Obligations to “Hold Harmless” and “Defend”
“Hold Harmless” Clauses and Their Consequences
Construction subcontracts nearly always include “hold harmless” terms, which enable
general contractors and construction project owners to avoid the financial consequences
of their own mistakes by shifting the cost of any lawsuits that are “connected to,” or
“arise out of,” any subcontracted work, regardless of cause, to the subcontractor who
performs the work.1 For example, when a subcontractor’s employee is injured on the job
site, that injury necessarily “arises out of” and is “connected to” the subcontract work,
because the employee would not have been on the job site, and thus, would not have been
injured, but for the subcontract work. It doesn’t matter how the employee was injured, or
who caused the injury. The subcontractor-employer is often required to hold the general
contractor and owner harmless against their own negligent actions to cause, or to fail to
prevent, the injury.2 A similar analysis applies to claims for damages arising from
construction defects, like mold growing on a drywall panel: the mold “arises out of” and
is “connected to” the work of a drywall subcontractor, and so the drywall subcontractor
might be required to hold the general contractor and project owner harmless against
mold-related damages and claims, despite the fact that mold requires water to grow, and
water intrusion would not normally be caused by any work that a drywall subcontractor
would perform.
Forty-one states have “anti-indemnity” legislation limiting the hold harmless obligations
of subcontractors. In many of those states, hold harmless obligations must exclude claims
caused by the sole negligence of the party seeking to be indemnified, but there is still no
requirement to prove that an indemnifying subcontractor was negligent before it can be
forced to pay for a loss.3 In other states, where anti-indemnity legislation requires hold
harmless obligations to be limited to the extent of the negligence of the party who must
pay, a duty to “defend,” that is, to provide for attorneys, experts and witnesses in defense
against a lawsuit, often can completely circumvent those limitations.4 In all but seven
1
See, e.g., Mikula v. Miller Brewing, decided April 12, 2005, by the Court of Appeals of Wisconsin,
District One, Docket No. 2004AP498 (petitions for Wisconsin Supreme Court review pending), requiring
subcontractor to hold project owner harmless against owner’s liability under Wisconsin’s “Safe Place”
statute to an injured employee of subcontractor. See also W.M. Schlosser Co., Inc. v. Maryland Drywall
Co., 673 A.2d 647 (D.C.App. 1996), requiring a drywall subcontractor to hold a general contractor
harmless for its liability to subcontractor’s injured employee who fell through door-sized hole in the floor.
2
Id. See also Acceptance Insurance v. Syufy Enterprises (interpretation of “arising out of” language in an
additional insured endorsement), 81 Cal.Rptr.2d 557 (Cal. App. 1999).
3
See Centex Golden Construction v. Dale Tile, 93 Cal. Rptr. 2d 259 (2000): “An agreement by a
subcontractor to indemnify a general contractor for any claim made with respect to the work covered by or
incidental to their subcontract may require indemnity even if the claim is not meritorious and the
subcontractor is not guilty of any negligence.”
4
For example, an allegation in a personal injury lawsuit against a general contractor by the injured
employee of a subcontractor, that the general contractor failed to provide a safe place to work, was held to
trigger the subcontractor’s obligation to defend the general contractor under a hold harmless clause which
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material reserved.
1
states,5 “additional insured” requirements can also circumvent limits on the use of hold
harmless clauses.6
Subcontractors are sometimes responsible when failures of job site safety occur, or when
quality is unduly compromised to cut costs. But safety and quality are also compromised
by poor project leadership. Unqualified subcontractors may submit lower bids than
qualified subcontractors because they carry less overhead to ensure the safety of their
workers, or to ensure the quality of their product. It’s up to the project leadership to set,
and enforce, safety and quality standards. As President Harry S. Truman understood, “the
buck stops” at the top.
Responsibility for Worker Injuries
For example, two different courts held general contractors responsible for the safety of
subcontractors’ employees. In a March 2005 decision by the North Carolina Court of
Appeals, Commissioner of Labor v. Weekley Homes,7 a general contractor was cited for
failure to conduct “frequent and regular inspections of the job sites” as required by
OSHA regulation 29 CFR 1926.20(b), after a subcontractor’s employees were observed
“working on a steep pitch roof over six feet from the ground without fall protection.”
Many general contractors would blame the subcontractor for the violation. But consider:
who hired the subcontractor? How many subcontractors that pay the overhead to
maintain, and use, proper fall protection equipment, lost the work because a cornercutting, unqualified subcontractor submitted a low bid that the general contractor
accepted? Who is responsible for supervising the job site?
Also in March 2005, a California appellate court allowed a sprinkler subcontractor’s
employee to sue Turner Construction and Intel Corporation for injuries sustained after
falling nine feet from a ladder while installing overhead sprinkler pipe.8 The trial court
had dismissed the case, but an appeals court decided that the injured employee should
“required [subcontractor] to indemnify [general contractor] for damages arising out of [subcontractor]’s
negligence but not out of [general contractor]’s own negligence,” because the “safe place to work”
allegation was “sufficient to allege theories of recovery based on the principles of the vicarious liability
exceptions to [the] general rule of nonliability [for the actions of an independent contractor].” State Auto
Mutual Insurance v. Dover Construction, 273 F.Supp.2d 1023 (N.D.Iowa 2003).
5
Colorado, Georgia, Kansas, New Mexico, Oklahoma, Oregon and Montana. See the ASA Subcontractors’
Chart of Anti-Indemnity Statutes, available in the members-only section of the ASA Web site,
www.asaonline.com.
6
Mehta, Samir B., “Additional Insured Status & Moral Hazard,” Connecticut Insurance Law Journal,
volume 3, number 1, page 169, 171 (“The effect of additional insured status is similar to the effect achieved
by the more traditional risk transfer via indemnity or ‘hold harmless’ clauses”) (1996); see also Strode,
Trisha, “From the Bottom of the Food Chain Looking Up: Subcontractors and the Full Costs of Additional
Insured Endorsements,” The Construction Lawyer, vol. 25, number 3, page 21, 22 (“Additional insured
status achieves a result similar to an indemnity agreement”) (Summer 2005).
7
Docket No. COA03-1634, filed March 15, 2005.
8
Browne v. Turner Construction, California Court of Appeal, Sixth Appellate District, Docket No.
H025934, filed March 29, 2005.
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material reserved.
2
have a trial based on evidence showing that Turner and Intel had installed, and, on the
day before the accident, removed, scissor-lift work platforms from the work area, which
would have permitted the work to be done without a ladder, while continuing to insist
that “the work [be] finished without delay.” Evidence also showed that, two months
earlier, Turner and Intel had removed fall protection cables from the ceiling of the work
area, so that “there was nothing … to ‘tie off’ to.”
The relative priority of keeping to a schedule “without delay,” and ensuring worker safety
on the job site, is partly a matter of perspective. Decision-makers must weigh the
potential cost of one course of action against another, in order to make an economically
rational choice. Hold harmless terms, however, are a finger on the scale, because they
allow project leaders to ignore the real costs of compromised safety and quality, by
foisting (or, as an economist might say, “externalizing”) those costs onto subcontractors,
workers, and the public. The argument for “freedom of contract” loses force when a
transaction has victims (or “externalities”) with no seat at the bargaining table. Consider
building codes, or environmental regulations: can you think of instances where the social
benefits of these kinds of rules outweigh the costs to the transacting parties?
Responsibility for Construction Defects
Responsibility for subcontractor selection, and for sequencing, scheduling, coordinating,
supervising, inspecting, and approving the work of multiple trade subcontractors, must
clearly lie at the top. The “Guideline on Benefits to the Owner of Effective Allocation,
Delegation, and Performance of General Conditions Responsibilities”9 jointly endorsed
by the ASA, the Associated General Contractors of America (AGC), and the Associated
Specialty Contractors (ASC) provides [citations and paragraph numbers omitted]:
The general contractor maintains continuous supervision,
administration, and control of a project. Communication of the
many details and coordination of the various phases is handled by
the general contractor as the job progresses. These responsibilities
are part of the general conditions.
***
Regardless of the project delivery system used, owners must
ensure that a general contractor or appropriate entity responsible to
the owner performs and is liable for the completion of general
conditions items. The person or entity responsible for delivery or
performance of general conditions items should maintain a jobsite
presence. These include, but are not limited to:
 Safety
 Scheduling/Coordination
9
Part of the Guidelines for a Successful Construction Project, published at
http://www.constructionguidelines.org.
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
3
 Site Logistics
 Communication
 Inspection
 Project closeout
While each construction project must be defined in contract terms
that express the unique characteristics and requirements of the
project, maximum efficiency and successful project delivery are
achieved when the owner ensures that a responsible party performs
the general conditions work. The value to the owner includes
timely project completion, reduced costs, delivery of a quality
project, and reduced likelihood of claims.
Hold harmless terms that shift financial responsibility for construction defect lawsuits,
without regard for causation, necessarily undermine the goal of delivering a quality
project, because they separate causes from consequences.
The use of hold harmless terms to shift the cost of construction defect claims, including
mold-related claims, also presents a particularly thorny problem for subcontractors due to
insurance coverage gaps. Although a subcontractor’s obligation to hold another harmless
against a personal injury suit will ordinarily be covered by the subcontractor’s general
liability insurance, coverage for property damage caused by construction defects is highly
unpredictable. For example, standard general liability insurance policies provide
coverage for “‘bodily injury’ and ‘property damage’ caused by an ‘occurrence,’” and
define the term “occurrence” to mean “an accident, including continuous or repeated
exposure to substantially the same general harmful condition.”10 Courts sometimes hold
that defective construction cannot be an “accident” where the claimed damage is to the
improved real estate itself, and is an ordinary, foreseeable result of a breach of warranty
like the implied warranty of “workmanlike” construction.11 Additionally, standard
general liability policies exclude coverage for damage to the insured’s own work that
“arises out of it or any part of it,” damage that is “expected … from the standpoint of the
insured,” and damage to “‘impaired property’ arising out of … a defect … in … ‘your
work.’”12 Mold-related claims, including both bodily injury and property damage claims,
are also routinely excluded from subcontractors’ general liability insurance coverage. By
10
Quotes are from the CG 00 01 07 98 form published by Insurance Services Office, Inc. “ISO is a
nonprofit trade association that provides rating, statistical, and actuarial policy forms and related drafting
services to approximately 3,000 nationwide property or casualty insurers. Policy forms developed by ISO
are approved by its constituent insurance carriers and then submitted to state agencies for review. Most
carriers use the basic ISO forms, at least as the starting point for their general liability policies.” Pardee
Construction, 92 Cal. Rptr. 2d at 456 n.15 (internal quotes omitted).
11
For example, in Hartick v. Great American Lloyds Insurance Co., 62 S.W.3d 270 (Tex.App.1st 2001), the
court held that damage to a house was not insured where it resulted from a defective foundation because the
damages “were the reasonably foreseeable results that would ordinarily flow from [the builder’s] failure to
comply with its implied warranties,” and so was not an “accident” within the meaning of a general liability
insurance policy.
12
See note 4, above.
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
4
contrast, “hold harmless” terms seldom contain any exclusions for mold-related claims,
“your work,” or otherwise, and so put the subcontractors’ cash and other assets directly at
risk, without any insurance as a buffer, when project leaders assert a contractual right to
be held harmless against a construction defects lawsuit.
Public Policy and “Moral Hazard”
An insured subcontractor has a financial incentive to keep its future insurance premiums
low by avoiding accidents, and by performing its work carefully and without defects. The
price that a general contractor and owner pay for a subcontractor’s services, including the
subcontractor’s agreement to hold them harmless from claims, is, on the other hand,
fixed: there are no “future premiums.” As a result, owners and general contractors have a
lessened financial incentive to avoid supervisory mistakes that can cause accidents and
defects to occur. Economists call this problem the “moral hazard problem,”13 and it is a
particularly serious problem in an industry like construction, where supervisory failures
have the potential to kill or maim workers and bystanders. Supervisory failures during the
construction process also have the potential, after construction is completed, to cause
problems ranging from minor inconveniences to serious health problems for generations
13
A “moral hazard occurs when a party to a transaction can engage in behavior that changes the risks to the
other party associated with the transaction.” Seidenfeld, An Apology for the Administrative Law in The
Contracting State, 28 Fla.St.U.L.Rev. 215, 225 n.44 (2000), quoted in English, Kenneth G., Government
Complicity and a Government Contractor’s Liability in Qui Tam and Tort Cases, 33 Public Contract Law
Journal 649, 658 (American Bar Association 2004). “[T]he moral hazard of insurance [is] the chance that
the existence of insurance will increase the likelihood of the insured event.” Hall v. Life Insurance
Company of North America, 317 F.3d 773, 775 (7th Cir. 2003); see also Charter Oak Fire Insurance Co. v.
Color Converting Industries Co., 45 F.3d 1170, 1174 (7th Cir. 1995) (“moral hazard” arises when
insurance companies “insure against risks that the insured controls. Such insurance would give the insured
an incentive to increase risk, since he would have shifted the cost of the increased risk to the insurance
company”), see also Kaplow, Louis, An Economic Analysis of Legal Transitions, 99 Harv.L.Rev. 509, 537
(1986). Acute moral hazards justify many public policy limits on the use of insurance, such as the “familiar
example [of] taking out a life insurance policy on another person’s life without his consent,” or “the rule
that forbids insuring against criminal fines.” Mortenson v. National Union Fire Insurance Co. of
Pittsburgh, Pa., 249 F.3d 667, 671 (7th Cir. 2001). The “moral hazard” of insurance is a common tool of
economic analysis that has been analogized to many issues not directly related to insurance, such as: (i)
bankruptcy (“One can buy and consume all sorts of nice things on debt and then default. The problem (a
particularly serious form of the general moral hazard problem of insurance) could be solved only by
distinguishing between voluntary and involuntary defaults and limiting the privilege to the latter,” Posner,
Richard A., Economic Analysis of Law, Little, Brown & Company (1986) at 376-377); (ii) contractual
attorneys fees provisions (“An opportunity to litigate on the adversary’s dime, without any need to prevail
in order to collect, creates a moral hazard …,” Gerow v. Rohm & Haas Company, 308 F.3d 721, 725-6
(2002)); and (iii) the scienter element of qui tam litigation (see English, 33 Public Contract Law Journal at
658). “Moral hazard” has also been applied to international monetary policy (see, e.g.,
http://www.morganstanley.com/GEFdata/digests/20000724-mon.html#anchor0), banking policy, and even
topics like the designated hitter rule in Major League Baseball, and whether skiers should wear helmets
(see generally http://www.gametheory.net/news/news.pl?Concept=Mor&highlight=MOR).
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
5
of people who inhabit, traverse, or are employed in the finished structure, or to cause
damage to property that is stored in a finished structure.
A few courts have explicitly recognized the purpose of anti-indemnity legislation to
reduce the incidence of workplace accidents. See Lamb v. Armco, Inc., 518 N.E.2d 53,
55-56 (Ohio App. 1986) (purpose of anti-indemnity legislation “is to require employers
to provide employees with a safe place to work [original emphasis]”), and Davis v.
Comm. Edison Co., 336 N.E.2d 881, 884 (Ill. Supr. 1975) (“Having arranged the
avoidance of the burdens of liability, they no longer have the same motivations to lessen
the extent of the danger ... to the prejudice of the worker's safety and interest”), and
Jankele v. Texas Co., 54 P.2d 425, 427 (Utah 1936) (“contracts exempting persons from
liability for negligence induce a want of care …. It has therefore been declared to be good
doctrine that no person may contract against his own negligence”).
Unfortunately, most courts have failed to recognize the important public policy reasons
for anti-indemnity laws, and so, as mentioned earlier,14 have fashioned loopholes around
those laws for requirements to provide insurance for “additional insureds,” or for duties
to “defend” upstream contractors, designers and the project owner from lawsuits. Many
courts seem to assume that the primary focus of anti-indemnity laws is merely “fairness”
to subcontractors, and that “fairness” is not offended so long as claims are satisfied by the
subcontractor’s insurance carrier, rather than directly from the subcontractor’s cash and
assets.15 In truth, however, “fairness” to subcontractors is the very least important reason,
from a public policy perspective, to limit the imposition of contractual indemnity
obligations on subcontractors. Far more important than protecting subcontractors from
“claims” (i.e., lawsuits), is the protection of the public from the antecedent problems that
lead them to make claims (i.e., file lawsuits) in the first place.
Problems With Obligations to “Defend”
Insurance policies provide two, distinct benefits to an insured: indemnity and defense.
The right to indemnity is defined by the insurance policy. In other words, a claim against
an insured under an insurance policy is either covered, or not covered, depending on the
written terms of the insurance policy. The right to a defense, however, is much broader:
“It is settled that where an insurer has a duty to defend, the obligation generally applies to
the entire action, even though the suit involves both covered and uncovered claims, or a
single claim only partially covered by the policy.”16 In other words, if any claim made in
a lawsuit is potentially covered by an insurance policy, then the insurer must pay for the
14
See notes 4-6, above, and accompanying text.
This reasoning utterly fails to account for the fact that the remedy for breach of an additional insured
requirement is payment of any claims that are uninsured because of the breach (i.e., indemnity) directly
from the subcontractor’s cash and assets.
16
Presley Homes v. American States 90 Cal.App.4th 571, 108 Cal.Rptr.2d 686 (Cal.App.4th Dist.3rd Div.
2001).
15
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material reserved.
6
lawyers, experts, and other costs to defend against the entire lawsuit, even if the
potentially covered claim is the smallest claim in the case.
Courts appear to use the very same analysis to define the obligation to defend under a
hold harmless clause as they use to define the obligation of defense under an insurance
policy.17 So, where an owner sues a general contractor for delivering a building with a
defective foundation, and also for a small amount of water damage that resulted when a
sprinkler pipe broke due to the stresses caused by the defective foundation, the sprinkler
subcontractor could be forced to hire the lawyers, the experts in civil engineering, and
others needed to defend the entire case, if the sprinkler subcontractor agreed to “hold
harmless and defend” the general contractor against all claims “connected to” or “arising
out of” its work, in a state without limits on the use of hold harmless agreements in
construction. This is the case even though the sprinkler contractor could only, ultimately
be liable to hold the general contractor harmless against the small, water damage claim,
based on the reasoning that the water damage could never have occurred if sprinklers had
not been installed in the building (the damages therefore “arise out of” or are “connected
to” the sprinkler subcontractor’s work). If the general contractor did not prepare the
foundation itself, but instead had the foundation prepared by another subcontractor, then
it would not change the result if the project were in a state with anti-indemnity legislation
requiring losses caused by the “sole negligence” of the general contractor to be excluded
from the subcontractor’s hold harmless obligations. After all, the foundation
subcontractor would bear at least some of the blame, and so the general contractor would
not be solely at fault.18
It might even be possible for the general contractor, under the same hypothetical facts, to
obtain a full defense from the hapless, faultless sprinkler subcontractor in a state where
hold harmless obligations are required to be limited to the extent of the subcontractor’s
own negligence. In Barton-Malow v. Grunau,19 a Florida appeals court suggested that it
is possible to make a subcontractor’s obligation to defend “severable,” or completely
independent, from its duty to “hold harmless” or indemnify. Carried to its logical
conclusion, such a rule would allow a subcontract agreement to impose an obligation of
defense for any claims “arising out of” or “connected to” the work of a subcontractor,
regardless of the provisions of a state anti-indemnity law.20
17
See, e.g., Southland Mall, LLC v. Valor Security Services, Tennessee Court of Appeals Docket No.
W2003-03066-COA-R3-CV, decided April 4, 2005 (interpreting a contract clause to “defend, indemnify
and hold harmless,” the court ruled that “Tennessee cases discussing the duty to defend in the insurance
context are instructive,” citing a Massachusetts Superior Court case), and see State Auto Insurance
Company v. Dover Construction, 273 F.Supp. 1023 (N.D.Iowa 2003) (applying insurance policy decisions
to determine duty to defend under a hold harmless agreement).
18
See, for example, Centex v. Dale Tile, note 3, above.
19
835 So.2d 1164 (Fla.App. 2nd Dist. 2002).
20
However, many states have anti-indemnity laws that limit not only “hold harmless” obligations, but also
obligations to defend. For example, Florida’s anti-indemnity statute, passed into law after the BartonMalow case, now explicitly bars overbroad obligations to “defend” on public projects, at ASA’s urging in
response to the Barton-Malow ruling.
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
7
Moreover, some courts hold that an obligation to “defend” under a hold harmless clause
that is limited to the extent of the negligence of the subcontractor will nonetheless require
the subcontractor to provide a full defense for a general contractor who has been sued for
negligently supervising a construction project. In a 2003 decision by a federal trial judge
in State Auto Mutual Insurance v. Dover Construction,21 a subcontractor’s employee sued
a general contractor for personal injuries based, in part, on the general contractor’s failure
to “provid[e] him with a safe place to work.” The judge held that the “safe place to work”
allegation fit within “the vicarious liability exceptions to [the] general rule of
nonliability” for the actions of an independent contractor, making the general contractor
“potentially … liable for [the subcontractor’s] negligence.”22 Even though the
subcontractor’s hold harmless obligation was limited to the extent of its own negligence,
then, it was forced to pay the entire cost of defense for the general contractor, just
because the hold harmless clause included the word “defend.” In most cases, defense
costs are so substantial, that any company obligated to pay for them has a powerful
incentive to pay for 100 percent of a reasonable settlement with its own money.
In construction defects cases, however, a general contractor can be held liable by the
owner, pursuant to its warranty, for any defective work on the project, no matter who
performed it, and without need for any proof of negligent supervision. Consequently, the
duty to provide a defense to an entire construction defect action would apply to any
subcontractor whose work is alleged to have been defective in the lawsuit, even where a
“hold harmless” clause limits the subcontractor’s indemnity obligation to the extent of the
subcontractor’s own negligence,23 and no matter how small any particular subcontractor’s
alleged share of the damage.
“Additional insured” requirements are another way to circumvent hold harmless
restrictions.
21
See note 17, above.
Other courts could be expected to rule differently in cases where injured employees of a subcontractor
sue the general contractor for negligent supervision. California courts require proof that a general
contractor’s conduct “affirmatively contributed to the employee’s injuries [original emphasis],” presumably
negating any argument that the general contractor is vicariously liable for the actions of its subcontractor in
such a case. See Hooker v. Department of Transportation, California Supreme Court, Docket No. S091601
(January 31, 2002), 27 Cal.4th 198, 115 Cal.Rptr.2d 853. Similarly, North Dakota courts hold that a
personal injury claim based on improper supervision “does not make the employer vicarious liable for the
acts of the independent contractor,” but is instead “an independent basis of liability.” See Fleck v. ANG
Coal, 522 N.W.2d 446 (1994).
23
Maryland Casualty Co. v. Nationwide Insurance Co., 65 Call.App.4th 21, 76 Cal.Rptr.2d 113
(Cal.App.4th Dist.1st Div. 1998) (interpreting an additional insured endorsement providing coverage to an
additional insured general contractor “only to the extent that such [general contractor] is held liable for [the
subcontractor’s] acts or omissions,” and finding the insurer was required to provide the additional insured
contractor with a defense to a construction defect action).
22
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material reserved.
8
Industry Practices
1. Standard Commercial General Liability Insurance Terms
Standard form insurance policy terms promulgated by the Insurance Services Office, Inc.
(ISO),24 are important to any discussion of contractual obligations to hold harmless and
defend in the construction industry, because a construction subcontractor’s obligations to
hold harmless and defend are, in many (but not all) cases, covered by insurance. ISO’s
standard Commercial General Liability Coverage Form is designated the CG 00 01 form.
The July 1998 version of the form (CG 00 01 07 98) contains standard language,
common to many general liability insurance policies purchased by construction
subcontractors, to provide coverage for their subcontract obligations to hold harmless and
defend. Additionally, there is another standard form, the CG 24 26 form published in July
2004 (CG 24 26 07 04), which is available as an option to limit the coverage for hold
harmless obligations that is provided by the CG 00 01 form.
The coverage grant in the CG 00 01 form is, somewhat paradoxically, contained in the
standard policy exclusions, in the form of an exception to an exclusion:
SECTION I – COVERAGES
…
2.
Exclusions
This insurance does not apply to:
…
b.
Contractual Liability
“Bodily injury” or “property damage” for
which the insured is obligated to pay
damages by reason of the assumption of
liability in a contract or agreement. This
exclusion does not apply to liability for
damages:
24
(1)
That the insured would have in the
absence of the contract or agreement;
or
(2)
Assumed in a contract or agreement
that is an “insured contract”,
provided the “bodily injury” or
“property damage” occurs
subsequent to the execution of the
contract or agreement. Solely for the
For a description of ISO, see note 10 above.
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
9
purposes of liability assumed in an
“insured contract”, reasonable
attorney fees and necessary litigation
expenses incurred by or for a party
other than an insured are deemed to
be damages because of “bodily
injury” or “property damage”,
provided:
(a)
Liability to such party for, or
for the cost of, that party’s
defense has also been
assumed in the same “insured
contract”; and
(b)
Such attorney fees and
litigation expenses are for
defense of that party against a
civil or alternative dispute
resolution proceeding in
which damages to which this
insurance applies are alleged.
SECTION V – DEFINITIONS
9.
“Insured contract” means:
…
f.
That part of any other contract or agreement
pertaining to your business (including an
indemnification of a municipality in
connection with work performed for a
municipality) under which you assume the
tort liability of another party to pay for
“bodily injury” or “property damage” to a
third person or organization. Tort liability
means a liability that would be imposed by
law in the absence of any contract
agreement.
Paragraph f. does not include that part of
any contract or agreement:
(1)
That indemnifies a railroad for
“bodily injury” or “property
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material reserved.
10
damage” arising out of construction
or demolition operations, within 50
feet of any railroad property and
affecting any railroad bridge or
trestle, tracks, road-beds, tunnel,
underpass or crossing;
(2)
(3)
That indemnifies an architect,
engineer or surveyor for injury or
damage arising out of:
(a)
Preparing, approving, or
failing to prepare or approve,
maps, shop drawings,
opinions, reports, surveys,
field orders, change orders or
drawings and specifications;
or
(b)
Giving directions or
instructions, or failing to give
them, if that is the primary
cause of the injury or
damage; or
Under which the insured, if an
architect, engineer or surveyor,
assumes liability for an injury or
damage arising out of the insured’s
rendering or failure to render
professional services, including those
listed in (2) above and supervisory,
inspection, architectural or
engineering activities.
These standard insurance terms include several important qualifications and exclusions of
coverage for a subcontractor’s obligations to hold harmless and defend, perhaps most
notably:
 Costs of defense are included within the policy limits (Section I, ¶ 2.b.(2)(b)). By
contrast, defense costs are paid in addition to the policy limits for claims made
directly by an insured (named insured or additional insured).
 Hold harmless obligations in favor of the project architect or engineer will not
ordinarily be covered, even if the claim doesn’t relate to professional malpractice
(Section V, ¶ 9.f.(2)(b)).
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
11

Hold harmless obligations for construction or demolition performed within 50 feet
of railroad property is not covered (Section V, ¶ 9.f.(1)).
The CG 24 26 form, when added to the CG 00 01 policy, amends the definition of an
“insured contract” by adding the language underlined below:
9.
“Insured contract” means:
…
f.
That part of any other contract or agreement
pertaining to your business (including an
indemnification of a municipality in
connection with work performed for a
municipality) under which you assume the
tort liability of another party to pay for
“bodily injury” or “property damage” to a
third person or organization, provided the
“bodily injury” or “property damage” is
caused, in whole or in part, by you or by
those acting on your behalf. Tort liability
means a liability that would be imposed by
law in the absence of any contract
agreement.
From a policy perspective, the change represented by the CG 24 26 can be seen as an
encouraging sign for construction subcontractors, because it requires a linkage between
financial responsibility for a loss and actual fault in causing the loss. That link, however,
is extremely minimal, as a subcontractor would only have to be partly (e.g., 1 percent or
more) responsible for a loss before the loss would be 100 % covered by the
subcontractor’s insurance through the subcontractor’s hold harmless obligations. In other
words, nearly any lawsuit against the general contractor based on its “failure to
supervise” would be covered, 100 percent, by a subcontractor’s general liability
insurance if covered by the subcontractor’s hold harmless obligations.
Also, from an individual subcontractor’s perspective, the change represented by the CG
24 26 can be problematic because it will result in a coverage gap for subcontractors who
agree to hold harmless terms with no exclusions, or that exclude only claims caused by
the “sole negligence” of the party held harmless. The case of Centex Golden Construction
v. Dale Tile25 provides an example: the subcontractor was required to indemnify the
general contractor against a loss where a jury found that neither the subcontractor, nor the
general contractor, was negligent, because, as the court ruled, the jury’s finding that the
general contractor was non-negligent was dispositive that the general contractor was not
solely negligent, and, in California where the case arose, only claims caused by the “sole
25
See note 3, above.
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material reserved.
12
negligence” of the party seeking to be indemnified were required to be excluded from the
subcontractor’s hold harmless obligations. The jury’s finding that the subcontractor was
non-negligent would also necessarily negate general liability coverage under the CG 24
26 form, because the claim would not have been “caused, in whole or in part, by” the
subcontractor. Claims caused by the negligence of another subcontractor, but “arising out
of” the work of an insured subcontractor, would provide additional examples of the
coverage gap in “sole negligence” states like California. Worse, in states where no
exclusions from “hold harmless” obligations are required, a subcontractor could also be
required to hold a general contractor harmless against a claim caused solely by the
general contractor’s own negligence, without any having any insurance as a buffer.
2. Construction Industry Contract Terms
Most standard form construction contracts, designed to work in all 50 states, reflect only
the most limited form of “hold harmless” obligations permitted in any of the 50 states,
where hold harmless obligations must be limited “to the extent” of the negligence of the
party required to pay for indemnity.26 As a result, most standard forms are not reflective
of actual industry practices in the majority of states, where unlimited hold harmless
obligations, or hold harmless obligations limited only by the restriction that the
underlying loss may not be caused by the “sole negligence” of the party seeking
indemnity, are permitted. On the other hand, standard forms published by industry
organizations that do not publish form subcontracts, and who, therefore, do not seek as
broad a “consensus” among industry participants in advance of publication, tend to be
more abusive.27 For example, the General Conditions of the Construction Contract
Between Owner and Contractor published by the Construction Management Association
of America (CMAA), CMAA Document A-3 (2005), requires the seller to indemnify the
buyer for claims “caused in whole or in part by” the buyer and its subcontractors.28 The
form for general conditions published by the Associated Owners and Developers (AOD),
the AOD 2002GC, provides a menu choice between two different hold harmless terms:
either “in proportion to fault, except to the extent that such claims, damages, losses and
expenses are covered by insurance,” or “irrespective of proportional fault, except to the
extent that such claims, damages, losses, and expenses are caused by the sole negligence
26
For example, the A201-2007 form of general conditions published by the American Institute of
Architects (AIA), and AIA’s form subcontract, the A401-2007, both limit the seller’s obligation to hold the
buyer harmless to the extent of the negligence of the seller. The same rule holds true for the general
conditions (DBIA 535 (1998)) and subcontract (DBIA 570 (2001)) published by the Design-Build Institute
of America (DBIA), and the general conditions (ConsensusDOCS 200 (2007)) and subcontract
(ConsensusDOCS 750 (2007)) published by ConsensusDOCS. The DBIA and ConsensusDOCS form
general conditions actually have mutual hold harmless obligations, so that both the buyer and the seller are
required to hold each other harmless, to the extent of their own negligence.
27
Arguably the C-700 (2002) Standard General Conditions of the Construction Contract, published by the
Engineers Joint Contract Documents Committee (EJCDC), is an exception, because it limits the seller’s
hold harmless obligations “to the extent [a claim is] caused by” the seller, its agents and subcontractors, and
EJCDC does not publish a form subcontract.
28
CMAA A-3 (2005) ¶¶ 4.15.1; 4.15.3.
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
13
of Owner or the employees, officers, agents, representatives, or consultants of Owner.”29
And, the general conditions form published by the Construction Owners Association of
America (COAA), the B-200GC (2000), requires the seller to hold the buyer harmless for
any claims “allegedly or actually arising out of or resulting from” the seller’s services.30
Moreover, standard forms do not reflect abusive contract language to define, and
broaden, a subcontractor’s duty to defend. For example, one “indemnification agreement”
reviewed by the author, that required the subcontractor to “defend, indemnify and hold
harmless,” also provided:
Defense cost recovery shall include all fees (of attorneys and
experts), and costs and expenses incurred in good faith. In
addition, Contractor shall be entitled to recover compensation for
all of its in-house expenses (including materials and labor)
consumed in its defense [emphasis supplied].
In other words, the “Contractor” expected to be compensated, by the subcontractor, for
the time the “Contractor” spent talking to its own lawyer, copying documents for its own
defense, and testifying on its own behalf in depositions and in court! These sorts of terms
illustrate that subcontractors generally lack bargaining power to negotiate fair terms, and
underscore the need for legislative solutions.
However, standard form hold harmless terms do illustrate a few important concepts.
General conditions forms published by DBIA, AOD, ConsensusDOCS and COAA, and
subcontracts published by DBIA and ConsensusDOCS, all require the seller to hold
harmless and “defend” the buyer.31 On the other hand, standard forms published by AIA
and CMAA substitute a requirement for the buyer to pay the seller’s costs of defense,
such as attorneys’ fees and costs, after the fact.32 The latter type of obligation can be
much more favorable to the subcontractor than the former, as in the case of Greer v. City
of Philadelphia,33 where a subcontractor was only required to pay the indemnified
parties’ attorneys fees “to the extent of” its own negligence (fixed by a jury at 22
percent), after the trial was concluded, rather than paying 100 percent of the defense
costs, up front.
Additionally, most standard form “hold harmless” clauses limit the hold harmless
obligations of the seller to claims and losses that are “bodily injury,” or that are “property
damage” not excluded from general liability coverage by the “your work” exclusion,
which are the only kinds of losses typically covered by general liability insurance. For
29
AOD 2002GC ¶ 11.3.1.
B-200GC (2000) at ¶ 26.3.
31
DBIA 535 (1998) ¶ 7.4.1 and DBIA 570 (1998) ¶ 11.4.1; ConsensusDOCS 200 (2007) ¶ 10.1.1 and
ConsensusDOCS 750 (2007) ¶ 9.1.1; AOD 2002GC ¶ 11.3.1; COAA B-200GC (2000) ¶ 26.3.
32
A201-2007 ¶ 3.18.1 and A401-2007 ¶ 4.6.1; CMAA A-3 (2005) ¶ 4.15.1
33
795 A.2d 376 (Pa. 2002).
30
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
14
example, the AIA form for general conditions, and the subcontract form, both only
obligate the seller to hold the buyer harmless from claims “attributable to bodily injury,
sickness, disease or death, or to injury to or destruction of tangible property (other than
the Work itself)….”34 Similar language is contained in the ConsensusDOCS forms, the
DBIA forms, and the CMAA general conditions form.
The EJCDC form goes even further to ensure that the seller’s hold harmless obligations
are limited to items actually covered by general liability insurance, because it not only
limits the obligation to claims “attributable to bodily injury, sickness, disease, or death, or
to injury to or destruction of tangible property (other than the Work itself),” but also
expressly excludes any obligation to hold the designer harmless from “1. the preparation
or approval of, or the failure to prepare or approve, maps, Drawings, opinions, reports,
surveys, Change Orders, designs, or Specifications” as well as “2. giving directions or
instructions, or failing to give them, if that is the primary cause of the injury or
damage.”35 These exclusions are essentially identical to the exclusions from contractual
liability coverage contained in the standard form general liability policy (CG 00 01)
quoted above.
Negotiating Tips for Subcontractors
As has already been mentioned, subcontractors should understand the coverage terms of
their own general liability insurance policies, and seek to avoid coverage gaps. Many of
the gaps in your general liability insurance coverage for your obligations to hold others
harmless, involve property damage caused by construction defects. Gaps related to
property damage caused by construction defects include coverage exclusions for:
 Damage to the insured’s own work that “arises out of it or any part of it”;
 Damage to “‘impaired property’ [meaning property that ‘cannot be used or is less
useful’ because your work is defective “or thought to be defective”] arising out of
… a defect … in … ‘your work’”;
 Mold-related claims [this exclusion may also impair your coverage for bodily
injury claims (e.g. “sick building” and respiratory claims)];
 Damage that is “expected … from the standpoint of the insured,” or that is not
considered an “occurrence,” because the claimed damage is to the improved real
estate itself, and is an ordinary, foreseeable result of a breach of warranty like the
implied warranty of “workmanlike” construction.
Consider, in light of your company’s warranty on its work, why it could be necessary to
also have a subcontract clause that also requires your company to hold others harmless
against construction defects. The primary reason: to unfairly extend your warranty to
include claims that only tangentially involve your work, and that aren’t caused by your
own negligence or your own failure to meet the terms of your subcontract. Consequently,
34
35
A201-2007 ¶ 3.18.1.
EJCDC C-700 (2002) ¶ 6.20.C.
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
15
it is a perfectly appropriate, and defensible, response, to seek to limit your hold harmless
obligations “to the extent of” your own negligence. Or, as ¶ 13 of ASA’s Addendum to
Subcontract (2008) suggests:
Hold Harmless Restriction. Any indemnification or hold harmless
obligation of Subcontractor extends only to claims relating to bodily injury
and property damage (other than to the subcontractor’s work), and then
only to that part or proportion of any claim caused by the negligence or
intentional act of Subcontractor, its sub-subcontractors, their employees,
or others for whose acts they may be liable. Subcontractor shall not have a
duty to defend. This paragraph does not, however, restrict obligations of
Subcontractor, if any, to indemnify Customer against intellectual property
infringement claims or against claims for payment for work for which
Subcontractor has been paid.
Point out that you are already obligated to provide a warranty for your work, and ask,
“Why do you need this in addition to my warranty?” Point out that you cannot accept
responsibility for the mistakes of others, at least partly because neither you, nor your
competition, can get insurance coverage for mold-related liabilities from any well-rated
insurance carrier, but mostly because you can’t accept liability for mistakes that you can’t
prevent, or for risks that you don’t control. “I can’t hold you harmless against your own
mistakes or the mistakes of subcontractors. You’re already limiting my ability to collect
for delays that are caused by others, holding retainage from my payments without
proving I’ve done anything wrong, and you’re forcing me to accept some (or all) of the
owner’s credit risk. Now I have to hold you and the owner harmless against your active
negligence that hurts or kills people, or causes the building to fall down, on top of
everything else? Which part of this contract benefits my company?”
At this point in the discussion, it will be very important to recall that general contractors
have a completely different set of liabilities to third parties than owners do, because the
general contractor will argue that “this all started with the owner – I’m just passing it
along,” or “I have to pass it along.” In fact, the owner’s primary responsibility is to hire a
responsible prime contractor. An owner who hands control of a job site to a general
contractor, who then fences-in, and completely controls, the job site, can rarely be held
responsible for injuries to the employees of subcontractors (except, perhaps, in New
York, where the strict-liability “scaffold law” applies), absent proof that it “negligently
hired” the general contractor.36 If the general contractor were asking you to hold the
owner harmless, according to the same terms that it agreed to, that would be “passing it
along,” and the risk of liability “passed along” would be quite small. Holding the general
contractor harmless, however, is a completely different proposition. It means holding
someone who is directly responsible for actively supervising and inspecting the job site
36
See, e.g., W.M. Schlosser Co., Inc. v. Maryland Drywall Co., 673 A.2d 647 (D.C.App. 1996) (owner won
judgment, notwithstanding a jury verdict against it, for lack of proof it had negligently hired the general
contractor).
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
16
harmless from claims. That liability isn’t passed along, it is added on, and it is an
exponentially larger risk than the risk of holding the owner harmless which was accepted
by the general contractor.
Another fact: the owner neither requested, nor required, the general contractor to force
subcontractors to hold it harmless against its own failures to perform its contract with the
owner. The prime contract may require the prime contractor to require subcontractors to
hold the owner harmless, but it doesn’t require the prime contractor to require
subcontractors to hold the prime contractor harmless. Demand to be shown the terms that
contradict your position, if the general contractor disputes this.
Finally, always seek remove the word “defend” from any proposed hold harmless
agreement. If necessary, offer to substitute language requiring you to pay attorneys fees
and costs of defense, in equal proportion to the amount of the underlying claim you must
pay. For example, if you will be required to pay for the underlying claims “to the extent
caused by” your own negligence, seek to substitute language requiring you to pay
attorneys fees and costs “to the extent caused by” your own negligence. One way to try to
sell this change to your customer is to suggest that “you don’t want me to be involved in
the selection of your attorney, you’ll want to hire your own lawyer.” Ultimately,
however, the arguments against a duty to “defend” are the same as the arguments against
a broad duty to hold harmless, because the defense obligation can be so expensive that
you will be forced to settle the case on your own, and pay for the negligence of others.
Refuse to pay the defense costs resulting from someone else’s negligence, especially
considering everything else that is being taken away from you by unfairly slanted
subcontract terms.
© 2009 American Subcontractors Association, Inc. All rights to ASA original
material reserved.
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