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ALERT: Indemnity and Additional Insured Status in Construction Subcontractor Agreements

December 16, 2015

Both General Contractors and Subcontractors alike need to be conscious of potential pitfalls when entering into agreements that call for indemnity and additional insured status.  The particulars of these types of clauses can create big headaches for both sides when things go wrong.
 
Indemnity Agreements: 
 
Indemnity language needs to clearly express the intentions of the parties.  In particular, in Pennsylvania, indemnity agreements which seek to indemnify a General Contractor for its own negligence need to be stated in “unequivocal terms”, this is known as the Perry-Ruzzi Rule.  See  Hershey Foods Corporation v. General Electric Service, 619 A.2d 285 (Pa. Super. 1992) citing Perry v. Payne, 66 A. 553 (Pa. 1907) and Ruzzi v. Butler Petroleum Company, 588 A.2d 1 (Pa. 1991).  The issue of indemnity in the face of workers’ compensation immunity is another often encountered situation.  Like indemnity for General Contractor’s own negligence, contractual language meant to impose an indemnity obligation on a party that would otherwise have workers compensation immunity also needs to be stated clearly.  Language such as “to the fullest extent possible” and “in any and all circumstances” is not sufficient.  See Szymanski-Gallagher v. Chestnut Realty, 597 A.2d 1225 (Pa. Super. 1991).  
 
Many General Contractors will attempt to get around this by including a standard “pass through” clause in the subcontract which incorporates the language of a prime contract, or contract between the general and owner, into the subcontract.  Often the prime contract will contain much more explicit language regarding indemnity and waiver of workers compensation immunity.  However, Pennsylvania courts have held that such “pass through” provisions in a subcontract are generally insufficient and do not meet the standard required for expressing an intent to indemnify for the indemnitees own negligence or for waiving workers compensation immunity.  See Bernotas v. Super Fresh Food Markets, Inc., 863 A.2d 478 (Pa. 2004) and Integrated Project Servs. v. HMS Interiors, Inc., 2007 PA Super 246 (Pa. Super. Ct. 2007).
 
So while you may think you’re covered in “any and all” circumstances, chances are you’re not.  
 
Additional Insured Clauses:
 
Subcontractor agreements to procure liability insurance, or additional insured status for a General Contractor are common in construction contracts.  The failure to comply with these provisions can result in liability on the part of the party that agreed to procure the insurance.  See Hagan Lumber Co. v. Duryea School District, 277 Pa. 345, 121 A. 107 (1923) and Borough of Wilkinsburg v. Trumball-Denton Joint Venture, 390 Pa.Super. 580, 568 A.2d 1325 (1990).  This can potentially be the case even in the face of workers compensation immunity.  
 
This can create big headaches for Subcontractors and General Contractors alike.  A claim for breach of contract for failure to procure insurance on behalf of another party is generally not covered under a Subcontractor’s liability policy.  See e.g. Giancristoforo v. Mission Gas & Oil Products, 776 F.Supp. 1037 (E.D.Pa. 1991).  This can leave the Subcontractor exposed to potentially devastating personal liability, or leave a General Contractor that thought they were covered through their agreement with the Subcontractor without insurance, or with inadequate insurance to cover a judgment.    These situations can be avoided by being thorough in ensuring compliance with contractual provisions.
 
First, know that a Certificate of Insurance is not binding on an insurer.  Rather, Certificates of Insurance are generally issued by brokers and confirm the existence of coverage in the form requested.  However, broker’s don’t issue the policies or interpret them when claims come in.  So both Subcontractors and Contractors alike should ask to see a copy of the actual policy, and the additional insured clause in particular.  Make sure it covers everyone that needs to be covered under the circumstances.  It may cost a little extra time and money to ensure you have the coverages needed, but accidents happen, and when they do not having the coverage you need will be a lot more costly.

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