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Where a construction contractor signed a contract containing an indemnification clause agreeing to indemnify the project owner for all claims arising under the contract, including those caused by the owner’s negligence, a court held that a liability insurance policy that had been purchased by the contractor naming the owner as an additional insured was enforceable against the insurance company to recover for personal injuries that were caused by the owner’s negligence despite a state statute precluding a project owner from requiring a contractor to indemnify the owner for damages arising out of the owner’s own negligence.

In Chrysler Corp. v. Merrell & Garaguso, 796 A.2d 648 (Del.Supr. 2002), an injury was sustained by an employee of Merrell and Garaguso (“Merrell”), the contractor, as a result of the alleged negligent operation of a forklift by an employee of Chrysler, the project owner. The Merrell employee sued Chrysler for his injuries, and Chrysler, in turn, brought a third party action against Merrell pursuant to the terms of the indemnification provisions of the Merrell contract. The issue in this reported case arises out of cross motions for summary judgment on the extent of Merrell’s duty to defend Chrysler against the injured worker’s claim. The trial court ruled that the indemnification provision was unenforceable because it was contrary to the statutory prohibition against being indemnified for one’s own negligence. The court also ruled that the provision of the contract requiring Merrell to obtain insurance naming Chrysler as an additional insured was “void as an indirect requirement to indemnify.” According to the trial court, even if the contractual duty to provide insurance has been satisfied, the resulting coverage is unenforceable.

On appeal, Chrysler argued that the public policy purpose of the anti-indemnity statute did not extend to the insurance aspect of indemnification. As asserted by Chrysler, although the statute in its first paragraph makes void a contract clause that requires indemnification for a party’s own negligence, the second paragraph of the statute provides “(b) Nothing in subsection (a) of this section shall be construed to void or render unenforceable policies of insurance issued by duly authorized insurance companies and insuring against losses or damages from any causes whatsoever.” In sorting out the interplay between the two sections of the statute, the appellate court found that there has been no consistency in the courts of the various state jurisdictions that have considered similar statutes. The court was impressed, however, with a decision by the Maryland Court of Appeals addressing similar statutory language and holding that liability insurance, once issued, may create coverage for one’s own negligence under an indemnity agreement, “even if the wrong party paid the premiums.”

The Maryland holding, as described by the Delaware court, “reflects a practical accommodation of the insurance savings provision with the right of a party to a construction contract to refuse, ab initio¸ and directly, to indemnify another party for that party’s own negligence.” In support of enforcing the insurance savings provision, the court noted that this was beneficial from the viewpoint of the injured worker. And the court further stated that if, in fact, the insurer issues an endorsement to cover the actions of a third party and charges a premium for that coverage, the insurer should not be permitted to create an illusion that insurance exists and then deny coverage. In conclusion, the court stated: “The savings provision has meaning only if it cannot be used as a shield by insurers to decline coverage for insurance once purchased and duly issued to any insured, however identified or designated.” For these reasons, the court affirmed the trial court ruling to the extent that it relieved Merrell of any direct obligation to indemnify Chrysler for that firm’s own negligence, and it reversed the trial court as to the rights Chrysler may be able to assert under Merrell’s insurance policy.

Risk Management Note: The court states that there is separate litigation going on between the insurance carrier and Chrysler concerning the matter of what, if any, coverage Chrysler may be entitled to under the policy. The issues in that litigation are not described in this decision. It is worth noting, however, that insurance companies appear to be rethinking the availability of additional insured status for project owners on a contractor’s policy. And on professional liability errors and omissions policies, insurance companies rarely, if ever, agree to make a project owner an additional insured. It would be prudent for parties that are executing contracts containing language requiring additional insured status of project owners should obtain advice of their insurance agent and concurrence of the insurance company in advance of signing such contracts.

Thirty nine states have enacted some form of anti-indemnity statute. The details vary widely from state-to-state. It is advisable to have counsel familiar with the laws of the jurisdiction applicable to any specific contract review the indemnification clause of the contract to evaluate how it may be interpreted and applied within the relevant jurisdiction.

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 4, No. 9 (Oct 2002).

Copyright 2002, ConstructionRIsk.com, LLC