Construction contract indemnification clauses may get turned topsy-turvy due to legislation making its way through the Pennsylvania Assembly. Currently, Pennsylvania’s anti-indemnification statute applies to certain, limited instances. The current law bars owners, contractors, subcontractors, or suppliers from entering into agreements that indemnify architects, engineers, or surveyors for damages or defense costs arising out of their (1) preparation or approval of maps, drawings, opinions, reports, surveys, change orders, designs or specifications, or (2) giving or failing to give instructions or directions provided that failure or giving is the “primary cause” of the damage. Nothing in Pennsylvania law, however, expressly prohibits contract provisions that indemnify a party for its own negligent acts. As long as these provisions use clear and unequivocal language, Pennsylvania Courts have not deemed them void or against public policy (but have disfavored them).
Proposed Amendment of 68 P.S. § 491
Seeking to change this law, Pennsylvania Representatives Michael Driscoll and Todd Stephens introduced bi-partisan legislation (H.B. 1887) that invalidates any construction contract provision that indemnifies a party for its own negligence by declaring them void and unenforceable. If passed, this new law would align Pennsylvania’s anti-indemnification statute with a majority of other states’ statutes.
The Reality of Construction Contract Negotiation
Given their position, general contractors typically draft subcontract agreements that include provisions favorable to themselves. While subcontractors always have the right to revise or reject a contract, practically speaking, it often does not occur. The highly competitive construction bid process pits subcontractors against each other from a price standpoint. A subcontractor fortunate enough to win a bid must still decide whether to engage in aggressive contract negotiation in an effort to obtain favorable terms. Frequently, a subcontractor’s decision-makers focus less on ensuring a balanced contract than on “inking” the contract and commencing the work. Furthermore, subcontractors are often reluctant to begin a relationship with a general contractor on an adversarial footing, or risk upsetting an existing business relationship. Even sophisticated subcontractors, or those represented by counsel, negotiate with restraint, despite knowing the risks assumed are usually won or lost during the contracting phase.
How Will the New Law Affect My Company?
If passed, this legislation could significantly impact general contractors and subcontractors, but in different ways. For general contractors, because this legislation prevents them from pushing risk down to their subcontractors, they will have to adjust to more potential liability for jobsite accidents. Any safety violation leading to a jobsite injury could result not only in OSHA penalties but also the added costs of a personal injury lawsuit, including the legal defense and a potentially expensive settlement or adverse judgment stemming. Such costs will almost certainly lead to increased insurance premiums. Conversely, the proposed legislation will benefit general contractors by relieving them of any duty to indemnify project’ owners for damages arising out of the owner’s negligence.
Meanwhile, subcontractors could benefit from this legislation because it limits indemnification exposure to only those damages arising out of the subcontractor’s negligence. Despite this gain, the bill will probably not rebalance the contract negotiation process between the general contractor and the subcontractor, as proponents hoped. Instead, to protect itself from claims arising from subcontractors’ work, a general contractor likely will require its subcontractors to name it as an additional insured using additional insured endorsements that will give broad coverage to the general contractor. These endorsements will be difficult for subcontractors to obtain and will likely drive up their insurance premiums.
Cohen Seglias attorneys will continue to monitor this legislation and will post any updates. If you have any questions about the proposed amendment or how it may impact your business, please contact Michael Schwartz or the Cohen Seglias attorney with whom you work.