Construction Engineering 380
Indemnification,
Sureties, and Bonding
Indemnification
• Can have varying “degrees” of
responsibility (liability)
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First instance vs. ultimate
Passive s. active
Primary vs. secondary
Contractual vs. non-contractual
Courts and the industry try to keep all liability
and indemnification cases as contract (not tort)
Indemnification
• Purpose of indemnification is to consolidate risk,
create efficiency, and define losses
• Losses are assigned to those who can most
cheaply avoid the harm, rather to those who are
responsible (at least in part) for the loss
• Some courts and legislatures are hostile because it
violates one of the basic principles of law (cost is
assigned to those responsible)
Joint Liability and Indemnity
• Indemnity clause- agreement that one party will
bear all the risks for various events (wind, fire,
risk, etc.)
• Types of clauses
– Limited- limited form indemnity clause restatement of
the law- each party responsible for their share
– Intermediate form indemnity clause- one party will pay
for all damages if it is partly responsible (makes
insurance easier and cheaper)
– Broad from indemnity- one party will pay for all
damages even if they have not caused any of the
damages. Illegal in many states- under review
Joint Liability and Indemnity
• Several people or companies may contribute
to one loss. (case or tort is more complex)
• Each party will pay damages in proportion
to the amount of their liability
• Joint liability is extremely common in
construction- each party pays according to
their proportion of cause (arbitrator assigns
percentage)
Joint Liability and Indemnity
• Claim that the “most responsible” should
pay all is not a valid defense in U.S. unless
there is a contractual clause to that effect
• Indemnity and contribution define the terms
of the settlement
– Indemnity action- bringing in another party
believed partly liable for some of the damages
– Contribution action- one party has already paid
and seeks recovery or reimbursement from
another party believed partly liable
Joint Liability and Indemnity
• Insurance companies represent liable
parties, but are not parties to the suit.
• Joint and severable liability– each tortfeasor is jointly liable with other
tortfeasors for the total damages AND
– Each tortfeasor is also individually liable for all
damages suffered should other parties not be
able to pay (severability)
Joint Liability and Indemnity
• Responsibility for contributory actions is on
the other tortfeasors, not the damaged party
• Law on settlement by a jointly liable party
varies by jurisdiction- some make nonsettlers pay more, others will use settlement
as the anchor for other party damage
assignments
Joint Liability and Indemnity
• Accepting liability (indemnifying others) is
financially risky. Need to make sure
insurance coverage is in place and high
enough to cover potential loss
• Insurance policy will usually have a clause
preventing you from from indemnifying
others without notification. Indemnitor will
pay more for insurance.
Joint Liability and Indemnity
• Additional insured rider- extends your
insurance coverage to another party. Same
effect as broad form indemnity, but not
legally as troubling. Usually applies to
specific acts or assets (like your car)
• Insurance and broad form indemnity apply
sometimes to officers of the company
Surety and Bonds
• Surety is similar to insurance, but insurance covers
specific loss to the insured. Surety guarantees the
financial aspects of a project to a third party, not to
the covered company
• Sureties paid to take risk, so the law views them as
commercial, contractual parties
• Individual can act as surety, but if they are not
paid the legal obligation is viewed differently
• Sureties provide bonds for contractors
Surety and Bonds
• Three major types of bonds in construction:
– Bid bond- submitted at time of bid- guarantees
that company will execute a contract if they are
the low bidder
– Performance bond- guarantees that the
contractor will complete the work defined by
the contract documents
– Payment bond- guarantees that the contractor
will pay all subcontractors, vendors, etc.
Surety and Bonds
• Contractor can ask subcontractor for bonds
(flow down principle)
• Who can sue for payment from a surety is a
problematic legal issue- most jurisdictions
allow a subcontractor or supplier to sue the
surety for payment, but the bond language
is important to determine this right
Surety and Bonds
• Bonds remain valid if the contractor defrauds, but
not if the owner does
• Surety has defense and remedy options against the
owner or A/E similar to those of the contractor
(unreasonable interference, failure to pay, etc)
• Bond limits protect the surety from scope creep
• Contractor bankruptcy does not relieve the surety
from obligation to owner
• Sureties can place a claim for reimbursement from
contractor, but rarely recover without “auction”