Insuring Contractual Indemnity Obligations—A Lesson In Careful Contract Drafting

The Minnesota Supreme Court issued a decision last week in the case of Engineering & Construction Innovations, Inc., v. L. H. Bolduc Co., interpreting a subcontractor's agreement to indemnify a contractor, the subcontractor's contractual obligation to procure insurance to cover that indemnity agreement and the impact of the Minnesota anti-indemnification statute on such contract provisions.

Background on Anti-Indemnification Statutes

An insure-the-indemnity clause is one in which one person agrees to purchase insurance covering its obligation to indemnify another. These clauses, standard in many form construction contracts and subcontracts, became particularly significant in Minnesota after the Minnesota Legislature adopted the antiindemnification statute in 1984. That statute restricts the scope of enforceable indemnity agreements by prohibiting indemnity agreements for claims for personal injury or property damage "except to the extent that the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission, including breach of a specific contractual duty," of the person agreeing to indemnify someone else. Minn. Stat. § 337.02. In other words, the law prohibits agreements in which one person agrees to be responsible for injuries or damages caused by another. Persons must only answer for injuries or damages that they themselves cause.

At the same time, recognizing the important risk-shifting role of insurance in the construction industry, the statute permits agreements in which one person agrees to purchase insurance "for the benefit of others." Minn. Stat. § 337.05, subd. 1. If one person purchases the specified insurance covering another's losses, then the insurer bears the loss; subrogation fights are avoided to the benefit of all. If not, the breaching person must indemnify the other person to the extent that the required insurance would have covered the loss. Id. at subd. 2. When the specified insurance is not reasonably available in the market, however, the indemnifying person can avoid liability for failing to purchase the insurance by either informing the other person before signing the agreement or by signing the agreement with a written notation that the required insurance is not reasonably available. Id. at subd. 3.

With insure-the-indemnity clauses, the scope of the indemnity obligation defines the insurance coverage that the person must provide. The scope of the required insurance is...