The indemnity clause is one of the most scrutinized, negotiated, and litigated terms of any construction contract. The indemnity clause is a risk-shifting provision that requires the contractor to defend, reimburse, and “hold harmless” the owner and architect from claims and liability “arising out of” the contractor’s work. The indemnity clause is focused on bodily injury and property damage suffered by third parties seeking recompense against the owner. Indemnity clauses share the same core purpose, but can have varying reach, depending on the language used.

Limited Form: Indemnity “To the Extent” Caused by the Contractor

The limited form indemnity clause makes the contractor liable for damages to third parties “to the extent” the damages were caused by the contractor. The contractor is only required to indemnify the owner for the portion of damages that resulted from contractor fault or negligence. The contractor is not required to indemnify the owner “to the extent” damages are caused by someone outside of its control. The limited form provision employs a comparative fault analysis in which the respective fault of the parties determines the scope of financial liability.

Intermediate Form: Indemnity Other than for “Sole Negligence” of the Owner

Under an intermediate form indemnity clause, the contractor promises to indemnify the owner for any loss, in whole or in part, other than for the owner’s “sole negligence.” Even if the owner is 99% at fault but is not at fault for the entire loss, the indemnity provision is triggered and the contractor is on the hook for all of the loss. On the other hand, if the owner is 100% at fault for the loss, the indemnitor is relieved of any indemnity obligation. Intermediate form indemnity is more akin to a contributory (as opposed to comparative) fault analysis: even the slightest negligence by the contractor can render it liable for the whole of the damages.

Broad Form: Indemnity Regardless of Cause

The most extreme form of indemnity (which also happens to be the most obsolete), is broad form indemnity, pursuant to which the contractor agrees to indemnify the owner for any cost, damage, or liability, regardless of who is at fault. To guard against such a seemingly unfair provision, thirty-nine states have enacted anti-indemnity statutes rendering broad form indemnity provisions void as a matter of public policy. Many of those states have also restricted intermediate form indemnity provision to preclude owners from seeking indemnity from their own negligence.

Direct Indemnity

Direct indemnity clauses cover first-party claims for damage arising from the indemnitee’s acts, omissions, or breach of contract. Direct indemnity provisions are generally not included in construction contracts because a party can always sue the breaching party in contract. However, direct indemnity clauses may provide the indemnitee with additional remedies, such as the ability to recover attorney’s fees and expert costs, which would otherwise be unrecoverable per the American Rule.

When Does A Claim For Indemnity Accrue?

The date on which a contractual indemnity claim “accrues” is significant because accrual triggers the operative statute of limitations, which can preclude untimely litigation by the owner. Accrual is another way of saying that the owner’s indemnity rights have been triggered. The moment that an indemnity claim accrues depends on: (i) the language of the contract and the type of indemnity being sought by the owner[1] and; (ii) the applicable statutory and case law in the governing jurisdiction.

Accrual of Indemnity Against Costs and Damages

Indemnity provisions may provide one of three types of protections that dictate when the claim accrues. Certain indemnity provisions apply to “losses,” “expenses,” “damages,” “costs,” and similar terms intended to convey that the owner has suffered out-of-pocket financial harm. With respect to this type of indemnity, the owner’s claim accrues the moment that it suffers the loss, i.e. makes payment to a third party.[2]  For example, if structural defects in the contractor’s work lead the owner to hire an investigative engineering consultant to opine regarding the necessary repair measures, the owner’s claim for indemnity to those costs accrues at the moment the owner pays the engineering consultant. The same is true for any other covered out-of-pocket costs or losses incurred by the owner; the claim accrues when the check clears for those costs.

Accrual of Indemnity Against Claims and Liability

Certain indemnity provisions obligate the contractor to “defend and hold harmless” against “claims,” “liabilities,” “awards,” and things of that nature. The duty to “defend” means that the contractor must pay for the costs of an owner’s legal defense. The duty to “hold harmless” means that the contractor must pay the judgment, settlement, or any other damages for which the owner is liable to a third party.

Knowing and understanding the law of the governing jurisdiction is critical for the owner seeking indemnity for claims or liability. In some states, indemnity for claims and liabilities does not accrue until the owner is deemed legally liable to the third party by a court decision, arbitration award, or other binding decision.[3] Some jurisdictions take it a step further by requiring the owner to show that liability was decided and that payment was made to the judgment creditor for part or all of the amount due.[4] Moreover, certain jurisdictions have enacted statutes that specify the requirements for a contractual indemnity claim, including indemnity for claims and liability.[5]

Accrual of Indemnity Claims Arising Out of a Promise to Perform

The indemnity clause may contain language directing the contractor to take some future action in the event of a claim or damage. This type of indemnity claim most commonly arises in the context of the contractor’s duty to defend. Where the indemnity provision expressly requires the contractor to take some specific action, the owner’s contractual indemnity accrues immediately upon the contractor’s failure to perform that action without valid justification.[6] Depending on the jurisdiction, contractual indemnity claims may accrue on different dates, depending on the nature of the indemnity and the language of the indemnity clause. For instance, indemnity for attorneys’ fees incurred defending a suit may accrue on the date of filing, while indemnity for the costs of paying a judgment may not accrue until a later date when the indemnitee pays the judgment to a third party. Where the owner seeks indemnity for both types of harm, the law of the jurisdiction may authorize equitable tolling of the limitations period to account for the continuing nature of damages that naturally take more time to develop (i.e. judgments, settlements, arbitration awards, and related costs and attorneys’ fees).

Conclusion

Contractual indemnity claims depend, first and foremost, on the agreed-upon language in the contract. From the contractor’s perspective, limited form indemnity is the most preferable because it limits the scope of indemnity obligations to those costs that can reasonably be shown to be caused by the contractor. From the owner’s perspective, intermediate or broad form indemnity is most preferable because it keeps the owner’s rights intact notwithstanding some failings or shortcomings of its own part. Regardless of whether liability is limited “to the extent of the work” or extends to claims outside the control of the contractor, both parties should keep in mind that the type of indemnity sought will determine the date that the cause of action accrues and, accordingly, the date the statute of limitations begins to run.

 


[1] Pulte Home Corp. v. Parex, Inc., 403 Md. 367, 381 (2008) (“[The] commencement and scope of contractual indemnity obligations depends on the terms of the contract.”)

[2] Kohl’s Dept. Store, Inc. v. Target Stores, Inc., 290 F. Supp.2d 674, 689 (E.D. Va. 2003) (noting the common law rule that “an action for indemnification did not accrue until the plaintiff suffered an injury, i.e., until the plaintiff paid out money to a third-party.”); Pulte, 403 Md. at 381 (“[I]ndemnity agreements may provide…indemnity against loss or damage, under which the indemnitee may not recover until it has made payment or otherwise suffered an actual loss or damage within the scope of the indemnity.”)

[3] Pulte, 403 Md. at 382.

[4] Casanova v. Marathon Corp., 256 F.R.D. 11, 14 (D.D.C. 2009) (“[A] claim for indemnification does not accrue until the party seeking indemnification is held liable and makes a payment.”); Russell v. Lemons, 205 S.W.2d 629 (Tex. Ct. Civ. App. 1947) (“Appellee’s cause of action did not accrue, therefore, until he suffered damage or injury by discharging the judgment or a portion of it.”)

[5] Va. Code Ann. § 8.01-249.5 (“[A]ctions for contribution or indemnification accrue when the contributee or the indemnitee has paid or discharged the obligation.”)

[6] Pulte, 403 Md. at 381; see Sitek v. J. Cerna Trucking, Inc., No. 3:06-CV-138 RM, 2009 WL 624345, at *5 (N.D. Ind. 2009) (“While the duty to defend arises when a potentially covered claim is filed or occurrence happens, the duty isn’t breached until the insurer is apprised of the claim or occurrence and, without legal justification, fails to undertake the defense.”)