Indemnity Clauses in Construction Contracts

Indemnity is one of the most consequential provisions in a construction contract and one of the most commonly misunderstood. The basic concept is that one party agrees to cover losses caused by its work. In practice, many indemnity clauses are drafted to shift far more risk than that, often reaching beyond what is insurable, beyond what is caused by the indemnifying party, and beyond what is enforceable under applicable state law.

The sections below explain how indemnity operates in construction contracts, where the common problems arise, and how contractors and subcontractors should evaluate these provisions before signing.

Third-Party Claims vs. First-Party Disputes

The purpose of indemnity in construction is to allocate responsibility for third-party claims, meaning claims brought by someone outside the contract, such as property damage or personal injury suffered by a third party during the project. A properly scoped indemnity clause limits the obligation to these types of claims.

When indemnity language is drafted too broadly, it can function as a mechanism for one contracting party to recover its own litigation costs against the other. For example, a GC could use a broad indemnity clause to require a subcontractor to pay the GC's attorney's fees in a payment dispute between the two of them. That is not what indemnity is designed to do. Contractors should confirm that the indemnity obligation is limited to third-party claims and does not create a backdoor fee-shifting provision for disputes between the contracting parties.

Relationship Between Indemnity and Insurance

Most commercial general liability policies are structured to respond to indemnity obligations involving bodily injury or property damage caused by the insured's negligence. When the indemnity clause in a contract goes beyond what the insurance policy covers, the contractor is accepting uninsured risk.

There are situations where accepting uninsured indemnity exposure is reasonable, such as indemnifying for invalid mechanic's liens after payment has been received, or for damage to the other party's property in the contractor's care. But those should be conscious decisions, not the result of signing a clause without comparing it to available coverage.

Contractors should evaluate indemnity provisions alongside their insurance program to confirm that the obligations they are accepting are either insurable or manageable as a business risk.

Scope of Negligence

A fair indemnity clause limits the obligation to losses arising from the indemnifying party's own acts, omissions, or negligence, including the acts of its employees, subcontractors, and suppliers. What a contractor should not accept without careful evaluation is an obligation to indemnify for the negligence of upstream parties such as the owner or general contractor.

Broad-form indemnity clauses that require a party to indemnify another for the other party's own negligence are unenforceable in many states. Kentucky's anti-indemnity statute (KRS 371.405(2)) prohibits contract provisions that require a party to indemnify another party against liability for damages caused by the sole negligence of that other party. This means a contract cannot require a subcontractor to indemnify a GC for losses caused entirely by the GC's own negligence. However, the statute permits indemnity for the GC's partial negligence as long as the subcontractor is also at fault, so the protection is narrower than contractors sometimes assume.

Other states have broader or narrower anti-indemnity statutes. Some void any indemnity for another party's negligence entirely. Others, like Kentucky, only prohibit indemnity for sole negligence. Contractors working across multiple states should understand that the same indemnity clause may be enforceable in one jurisdiction and void in another.

Despite these statutory limits, contracts routinely include indemnity language that exceeds what is enforceable. The clause may not survive a legal challenge, but it still creates confusion about who bears what risk and can influence settlement dynamics before enforceability is ever tested.

Defense Obligations vs. Indemnity

Indemnity and defense are separate obligations that are often combined in the same clause but operate differently. Indemnity is an obligation to reimburse for losses after they are determined. Defense is an obligation to pay legal costs at the outset of a claim, often before fault has been established.

Agreeing to defend an owner or GC at the start of a lawsuit can create significant financial exposure even when the indemnifying party is not ultimately found at fault. Contractors should identify whether the contract imposes a standalone duty to defend and evaluate that obligation separately from the indemnity itself.

Limitation to Scope of Work

An indemnity clause should be limited to damages arising from the indemnifying party's scope of work. A subcontractor performing electrical work should not be indemnifying for structural design errors, excavation failures, or owner-directed changes to other trades' work.

Broad indemnity language that covers "any and all claims arising out of or related to the project" can extend the obligation well beyond the subcontractor's scope. Narrowing the clause to claims arising from the subcontractor's own performance, its employees, and its lower-tier subcontractors keeps the obligation proportionate to the work and the risk the subcontractor can actually control.

Evaluating an Indemnity Clause

A properly balanced indemnity provision covers third-party claims only, is limited to the indemnifying party's own negligence and scope of work, is backed by available insurance or involves risk the party can operationally control, does not extend to the sole negligence of upstream parties, and separates defense obligations from indemnity so each can be evaluated independently.

Indemnity language that does not meet these standards shifts risk that the indemnifying party may not be aware of, may not be able to insure, and may not be able to price into its bid. Evaluating these provisions before execution is one of the most effective ways to prevent disputes and protect margin.

For a review of how indemnity provisions allocate risk in a specific agreement, contact Simon Law.