In the construction industry, there are many terms that attorneys have written into modern-day contracts to confuse contractors with legalese and intimidate them into agreeing to terms they do not fully understand. Learning these terms is essential to the survival and success of construction businesses everywhere. It is integral in understanding exactly what you are responsible for and how you can navigate your responsibilities effectively. Frequently, contractors come to me looking for clarity on these terms, and one that I see overwhelming confusion on is the big, bad, scary term, “INDEMNITY.” This is the part of the contract that is always bolded and seems like it is written in another language; you can read it again and again and still have no idea what it says.
What is Indemnity?
Indemnity is security or protection against a loss. To have indemnity in the construction industry means that you will protect the hiring party from the claims of third parties. Indemnity is often better explained through an example, so allow me to break it down.
Suppose you are a roofing contractor that an owner hired 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 homeowner. In this situation, the third party is your employee. Your contract with the owner has an indemnity clause, which means you must step up to protect and defend the owner from your employee's claims.
Over the years, attorneys have tried to expand the situations that would leave you, the party promising indemnity because of the clause, responsible for protecting and defending the person who hired you. For example, attorneys would expand clauses to include indemnity even when the actions of the hiring party caused the incident. So, expanding on the above example, if the homeowner who hired you ran his car into the scaffolding and that is why the employee fell, you would still be responsible if you signed one of these clauses. However, the laws of most states have been written to say that these types of indemnity provisions are unenforceable. Specifically, in Texas, you are not required to indemnify a party from damages that are their own fault so long as you have property and casualty insurance.
So, what does this mean? Bottom line, under an indemnity provision in a contract, you will be responsible for any damage caused by your employees, subcontractors, or anyone else that works for you. You will also have to defend and protect the person hiring you from any claims made against them from your employees, subcontractors, or anyone else that works for you. However, if you have property and casualty insurance, you do not have to indemnify or repay the person hiring you for damages caused by their actions. Insurance is your one safety net.
Insurance Vs. Indemnity
If your contract says that you will indemnify the party hiring you from their gross negligence, general negligence, or intentional actions, but you have insurance on your construction project, the indemnity clause is no longer enforceable against you. The best defense against indemnity clauses is to have fantastic insurance, and I am not talking about insurance from the same company that handles your car insurance. Do some thorough research when seeking insurance for your construction projects. Find a company that specifically writes policies for businesses in the construction industry. Talk to an agent, tell them what kind of business you run, detail what type of issues you are likely to have, and have a policy written that would cover those types of issues.
I once represented a contractor that a store owner hired to do a "facelift" to the front of his building. Part of the facelift included pressure washing the sidewalk. My client did not have a pressure washer, so he hired a subcontractor to do this part of the work. The pressure washing company that my client hired to do the work had a new guy on the job that day, and he accidentally sprayed the junction box and caused thousands of dollars of damage. My clients filed on their insurance, but their claim was promptly denied because their insurance did not cover damages caused by subcontractors. We were able to resolve the issue for my clients, but they could have had to pay thousands of dollars for damages out of their pocket. This is why having great insurance is necessary for your business.
Ultimately, understanding indemnity, its effect on your business, and how you can prepare for indemnity 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 excellent insurance is your best defense. To learn more about the legalese in your construction contract, consider reaching out to a full-service construction law firm and connecting with a construction attorney who has valuable experience with 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 to three girls, and Owner and seasoned Managing Partner of The Cromeens Law Firm (TCLF), Karalynn Cromeens is a true jack of all trades. Karalynn is the Co-Founder of Morrell Masonry Supply and Owner of The Subcontractor Institute, an easy-access online educational platform for contractors. In addition to TCLF, and The Subcontractor Institute, she is also the Host of the rapidly growing educational construction podcast, Quit Getting Screwed - making cost-free industry insight available to contractors across the country. In 2021, Karalynn published two Amazon Best-Selling books - Quit Getting Screwed: Understanding and Negotiating the Subcontract and, in September, Quit Getting Stiffed: A Texas Contractor's Guide to Liens & 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 has tried saving companies that have signed problematic subcontracts and lost out on being paid for their work. Unfortunately, it was too late by the time they came to her; she could do nothing to help. She hated seeing clients lose money—sometimes their entire business—over language they did not understand and laws they did not know about. Watching these situations play out day after day was the driving force behind her two books, The Subcontractor Institute, and the firm's accessibility efforts. Providing education to contractors on a national level has become Karalynn's personal mission, and she is always doing what she can to help make it a reality.