INSIGHTS: Articles

"Indemnification: A Useful Tool for Allocating Risk in Construction Contracts," Construction Executive

In an article published on November 30 in Construction Executive, Laura Fraher discusses indemnification clauses in construction contracts.

“The purpose of an indemnification clause is to provide an agreed upon allocation of risks between the parties. Like any other contractual clause, it is important to draft with precision to avoid unintended consequences,” she explains. “In other words, to ensure that the party intended to bear a certain risk is the one held responsible if that risk materializes.”

Fraher states that an indemnitor must broadly compensate an indemnitee for all losses specified in the indemnification provision. Certain losses, including attorneys’ fees and consequential damages, often create disputes, so they should be addressed specifically when drafting.

Additionally, she explains that when drafting an indemnification provision for a construction contract, specifically consider mechanics’ liens. “Typically, an owner expects a contractor to indemnify it against mechanics’ liens asserted by subcontractors and suppliers. Clearly state whether the contractor’s obligation to indemnify against liens applies when there is a dispute between owner and contractor and when contractor believes the lien claim to be valid,” she says.

Most jurisdictions recognize a common law right to indemnification. Fraher advises that when drafting a contractual indemnification clause, specify whether contractual indemnification abrogates or supplements those rights.

“State laws may limit the enforceability of indemnification provisions,” she explains. “In addition to researching and understanding the laws applicable to the contract, preface any indemnification provision with the clause ‘to the fullest extent permitted by law’ and include a provision that, ‘if the contract is to be enforced under the laws of a state that prohibits any part of the indemnity coverage provided for in the contract, the contractor shall provide the maximum indemnity coverage allowed by that state to each of the indemnitees.’”

For the full article, click here.