What is an Anti-Indemnity Statute
An anti-indemnity statute is a law defining how much risk can be transferred between parties in a contract and is oftentimes used in construction contracts.
Breaking Down Anti-Indemnity Statute
An anti-indemnity statute protects sub-contractors from risks they take on from a primary contractor. In the insurance industry, financial risk is oftentimes transferred to reinsurers, which are companies that agree to take on some of the risk in exchange for some of the premium collected by the primary insurer.
Without anti-indemnification statutes, contractors could transfer liability to subcontractors, and the subcontractor could be liable for damages even if the damages were caused by the negligence of the contractor that did the transferring. For example, a construction company purchases liability insurance to cover accidents that occur during a construction project. When that company hires subcontractors, including electricians and plumbers, they are required to purchase additional insurance. The new policy specifies the other parties as being additionally insured, so in the event they are injured on the job they will be covered under the subcontractor’s policy.
Legislation has been passed in several states addressing anti-indemnification so it is best to check state requirements when evaluating options.
Indemnity insurance can be written in broad language to indemnify the indemnitee for all claims, costs, losses and damages resulting from either party’s negligence, even if the indemnitee is solely responsible for the third-party’s injury. Whether an indemnity agreement will be enforced may depend on whether the governing state law limits enforcement of indemnity agreements through their anti-indemnity statutes.
States typically deal with indemnity agreements in three ways. The first way is the state may not have an anti-indemnity statute. The second way is the state has an anti-indemnity statute that prohibits a primary contractor from indemnifying a sub-contractor for the primary contractor’s sole negligence. The third way is the state prohibits a prime contractor from indemnifying a sub-contractor for the primary contractor’s own negligence, regardless of degree of fault. Given the widespread usage of indemnity agreements in construction contracts, all interested parties need to be aware of the state law governing each of their projects.
Even without an anti-indemnification statute, most courts tend to narrowly interpret provisions that attempt to indemnify a prime contractor for its own negligence. For example, most courts will not interpret an indemnity agreement to indemnify a subcontractor for its own negligence unless such intention is expressed in clear and unequivocal terms.