How the Right Indemnification Clause Can Reduce Your Risk as a Subcontractor

Working with other businesses in the construction industry, especially for a subcontractor, means that there are risks associated with the work, with the payment, and with the contractual relationship itself. Where there are a number of mechanisms in place to protect subcontractors from unscrupulous businesses that will try and take advantage of them, one important protection is to include an indemnification clause in every contract.

What is Indemnification?

When you agree to indemnify another party, you are agreeing to take responsibility for what happens based on an contractual agreement. For example, if the homeowner sues based on the work performed, if the contractor indemnified you, they are responsible for the legal fees and costs associated with the problem. Similarly, you can choose to indemnify others and take the responsibility for the problem, even if you didn't create it.

Why Does Indemnification Matter?

When someone has been harmed, they have the right in our legal system to seek compensation for the harm done to them. This harm could include, for example, a house that was not completed based on the specifications in the contract. In this situation, the homeowners would sue the contractor for not completing the work as specified. If the contractor has indemnified subcontractors, then they are responsible for handling the matter themselves.

For subcontractors, this is a way to prevent the liability from a falling on them. Even if their work wasn't responsible for the damage, they may get caught up in the lawsuit and, without an indemnification agreement, found to be jointly liable with all other parties on the project. Sorting out the amount of their liability, or the fact that they're not liable at all, is a difficult, costly process. While many subcontractors carry business insurance to cover these costs when they do arise, preventing the problem in the first place is a great way to prevent headaches and complications.

What Does an Indemnification Clause Cover?

Depending on how the clause is drafted, it can be a broad statement that covers the entire agreement or it can be narrowed to only cover certain parts. Indemnification clauses can also be drafted that limit your liability only to those situations where you or your employees acted in a malicious or intentional fashion to cause harm.

Another option is an indemnification clause can hold you liable, but limit the amount of damages that can be collected, generally to the value of the contract or insurance coverage. In the construction industry, the most common type of indemnification clause is one stating that a subcontractor is responsible for their actions alone. In all cases, its best to try and limit your liability as much as possible.

Having an experienced construction attorney on your side, like the team at National Lien & Bond, is a great way to ensure you're agreeing to a fair indemnification clause. Get in touch with us now for a free consultation to make sure you are protecting your right to get paid.