The Importance of Indemnity Clauses

Indemnity clauses — common to the construction industry — are defined by California Civil Code Section 2772 as “a contract by which one engages to save another from the legal consequences of the conduct of one of the parties, or of some other person.” The California Supreme Court has further declared indemnity as “the obligation resting on one party to make good a loss or damage another party has incurred.”

An indemnity clause, in common use, will often protect a general contractor at a construction site from losses incurred by shifting the liability to the subcontractor, with various interpretations of liability depending on the type of clause used.

If you are an owner, developer, contractor, or subcontractor in the San Francisco Bay Area who needs to draft or interpret an indemnity clause, contact the Law Offices of David H. Schwartz, INC., to speak with an experienced commercial litigation attorney with 45 years of experience.

Three Types of Indemnity Clauses

Indemnity clauses are used to transfer common law and statutory risk arising from one party’s negligence to another party. One party (called the indemnitor) agrees to pay the other party (the indemnitee) for attorney fees and any judgment arising from one or both parties’ wrongful conduct. In the absence of an indemnity clause, each party would be liable according to its comparative fault portion of the responsibility.

Over the years, California courts have refined the classification of indemnity clauses into three categories by defining the type and extent of negligence that must be shown for the clause to be valid. This classification began in 1972 with a decision known as MacDonald & Kruse, Inc., v. San Jose Steel Company, Inc.

That decision resulted in the three-part classification of indemnity clauses that still pertains, though subsequent court decisions have somewhat blurred the distinctions. Recent decisions have focused more on the parties’ intention in the given case under review. The examples below will rely on clauses between contractors and subcontractors, though it could just as easily be owner and contractor or between other parties not in the construction industry.

Type I Classification

In the first classification — referred to as a Type I clause — the indemnitor (the subcontractor in this example) is liable for loss or damage to the indemnitee (the contractor) regardless of whose fault it was (the contractor’s, the subcontractor’s, or both), except in cases where the indemnitee exhibited active negligence or willful misconduct.

Typical wording might say that “the subcontractor agrees to hold the general contractor free and harmless of any loss or liability except for loss or liability caused by the general contractor’s sole willful conduct or active negligence."

Type II Classification

The next classification, Type II, is also known as the general indemnity clause. Type II holds the indemnitor liable for loss or damage resulting from the indemnitee’s passive negligence only. Passive negligence and active negligence have been defined by the California Supreme Court in this way:

“Passive negligence is found in mere nonfeasance, such as the failure to discover a dangerous condition or to perform a duty imposed by law. Active negligence, on the other hand, is found if an indemnitee has personally participated in an affirmative act of negligence, was connected with negligent acts or omissions by knowledge or acquiescence, or has failed to perform a precise duty which the indemnitee had agreed to perform.

Type III Classification

The final classification, Type III, protects the indemnitor from paying for any loss or damage caused by the indemnitee. The indemnitor is liable only for any loss or damage they cause.

Importance of Indemnity Clauses

The importance to the indemnitee is obvious, especially if they can secure a Type I agreement, which essentially holds them harmless unless they are actively negligent. For the indemnitor, the Type III clause provides the most protection.

Another important factor is securing general liability insurance. Depending on whether you’re the indemnitee or indemnitor, the insurer may insist on one type of clause over the other.

Enforcing Indemnity Clauses

An indemnity clause will often come into play when a third party files a claim. If, for instance, an owner of a newly constructed building is being sued by someone who was on the premises legally when they fell down a flight of stairs and suffered injuries. The owner might then invoke the indemnity clause to which he had the contractor agree. The following events may depend on the type of indemnity clause agreed upon and whose negligence was involved, if matters indeed go to litigation or even negotiation.

In California, indemnity clauses are generally legally binding except for what is called a “broad form” or “no-fault” clause, in which the indemnitor is liable for all damage to the indemnitee regardless of negligence. The Type I clause comes the closest to broad form but excludes active negligence or willful misconduct. California also prohibits punitive damages — rewards must be limited to actual damage or loss.

Trust an Experienced
Commercial Litigation Attorney

Attorney David H. Schwartz has spent more than four decades handling contract, business, and commercial disputes, and will bring his knowledge and experience to any issue you have regarding indemnity clauses.

Whether you’re the indemnitee or indemnitor, he can help you draft and understand indemnity clauses, advise you on your best options, and help you should problems arise from an indemnity clause you agreed to, whether you’re the indemnitee or indemnitor.

If you’re in or around the greater San Francisco Area, or in San Mateo, Santa Clara, San Jose, Oakland, or Alameda County, rely on the Law Offices of David H. Schwartz, INC., for all your business litigation needs. Call today for a consultation.


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