Sometimes the insurance requirements of a contract aren’t in agreement with the indemnification provision. This can result from a simple error due to edits by multiple parties, or it can be an attempt to circumvent anti-indemnity statues – or even bury a provision that, in effect, is a broad-form indemnity. As we’ve discussed in previous posts, many states have enacted anti-indemnification statutes, making certain broad-form indemnifications void as against public policy. Any provision that attempts to circumvent an anti-indemnity statute will also be void, and a conflict between insurance and indemnity can lead to litigation. In this edition of our contract review series, we review some of the statutes that address those provisions and study examples so you can identify such a provision when you see it in a contract.
Disagreement Between Indemnity and Insurance Requirements
First, what do we mean by the insurance requirements not being “in agreement” with the indemnification? Consider the following excerpt from a contract:
To the extent caused by Smith’s negligence or willful misconduct, Smith shall indemnify, defend and hold harmless Jones for any claims that arise out of this Agreement or the Work.
Smith’s insurance policies shall: 1) be occurrence based; 2) name Jones as an Additional Insured (other than on workers compensation and employers liability); 3) provide defense as an additional benefit; 4) not exclude from coverage the negligence, strict liability or gross negligence, whether sole or otherwise, of the “Additional Insureds”; and 5) include an endorsement that the insurer shall not cancel or non-renew without thirty days’ written notice to Jones.
Here, the indemnification provision is limited-form; it only requires Smith to indemnify Jones to the extent Smith’s negligence or willful misconduct causes claims. However, the insurance provision requires that Jones be named as an additional insured and that the policy not exclude Jones’s negligence. This means Jones could make a claim against Smith’s policy and obtain coverage for Jones’s own negligence; the effect would provide Jones with an intermediate or broad-form indemnification. Thus, the insurance provision is not in agreement with the indemnification provision. For a standard contract, this could cause the parties to enter litigation to determine which provision prevails. For a contract subject to an anti-indemnity statute, it could void certain parts of the contract.
Anti-Indemnity Acts Addressing Circumventing Language
Anti-indemnity statutes often will address this issue directly by including language that expressly makes an insurance requirement provision void if it attempts to circumvent the statute. Louisiana’s Oilfield Anti-Indemnity Act (LOAI) contains the following language:
“Any provision in any agreement arising out of the operations, services, or activities listed in Subsection C of this Section of the Louisiana Revised Statutes of 1950 which requires waivers of subrogation, additional named insured endorsements, or any other form of insurance protection which would frustrate or circumvent the provisions of this Section, shall be null and void and of no force and effect. La.R.S. § 9:2780(G).”
New Mexico has a similar provision:
“A provision in an insurance contract indemnity agreement naming a person as an additional insured or a provision in an insurance contract or any other contract requiring a waiver of rights of subrogation or otherwise having the effect of imposing a duty of indemnification on the primary insured party that would, if it were a direct or collateral agreement described in Subsections A and B of this section, be void, is against public policy and void. NMSA 1978 § 56-7-2(C).”
Even if a statute doesn’t have an express statement forbidding such a circumvention provision, the most likely outcome is that a court will find that the goal of the statute requires voiding such a provision. So, it’s important to identify potential conflicts.
Example: Additional Insured Provision
Sometimes, naming a party as an additional insured will violate an anti-indemnity act. In Babineaux v. McBroom Rig Bldg. Serv., Inc., 806 F.2d 1282 (5th Cir. 1987), a contract drafted under Louisiana law contained the following provision:
“Each insurance policy secured by Contractor shall name R & B as an additional insured and shall contain a suitable waiver of the rights of recovery of Contractor's insurers and underwriters against R & B and its customers.”
The court found that this provision violated LOIA:
“Subsection G expressly invalidates agreements requiring ‘additional named insured endorsements or any other form of insurance protection which would frustrate or circumvent the prohibitions of this section.’ … We are persuaded that it would frustrate the purposes of the Act to allow Reading & Bates to obtain from [the insurer] the indemnification it cannot obtain from McBroom.”
The outcome of this case was likely not what the parties had intended when they signed the agreement. This illustrates the importance of consulting counsel well-versed in a particular state’s law.
Some contracts will use a waiver to attempt to circumvent the law. Consider this provision:
“Smith waives all rights against Jones for recovery of loss, injury, or damages to the extent such loss, injury, or damages are covered by the insurance policies maintained by Smith.”
If Jones caused damage to Smith’s property, and Smith’s property insurance policy would cover the loss, this provision would waive Smith’s right to bring a claim against Jones. The effect would be that Smith indemnifies Jones for Jones’s own negligence, even though there was no intermediate or broad-form indemnity signed. This may not be what Smith anticipated after reviewing the indemnity provision.
Navigating the Complexities
Identifying insurance provisions that don’t agree with indemnity provisions or that attempt to circumvent anti-indemnity statutes can prevent costly litigation. When you partner with Higginbotham’s contract review experts, you get the tools you need to make smart decisions about managing your contractual risks.