THE INDEMNIFICATION LIMITATION IN SECTION 725.06 DOES NOT APPLY TO UTILITY / HORIZONTAL-TYPE PROJECTS

shutterstock_486800107One of the most important provisions in construction contracts is the indemnification provision.  Appreciating contractual indemnification obligations are critical and certainly should not be overlooked.  Ever!

 

Florida Statute s. 725.06 (written about here and here) contains a limitation on contractual indemnification provisions for personal injury or property damage in construction contracts.   There should always be an indemnification provision in a construction contract that addresses property damage or personal injury.  Always!

 

Section 725.06 pertains to agreements in connection with “any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating associated therewith…” If the contract requires the indemnitor (party giving the indemnification) to indemnify the indemnitee (party receiving the indemnification) for the indemnitee’s own negligence, the indemnification provision is unenforceable unless it contains a “monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.”   It is important to read the statute when preparing and dealing with a contractual indemnification provision.

 

A common defense from an indemnitor in a case dealing with contractual indemnification on a construction project is that the provision is unenforceable because it does not comport with s. 725.06.  

 

In a recent case, Blok Builders, LLC v. Katryniok, 43 Fla. L. Weekly D253b (Fla. 4th DCA 2018), the indemnitor argued the indemnification provision was not enforceable. Here, a utility company hired a contractor to improve its telecommunications services. Part of the work required the contractor to provide access to preexisting underground telecommunication lines located in neighborhood easements.  The contractor hired a subcontractor to perform the required excavation to access the preexisting underground lines.   This work resulted in a personal injury action where the injured person sued the contractor, subcontractor, and utility company.

 

The contractor’s subcontract with the subcontractor required the subcontractor to indemnify the contractor and its directors, officers, employees, and agents, from loss caused wholly or partially by the subcontractor.  Thus, the indemnification provision required the subcontractor to indemnify the contractor for losses that were caused partially by the contractor’s own negligence (otherwise, the indemnification provision would be limited to losses solely attributable to the subcontractor). 

 

The contractor and utility owner both claimed that the subcontractor was responsible for contractually indemnifying them for all losses including attorney’s fees.  The subcontractor argued that the indemnification provision should be deemed unenforceable because it did not contain a monetary limitation on the extent of the indemnification. 

 

Indemnification as to the Contractor

 

The appellate court affirmed the trial court that the indemnification provision as to the contractor was enforceable because the statute (s. 725.06) did not apply.  What?  That is right, the statute did not apply because the statute does not apply to utility contracts.  What?  That is right, the appellate court held that the statute applies to “any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance” so if the excavation is not connected to a building, structure, appurtenance, or appliance, it does not apply.  Since the project dealt with underground utility lines, s. 725.06 did not apply so the contract did not need to contain a monetary limitation on the indemnification provision.

 

Of course, in my opinion, it is hard to truly reconcile the distinction between a vertical project of a building or structure and a horizontal project, such as the project at-issue.  In other words, why would a limitation on indemnification provisions apply to one type of project but not the other?  I do not know the answer to this other than to say the court reading s. 725.06 noticed that it mentions nothing about applying to horizontal type projects that do not involve a building or structure.

 

Indemnification of Utility Owner

 

The appellate court however reversed the trial court as to the application of the indemnification provision extending to the owner.  The indemnification provision mentioned nothing about the utility owner.   That is true.  The contractor argued that because the prime contract was incorporated into the subcontract, the subcontractor’s duty to indemnify the utility owner arose from the prime contract.  But, the prime contract required the contractor to indemnify the utility owner; it mentioned nothing about subcontractors being required to indemnify the owner.

 

Interestingly, if this contract were governed by s. 725.06, this perhaps would be an issue because s. 725.06 provides that contractors may not require the indemnitor to indemnify the indemnitee for damage to persons or property caused in whole or in part by any person other than the (a) indemnitor, (b) the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, agents, or their employees, or (c) the indemnitee’s officers, directors, agents, or employees.   Thus, the indemnification provision would not permissibly authorize the subcontractor to indemnify the owner for the owner’s own negligence. 

 

Ultimately, what this means is that the owner can pursue contractual indemnity from the contractor based on the indemnification provision in the prime contract.  The contractor would owe this indemnification (since any negligence attributable to the subcontractor would be attributable to the contractor that hired the subcontractor). This would get resolved (or play out at trial) and the contractor, based on this loss, would sue the subcontractor for indemnification for the loss connected with the subcontractor’s negligence.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

GENERAL CONTRACTORS: CONSIDER IMPORTANCE OF “PRIMARY AND NONCONTRIBUTORY” LANGUAGE

UnknownIn prior articles, I reinforced the importance of general contractors including “primary and noncontributory” language in subcontracts and requiring the subcontractor to provide an analogous “primary and noncontributory” endorsement.   As a general contractor this is important, particularly since you are going to require the subcontractor to (i) indemnify you for claims relating to personal injury, property damage, or death, and (ii) identify you as an additional insured under its commercial general liability (CGL) policy for claims arising out of the subcontractor’s scope of work.   The “primary and noncontributory” language in your subcontracts allows you to maximize the value of your additional insured status.  

 

A recent opinion explains why I reinforced the importance of this language.

 

The case of Zurich American Insurance Co. v. Amerisure Ins. Co., 2017 WL 366232 (S.D. Fla. 2017) involved an underlying construction defect lawsuit where a condominium association sued a general contractor.    The general contractor hired subcontractors and required them to identify the general contractor as an additional insured.   This is all routine, right?  A few of the subcontractors had CGL policies issued from the same insurer (Amerisure).  They contained the same additional insured endorsement that included the following “other insurance” clause:

 

Any coverage provided in this endorsement is excess over any other valid and collectible insurance available to the additional insured whether primary, excess, contingent, or on any other basis unless the written contract, agreement, or certificate of insurance requires that this insurance be primary, in which case this insurance will be primary without contribution from such other insurance available to the additional insured.

 

When the general contractor was sued it, as it should, tendered the defense of the lawsuit to the responsible subcontractors as an additional insured under their policies demanding both a defense and indemnification from the association’s claims.  The insurer, however, refused to defend the general contractor.  The general contractor’s insurer (Zurich) defended the general contractor in the action. 

 

Thereafter, the general contractor’s CGL insurer sued the subcontractors’ CGL insurer.  (The general contractor had also assigned its additional insured rights under the policies to its CGL insurer.)  The general contractor’s CGL insurer was seeking reimbursement for the attorney’s fees and costs expended in the defense of the general contractor in the underlying construction defect lawsuit.  The subcontractors’ CGL insurer moved to dismiss the claims based on the clause above—that the subcontractors’ CGL insurance operated as excess insurance over the general contractor’s CGL insurance.  In other words, the subcontractors’ CGL insurance was not primary and noncontributory.  There was no allegation that the subcontract included language requiring the subcontractor’s CGL insurer to be primary and noncontributory. 

 

The first reason this is an important point is because “when an insurance policy defines its coverage as secondary or “excess” to a primary policy, the excess insurer has no duty to defend the insured—so long as the primary policy provides for a defense and its coverage has not been exhausted.”  Zurich American Ins. Co., supra, at *4.    If the subcontractors’ CGL policy is excess, then than their CGL insurer does not have a duty to defend if the primary policy is not exhausted.   This means they have no duty to defend the additional insured – not very helpful to a general contractor tendering the defense of the claim to responsible subcontractors. 

 

The second reason this is an important point is because of what is known between liability insurers as the anti-contribution rule:

 

Florida courts have consistently held that, once the duty to defend is activated, every subject insurer assumes it on a personal and indivisible basis. That means that when an insured tenders a claim to multiple insurance providers, the entity that actually engages in the defense and incurs the fees and costs associated with it cannot subsequently seek contribution or equitable subrogation from the fellow insurer who “lagg[ed] behind.”

Zurich American Ins., Co., supra, at *5 (internal citations omitted).

 

Since the general contractor’s CGL insurer bore the costs of the general contractor’s defense in the construction defect lawsuit, it cannot now divvy up the defense fees and costs to other insurers that may have had a similar obligation unless an exception to this rule applies (see below).

 

The third reason this is an important point is because there is an exception to this anti-contribution rule:

 

A “responsive” insurer who complied with its insured’s tender for defense can extract reimbursement from the “nonresponsive” insurer when the insured had separately contracted with another entity, itself an insured of the nonresponsive carrier, to indemnify the first insured. The logic of the exception is that the insured parties’ express decision to “shift[ ] exposure” from one to the other is imputed to the insurer relationship and overcomes the general anti-contribution principle.

Zurich American Ins., Co., supra, at *8 (internal citations omitted). 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

FLOWING DOWN LIABILITY IN CONSTRUCTION DEFECT LAWSUITS

unknownIn construction defect lawsuits, third-party (or fourth-party) claims are routine to flow-down liability downstream.  Right, a general contractor sued by an owner will want to flow-down its liability to the subcontractors.  And, subcontractors will want to flow down their liability to sub-subcontractors and suppliers.   Common, and appropriate, flow-down claims are indemnification and contribution claims

 

In an appellate opinion with little factual discussion, Gozzo Development, Inc. v. Esker, 2016 WL 2908442 (Fla. 4th DCA 2016), the trial court entered summary judgment in favor of subcontractors dismissing the contractor’s indemnification and contribution claims.  The owner sued the contractor for a violation of building code (and corresponding defects and damage) and the contractor, in turn, sued subcontractors for indemnification and contribution.  The contractor was seeking indemnity for the statutory building code violations as well as contractual breaches that caused the construction defects and damage. 

 

On appeal, the Fourth District reversed the trial court’s summary judgment as to the indemnification claim, but affirmed the trial court’s dismissal of the contribution claim (as Florida abolished joint and several liability in negligence-based actions):

 

Further, as appellant [contractor] sought indemnity for violations of both statutory and non-statutory building standards, it was error to grant summary judgment on the indemnity claim under a provision that applies only to statutory liability. The statutory building code does not preclude liability for violating a contractual duty to adhere to local building standards.

However, we affirm the trial court’s summary judgment on the contribution claim, as appellant’s right to contribution had not arisen by the effective date of the revised statute barring joint and several liability.

Gozzo Development, 2016 WL at *1. 

  

It is important to understand the manner in which liability is flowed downstream (passed-through) in construction defect lawsuits.  It is generally this reason why construction defect lawsuits contain many parties, from the general contractor hired by the owner to the subcontractors, sub-subcontractors, and suppliers implicated by the defective work.   These articles on indemnification (common law and contractual) and contribution explain these very important flow-down claims in more detail. 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CONTRACTUAL INDEMNIFICATION LIMITATION ON FLORIDA PUBLIC PROJECTS

imagesConstruction contract indemnification provisions are governed under Florida Statute s. 725.06.  This is a very important statute to know if you are drafting indemnification provisions for any type of construction contract.  (There is also Florida Statute s. 725.08 that discusses indemnification provisions applicable to design professionals that is also worth knowing.) 

 

Contained within s. 725.06, is a limitation on indemnification provisions applicable to public construction projects:

 

(2) A construction contract for a public agency or in connection with a public agency’s project may require a party to that contract to indemnify and hold harmless the other party to the contract, their officers and employees, from liabilities, damages, losses and costs, including, but not limited to, reasonable attorney’s fees, to the extent caused by the negligence, recklessness, or intentional wrongful misconduct of the indemnifying party and persons employed or utilized by the indemnifying party in the performance of the construction contract.

(3) Except as specifically provided in subsection (2), a construction contract for a public agency or in connection with a public agency’s project may not require one party to indemnify, defend, or hold harmless the other party, its employees, officers, directors, or agents from any liability, damage, loss, claim, action, or proceeding, and any such contract provision is void as against public policy of this state.

 

The key to this contractual indemnification limitation on public projects is the bolded language “to the extent caused by….”  This language is comparative fault language meaning the indemnitor (party giving indemnification) is only responsible for indemnifying the indemnitee (party receiving the indemnification) “to the extent caused by the negligence, recklessness, or intentional wrongful misconduct” of the indemnitee.  The language “to the extent caused by” is more limiting than an intermediate or broad form of indemnification provision that expands the scope of the indemnitor’s obligation to indemnify the indemnitee (for example, for negligence acts caused by the indemnitee).   Stated differently, this limitation would certainly seem to preclude the indemnitor from indemnifying the indemnitee for the indemnitee’s negligence.

 

But, there is not yet a Florida case that truly discusses the application of this contractual indemnification limitation on public projects. 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.