Understanding Indemnification Clauses and Why They are Crucial For Construction Projects and More

Liability is one of the most serious considerations for various projects, business processes, and other undertakings, such as construction work. While modern construction sites are far safer for workers, the community, and other stakeholders, risks remain elevated. Injuries, property damage, and sadly, even death can all occur during a construction project. This makes indemnification clauses, which are used to transfer risks from one party to another, crucial.

Property owners are typically the indemnitee, and under normal circumstances, risks and liabilities fall on them. If someone is walking through a building and slips on a flight of stairs owing to a broken handrail, the property owner may be found liable. Indeed, the property owner could find him or herself in court, facing a lawsuit.

In some cases, it makes sense for property owners to transfer risks to another party. If a property owner in New York hires a contractor to work on his condo building in Brooklyn, he may ask the contractor to take on some of the liabilities associated with their work and the project. To do this, an indemnification clause will be put in the contract.

We’ll cover some vital points. However, if you have questions about indemnification clauses, business contracts (including for construction), or other legal issues, reach out to SMB Law Firm, based in NYC.

Why Transferring Liabilities Often Makes Sense

In some situations, risk may be transferred to another party. Let’s say a property owner in New York hired a local construction contractor to replace and repair a stairwell. However, while completing the project, the construction contractor failed to properly close off access and set up warning signs. As a result, someone tripped over a tool and was injured.

Who’s liable? Without an indemnification clause, the property owner could be found liable even though it was the contractor who made the mistake. On the other hand, so long as a properly written indemnification clause is in place, the indemnitee, meaning the property owner, should be protected. The indemnification clause will have transferred risk to the contractor, and since the contractor’s negligence led to the accident, they will likely be found liable.

A Tale of Contesting Interests

In general, the indemnitee, such as a property owner in New York hiring a construction firm, will seek to transfer as much liability as possible to the contractor. The contractor, meanwhile, will seek to reduce how much risk they will take on. Given these contested interests, contracts are essential. Both parties should also have in-depth knowledge of the terms and what they are agreeing to.

The legal system in New York (and pretty much every jurisdiction, for that matter) is immensely complex. It’s always important to ensure that contracts are properly written, and legal advice can pay off in practically any situation. That said, before two parties with competing interests

Beyond that, there are often many complexities with indemnification. For example, did you know that in New York, the “work itself,” meaning the work the contractor is completing, is excluded? Let’s look at why.

Why the “Work Itself” is Often Excluded

Folks are sometimes surprised to learn that the work itself being carried out by a contractor or other party is typically not covered under an indemnification clause. This means that if the contractor damages their own work, either directly or indirectly (say through negligence), they often won’t be held responsible, at least not under the indemnification clause. Why should this be the case? Insurance plays a vital role.

Property owners typically carry insurance for their property. This insurance will cover not only damage to the property, say storm damage to a roof, but also liabilities. Thus, if someone is hurt on an insured property, it might be the insurance company rather than the property owner who pays out.

Likewise, contractors will often carry liability insurance that will cover damages caused by their work. However, insurance companies will often decline to provide coverage for the work being performed by the contractor. Insurance companies often decline to cover damages to the work itself because, among other things, it could lead to misaligned incentives.

If an insurance company had to pay for damages, the contractor might intentionally cause damage to their own work. Then the insurance company could end up paying the contractor for the damage they themselves caused to the work they are completing. This could incentivize them to damage their own work, which in turn could lead to more insurance claims (and likely fraudulent activities).

Given all the nuances involved with indemnification clauses, it’s smart to work with tried and true legal experts, like those found at SMB Law Firm.

Managing Risks and Legal Issues in New York

Whether you’re writing up a contract before beginning work on a construction project or are facing a civil suit, having sound legal advice can go a long way. We have built up a highly refined understanding of the laws in New York regarding indemnification and many other issues. Contact SMB Law Firm at your convenience.

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