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Two employees of a subcontractor sued the prime contractor for their personal injuries resulting from a fall.  The prime contractor in turn sued the subcontractor and the subcontractor’s insurance carriers for breach of a duty to defend and indemnify the contractor in the employee’s action.  For various reasons, the trial court determined the indemnification provision in the subcontract was so broad that it violated the state anti-indemnity statute that prohibits one from being indemnified for its own negligence and that neither the subcontractor nor insurers had any duty to the prime contractor.  On appeal, it was held that although the anti-indemnity statute was indeed applicable to make the subcontract indemnification void, the subcontractor had a separate duty to defend and indemnify the contractor pursuant to the terms of prime contract clauses that were incorporated by reference into the subcontract.  In addition, an insurance exhibit to the subcontract expressly required the subcontractor to install it to work in accordance with certain specifications that required it to name the prime contractor as an additional insured to its insurance policies.  As a result of the incorporated prime contract clause requiring defense and indemnity, and the insurance requirements that were incorporated into the specifications, both the subcontractor and its insurance carriers of the subcontractor owed the prime contractor a defense.  Uniwest Construction v. Amtech Elevator Services, 699 S.E.2d 223 (VA 2010).

This is a complicated case due to the number of insurance carriers and the different arguments made by each and the different decisions applicable to each.  The bottom line conclusion of the appellate court, however, is quite straight forward:   Even though the subcontract contained a void indemnification clause, the subcontractor and its carriers owed the prime contractor defense and indemnity pursuant to the terms of the prime contract that were incorporated by reference into the subcontract, as well as certain additional insured provisions of the subcontract that became applicable once the prime contract indemnification requirements were flowed down to the subcontract.

Provisions of the contracts that were most significant in this case include the following:

Paragraph 3.18.1 of the General Conditions obligated Uniwest to defend and indemnify Fountains

[t]o the fullest extent permitted by law … 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 injury to or destruction of tangible property, (other than the Work itself) including loss of use resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions of [Uniwest], a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.

The General Conditions also obligated Uniwest to “require each Subcontractor … to be bound to [Uniwest] by [the] terms of the Contract Documents, and to assume toward [Uniwest] all the obligations and responsibilities which [Uniwest], by these Documents, assumes toward [Fountains].”

The subcontract expressly incorporated the Prime Contract “to the extent not otherwise excluded or modified by the terms of the Subcontract.”  The incorporation language provided as follows:

[Amtech] agrees to be bound to Uniwest by all the terms of the [Prime Contract] and to assume towards Uniwest all of the obligations and responsibilities that Uniwest has by the [Prime Contract] assumed toward [Fountains]. All terms and conditions contained in the [Prime Contract] which, by the [Prime Contract] or by operation of law, are required to be placed in [the] Subcontract[ ] are hereby incorporated herein as if they were specifically written herein.

The court also explained that there was an insurance exhibit to the subcontract that was important here.   The court stated:

Finally, Exhibit B of the Subcontract required Amtech to “[f]urnish and install elevator work in accordance with ‘Elevator Installation and Modernization Specifications for Logan Square East’ as prepared by Zipf Associates, Inc.” (the “Zipf Specifications”). The Zipf Specifications required Amtech to “name [Uniwest] as [an] *435 Additional Insured” to its insurance policies or “submit a separate … Liability Insurance policy” for Uniwest.

As analyzed by the court, the relevant language of the incorporation clause quoted above is that:

“Subcontractor agrees to … indemnify towards Uniwest all of the obligations and responsibilities that Uniwest has by the [Prime Contract] assume toward [Fountains].”  The plain meaning of these words is that Uniwest’s duty to defend and indemnify Fountains became a duty by Amteck to defend and indemnify Uniwest.

Based on the above-quoted language, the court determined that the subcontractor had contractually obligated itself to provide defense and indemnity to the prime contractor to claims such as those brought by the injured employees.

Next, the court turned to the language of the relevant insurance policies of the carriers that were denying they had any defense or indemnity duties to the prime contractor as an additional insured under their policies.  What it found was that where the named insured subcontractor had agreed in advance, in writing, to provide additional insured coverage for its client, the prime contractor, the insurance company was obligated to defend and indemnify.  The court’s reasoning was as follows:

Subdivision E-4 [of the insurance policy] requires AIU to defend and indemnify any entity insured under the CNA Policy.  Under the errors and omissions endorsement of the CNA Policy, Continental insured any entity Amtech was required by a written agreement to provide with insurance “to the extent that it is required to be indemnified by [the] written agreement.” Similarly, Subdivision E-7 requires AIU to defend and indemnify any entity “to whom [Amtech was] obligated by a written Insured Contract to provide insurance.” For this purpose, an “Insured Contract” is defined as “any oral or written contract or agreement … under which [Amtech] assumes[d] the tort liability of another party.”

Because the subcontract by virtue of the incorporation by reference of the prime contract language, required the subcontractor to defend and indemnify Uniwest, the additional insured obligations of the carrier likewise became applicable pursuant to the above-quoted insurance policy language.

Comment: Several important lessons are learned from this decision.  (1)  Indemnification language in contracts needs to be carefully circumscribed to comply with the relevant state anti-indemnity statute.  Despite the argument by the prime contractor that it was not asking to be indemnified for its own negligence, but rather for the negligence of the subcontractor, the court held that the circumstances of the underlying claims would not be considered in determining whether the clause on its face was contrary to the law and would therefore be void and unenforceable regardless of the facts.  (2)  The incorporation by reference provisions of prime contracts flowing down into subcontracts must be taken very seriously by all concerned and carefully reviewed and negotiated to provide appropriate risk allocation.  In this case, the flow down provisions ended up providing the prime contractor the benefits it originally thought it was obtaining through the express subcontract language that the court found unenforceable.  This was more than just an issue of belts and suspenders.  (3)  Be assertive in demanding your rights as an additional insured and suing to enforce those rights.  The contractor (and its own insurance carriers) in this case might easily have given up after the trial judge (in a well reasoned decision) found that the indemnification language it had included in the subcontract was void.  Instead, they stayed the course, and prevailed on the balance of the contract terms to enforce the right to additional insured coverage.

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. 13, No.5 (May 2011).

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