(Part II) Minnesota CGL: Getting a Handle on Large Construction Defect Claims


This post is a continuation of the series “Minnesota CGL: Getting a Handle on Large Construction Defect Claims.” This post, as well as the next three, will focus on the subcontractor’s liability to a general contractor pursuant to an indemnity agreement between the parties. This post (Part II) addresses the basic laws of indemnity applicable to agreements in the building and construction context.

The basic laws of indemnity were discussed in depth by the Minnesota Supreme Court in Hendrickson v. Minnesota Power & Light Co., 258 Minn. 368, 104 N.W.2d 843 (1960) and Tolbert v. Gerber Industries, Inc., 255 N.W.2d 362 (Minn.1977). In Tolbert, the Supreme Court recognized that one party may recover indemnity from another in the following four situations:

(1)       Where the one seeking indemnity has only a derivative or vicarious liability for damage caused by the one sought to be charged.

(2)       Where the one seeking indemnity has incurred liability by action at the direction, in the interest of, and in reliance upon the one sought to be charged.

(3)       Where the one seeking indemnity has incurred liability because of a breach of duty owed to him by the one sought to be charged.

(4)       Where there is an express contract between the parties containing an explicit undertaking to reimburse for liability of the character involved.

Tolbert v. Gerber Industries, Inc., 255 N.W.2d 362, 372-373 (Minn.1977).

Thus, the basic laws of indemnity allow parties to a business contract to prospectively allocate the risk of third party tort liability arising out of the parties’ business relationship through the use of an indemnity agreement (scenario #4, above) Minnesota recognizes that a party to a contract may “properly bargain for indemnity against his own negligence where the latter is only an undesired possibility in the performance of the bargain . . .”.  St. Paul Fire & Marine Ins. Co. v. Perl, 415 N.W.2d 663, 666 (Minn.1987) (quoting Northern Pacific Ry. Co. v. Thornton Bros. Co., 206 Minn. 193, 197, 288 N.W. 226, 227-28 (1939).  Thus, unless prohibited by statute or public policy, a “party may contract to indemnify another for damages or injuries caused by the negligence of the indemnitee . . .” Christy v. Menasha Corp., 297 Minn. 334, 211 N.W.2d 773, 777 (1973).

In the building and construction context, the subcontract between the general contractor and subcontractor invariably contains an indemnity clause obligating the subcontractor (“indemnitor” or promisor) to indemnify the general contractor (“indemnitee” or promisee) for the latter’s own negligence. In Minnesota, such agreements are generally unenforceable. See, Minn. Stat. § 337.02; Holmes v. Watson-Forsberg Co., 488 N.W.2d 473, 475 (Minn. 1992)). Indemnity agreements are generally only enforceable to the extent that the underlying injury or damage is attributable to the “negligent or otherwise wrongful act or omission, including breach of specific contractual duty, of the promisor (i.e., subcontractor).” Id.  Minnesota Statute § 337.02, enacted in 1983, is intended to ensure that each party to the contract will remain responsible for its own negligence. Katzner v. Kelleher Construction Co., 545 N.W.2d 378, 381 (Minn. 1986).

However, there is one major exception to this statutory prohibition.  Since an indemnity agreement is only worth only as much as the subcontractor’s financial ability to pay the general contractor,  “it became customary to assure the availability of funds by requiring the subcontractor to procure and maintain contractual liability insurance to insure the subcontractor’s undertaking to indemnify the general contractor.”  Hurlburt v. Northern States Power Co., 549 N.W.2d 919, 923 (Minn. 1996). In 1983, the Minnesota legislature recognized this common practice and also created an exception to the prohibition against indemnification for the general contractor’s own negligence:  the prohibition does not affect the validity of an agreement whereby a subcontractor agrees to provide specific insurance coverage for the general contractor or others.  Minn. Stat. § 337.05, subd. 1.

The subcontract agreement at issue in Holmes required the subcontractor:

7. To obtain, maintain and pay for such insurance as may be required by the General Contract, the rider attached hereto, or by law, and to furnish the Contractor satisfactory evidence that it has complied with this paragraph; and to obtain and furnish to the Contractor an undertaking by the insurance company issuing each such policy that such policy will not be cancelled except after fifteen (15) days notice to the Contractor of its intention to so do.

The Subcontractor agrees to assume entire responsibility and liability, to the fullest extent permitted by law, for all damages or injury to all persons, whether employees or otherwise, and to all property, arising out of it, resulting from or in any manner connected with, the execution of the work provided for in this Subcontract or occurring or resulting from the use by the Subcontractor, his agents or employees, of materials, equipment, instrumentalities or other property, whether the same be owned by the Contractor, the Subcontractor or third parties, and the Subcontractor, to the fullest extent permitted by law, agrees to indemnify and save harmless the Contractor, his agents and employees from all such claims including, without limiting the generality of the foregoing, claims for which the Contractor may be or may be claimed to be, liable and legal fees and disbursements paid or incurred to enforce the provisions of this paragraph and the Subcontractor further agrees to obtain, maintain and pay for such general liability insurance coverage and endorsements as will insure the provisions of this paragraph.

The language obligating the subcontractor to indemnify the general contractor against “claims for which the Contractor may be or may be claimed to be liable,” “necessarily includes claims of the [general] contractor’s negligence.” Johnson v. McGough Constr. Co., 294 N.W.2d 286, 288 (Minn.1980). See also, Seward Housing Corp. v. Conroy Bros. Co., 573 N.W.2d 364, 365-368 (Minn. 1998) (same).  If this was all the subcontractor had agreed to, the agreement would constitute an unenforceable indemnification agreement under Minn. Stat. § 337.02.  However, as noted above, the contractual promise to purchase insurance to cover the subcontractor’s indemnity obligation is enforceable under Section 337.05. Id.; Mytty v. Dean R. Johnson Construction Co., 1999 WL 768352 (Minn. Ct. App. 1999); Van Vickle v. C.W. Scheurer and Sons Inc., 556 N.W.2d 238, 241 (Minn. Ct. App. 1996) rev. denied (Minn. March 18, 1997).  The typical subcontract agreement, and that at issue in Holmes, also obligated the subcontractor to “obtain, maintain and pay for such general liability insurance coverage as will insure the provisions of this paragraph.” Holmes, 488 N.W.2d at 474-475.

A subcontractor’s agreement to maintain insurance to cover its indemnity obligation converts the indemnity clause from an unenforceable agreement into an enforceable one. The court in Holmes reasoned that “the legislature both anticipated and approved a long-standing practice in the construction industry by which the parties to a subcontract could agree that one party would purchase insurance that would protect ‘others’ involved in the performance of the construction project.” Id. Thus, indemnity agreements in building and construction contracts are enforceable if a subcontractor agrees both to indemnify for another’s negligence and to insure that risk. Stated another way, an “indemnity provision . . . [can be] saved from invalidity . . . by [a] requirement that the [subcontractor’s] contractually assumed liability be insured.”  Hurlburt v. Northern States Power Co., 549 N.W.2d 919, 923 (Minn. 1996).  “The agreement to provide insurance . .  . [converts] . . . an unenforceable indemnification agreement to an enforceable insurance agreement allowed under section 337.05.” Id.  See also, Seifert v. Home Insurance Company, 505 N.W.2d 83, 86 (Minn. Ct. App. 1993), rev. denied (Minn. Oct. 28, 1993) (“when an indemnitor’s obligations are covered by insurance then section 337.02’s invalidation language does not apply”); Van Vickle v. C.W. Scheurer and Sons Inc., 556 N.W.2d 238, 241 (Minn. Ct. App. 1996) rev. denied (Minn. March 18, 1997).

The standard CGL policy contains contractual liability coverage protecting the subcontractor against indemnity claims in certain situations.  This coverage is found in the “insured contract” provisions of the policy.  The standard CGL policy has defined an “insured contract” to include:

That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for “bodily injury” or “property damage” to a third person or organization.  Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.

In Holmes v. Watson-Forsberg Co., 488 N.W.2d 473, 475 (Minn. 1992), he subcontractor obtained “the requisite insurance which included a policy endorsement providing contractual indemnification consistent with provision 7 of the subcontract agreement. Id. at 474-75. As a result, the general contractor in Holmes was entitled to indemnification for its own fault pursuant to the insured contract provisions of the subcontractor’s policy.

If the subcontractor does not obtain and maintain a CGL policy insuring the subcontractor against the indemnity obligation identified in the subcontract, the subcontractor may be personally liable to the general contractor.  Minnesota Statute § 337.05, subd. 2 provides that if: (a) a promisor agrees to provide specific types and limits of insurance; and (b) a claim arises within the scope of the specified insurance; and (c) the promisor did not obtain and keep in force the specified insurance; then, as to that claim and regardless of section 337.02, the promisee shall have indemnification from the promisor to the same extent as the specified insurance. See e.g., Van Vickle v. C.W. Scheurer and Sons Inc., 556 N.W.2d 238, 241 (Minn. Ct. App. 1996) rev. denied (Minn. March 18, 1997).

A subcontractor’s failure to read the indemnity provision of is not grounds to avoid the obligation.  Wilton v. Barbarossa and Sons, Inc., 1993 WL 290270 (Minn. Ct. App. 1993).

 

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

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