Builder's Risk Insurance: Part Six


Be mindful of your state’s anti-indemnification statutes, and check if your policy can find a way around them.

If each contractor acquires insurance, then each of their respective bids on the project will be impacted by the cost of the needed insurance for their contribution to the project.  In such cases, the owner of the property will likely be added as an additional insured to each contractor’s insurance policy. However, there are numerous problems that could result from this multiplicity of insurance agreements, including:

  1.  Increased costs for the project due to the calculation of premiums for insurance[1];
  2. Conflicting interpretations of the policy’s provisions depending on the state where the policy was issued[2];
  3. Conflicting language for the additional insured endorsements such that they may not cover the owner of the property for tort liability unless the named insured (the contractor, in this instance) were determined to be at fault[3].

However, if the owner of the project acquires insurance and adds all of the contractors to the policy as additional insureds, then the owner retains the power of selecting the insurance broker, lowering the costs of bids, and working closely with an insurance attorney of their choosing to better protect their interests under the agreement as opposed to relying on the contractor’s judgment. These agreements, called “OCIP” policies, are owner controlled insurance programs, where owner purchases insurance and everyone with an insurable interest is added as an additional insured.[4]

This owner-controlled arrangement gives the owner a better vantage point to the project, by allowing the owner to control the brokering of the insurance and lower the costs of bids. However, the agreement may run into difficulty since the explosion of anti-indemnification statutes in a majority of states.

While drafting the agreements for the project, the contractor will likely require that he be added as an additional insured to the policy to protect himself from any costs or form of liability he may incur while working on the job. In effect, he will rely on the insurance policy to indemnify him in all cases, whether the project runs late due to natural disaster, or whether someone suffers an injury due to his own negligence. In effect, the owner agrees to indemnify the contractor from his own negligence in the construction agreement and fulfills this agreement by adding the contractor as an additional insured to the OCIP policy.

However, anti-indemnification statutes generally will render any provision of an agreement purporting to indemnify a contractor from his own negligence void as a matter of public policy.  Forty-five states currently have some form of statutory prohibition against indemnity agreements that require one party to indemnify a contractor for his own negligence.[5] These range from broad prohibitions against any agreement to indemnify from a party’s own negligence,[6] to statutes with exclusions that generally prohibit indemnity agreements but allow for indemnity by way of an insurance contract.[7] Some states even explicitly allow for indemnity through Builder’s Risk Insurance policies.[8]

The Table at Attachment  9 to this article, and the Table Update notes at Attachment  10 to this article, together outline the current state of the law in all 50 states with citations to key case law on anti-indemnification statutes.  The Attachment  9 Table was first prepared for the Foundation of the American Subcontractors Association, Inc. in 2013.  These authors have received permission to use this copyrighted Table, have updated its contents, and have provide those updates in the report at Attachment  10. The state by state analysis should be accurate as of May 1, 2015. 

For brevity, this article will use Kentucky’s anti-indemnification law as an example to illustrate how a real estate attorney should consider drafting the contract documents to avoid a legal pitfall.

In 2005, Kentucky’s passed its anti-indemnification statute:

“Any provision contained in any construction services contract purporting to indemnify or hold harmless a contractor from that contractor’s own negligence or from the negligence of his or her agents, or employees is void and wholly unenforceable.”[9]

Notably, a “construction services contract” is defined as:

“A contract or agreement relating to the construction, alteration, repair, addition to, subtraction from, improvement to, or maintenance of any building, highway, road, railroad, excavation, or other structure, project, development, or improvement attached to real estate, including moving and demolition connected therewith; or

“A contract or agreement relating to the planning, design, administration, study, evaluation, consulting or other professional and technical support services provided in connection with any of the work or activities described in subparagraph 1 of this paragraph.”[10]

Most importantly, the statute also says:

“This section does not apply to construction bonds or affect the validity of insurance contracts.”[11]

No Kentucky court has interpreted the meaning of these provisions. However, in Pruitt v. Genie Indus.,[12] a federal court in the Eastern District of Kentucky looked to a similar statute in Tennessee and its corresponding case law, ultimately taking a very broad interpretation of the statute’s meaning.

In Pruitt, C.J. Mahan Construction Company moved for a declaratory judgment that it was not required to indemnify Sunbelt Rentals pursuant to its rental agreement after an employee was injured using a Sunbelt aerial lift. Ultimately, the Court agreed that the rental agreement did not contemplate the performance of construction services, but still held that an agreement to rent a piece of construction equipment for use on a project did “relate to the construction of a structure.” Therefore, the rental agreement was subject to the anti-indemnification statute and the indemnification provision was held to be invalid.

Based on Pruitt, owners and their respective attorneys should take heed that any and all contracts issued with respect to a real estate transaction could be interpreted to be “construction services contracts” and thus be subject to this anti-indemnification statute. All contracts that are necessary to the project must have language in compliance with the statute. Arguably, an OCIP policy also falls within this wide breadth.

However, Kentucky’s statue expressly states that it does not affect the validity of insurance contracts.  While no court has interpreted this provision, this could mean that an additional insured endorsement that provided for coverage for both the named insured and additional insured’s negligence should not be held to be unenforceable as a matter of law, but any other document constituting a construction services contract would be subject to the statute’s prohibition.

Kentucky is not necessarily unique in excluding insurance contracts from its provision. For now, some states explicitly allow for indemnification by adding a contractor as an additional insured to an insurance policy.[13] Therefore, a careful attorney wishing to draft the most cost-effective agreement for property owners may consider deleting a broad indemnity provision within the construction agreement, and instead require:

  1. The owner of the property to purchase Builder’s Risk Insurance, which
  2. Names all individuals with an insurable interest as additional insureds via endorsement, and
  3. Which does not restrict coverage for additional insureds in the endorsement to issues of vicarious liability.

Thus, the owner retains control of brokering the insurance agreement, while protecting all the contractors for the limited purpose of building the project, and arguably gets around the language of anti-indemnification statutes within the states that have adopted them.

Some states have reached this same conclusion, striking down a separate agreement to indemnify but upholding requirements to purchase insurance and name a party to the construction agreement as an additional insured. For example, in Chrysler Corp. v. Merrell & Garaguso, Inc.,[14] the Supreme Court of Delaware considered whether a provision of a construction agreement requiring the contractor of the property to add the owner of the property as an additional insured was enforceable in a suit where a third-party sued the owner for the owner’s employee’s negligence.[15] The contract also contained a requirement that the contractor indemnify the owner for all claims, including when the claim was the result of the owner’s negligence.[16] Delaware’s anti-indemnification statute, much like Kentucky’s, says it does not apply to insurance contracts.[17] The Court held that the obligation to indemnify the owner for its sole negligence was unenforceable pursuant to the state’s anti-indemnification statute,[18] but the Court reached a different conclusion as to the obligation to purchase insurance:

From the viewpoint of the injured worker, the greater the amount of insurance available to respond to his claim, the better the prospect for full compensation. Although, here, Chrysler is obviously a financially responsible entity, situations can occur where the prospects for recovery are doubtful because of the absence or limits of insurance. We also assume that the purchase of insurance is supported by an additional premium, the cost of which, in the usual contractual setting, is included in the bid price. Finally, if in fact an insurer issues an endorsement to cover the actions of a third party and charges a premium for that coverage, it should not be permitted to create an illusion that insurance exists. Insurance companies are sophisticated entities who can protect their own interests either in refusing to issue additional insured coverage or restricting such coverage with notice to the insured or third parties.[19]

However, some states have explicitly closed the additional insured “loophole”. In Roberts v. Energy Dev. Corp.,[20] the parties tried to get around Louisiana’s broad-reaching anti-indemnification statute by adding a choice-of-law provision to the agreement that applied the law of the state of Texas, which allowed for indemnification by way of adding the party as an insured.[21] The Court refused to enforce the choice of law provision, knowing it was an attempt to circumvent the prohibition of indemnification:

Our analysis here is brief. Both parties have agreed that under Louisiana law, the LOIA would avoid the indemnity provision in the MSA, and the parties agree that application of Texas law permitting indemnification through an additional insured provision like that found in the MSA at issue in this case would contravene Louisiana’s explicit and unambiguous public policy against indemnification agreements in any form. Accordingly, we find that the district court committed reversible error in holding that the choice of law provision in the PMCS/EDC MSA was enforceable.[22]

Based on this analysis, any attorney advising a property owner in the property owner’s negotiations is well-advised to see how Courts in the relevant jurisdiction(s) have interpreted the breadth of the relevant state’s anti-indemnification provisions. In the event a state does not allow for indemnification by adding the contractors as additional insureds, an owner could require the contractor to show proof that the contractor has a commercial general liability policy that would cover the contractor’s own negligence, whether or not the owner is listed as an additional insured on the policy. An owner could also require a clause to the contract expressly waiving any claims one party has against any other when the claims arise out of tort, to the extent the claims are not covered by insurance. Such a provision could effectively encompass a claim for indemnity in the event that an OCIP refused to tender a defense pursuant to a state’s anti-indemnification clause.


First, carefully review the contracts which identify the parties’ rights and obligations regarding development and use of the underlying real property.  Those agreements may include one or more of the following:  (i) lease of an existing building, with renovation/reconstruction and insurance obligations allocated between the parties based on arms-length negotiations between the parties; (ii) one or more agreements between a landowner and one or more contractors—who may themselves have agreements with subcontractors—to construct, reconstruct, or renovate real property improvements; (iii) one or more agreements between a lender and the landowner, pursuant to an underlying financing transaction, which obligates the landowner to protect the lender’s  real property collateral in the event the collateral is to be built, rebuilt or renovated as part of, or during the existence of, the underlying financing transaction.

Visualize the activities needed to complete the construction, reconstruction or the renovation so that you can identify the parties that will be involved, the work they will do, the equipment they will use, the time it should take, and the most likely ways in which the project can be affected by casualty events, delays, or lack of available equipment.

Determine whether your state enforces the Nationwide Marine Definition in a way that allows you to use, or prohibits you from using, Inland Marine Builder’s Risk Insurance to cover risks associated with renovation of existing improvements.

Think about the components and the amounts of the resulting financial loss that will result if one or more of these events occurs (i) near the start of the project; (ii) midway through the project; or (iii) close to but before the conclusion of the project.

Decide whether there are any unusual circumstances that make it practical for more than one of these parties to maintain separate or overlapping coverages.

If it’s more practical to have one party maintain a policy or series of policies that together cover all aspects of the construction, reconstruction or renovation project, decide whether it makes more sense to have the property owner or the main contractor serve as the insured.  Lean heavily in favor of having the owner maintain that coverage unless there is a specific reason to do otherwise.

Once you know how you expect the construction, reconstruction or renovation project to proceed, structure the lease, the construction contract, or the financing documents so that they are in sync with that vision.  Make sure those documents identify the parties, and the steps those parties are obligated to take, to recover from any variation from that vision.

Then, in tandem with your negotiation of the lease, the construction contract, or the collateral documents, WORK WITH YOUR INSURANCE BROKER OR INDEPENDENT INSURANCE CONSULTANT to craft the Inland Marine Builder’s Risk policy, the OCIP, or the CCIP (and any CGL policies that you may find helpful as supplemental coverage), and any companion ISO Commercial Property or CGL Insurance policy to make sure that you’ve provided coverage for the identified and anticipated risks.

[1] See Karin A. Fleischhaker, The Savvy Businessperson’s Guide to Property & Casualty Insurance: Applications and Practices 83 (2008).

[2] See Restatement (Second) of Conflict of Laws §193; see also State Farm Mut. Auto Ins. Co. v. Hodgkiss-Warrick, 413 S.W.3d 875 (Ky. 2013).

[3] See Douglas R. Richmond, The Additional Problems of Additional Insureds, 33 Tort & Ins. L.J. 945, *10/45 (Summer 1998).

[4] See Cliff J. Schexnayder & Sandra L. Weber, Owner Controlled Insurance Programs 18 (2002).

[5] See Chart of Anti-Indemnity Statutes, attached as Attachment  9.

[6] See N.H. Rev. Stat. Ann. §§ 338-A:1.

[7] See Mo. Rev. Stat. § 434.100.

[8] See Ga. Code § 13-8-2.

[9] See KRS § 371.180(2).

[10] See KRS § 371.180(1).

[11] See KRS § 371.180(3).

[12] Pruitt v. Genie Indus., 2013 U.S. Dist. LEXIS 16010 (E.D.Ky. 2013).

[13] See e.g. Tex. Ins. Code § 151.001 and 151.105; Del. Code, Title 6, § 2704.

[14] Chrysler Corp. v. Merrell & Garaguso, Inc., 796 A.2d. 648 (Supreme Court of Delaware 2002).

[15] Chrysler Corp. v. Merrell & Garaguso, Inc., 796 A.2d. 648, 649-50 (Supreme Court of Delaware 2002).

[16] Chrysler Corp. v. Merrell & Garaguso, Inc., 796 A.2d. 648, 649 (Supreme Court of Delaware 2002).

[17] 6 Del. C. § 2704.

[18] Chrysler Corp. v. Merrell & Garaguso, Inc., 796 A.2d. 648, 653 (Supreme Court of Delaware 2002).

[19] Chrysler Corp. v. Merrell & Garaguso, Inc., 796 A.2d. 648, 652-53 (Supreme Court of Delaware 2002).

[20] Roberts v. Energy Dev. Corp., 235 F.3d 935 (5th 2000).

[21] Roberts v. Energy Dev. Corp., 235 F.3d 935, 936 (5th 2000).

[22] Roberts v. Energy Dev. Corp., 235 F.3d 935, 943-44 (5th 2000).