Contractual indemnity is a risk allocation device whereby the parties to a contract use indemnity provisions to apportion, or in some instances completely shift, the responsibility for future third party claims. South Carolina, as well as a vast majority of states, has enacted legislation that serves to modify or in some way limit indemnity provisions that seek to completely hold harmless a party for its own negligence. The “limited” or “comparative fault” indemnification obligation makes the party in which indemnity is being sought (“Indemnitor”) responsible only to the extent of his/its own fault or negligence. “Fault” may be defined to include “breach of contract” and negligence or may be limited to “negligent errors, acts or omissions.”
Such an agreement might be drafted as follows:
Subcontractor agrees to defend, indemnify and hold harmless General Contractor from any and all damages, liabilities, losses or expenses (including attorneys’ fees, costs and expenses of litigation) due to personal injury oR property damage, or both, including, but not limited to, any and all claims, causes of action, proceedings or suits for bodily injury, illness, disease, death, property damage or loss, loss of use, maintenance, cure, or wages arising from or on account of any negligent error, act or omission of Subcontractor, provided that under no circumstances shall Subcontractor be responsible forthe negligence of Contractor.
As a rule, this type of agreement is enforceable in every state, including South Carolina because it does not attempt to shield any party to the agreement from its own negligence. Therefore, an agreement or entire contract might be considered void if it does not have limitations on the scope of indemnity being sought.
DUTY TO DEFEND PROVISIONS
The “duty to defend” obligation is a contractual provision with legitimate goals. It is reasonable for a party seeking indemnity to also require that the defense costs be covered in third-party suits, such as a situation when a General Contractor is sued by a Third-Party such as a homeowners association due to deficient work of a subcontractor. it is frequently requested in circumstances where it is inapplicable. The party drafting and, thus, seeking defense costs must draft the provision with caution in South Carolina, as an overly broad statement is likely to result in a refusal to honor the defense request at the beginning of a dispute. Additionally, if there is any fault on the part of the indemnitee, the presence of a defense provision may cause a court toview the entire clause as against public policy because of the unfairness of the result occasioned by the shifting of all attorneys’ fees, costs and expenses to the indemnitor.
SELF INSURED CONTRACTORS AND THOSE WITH DEDUCTIBLES
There may also be issues of whether the indemnitor is entitled to have the cost of the defense of the indemnitee covered by its insurance or whether it must bear some ofthose costs outside of, or in addition to, the deductible obligations under its insurance policy. In this respect, if the defense of the indemnitor is provided as a part of itsinsurance coverage, the insurance carrier may decline to pay for the provision of defense for the indemnitee unless and until there is a finding of fault that is within the scope of the policy. Even where the carrier determines that the costs of defense are within the scope of the policy, these costs are subject to the deductible, per claim and aggregate limits of the policy. The carrier may have questions about the reasonableness of the attorneys’ fees, costs and expenses that were incurred in the defense. Finally, there may be apportionment issues in circumstances in which the indemnitee has some fault in the creation of the liability and the apportionment of the defense costs that are incurred.
Each state’s legislation and case law places varying limitations on the enforceability of indemnity agreements in construction contracts. To date, forty-two states have enacted some form of so-called “anti-indemnity” statute applicable to all or part of the construction industry. Many states, including South Carolina, have anti-indemnification statutes that void indemnity provisions in construction contracts arising from the “sole negligence” of the indemnitee. Because these statutes focus on a party’s “sole” negligence, they generally will not invalidate indemnity provisions that indemnify against the indemnitee’s joint or concurrent negligence.
APPLICATION FOR CONTRACTORS
Every construction contract should have the indemnity provision and the requirement to procure insurance in separate clauses. As discussed above, most states possessing anti-indemnification statutes hold that agreements to purchase insurance do not fall within the scope of the statute and, thus, enforce those agreements regardless of whether the practical effect is to indemnify parties against their own negligence.
The South Carolina Court of Appeals addressed the requirements for an indemnification clause which requires one party to indemnify another for its own negligence in Federal Pacific Electric v. Carolina Production Enterprises, 378 S.E.2d 56 (S.C. Ct. App. 1989). Federal Pacific holds that a contractual indemnification clause should “not be construed to indemnify the indemnitee against losses resulting from its own negligent acts unless such intention is expressed in clear and unequivocal terms.”