Following the construction industry and related legal topics in the United States.


Tuesday, September 4, 2007

Did Georgia Unintentionally Codify its Broad Form Indemnification Loophole?

On May 18, Georgia Governor Sonny Perdue signed H.B. 136, a bill that was intended to expand the state's prohibition against broad form indemnification to include those situations in which the indemnitor was required to obtain liability insurance, effectively closing a loophole created by the Georgia Court of Appeals decision in McAbee Const. Co. v. Georgia Kraft Co., 178 Ga. App. 496, 343 S.E.2d 513 (1986). Instead, it appears that Georgia codified the loophole.

Under the previous iteration of Georgia Code Section 13-8-2(b), broad form indemnity agreements were void as against public policy. A broad form indemnity agreement is one that requires complete indemnification of the indemnitee for all obligations of the indemnitee, and generally covers joint negligence and the sole negligence of the indemnitee. However, in McAbee Construction, the Georgia Court of Appeals created an exception to the general prohibition if the indemnity provision was coupled with a corresponding obligation of the imdemnitor to obtain insurance coverage. The court reasoned that Ga. Code. 13 -8-2(b) was inapplicable because the insurance requirement shifted the risk of loss from the indemnitor (fix typo in previous word) to the insurance company regardless of who was at fault.

The new law, effective July 1, 2007, was intended to close this loophole. It reads, in pertinent part:

A covenant, promise, agreement, or understanding in or in connection with or collateral to a contract or agreement relative to the construction, alteration, repair, or maintenance of a building structure, appurtenances, and appliances, including moving, demolition, and excavating connected therewith, purporting to require that one party to such contract or agreement shall indemnify, hold harmless, insure, or defend the other party to the contract or other named indemnitee, including its, his, or her officers, agents, or employees, against liability or claims for damages, losses, or expenses, including attorney fees, arising out of bodily injury to persons, death, or damage to property caused by or resulting from the sole negligence of the indemnitee, or its, his, or her officers, agents, or employees, is against public policy and void and unenforceable. This subsection shall not affect any obligation under workers' compensation or coverage or insurance specifically relating to workers' compensation, nor shall this subsection apply to any requirement that one party to the contract purchase a project specific insurance policy, including an owner's or contractor's protective insurance, builder's risk insurance, installation coverage, project management protective liability insurance, an owner controlled insurance policy, or a contractor controlled insurance policy.

However, it appears that the italicized language has the unintended effect of codifying the holding of McAbee Construction. During final negotiation of the bill between the House and Senate, the following language--which was inserted before the italicized text above--was deleted: "Any provision in an insurance contract issued pursuant to any such covenant, promise, agreement, or understanding to insure against any such liability or claims is, to that extent, against public policy and void and unenforceable." This language would have made it clear that a party can no longer avoid the prohibition against blanket indemnification by requiring liability insurance from the indemnitor. By removing that language from the enacted bill, the section appears to have the opposite effect: it permits an indemnitee to side step the prohibition against broad form indemnification by requiring insurance coverage from its indemnitor.

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