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Although a subcontractor damaged a sewer pipeline during the course of construction, it owed no indemnification duty to the prime contractor for expenses the prime incurred in repairing the pipe. The key reason given by the court was that a jury found that the sub was not negligent, and the Minnesota anti-indemnification statute prohibits indemnification except to the extent damages are caused by the indemnitor’s negligence.  Nor did the sub’s insurance carrier owe the prime coverage for the damages as an additional insured.  This was because the additional insured endorsement provided coverage only to the extent of vicarious liability of the prime contractor for the subcontractor’s fault.  Having determined that the subcontractor was not at fault, the court found no liability resulted to the prime contractor that could be subject to additional insured coverage. Engineering & Construction Innovations, Inc. v. LH Bolduc, 825 NW 2d 695 (Minn. 2013).

The facts considered by the court were as follows:  The prime contractor repaired the damaged pipeline and sought reimbursement from Travelers Insurance, the sub’s carrier who had issued an additional insured endorsement for the benefit of the prime.  The endorsement named the prime as an additional insured for liability “caused by acts or omissions” of the named insured, subcontractor.  Travelers denied coverage.  The prime then sued the Sub.

A jury found the Sub was not negligent and awarded the prime zero damages.  Following the jury trial the district court granted summary judgment in favor of Travelers and the Sub on breach of contract claims, concluding that Travelers and the Sub had no obligation to reimburse the Prime for damages not caused by negligence of the Sub.   This was reversed by an intermediate appellate court but reinstated by the Minnesota Supreme Court.

On the project in question, the project owner hired Frontier Pipeline, Inc as its general contractor involving installation of an underground sewer pipeline.  Frontier subcontracted with Engineering and Construction Innovations (ECI) to install a lift station and force main access structures.  ECI further subcontracted with Bolduc (referred to throughout his article as “Sub” or “Subcontractor”) to build cofferdams over the pipeline at six locations by driving metal sheeting into the ground to act as walls for the pit during excavation and construction.  Per the subcontract, the Sub was to drive the sheets “per ECI location.”  Consequently, the Sub was not responsible for determining where to drive the cofferdams.

The Sub’s indemnity clause stated it would defend and indemnify ECI against claims and damages “caused or alleged to have been caused by any act or omission of Sub….” The Sub’s general liability insurance policy from Travelers was endorsed to make ECI an additional insured “If, and only to the extent that, the injury or damage is caused by acts or omissions of you or your subcontractor in the performance of ‘your work’” to which the “written contract requiring insurance” applies.  The person or organization does not qualify as an additional insured with respect to the independent acts or omission of such person or organization.

The clause of the contract provided as follows:

 “[Bolduc] agrees to protect, indemnify, defend, and hold harmless ECI and Owner, to the fullest extent permitted by law and to the extent of the insurance requirements below, from and against (a) all claims, causes of action, liabilities, obligations, demands, costs, and expenses arising out of injury to any persons or damages to property caused or alleged to have been caused by any act or omission of [Bolduc], its agents, employees or invitees, and (b) all damage, judgments, expenses, and attorney’s fees caused by any act or omission of [Bolduc] or anyone who performs work or services in the prosecution of the Subcontract. [Bolduc] shall defend any and all suits brought against ECI or Owner on account of any such liability or claims of liability. [Bolduc] agrees to procure and carry until the completion of the Subcontract, worker’s compensation and such other insurance that specifically covers the indemnity obligations under this paragraph, from an insurance carrier which ECI finds financially sound and acceptable, and to name ECI as an additional insured on said policies.

 ….

 [Bolduc] agrees to obtain, maintain and pay for such insurance coverage and endorsements as will insure the indemnity provisions and coverage limits above and to furnish ECI certificates of insurance evidencing the aforementioned coverage.”

 No Indemnification Duty Owed by Subcontractor

The Minnesota anti-indemnity statute provides:

 “An indemnification agreement contained in, or executed in connection with, a building and construction contract is unenforceable except to the extent that: (1) the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission, including breach of a specific contractual duty, of the promisor or the promisor’s independent contractors, agents, employees, or delegatees[.]”

  The court found that “the damage to the pipeline was not due to Bolduc’s negligence, wrongful act, or breach of a specific contractual duty”.  The Prime argued that even if the Sub was not negligent, the indemnity clause was not limited to negligent acts, errors and omissions but was broad enough to encompass all acts of the Sub.  It argued that in hitting the pipeline, the Sub breached its obligation to perform its work “efficiently, properly and promptly,” and by failing to pay for the repairs, breached its agreement to bear “complete responsibility’ for its work.

The court found that the Prime presented no evidence that the Sub breached the subcontract in performing its work despite having hit the pipeline with the sheeting while installing the sheets.  The jury’s finding of no negligence constituted a finding that the Sub was not in breach of its contract.  According to the court, “the negligence and breach of contract for performance of work claims both arose out of the same duty; therefore, the jury’s determination on the negligence issue allowed the district court to properly determine that there was no evidence to find Bolduc in breach of its performance of work obligations.”

Because the court found the Sub was “not at fault for the pipeline damage” any obligation to indemnify the Prime that was not accompanied by a coextensive insurance agreement would violate the anti-indemnity statue.

Additional Insured Analysis

The language of the additional insured endorsement provided that ECI is an addition insured under the policy as follows:

“a) Only with respect to liability for ‘bodily injury’, ‘property damage’ or ‘personal injury’; and

 b) If, and only to the extent that, the injury or damage is caused by acts or omissions of you or your subcontractor in the performance of ‘your work’ to which the ‘written contract requiring insurance’ applies. The person or organization does not qualify as an additional insured with respect to the independent acts or omissions of [ECI].”

 In reviewing this additional insured language, the state Supreme Court stated that the language “caused by the acts or omissions of [Bolduc]” provided coverage to ECI as an additional insured “only in instances of ECI’s vicarious liability for Bolduc’s negligent acts or omissions.”   Therefore, unless ECI had liability for property damage it would not be entitled to coverage.  And the court found it had no such vicarious liability, since a jury had found the Subcontractor itself not negligent.  Consequently, Travelers owed ECI no duty under the policy.  Even if the indemnity agreement were deemed to have created contractual liability, the court held that the policy would not cover it since the contractual liability exclusion of the policy bars coverage arising out of indemnity clauses except to the extent of tort liability assumed by the indemnitor.

The court reasoned that tort liability is defined under the policy as “a liability that would be imposed by law in the absence of any contract or agreement” and, therefore, “damages resulting from other contractual liabilities –including ECI’s possible assumption of liability in its contract with Frontier for Bolduc’s breach of the subcontract—are plainly excluded from coverage under the policy.”

Comment:  The reasoning of the court in this decision, particularly with regard to equating “acts and omissions” with “negligence” is not necessarily followed in other jurisdictions.  The court itself acknowledged that other courts have found additional insured provisions similar to the one here to be ambiguous and therefore to be interpreted against the insurance company to, therefore, provide coverage to the additional insured.  One lesson to be learned from this decision is the importance of understanding how the applicable anti-indemnity statutes will be interpreted and applied to the language of an indemnification clause.

If it is known the court is going to limit indemnification provisions that contain what appears to be broad language such as “acts and omissions” so that it applies only to “negligent acts,” perhaps an indemnitee such as a subcontractor need not worry quite so much about agreeing to what we normally consider onerous language. On the other hand, do you really want to litigate through trial, intermediate appellate court and state Supreme Court to find out what the clause means?  Why not just use plain English to restrict the indemnification to damages to the extent caused by the indemnitee’s negligence and avoid all the uncertainty and litigation?

 

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. 15, No. 5 (May 2013).

Copyright 2013, ConstructionRisk, LLC