More on the Amendments to RCW 4.24.115, Washington’s Defense and Indemnification Statute Addressing Limitations on Defense and Indemnification Obligations
by Paul R. Cressman, Jr.
Indemnification is a legal term with which contractors are generally familiar, but is also a term with which lawyers struggle, causes confusion and sometimes results in poor contracts for the unwary. In plain terms, indemnification is an agreement to be responsible for the liability of another party. Indemnification clauses appear in owner-contractor contracts and subcontracts, and frequently in owner-design professional contracts. Indemnification provisions should be read and understood fully. If they are unclear in any way, legal advice should be sought.
We previously addressed the amendments to Washington’s Construction Indemnification Statute, RCW 4.24.115, in our blog postings dated April 17, 2012, and June 13, 2012. As we mentioned in those earlier blog postings, the statute was amended to address the duty to defend in addition to the duty to indemnify, and to apply to design contracts, as well as construction contracts. The amended legislation became effective on June 7, 2012.
Washington’s Indemnification Limitations Statute Now Covers Claims in Addition to Claims for Personal Injuries or Damage to Property
In our view, in addition to the amendments made the limitations on the duty to defend and indemnify the amendments also apply to the “services” being performed by the indemnitor, usually either a contractor or a design professional. The statute as revised provides in part:
A covenant, promise, agreement, or understanding in, or in connection with or collateral to, a contract or agreement relative to the construction, alteration, repair, addition to, subtraction from, improvement to, or maintenance of, any building, highway, road, railroad, excavation, or other structure, project, development, or improvement attached to real estate, including moving and demolition in connection therewith, a contract or agreement for architectural, landscape architectural, engineering, or land surveying services, or motor carrier transportation contract, purporting to indemnify, including the duty and cost to defend, against liability for damages arising out of such services or out of bodily injury to persons or damage to property: ….
As a result, in order to ensure that the defense and indemnification obligations contained in either a construction or design contract are enforceable to the fullest extent the provision should specify that the statutory requirements apply to not only the defense and indemnification of claims for bodily injury to persons and damage to property, but also to claims arising out of the services being performed by the contractor or design professional. A sample defense and indemnity provision accomplishing these goals, for inclusion in a Subcontract, is as follows:
Subcontractor agrees to defend, indemnify, and hold Contractor, Owner, and any upper-tier contractor (“Indemnitees”) harmless from any and all claims, demands, losses, and liabilities to or by third parties arising from, resulting from, or connected with services and work performed or to be performed under this Subcontract by Subcontractor or Subcontractor’s agents, employees, and lower-tier subcontractors and suppliers of any tier, even though such claims may prove to be false, groundless, or fraudulent, to the fullest extent permitted by law and subject only to the limitations provided below.
Subcontractor’s duty to indemnify, including the duty and cost to defend, Indemnitees shall not apply to claims for damages arising out of the services performed or to be performed by Subcontractor or arising out of bodily injury to persons or damage to property caused by or resulting from the sole negligence of Contractor or Contractor’s agents or employees.
Subcontractor’s duty to indemnify Indemnitees, including the duty and cost to defend, for claims arising out of the services performed or to be performed by Subcontractor or arising out of bodily injury to persons or damage to property caused by or resulting from the concurrent negligence of (a) Contractor, its agents or employees, and (b) Subcontractor, its agents or employees, and lower-tier subcontractors or suppliers of any tier, shall apply only to the extent of negligence of Subcontractor, its agents or employees, and lower-tier subcontractors or suppliers of any tier.
Subcontractor specifically and expressly waives any immunity that may be granted it under the Washington State Industrial Insurance Act, Title 51 RCW, and all other applicable industrial insurance / workman’s compensation acts or their equivalent in the applicable jurisdiction. Further, the indemnification obligation under this Subcontract shall not be limited in any way by any limitation on the amount or type of damages, compensation, or benefits payable to or for any third party under workers’ compensation acts, disability benefits acts, or other employee benefits acts; PROVIDED Subcontractor’s waiver of immunity by the provisions of this paragraph extends only to claims against Subcontractor by Contractor and does not include, or extend to, any claims by Subcontractor’s employees directly against Subcontractor.
Defense cost recovery shall include all fees (of attorneys and experts), and costs and expenses incurred in good faith. In addition, Contractor shall be entitled to recover compensation for all of its in-house expenses (including materials and labor) consumed in its defense.
Claims by Contractor for defense and indemnity against Subcontractor shall be exempt from RCW 4.16.040, RCW 4.16.300, RCW 4.16.310, and RCW 4.16.326, to the same extent that claims by the Owner or any upper-tier contractor are exempt from those statutes. Notwithstanding any other statutory or contractual provision to the contrary, claims for defense and/or indemnity by Contractor against Subcontractor shall not be time-barred, provided that they are brought within 90 days of the service of suit on such claims against Contractor by Owner, any upper-tier contractor, or third party to this Subcontract.
By initialing below, the Contractor and Subcontractor specifically acknowledge that the waiver of immunity contained in this provision was mutually negotiated.
Contractor Initials __________ Subcontractor Initials __________
Similar changes must be made to the defense and indemnification provisions contained in contracts between an Owner and a General Contractor and in design contracts to make such provisions fully enforceable in the event of the concurrent negligence of the Owner and the General Contractor or the design professional and the party with whom it contracts.
When is an Indemnitee’s Duty to Pay Defense Costs Determined?
As mentioned previously, RCW 4.24.115 now addresses not only the indemnity obligation, but also the obligation of an indemnitor to defend and pay defense costs of the indemnitee. The statute indicates that in instances of concurrent negligence of the indemnitor, often a Subcontractor, and the indemnitee, often a General Contractor, the defense obligation is enforceable only to the extent of the indemnitor’s negligence. The statute does not make clear when that determination is to be made. Presumably, the extent of the indemnitor’s negligence can only be determined after the case has been adjudicated, or at the time of settlement by agreement of the parties. It is noteworthy that the statute does not provide a mechanism for the indemnitor to pay some amount for defense costs, and for an adjustment to be made later in the event of overpayment or underpayment. It appears that this will be a practical problem associated with the implementation of the statute.
Our lawyers are available to assist our clients in making the necessary changes to their contracts/subcontracts in order that the indemnification provisions contained in such contracts comply with the amendments to RCW 4.24.115.
Comment: Clauses providing for defense and indemnification of other parties are rarely advantageous. Therefore, contractors should carefully review those provisions in the normal course of entering into a project agreement and consult with legal counsel as to the effect of any uncertainties in the indemnification provision. Though insurance does cover some indemnification obligations, generally, broad indemnity clauses are not entirely covered by insurance. Contracts in which the contractor may make a relatively small fee may require that the contractor nevertheless assume a disproportionate amount of the risk through the indemnification clause. By discussing questionable indemnity provisions with your legal professional, the risk assumed can be properly assessed and the bid appropriately priced to take that risk into account.