- Posted by Scott MacDonald
- On November 11, 2015
This article provides an overview of the difference between indemnification and being added as an additional insured to an insurance policy. For further information on indemnification provisions, follow these links to a few of our previous blog posts: Top 10 Construction Contract Provisions – Indemnity; Anti-Indemnity Statutes to Prevent Overreaching; and Amendment’s to Washington’s Anti-Indemnity Statute.
- I. Indemnification Agreements
Generally, indemnification agreements require a general contractor to “indemnify” a property owner for injuries occurring on the owner’s property. The parties to such terms are referred to as the “indemnitor”—the party agreeing to cover liability—and the “indemnitee”—the party whose liability is covered. Because these provisions could otherwise completely transfer liability risk, Washington enacted a statute invalidating any contract term that transfers liability for damages caused solely by the indemnitee’s actions.[i] That same statute requires indemnification terms to be clear and express in orderto be enforceable. The following indemnification provision from the American Institute of Architects (AIA) A201 form meets both these standards:
To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property …, but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable….[ii]
Indemnification agreements have practical limitations as well. Most importantly, if an indemnitor cannot cover the full amount of the indemnitee’s incurred liability, the indemnitee will be required to pay any remaining sum. To compensate for this shortcoming, indemnitees began incorporating additional insured provisions into their contracts.
- II. Additional Insured Provisions
Additional insured provisions typically require the indemnitor to add the indemnitee as a party to its commercial general liability policy. Below is an example from AIA A201:
The contractor shall cause the commercial liability coverage (excluding Workers Compensation) required by the Contract Documents to include (1) the Owner, the Architect and the Architect’s Consultants as additional insureds for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s operations; and (2) the Owner as an additional insured for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s completed operations.[iii]
The additional insured provision allows the indemnitee to double-down on its protection. On the one hand, requiring the indemnitor to secure general liability insurance ensures that someone will be able to cover the costs of indemnification. On the other hand, as a named party to the policy, the indemnitee itself can tender a claim to the indemnitor’s insurance company. For an indemnitor, though it may face higher insurance premiums, the added insurance still protects against unknown contingencies.
- III. The Importance of Differentiating
As one unfortunate Washington contractor discovered, failing to appreciate the separate obligations these two contract terms impart can have severe consequences. In ABCD Marine, an underwater welding contractor entered into an access agreement with the owner of a riverside terminal in order to continue its welding operations on the property.[iv] The contract contained both indemnification and additional insured provisions, but the contractor mistook them for the same thing and failed to add the owner to its insurance policy. Before anyone realized the mistake, the co-owner of the welding partnership was injured by the terminal owner’s employee. The matter settled, with the settlement providing a damages award of $600,000 against the owner. However, because the contractor agreed to indemnify the owner for any liability, the $600,000 award was passed back to the contractor to cover.
Ordinarily, the contractor would be able to recover its awarded damages against the owner from its own insurance policy, as the owner would have been named as an additional insured. But here, when the contractor sought to require its insurance company to pay for the owner’s liability, both the insurer and the court refused. Because the contractor failed to place the owner on the policy, the insurance company was not obligated to cover liability of the owner as an unnamed third party. Thus, even though the contractor obtained a $600,000 settlement against the owner, because it had indemnified the at-fault party and did not place that party on its insurance policy, there was no party left to recover from.
It should be noted that but for the Rules of Civil Procedure and the contractor’s failure to raise the issue in previous proceedings, the contract term allowing complete indemnity to the owner for its sole negligence should have been voided under Washington’s anti-indemnification statute discussed above. But even without raising that statutory argument, the consequences of the case could have been entirely avoided if the contractor had understood and followed the contract terms.
COMMENT: Indemnification terms apportion the liability risk between parties. Additional insured provisions were created to solidify that apportionment by ensuring that the indemnitor, or its insurer, could cover any damages awarded against the indemnitee. Contractors should be wary of indemnification terms that seem to transfer too much risk away from the indemnitor, as they may be void. Additionally, as demonstrated by this case, failing to understand what each term requires of a contracting party, especially in the context of damages liability, can have significant consequences later down the road.
[i] RCW 4.24.115.
[ii] American Institute of Architects, A201 § 3.18.1 (2007) (emphasis added) (italicized language demonstrates how to survive statutory challenge).
[iii] Id. at § 11.1.4.
[iv] Int’l Marine Underwriters v. ABCD Marine, LLC, 179 Wn.2d 274, 313 P.3d 395 (2013).