This post is a continuation of the series “Minnesota CGL: Getting a Handle on Large Construction Defect Claims.” This post (Part III) addresses the “strict construction” test used to interpret indemnification agreements.  Part IV will address the specific requirements of “insured contract” coverage under the subcontractor’s commercial general liability (CGL) policy.

As noted in prior posts in this series, the standard CGL policy contains “insured contract” coverage which usually protects the subcontractor against a general contractor’s indemnity claim.  Generally, a CGL policy will protect the subcontractor against liability “[a]ssumed in a contract or agreement that is an ‘insured contract’ provided the ‘bodily injury’ or ‘property damage’ occurs subsequent to the execution of the contract or agreement.” The standard CGL form 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.

The first step in addressing the subcontractor’s potential indemnity obligation to the general contractor (and, thus, whether the insured contract provisions of the subcontractor’s CGL policy apply) requires a determination of whether the language of the subcontract obligates the subcontractor to indemnify the general contractor for the general contractor’s own negligence.  If the subcontractor did not promise to indemnify the general against the latter’s own negligence, the subcontractor will have no indemnification exposure and the “insured contract” provisions of the subcontractor’s CGL policy will not apply. See e.g.,  Hurlburt v. Northern States Power Co., 549 N.W.2d 919 (Minn. 1996); Richmond & Black, Expanding Liability Coverage: Insured Contracts and Additional Insureds, 44 Drake L. Rev. 781, 784 (1996) (“[T]he insured must assume the other contracting party’s tort liability to third parties in order for insured contract coverage to attach”).

Whether the indemnity agreement requires the subcontractor to indemnify the general contractor for the general contractor’s own negligence is, in turn, dependent upon the legal standard used to interpret the indemnification language.  Prior to 1980, Minnesota courts interpreted indemnity agreements, including those found in building and construction contracts, under a “fair construction” test.  See, Northern Pacific Railway Co. v. Thornton Brothers Co., 206 Minn. 193, 288 N.W. 226 (1939) (adopting the fair construction test).  The specific indemnification language at issue in Northern Pacific provided that the contractor would indemnify the owner for “loss of or damage to the property of third persons arising in any manner out of or in any manner connected with the said work . . .”.  The Minnesota Supreme Court adopted the “fair construction” standard and found the language required the contractor to indemnify the railroad for damages caused by the railroad’s own negligence. The “fair construction” standard was applied until 1979 when the Minnesota Supreme Court decided Farmington Plumbing & Heating Co. v. Fischer Sand and Aggregate, Inc.,281 N.W.2d 838, 842 (Minn. 1979).  In Farmington, the court abandoned the “fair construction” test and adopted the “strict construction” rule, holding that when a party is seeking to be indemnified for its own negligence, the agreement must be strictly construed: “[t]here must be an express provision in the contract to indemnify the indemnitee for liability occasioned by its own negligence; such an obligation will not be found by implication.”  See also, National Hydro Sys. V. M.A. Mortenson Co., 529 N.W.2d 690, 694 (Minn. 1995) (requiring an unequivocal expression of indemnity for losses occasioned by the negligence of the indemnitee).

In Johnson v. McGough Construction Co., 294 N.W.2d 286 (Minn. 1980), the subcontract agreement contained an indemnity clause providing:

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 . . . 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 the insure the provisions of this paragraph.

The Johnson court held that this language – particularly the provisions requiring the subcontractor to “assume entire responsibility and liability for all  provisions damages” and “indemnify and save harmless the Contractor . . . from all such claims including . . . claims for which the Contractor may be, or may be claimed to be, liable” –“necessarily included claims of the [general] contractor’s negligence”.  Id. at 291. See also, Holmes v. Watson-Forsberg Co., 488 N.W.2d 473, 475 (Minn. 1992) (phrase “claims for which the Contractor may be or may be claimed to be, liable” includes general contractor’s negligence); R.E.M. IV, Inc., v. Robert F. Ackermann & Associates, 313 N.W.2d 431 (Minn. 1981) (interpreting same language and reaching same result); Christenson v. Eagan Companies Inc., Minn. Ct. App. A09-1539 (unpublished, June 1, 2010) (same).

The question is whether the indemnity clause unequivocally requires the subcontractor to indemnify the general contractor for the latter’s own negligence or is susceptible to more than one reasonable interpretation.  For example, in Katzner v. Kelleher Constr., 545 N.W.2d 378 (Minn. 1996), the indemnification clause stated as follows:

The Contractor shall indemnify and hold harmless the (Owner) and (its) agents and employees from and against all claims . . . arising out of or resulting from the performance of the Work provided that any such claim . . . is caused in whole or in part by any negligent act or omission of the Contractor, . . . regardless of whether or not it is caused in part by (the Owner).

This language would seem to obligate the Contractor to indemnify the Owner for all claims against the Owner, regardless of who was at fault.  However, the court found that the indemnity clause could be read in one of two ways: either as (1) an agreement to indemnify the Owner from all claims regardless of who was at fault; or (2) an agreement to only indemnify the Owner from claims caused “in whole or in part by any negligent act or omission of the Contractor.” In keeping with the strict construction rule, the court found the indemnity clause only required the Contractor to indemnify the Owner for the Contractor’s negligence, not the Owner’s negligence. Therefore, the indemnity clause was not enforceable to the extent the Owner sought indemnification for its own negligence.

In Mattila v. Minnesota Power and Light Co., 363 N.W.2d 842 (Minn. Ct. App. 1985), the indemnity clause contained the following language:

Except as may be caused by the sole negligence of [MP&L], [National] shall indemnify and save harmless [MP&L] from all claims . . . arising in whole or in part from any act or omission of [National] . . . incidental to the performance of this contract . . . and shall assume . . . the defense of any such claims . . . irrespective of whether it is alleged, claimed or proved in connection with such act or omission that negligence of [MP&L] . . . caused or contributed thereto.

Upon first reading this language would seem to require National to indemnify MP&L for all claims against MP&L unless the claim arose solely as a result of MP&L’s negligence. However, the court found the clause to be “merely a provision requiring National to indemnify MP&L for liability brought about by National’s negligence. It clearly does not contain an express provision to indemnify MP&L for liability occasioned by MP&L’s own negligence.” Id. at 846.

Another example of the courts’ narrow reading of indemnity clauses is Braegelmann v. Horizon Development Co., 371 N.W.2d 644 (Minn. Ct. App. 1985), review denied (Oct. 11, 1985), where the subcontract agreement (an American Institute of Architects standard form) provided:

To the fullest extent permitted by law, the Subcontractor shall indemnify and hold harmless the . . . Contractor . . . from and against all claims . . . arising out of or resulting from the performance of the Subcontractor’s Work . . . to the extent caused in whole or in part by any negligent act or omission of the subcontractor . . . or anyone for whose acts he may be liable, regardless of whether it is caused in part by a party indemnified hereunder . . . .

The court noted that this language differed from the indemnity provision found enforceable in Johnson v. McGough Construction Co., 294 N.W.2d 286, 291 (Minn. 1980) and discussed above.  In Braegelmann, the court found the additional phrase “to the extent caused” suggested a comparative negligence analysis. The remaining language, “regardless of whether it is caused in part by a party indemnified hereunder” did not save the indemnity clause, but instead made it “equivocal at best.”  As a result, the indemnity clause was unenforceable under the strict construction test.

In a later case, the Minnesota Court of Appeals interpreted language that was nearly identical to that in Braegelmann, except that it did not contain the phrase “to the extent.” In Oster v. Medtronic, Inc., 428 N.W.2d 116 (Minn. Ct. App. 1988) the court upheld the indemnity agreement, holding that it was “at least as specific as that found in the Johnson contract.”  As a result, the contract unequivocally expressed an intent to indemnify the contractor even for damages occasioned by the contractor’s own negligence.

In Hurlburt v. Northern States Power Co., 549 N.W.2d 919 (Minn. 1996), a rider to the standard subcontract agreement obligated the subcontractor to indemnify the general contractor “to the extent that injury or damage [was] attributable to the negligence . . . of subcontractor.” Id. at 922. According to the court, this language, “converted the agreement “from an agreement to indemnify [the general contractor] for all damages . . . without regard to fault and to procure and maintain insurance to fund that undertaking, to an agreement by [the subcontractor] to be responsible for injury or damage attributable to its own . . . negligence . . . and to procure and maintain insurance to pay [the subcontractor’s] liability for its fault . . .”.  Id. at 922-23.  Because the jury in Hurlburt determined that the subcontractor was free of fault for the accident (the injured employee and general contractor were found 15% and 85% at fault, respectively), “there was no basis either for imposing liability [on the subcontractor] or for calling upon [its] insurer for payment of sums for which [the general contractor [was] liable.” Id. at 923. Because the rider did not require the subcontractor to indemnify the general contractor for the latter’s fault, the indemnity agreement did not constitute an “insured contract” under the subcontractor’s CGL policy – there was no assumption of tort liability.

Thus, the first step in addressing the subcontractor’s potential indemnity obligation is to determine whether the subcontract unequivocally obligates the subcontractor to indemnify the general contractor for the general contractor’s own negligence.  If it does not, the subcontractor has no indemnity exposure and the insured contract provisions of the subcontractor’s CGL policy do not come into play.  Part IV of this series will address several additional issues which may arise when interpreting indemnity clauses and whether the insured contract provisions of the subcontractor’s CGL policy will apply.

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