The Slippery Slope of Indemnification Provisions in Construction Contracts

April 9, 2013

For individuals and contractors conducting business within the construction arena, it is critical to recognize and understand Illinois courts’ interpretation and application of indemnification and hold harmless clauses contained within comprehensive general liability insurance policies commonly implemented in construction settings. Specifically, while it is advantageous for a contractor to limit the extent of its liability exposure, such limitations generally held within indemnity or hold harmless agreements will not be enforced to the extent that they seek to extinguish the indemnitee’s liability for its own negligence.

The Illinois legislature has adopted a statute known as the Construction Contract Indemnification For Negligence Act which states that, with respect to construction contracts or agreements, every covenant, promise or agreement to indemnify or hold harmless another person from that person’s own negligence is void as against public policy and wholly unenforceable. Although each indemnification and hold harmless agreement is given a reasonable interpretation based upon a thorough consideration of all of its provisions, the aforementioned statute and subsequent case law interpreting its language clearly prevent one party from contracting with another to indemnify the first party from its own negligence in general construction settings.

Illinois courts have generally held that indemnity contracts which purport to indemnify one against their negligence, and therefore violating the statute, be written in clear and explicit language, or that such intention is expressed in unequivocal terms.  Simply put, Illinois courts will balance the right of the parties to negotiate contractual terms at arms length, while at the same time protecting the interests of persons working within the construction industry from being forced to accept liability for the negligent acts or omissions of other contractors on the job site.

It is also important to note that a promise to obtain insurance is different than a promise to indemnify.  Illinois courts have found that when there is a promise to obtain insurance, the promisor is agreeing to procure and pay for the insurance, but bears no responsibility in the event of injury or damages once the insurance is obtained.  This obligation, when contained in the contract, does not void the contract under the act.

The Illinois Courts have been vocal in stating that the purpose of this act is to protect the industry workers as well as the public, yet they do not apply the statue as a blanket provision voiding the effect of all indemnity and hold harmless agreements in construction.  Therefore, it is critical for individuals that regularly conduct business within the construction field to be aware of certain basic principles and recommendations to help facilitate the enforcement any such agreement in construction contracts.

First, individuals active in construction related industries should seek counsel that is experienced in the areas of commercial contract negotiation and drafting. Second, the client’s needs and goals should be discussed at length with counsel prior to drafting and executing any contractual document, in order to promote the client’s needs and expectations as efficiently as possible.  Third, any construction related document that seeks to implement an indemnification or hold harmless clause should be drafted narrowly pursuant to the requirements of the Construction Contracts Indemnification for Negligence Act and with deference to the Illinois courts’ common goal of protecting the well being of those working within the construction industry by disallowing contractual terms that seek to absolve a party of their own negligent acts.  Finally, it is imperative that any indemnitor provide written notice of such undertaking to their respective insurer, because, typically, a failure to provide such notice when entering into an agreement to indemnify is grounds for rejection of coverage by the indemnitor’s insurer. We at Rock Fusco & Connelly have decades of experience drafting construction related documents and litigating in the construction arena.