In the construction industry, there are many terms that lawyers have written into modern contracts to confuse contractors with legalese and intimidate them into agreeing to terms they don’t fully understand. Learning these terms is essential to the survival and success of construction companies everywhere. This is integral to understanding exactly what you are responsible for and how you can manage your responsibilities effectively. Frequently contractors come to me for clarification on these terms, and the one I see overwhelming confusion over is the big, bad, scary term, “INDEMNITY”. This is the part of the contract that is always in bold and appears to be written in another language; you can read it over and over and still have no idea what it is saying.
What is the Indemnity?
Indemnity is a guarantee or protection against loss. Having an indemnity in the construction industry means that you will protect the principal against third party claims. Indemnity is often best explained with an example, so let me break it down.
Suppose you are a roofing contractor who has been hired by a landlord to put a tile roof on a very large and expensive house. One of your employees slips off the roof, is seriously injured and cannot return to work. In an attempt to recover more money for the injuries, the employee sues the owner. In this situation, the third party is your employee. Your contract with the landlord contains an indemnity clause, which means that you must step in to protect and defend the landlord against your employee’s claims.
Over the years, lawyers have tried to broaden the situations that would leave you, the party promising compensation due to the clause, responsible for protecting and defending the person who hired you. For example, attorneys would expand clauses to include indemnification even when the hiring party’s actions caused the incident. So, expanding on the example above, if the owner who hired you hit the scaffolding with their car and that’s why the employee fell, you would still be liable if you signed one of these clauses. However, most state laws have been written to say that these types of indemnification provisions are unenforceable. Specifically, in Texas, you are not required to indemnify any part of the damages that are his fault as long as you have property and casualty insurance.
What does that mean? Ultimately, under an indemnity clause in a contract, you will be responsible for any damages caused by your employees, subcontractors or anyone else who works for you. You will also have to defend and protect the person who hires you against any claims made against them by your employees, subcontractors or anyone else working for you. However, if you have P&C insurance, you don’t have to compensate or reimburse the person hiring you for damages caused by their actions. Insurance is your only safety net.
Insurance Vs. Indemnity
If your contract says you will indemnify the party hiring you for their gross negligence, general negligence, or willful acts, but you have insurance on your construction project, the indemnification clause no longer applies to you. The best defense against indemnification clauses is to have fantastic insurance, and I’m not talking about insurance from the same company that handles your car insurance. Do your research thoroughly when looking for insurance for your construction projects. Find a company that specifically writes policies for companies in the construction industry. Talk to an agent, tell them what type of business you run, detail the type of issues you are likely to have, and write a policy that would cover those types of issues.
I once represented a contractor that a store owner hired to do a facelift on the front of his building. Part of the facelift included pressure washing the sidewalk. My client didn’t have a pressure washer so he hired a subcontractor to do that part of the job. The pressure washing company my client hired to do the job had a new guy on the job that day, and he accidentally blew out the junction box and caused thousands of dollars in damage. My clients applied for insurance, but their claim was quickly denied because their insurance did not cover damage caused by subcontractors. We were able to fix the problem for my clients, but they could have had to pay thousands of dollars for damages out of pocket. This is why having good insurance is necessary for your business.
Ultimately, understanding indemnification, its effect on your business, and how you can prepare for indemnification clauses in your contracts can save your business. Doing the proper research, familiarizing yourself with the terms you see in your contract, and setting yourself up for success with great insurance is your best defense. To learn more about the legalese in your construction contract, consider contacting a full-service construction law firm and connecting with a construction attorney who has valuable experience in contracts and contract terms. Knowledge is power, so equip yourself with the tools you need to protect your business.
About the Author:
Published author, award-winning lawyer, devoted wife and mother of three daughters, and veteran owner and managing partner of The Cromeens law firm (TCLF), Karalynn Cromeens is a real jack-of-all-trades. Karalynn is co-founder of Morrell Masonry Supply and owner of The institute of the subcontractor, an easy-to-access online educational platform for entrepreneurs. In addition to TCLF and the Institute of Contractors, she is also the host of the fast-growing educational construction podcast, stop being fooled – the free provision of information on the industry to entrepreneurs throughout the country. In 2021, Karalynn published two Amazon Best-Selling books – Stop being tricked: understand and negotiate the subcontract and, in September, Stop Stiffening: A Texas Contractor’s Guide to Liens and Collections.
In the seventeen years she has practiced construction, real estate and business law, Karalynn has reviewed and explained thousands of subcontracts. For years, she tried to save companies that had signed problematic subcontracts and lost compensation for their work. Unfortunately, it was too late when they came to see her; she couldn’t do anything to help. She hated to see clients lose money—sometimes their entire business—because of language they didn’t understand and laws they didn’t know. Watching these situations unfold day in and day out has been the driving force behind his two books, The Subcontractor Institute, and the company’s accessibility efforts. Providing entrepreneur education on a national level has become Karalynn’s personal mission, and she always does what she can to help make it a reality.