AIA contract language on indemnification typically requires contractors to hold harmless and indemnify against claims arising out of their performance of work. Simply translated, this means if an owner is sued and ultimately it is determined that the contractor or its representatives or subcontractors were the source of the suit, the contractor must indemnify the owner for the damages it incurred as a result of being sued.
Painful litigation experiences have driven industry participants to routinely attempt to alter this clause to include a simple addition, that contractors must "defend," hold harmless and indemnify... and this simple addition has created a host of issues for unwitting contractees who sign off on this provision without accounting for the potential risk associated with it.
Newest case in point: Arthur v. State of Hawaii, et al., Nos. CAAP-13-0000531, 552, and 615 (Haw. Ct. App. February 27, 2015). In this case, Hawaii's ICA was asked to revisit its Pancakes v. Pomare decision regarding private indemnity agreements, in which the ICA basically held that when a private contractee contracts to "defend" as part of an indemnity agreement, it takes on the role of an insurer who likewise contracts to defend insurers who are sued in civil actions.
The Arthur case arose out of a wrongful death case in which a homeowner fell down a steep hillside and suffered a mortal head injury. The homeowner's husband sued, claiming negligence against the State which originally owned the land, the developer who developed it, the designer who designed its improvements, the contractor who graded it, and finally the chain link fence subcontractor who, for $18,000, constructed a two foot high chain link fence at the base of the hill. In their contracts, all of the parties had signed off on "defend and indemnify" provisions promising to defend against claims arising out of their contracts.
At issue on appeal were various rulings at the Circuit Court level regarding the effect of these multiple indemnification and duty to defend clauses but for purposes of this post, the case boils down to three important findings.
Pancakes Is Still The Law: First, though specifically requested, the ICA refused to reconsider its decision in Pancakes vs. Pomare, which essentially held that when a private party contracts to defend and indemnify, it will be held to the same standards of "defense" as an insurer, meaning the duty will be determined by and enforceable upon, the allegations of the complaint, and not after trial and a determination of fault. This means that, like insurers, if there is even the possibility of a finding against the indemnitor based upon the allegations of the complaint, the indemnitor must defend against the entire complaint. Industry consternation that private contracting parties are not the same as insurers, i.e. they do not have the capitalization, they are not likewise governed by statute, and most importantly that is not their business, apparently does not and will not sway the court from its original finding.
Hawaii's Insurance Statute Prohibiting Indemnification for One's Own Negligence, Is Not Very Protective: the designer in Arthur attempted to point out to the ICA that by putting indemnitors into the shoes of insurers, the court was violating HRS 431:10:222 , which provides that for construction projects, courts will not enforce indemnity agreements where one party claims indemnification for a party's sole negligence. Focusing on the language "sole negligence," the ICA stated that the plaintiff's complaint did not allege "sole" negligence on the part of the contractor. Therefore, the designer could not claim the indemnification clause was unenforceable under Hawaii law.
The duty to defend is not a flow through duty unless specifically contracted to be one: Despite finding that Pancakes is still governing law and that the duty to defend puts the indemnifier into the same shoes as an insurer who likewise contracts to defend, the ICA was unwilling to assign to the fencing subcontractor a flow through duty to the defend not just the entity with whom it contracted, but the develop and Architect as well, because of flow through provisions in the parties' contracts. Because the Contractor contracted to defend and indemnify the Owner and because the Designers did likewise, they could not disclaim their responsibility to pay for a portion of the defense.