Contractual Indemnity in Construction for Your NegligenceâWhat Year Is It?
In a construction project in Florida, if an individual or the individual’s agent acts wrongfully by action or inaction that results in property damage or personal injury, a contractor, lower tier contractor, architect, engineer, or material supplier will indemnify that person and hold them harmless for their own wrongful act, omission, or default. Except for the year 2000, clauses containing such indemnifications were and are enforceable in Florida if certain conditions were met, which are described below. This concept of indemnification for one’s own wrongful acts is discussed in an article at 68 A.L.R.3d 7 (1976), and raises interesting questions.
Is it fair for one person to be responsible for the wrongful or negligent acts of another person? Is the answer to this question any different if the person agrees to take on that responsibility by a contract? Is it reasonable to believe that most people signing construction contracts understand that they are indemnifying the other side from their own negligence? For those people in construction who sign such contracts and understand what an indemnity clause is,1 t here are three basic schools of thought on whether a contractual undertaking to hold someone harmless from that other person’s own wrongful acts is fair.
One school of thought, adopted in several states,2 is that the concept of holding someone harmless from that person’s own wrongful acts is simply wrong, not fair, against public policy, and should not be enforced in any event.
The second school of thought, at the other end of the spectrum, is that people in the construction business should be able to understand the terms to which they are agreeing. If they don’t comprehend their responsibility, they should obtain advice to allow them to understand before agreeing to an indemnity undertaking. Further, the parties to a contract should be free to allocate the risks arising out of a construction project as they see fit and there is nothing wrong with an individual agreeing to be responsible for the property damage or personal injury that another person causes if the indemnitor willingly subscribes his name to such an indemnity clause.
The third school of thought (a middle ground) is that such indemnity clauses are subtle, not easily understood, and, in order to be enforceable, they should include some limitation on, or warning regarding, the duty to hold someone harmless from that person’s own wrongful acts. Such indemnity should be distinguished from an indemnity for one person to hold another harmless from actions done by the first party, or others working under him. While that may be addressed by contract, it is also addressed in the common law, known as common law indemnity. The subject of this article regards holding one harmless from property damage or personal injury that such individual causes. There is no common law indemnity for that situation. Indemnity for that only arises when agreed in a contract. Florida law evolved from having no statute addressing such clauses (pre-1972), to requiring monetary limits or specific consideration for such clauses as a condition of enforceability (1972-2000), to subtly making such clauses unenforceable for all construction parties (2000-2001), to making them enforceable for construction parties so long as there is a monetary limit on the indemnity of not less than $1,000,000 per occurrence, which limit must “bear a reasonable relationship to the contract,” is “a part of the project specifications or bid documents, if any,” and has other limits on intentional, reckless, and wanton acts.
A review of the legislative history follows.
The 1972 Legislature was convinced that indemnification from a person’s own negligence should only be enforced if one of two conditions existed:
1) The contract had a monetary limit on the indemnity and was a part of the project specifications or bid documents, if any; or
2) The person indemnified gave the indemnitor specific consideration for the indemnification “that shall be provided for in his or her contract and section of the project specifications or bid documents, if any.”
To comply with the statute, many people simply included language in their contract indicating “the first (fill in dollar amount, but usually between $10 and $1,000) is specific consideration for all indemnity undertaken in this agreement.” While this appeared to some to recite a fiction, the courts determined that such a recitation was all that was required (along with being in the specifications or bid documents) to meet subsection (2) of the statute.3
Subsection (1) of the 1972 statute could be satisfied by stating in the contract that all indemnities undertaken in the agreement (or maybe just the indemnity for the damages caused by the other person) was limited to a stated sum regardless of its magnitude.
Therefore, the statute could have been a trap for the unsophisticated. It was preferable than having no statute because there was some attention and specific language required before such clauses were enforceable. With a pro forma recitation and inclusion in the bid documents or specifications, an indemnity for the other person’s wrongful acts was enforceable. If an individual was unaware, and/or did not include one of the two required statements in the contract and bid documents or specifications, the indemnity clause was unenforceable. This was the status of the law from 1972 until 2000.
In late 1999, Florida architects focused on the potentially significant liability of this indemnity and caused a bill to be filed with the Florida Legislature to make such clauses unenforceable when included in contracts with public agencies. Contractors tracking the architects’ legislative activities had their own bill filed making such clauses unenforceable when included in any construction contracts. These bills passed (although the architects wanted a separate statutory section, not to be combined with the contractors). The contractor’s revision was included in Session Law 2000-372 and the design professionals’ revision was adopted as part of Session Law 2000-162. These became, respectively, F.S. §§725.06 and 725.08 (2000).
The 2000 law contained subtle distinctions from the prior legislation. While subsection (1) of each of the statutes4 s tated the ability to make an enforceable contract for indemnity from negligence, recklessness, or intentional misconduct of the indemnitor “and persons employed or utilized by the indemnifying party in the performance of the construction contract,” subsection (2) stated that “except as specifically provided in subsection (1) there could be no enforceable contractual indemnity.” Any indemnity beyond that allowed in subsection (1) ( e.g. , indemnity from the indemnified person’s wrongful acts), would not be enforced.
F.S. §725.06 was applicable to contracts between any combination of owner, architect, engineer, general contractor, subcontractor, sub-subcontractor, or materialman. F.S. §725.085 was limited to contracts between design professionals6 and a public agency. The law limiting the design professional’s indemnity for the other party’s wrongful acts became effective May 25, 2000. The law limiting liability in construction contracts (F.S. §725.06) became effective on July 1, 2000, but remained in its original format only until July 1, 2001.
Concerns by private construction owners focused on the 2000 amendments to F.S. §725.06, and the new F.S. §725.08, since they invalidated any indemnities other than for the negligence, recklessness, or intentional misconduct of the indemnitor. The owners became legislatively active seeking to modify what had been adopted in 2000. Session Law 2001-211 became effective July 1, 2001 as a compromise. It amended F.S. §§725.06 and 725.08. While interpretation of the full effects of the 2001 amendments continues, as is the case of most compromises, it did not fully satisfy everyone’s concerns.
First, with respect to contracts with public agencies, design professionals as well as contractors, lower tier contractors, and materialmen may not enter into an enforceable contract to hold a public agency harmless from the wrongful acts of the public agency.7 c ontrast, in private contracts, an indemnity by one party for another party’s negligence is enforceable (subject to some further restrictions discussed herein).8 One possible reason for the distinction is that public contract terms are often not negotiable, while contracts with private owners may address this issue by negotiation. Thus, the limit on contractual indemnity enacted in 2000 remained in place with regard to contracts between design professionals and public agencies, but not with respect to private construction contracts.
Focusing on the elimination of the prohibition against indemnifying one from his or her own wrongful acts by contractors, lower tier contractors, materialmen, and architects and engineers dealing with private owners, these parties have returned to their former status, prior to the 2000 amendment and again may be obligated by contract to indemnify their contract customers and others for those other persons’ wrongful acts. There are conditions, however. The prime condition is that the indemnity agreement addressing wrongful acts of the indemnitee must:
1) Have a “monetary limitation on the extent of the indemnification that bears a reasonable relationship to the contract”; and
2) Be a part of the contract specifications or bid documents, if any.
The statute further states that regardless of the “reasonable relationship” limit of liability language, when the contract has the owner as one of the parties, the indemnity limit9 & #x201c;shall not be less than $1 million per occurrence,10 u nless otherwise agreed by the parties.”
The 2001 version of F.S. §725.06 limits the enforceability of an indemnity from the indemnitee’s wrongful acts by excluding
claims of, or damages resulting from, gross negligence, or willful, wanton, or intentional misconduct of the indemnitee, its officers, directors, agents, or employees, or for statutory violation or punitive damages except and to the extent the statutory violation or punitive damages are caused or result from the acts or omissions of the indemnitor,
their agents, employees, and those working under them. Therefore, essentially, construction people may only indemnify the other party from that other party’s ordinary negligence.
Summary of 2001 Amendment
With respect to construction contracts or design professional contracts for a public agency, there can be no enforceable indemnity from the wrongful acts of the public owner, its employees, officers, directors, or agents. With respect to private owners, there can be indemnity from the indemnitee’s11 o rdinary negligence if there is a monetary limit on the extent of indemnity that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.
U pon discussion in the Real Property, Probate and Trust Law Section’s Construction Law Committee, the majority of members believed that insurance companies are best equipped to cover the liabilities for personal injuries and property damage rather than contractors or design professionals. Thus, reasoned the majority, if the parties to a contract want to allocate to one party the risk of personal injuries and property damage caused by any of the other parties, then the parties should require that the risk be covered by insurance and the indemnity from the party taking on the risk should be limited to the amount of the required insurance coverage. In that fashion, the risk would be managed by people who are in the business of assuming such risks for people who pay a premium for that undertaking. This was deemed preferable to requiring a warning or specific language as a condition to enforceability of an indemnity for the negligence of the other party(ies).
A minority of committee members continue to take the position that contracting parties should be free to enter into contracts that allocate risks on the basis of the economic value perceived by each party for those risks. The minority position reasons that the decision of whether to obtain insurance for an indemnity obligation that a party agrees to assume should be left to the parties rather than mandated by the legislature.
Stay tuned—more legislation to follow.
1 There are many sophisticated people in construction who fully understand what an indemnity undertaking is. Then there are people in construction who don’t understand what indemnity is, but have a basic understanding of what “hold harmless” means. And then at the other end of the spectrum, there are people in construction who are very competent in their trade, deal competently with large sums of money, but have no idea what indemnity is (and might guess that “hold harmless” is the Heimlich maneuver, with which they fully agree). “Common law indemnity” is the right that inures to one who discharges a duty that is owed by a person, but which, as between that person and another should have been discharged by the other. Houdaille Industries, Inc. v. Edwards , 374 So. 2d 490 (Fla. 1979). Contractual indemnity is a matter of draftsmanship.
2 Cal. Civ. Code §2782; Mass. Gen. Laws §29C; Mich. Comp. Laws §691.991; Minn. Stat. §337.02; N. M. Stat. §56-7-1; N.Y. Stat . §5-322.1; R.I. Gen. Laws 6-34-1; Utah Code §13-8-1; Wash. Rev. Code §4.24.115, and others.
3 See People’s Gas System, Inc. v. RSH Constructors, Inc. , 563 So. 2d 107 (Fla. 1st D.C.A. 1990).
4 Fla. Stat. §§725.06 and 725.08 (2000).
5 It is interesting that when the bill that became Fla. Stat. §725.08 was drafted, it made reference to Fla. Stat. §725.06, but in its then existing form (the 1972 version). Thus Fla. Stat. §725.08 begins with “Notwithstanding the provisions of §725.06. . . . ” Since Fla. Stat. §725.06 was changed at roughly the same time as §725.08 was enacted, and addressed essentially the same subject matter, the reference appears curious.
6 Design professional is defined as a licensed architect, engineer, landscape architect, or surveyor/mapper. See Fla. Stat. §725.08(4) (2000).
7 Fla. Stat. §725.08(1), (2) (2000).
8 Fla. Stat. §725.06(2), (3) (2001).
9 Limit is an amusing choice of terms here.
10 Note that there is no overall limit, nor limit on the number of occurrences.
Larry R. Leiby is a graduate of the University of Miami School of Law (J.D., 1973) and a principal in Leiby Taylor Stearns Linkhorst and Roberts, P.A. He founded and was the first chair of the Construction Law Committee of The Florida Bar Real Property Section (1976-1994). He is a member of the arbitrator-training faculty of the American Arbitration Association. Mr. Leiby authored the Florida Construction Law Manual , currently in its fifth edition.
Jeff Craigmile is with the Walt Disney World Co. legal department, Lake Buena Vista. He received his J.D. from the University of Virginia.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Louis B. Guttmann III, chair, and Richard R. Gans and William P. Sklar, editors.