactor’s negligence, which in this case was nonexistent; and
- A contractual indemnification provision in a construction contract obligating a subcontractor to indemnify another party for damages not caused by the subcontractor’s fault, unaccompanied by either a coextensive insurance agreement or a proper allegation that the subcontractor failed to procure the required insurance, violates Minnesota’s anti-indemnification statute (Minn. Stat. §337.02).11
The Court’s Analysis
It should not be surprising that specific language is the key to the supreme court’s analysis. The wording of the indemnification clause, the specificity of the agreement to insure, and the
coverage provided by the insurance policy provisions/exclusions are all essential to a determination of whether an indemnification agreement is enforceable.
In analyzing the indemnity language in ECI’s subcontract with Bolduc, the supreme court undertook a two-part analysis. Outlining its approach, the supreme court stated, “we first consider whether indemnification in this situation would violate Minn. Stat. §337.02 and then whether any indemnification obligation ordinarily barred by section 337.02 is saved by Minn. Stat. §337.05.”
Based on this analysis, courts will first look to the language of the indemnity agreement to determine whether the indemnity provision violates the anti-indemnification statute, Minn. Stat. §337.02. In Bolduc, the indemnity language required Bolduc to:
protect, indemnify, defend, and hold harmless ECI … to the fullest extent permitted by law and to the extent of the insurance requirements below, from and against (a) all claims, causes of action, liabilities, obligations, demands, costs, and expenses arising out of injury to any persons or damages to property caused or alleged to have been caused by any act or omission of [Bolduc] … and (b) all damage, judgments, expenses, and attorney’s fees caused by any act or omission of [Bolduc] or anyone who performs work or services in the prosecution of the Subcontract.
The supreme court held that, because a jury determined that Bolduc was not liable, any requirement that Bolduc indemnify ECI—regardless of ECI’s negligence—violated section 337.02. Because most construction defect cases do not have a jury determination of liability when the general contractor moves to enforce its indemnity agreements, courts will have to examine the language of the contract to determine whether it requires the subcontractor to indemnify the general contractor for the general contractor’s own negligence or fault. If so, it violates the anti-indemnification statute, and the court will have to determine whether the “narrow” agreement-to-insure exception applies. If not, the inquiry is complete because the subcontractor will not be responsible for the general contractor’s liability (the subcontractor, however, will most likely be responsible for its own negligence).
If the anti-indemnification statute applies, courts will then have to determine whether the subcontractor agreed to procure insurance to cover the indemnity obligation. If the subcontractor did agree to procure specific types of insurance at specified limits, the indemnification clause may be enforceable against the subcontractor’s insurer (if insurance was purchased) or the subcontractor (if the subcontractor failed to purchase the insurance). The analysis under section 337.05 could require the court to examine not only the language of the indemnity provision but also the language of any insurance that the subcontractor agreed to procure. An examination of the insurance polices and even a coverage determination may be necessary because, if the agreement to insure requires insurance that does not actually cover the indemnity obligation, the exception is not met and the indemnity agreement is unenforceable.12
In Bolduc, ECI stipulated that Bolduc had purchased the appropriate insurance through a general coverage policy written by Travelers. ECI argued that, as an additional insured on that policy, Travelers needed to provide ECI coverage. The court however analyzed the “Who Is An Insured” provision of the policy and determined that “liability” for property damage was a requirement for coverage. Because the jury had found no liability on the part of Bolduc (and no determination of ECI’s liability had been made) ECI was not entitled to coverage under the policy.
One of the main lessons to be learned from Bolduc is that if a general contractor wants a subcontractor to indemnify it with respect to its own negligence, the language in the subcontractor agreement must express that intention clearly and unequivocally. It must also include a specific insurance agreement in which the subcontractor agrees to procure specific types and limits of insurance to cover the indemnification obligation for the benefit of the general contractor.
When courts are asked to determine the enforceability of such agreements, they will be looking to the language of the insurance policy that was actually procured, the language of the contractual indemnification clause, and the language of the agreement to insure the indemnification clause. There are a wide variety of boilerplate and customized contractual clauses to choose from. When deciding whether the indemnification clause expresses their client’s intention clearly and unequivocally, drafters will need to select the language carefully and with an understanding of how the courts will analyze it when the issue of enforceability is raised.
Darwin S. Williams is a senior associate with Jardine, Logan & O’Brien, PLLP, focusing his practice primarily on civil litigation, including products liability, construction, personal injury, and workers’ compensation law. He is a graduate of the University of St. Thomas School of Law, and he clerked for Judge Natalie E. Hudson at the Minnesota Court of Appeals.
Mark K. Hellie is a senior associate with Jardine, Logan & O’Brien, PLLP, practicing primarily in civil ligation. A graduate of William Mitchell College of Law, he clerked for Judge Randolph W. Peterson and Judge Terri J. Stoneburner at the Minnesota Court of Appeals and Judge Mark Wernick at Hennepin County District Court before joining the firm.
1 Bolduc, __ N.W.2d __, No.
A11-0159 (Minn. 01/23/2013).
2 Minn. Stat. §337.01, subd. 3 (2012) defined an indemnification agreement as “an agreement by the promisor to indemnify or hold harmless the promisee against liability or claims of liability for damages arising out of bodily injury to persons or out of physical damage to tangible or real property.”
3 Farmington Plumbing & Heating Co. v. Fischer Sand & Aggregate, Inc., 281 N.W.2d 838, 842 (Minn. 1979) superseded by statute Minn. Stat. §337.02; see also, Yang v. Voyagaire Houseboats, Inc., 701 N.W.2d 783, 791-93 (Minn. 2005).
4 Katzner v. Kelleher Construction, 545 N.W.2d, 378, 381 (Minn. 1996).
6 Minn. Stat. §337.05, subd. 1.
7 Minn. Stat. §337.05, subd. 2.
8 Katzner, 545 N.W.2d at 381.
9 Bolduc, 803 N.W.2d at 922.
10 Holmes v. Watson-Forsburg Co., 488 N.W.2d 473, 475 (Minn. 1992).
11 Bolduc, A11-0159 (January 23, 2013) (court syllabus).
12 Seward Housing Corp. v. Conroy Bros. Co., 573 N.W.2d 364, 367-68 (Minn. 1998).