Jernigan Copeland Attorneys | Mississippi Construction & Insurance Law

Going Back to the Basics II: Indemnity Agreements – You Really Cannot Live Without Them

One of the things that we see time and time again in insurance policies is the requirement that there be a written indemnity agreement between the general contractor, homebuilder, and his subcontractors.  So what is an indemnity agreement, and why is the insurance industry so keyed-up on the construction industry having them?

What is an indemnity agreement?  An agreement to indemnify one party from another is an agreement to pay the debts of that party.  In the construction world, we cannot require one party to pay our own debts, at least, those debts that we have caused ourselves through our own negligence, or our own actions, but we can require others to indemnify us from debts and obligations that we incur, but which they should, rightfully, be responsible.  This is the essence of an indemnity agreement.

At law, there are two types of indemnity agreements, written indemnity contracts or common law indemnity obligations.  The first is simple, at least on the surface.  A written indemnity agreement is one typically made by an owner to the general contractor, general contractor back to an owner, or a general contractor to a subcontractor that provides that the obligated party, let’s say as between a general contractor to a subcontractor, the subcontractor, agrees, in writing, to indemnify, the general contractor, who we will call the “indemnitee” for actions caused by the subcontractor, who we will also call  the “indemnitor”, that result in liability to the general contractor.

How does this happen, and how does it work?  Typically indemnity agreements are contained in construction contracts or subcontract agreements.  In a typical example, a subcontractor performs work for a general contractor, and does something to result in a defect or a loss, and indemnity agreement within the subcontract would be helpful to the general contractor.  For example, a framer miss-sizes spans while framing the second floor to a house, resulting in a structural instability in the house.  Homeowner makes a claim against the general contractor, because the homeowner’s contract was with general contractor, and the general contractor carries the warranty on the workmanship for the house.  Homeowner may not even know who the framer is, and for all practical purposes, may not care.  If there was an indemnity agreement between the general contractor and framer, the general contractor would make a claim on that indemnity agreement, depending on the language in the indemnity agreement and seeking reimbursement from the subcontractor.

There are many nuances involved in this process.  First, the wording of the indemnity agreement needs to be fairly particular.  It needs to not only seek indemnity for the acts of the indemnitor, but it should be broad enough to capture not only his negligent or inadvertent acts or omissions, but his intentional ones as well.  The indemnity agreement should also permit, in this case, the general contractor to seek indemnity, not only for his actual liability, but for claims and contingent liabilities as well.  Unless put in writing, under Mississippi law, an indemnitee, like our contractor here, cannot seek indemnity from an indemnitor, like our subcontractor, unless the obligation from which the Indemnification is being sought is an obligation at law, or what the law calls “under legal compulsion.”  In other words, unless there is a specific agreement between the parties to the contrary, if the contractor settles the claim while denying any liability for the claim, he cannot seek indemnity from the subcontractor, even if it is purely based upon the subcontractors work.  This is called the defense of “voluntary payment.”  The way to get around this is for the general contractor to put in his written indemnity agreements that the duty to indemnify applies not only to actual liabilities, but contingent claims, including claims that have been voluntarily settled.  Another important provision to have in any indemnity agreement is the right of contribution.  Contribution, unlike indemnity, allows parties to share liability.  In our example above, say the general contractor has 15% of the blame for the subcontractor’s mistake, because the general contractor was actively involved in measuring spans and providing some design for the subcontractor to follow.  Under traditional common law indemnification, which we will discuss below, any contributory fault by the general contractor, indemnitee, would result in nullifying any rights to indemnification that the contractor would have.  Again, a benefit of having a written indemnification agreement would be that the parties can agree that in the case of shared liability, each party would contribute up to his percentage of fault, and would indemnify the other party to the extent that other party was being called to pay the claimant more than his contributed share of fault.  Again, only in a written indemnity agreement does such a right exist.  No such right exists at common law.

Lastly, written indemnity agreements provide a very important defense to the Statute of Repose.  The Statute of Repose is the same thing, or similar to, a statute of limitations for construction projects.  The Statute of Repose runs six years after completion or first use of a building.  The Statute of Repose, under its own language, also cuts off common-law indemnity claims that are not made within that same six years.  Therefore, a real injustice can occur if a general contractor is sued by an owner on the very cusp of the running of the six-year Statute of Repose, such that he does not have the time to third-party in the at fault subcontractor, or from the subcontractor standpoint, the at fault sub-subcontractor.  If there is a written indemnity agreement in place, the statute of repose provides that the indemnity claim is saved from the statute, and is not subject to its bar.  If there is no written indemnity agreement, the indemnity claim is barred before it would ever even be able to be made.  Therefore, written indemnity agreements are vitally important, if for no other reason to simply provide a vehicle to preserve the right to make and indemnity claim, if necessary.

Like, so we talked about written indemnity agreements, what about common-law indemnity agreements?  Can the general contractor in our example make an indemnity claim against his subcontractor without a written indemnity agreement?  The short answer is yes.  However, his right is limited.  The general contractor may make a successful claim for indemnification from the subcontractor, indemnitor, where the subcontractor is 100% actively at fault, compared with the fault of the general contractor.  While the general contractor may have fault, he can only be passive, as opposed active.  This is known as the “active-passive dichotomy”.  What is active negligence?  Active negligence is the actual act or omission resulting in the harm.  Passive negligence occurs when a party is charged with oversight of the activity causing the harm, but not the actual activity that causes the harm.  It is easy for a general contractor, acting as a construction manager, to only have passive liability.  If his responsibilities are to merely oversee the work, contract with subcontractors, manage and approve the work, then a strong argument exist that his liability for any defects or claims is passive only.  It is when the general contractor actually engages, himself, in the work that his liability becomes active.  Under Mississippi common law, if the general contractor only has 1% of active fault, then he has no right to seek indemnification from the subcontractor, even if the subcontractor has 99% of the active fault.  This is a huge drawback to merely relying on common-law indemnification.

In addition, as indicated above, the general contractor, in order to seek common-law indemnity from a at fault subcontractor, must also show that the claim that he wishes to pass on to the subcontractor, by way of indemnification, is a claim that is enforced on him and he is legally compelled to pay.  As stated above, unless there’s a written indemnity agreement to the contrary, the general contractor cannot voluntarily settle a claim and then try to seek indemnity for that claim against the at fault subcontractor or supplier, or whatever the case.  If the general contractor does this, and has no written indemnity agreement, he is simply “out of luck.”

Lastly, as discussed above, with the Statute of Repose, a general contractor who does not have a written indemnity agreement, and is relying on the common-law to provide him the rights of indemnification against the subcontractor, is at the mercy of the Statute of Repose.  If a general contractor is sued on the day before the running of the Statute of Repose, but is served with the lawsuit 30 days thereafter (a claimant has up to 120 days to serve a lawsuit once it has been filed), the general contractor has no right to seek common-law indemnity from the at fault subcontractor.  His common-law right of indemnification has been barred by the operation of the Statute of Repose.

Therefore, we go back to a common theme: The importance, no, the vitality of having good written contracts, not only between general contractor and subcontractor, but also between general contractor and owner.  Indemnity agreements need to exist not only between general and sub, but also between general and owner for the same reasons discussed above.

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