Over my 40+ year career working with contractors, I have reviewed well over 1,000 contracts and subcontracts for our clients. One critical lesson I’ve learned is that every word in a contract matters. Even slight mistakes can be costly.
Contracts, Subcontracts or Purchase Orders, whatever you might use, serve many purposes, but for insurance brokers, it’s crucial they include the proper risk management and transfer mechanisms – insurance requirements and indemnification provisions. Too often, we see agreements that overlook these essential areas, leaving clients with little to no protection against the acts of contractors or subcontractors.
This can be particularly dangerous in New York due to its unique legal environment. Over the years, New York courts have made various contract and coverage interpretations that significantly impact coverage and indemnification interpretations/outcomes, prompting the insurance industry to adjust policy wording. These changes have had mixed effects on the construction industry.
For example:
- Additional Insureds: Many contractors have blanket or automatic additional insured forms on their general liability policies (e.g., ISO CG 2033). While intended to provide automatic additional insured status to any party required by contract, courts have limited coverage to parties with whom the insured has a direct contract. This means you and an owner might believe the Owner is covered under a subcontractor’s policy when in reality they are not. In a large claim involving multiple subcontractors, the owner might find themselves without the expected coverage, resulting in significant defense expenses to be covered by your insurance program.
- Indemnification: The indemnification language in construction contracts is typically broader than the coverage in an insurance policy, making the contractor responsible for all risks, even uninsurable ones. It is important to understand that not all types of indemnification clauses are acceptable under New York law:
- Broad Form Indemnity: Transfers risk from one party to another, making one party responsible for any claims or damages, even if they are not at fault.
- Intermediate Form Indemnity: Requires one party to indemnify another for all claims, except those caused solely by the indemnified party’s negligence.
- Limited Form Indemnity: Limits indemnification to damages and claims caused by the indemnifying party’s negligence.
Experienced Professionals are a Crucial Line of Defense
Properly developing indemnity wording to ensure appropriate risk transfer is best handled by construction law professionals like Mike Catania at Catania Mahon & Rider and Tom Tripodianos at Welby, Brady &. Greenblatt.
Incorporating these crucial requirements into your construction contracts will help mitigate financial, legal, and operational risks associated with your construction projects, saving you time, money, and headaches.
Lastly, it is importantly that you and your team read and understand your contractual obligations – remember to Read Your Full Contract (RYFC). Your business depends on it.
As always, we are here to help strengthen your agreements for better protection.
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