How the PA’s proposed anti-compensation statute may affect the belt and braces approach to risk transfer in construction contracts | Cohen Seglias Pallas Greenhall & Furman PC
How the PA’s proposed anti-compensation statute may affect the belt and braces approach to risk transfer in construction contracts
In a January 2021 memorandum, Pennsylvania state officials Todd Stevens and Michael Driscoll reintroduced a bill that, if passed, would amend 68 PS Section 491 to significantly restrict the scope of the indemnity provisions in construction contracts. As in a. explained previous post, this bill was originally introduced as House Bill 1887 in September 2019, but was eventually “put on the table” in November 2020. According to the Representatives’ memorandum, many Pennsylvania contractors, without compensation, face the unfair practice of being liable for the negligence of another party. On December 13, 2021, this draft law was officially “struck off the table”, ie it is available for possible examination and can soon be added to the house’s calendar.
Reclamation in the case of construction contracts
Building owners and general contractors protect themselves against third-party lawsuits for personal injury or property damage using two methods: contractual compensation arrangements and additionally insured status (ie “belts and suspenders”).
Contractual exemption provisions
Indemnification provisions are used by the parties to transfer the risk of certain losses to another party for losses arising out of the other party’s work. There are three main types of compensation provisions: broad, medium-term and limited.
- A comprehensive compensation scheme enables the exemption holder to require the exemption contract to cover the entire liability of the exemption holder, even if the exemption holder suffers damage completely (or “simply” negligently).
- An interim compensation scheme enables a person entitled to exemption to be fully compensated by the exemption officer for any damage as long as the exemption recipient has only acted partially negligently.
- A limited amount of compensation only demands that the compensation be paid for that part of the damage attributable to the compensation. If it is found that the exemption holder and the exemption officer show 60% and 40% negligence, respectively, the exemption contract only has to cover its share (40%) of the liability.
A broad or medium indemnity clause requires a general contractor or subcontractor to bear the indemnity’s defense costs and any judgments against the indemnity related to its work. For example, if a subcontractor’s employee is injured at work, the employee will likely sue both the general contractor and the project owner. A typical exemption clause between builder and general contractor basically says: “As general contractor you were responsible here, and if someone is injured in the project and sued me, you have to defend me (pay the costs, lawyers) and hold me harmless (for settlements or Paying judgments), also for my own negligence. “
In practice, as soon as a general contractor receives the owner’s claim for compensation, he will (or should) notify his commercial liability insurer (CGL) of the claim. As a result, the owner can indirectly access the general contractor’s CGL policy to cover his damage by first asserting the indemnity claim against the general contractor and then, if necessary, suing the general contractor for contractual indemnification. The same procedure applies to the general contractor demanding compensation from his subcontractor.
Additional insurance status
In addition to the compensation provisions, owners and general contractors will also endeavor to be included in the CGL policies of the general contractor or the subcontractor as an additional insured party. In the above example of an injured worker, the owner, as an additional insured, can apply for insurance coverage under the general contractor’s CGL policy and require the insurance carrier to defend and compensate the owner for the claims of the subcontractor’s employee. This adds further protection to the owner and general contractor, as he, as an additional insured person, has a contractual relationship with the insurance company and direct rights under the applicable CGL policy.
House Bill 424 seeks to ban broad and medium-sized forms of compensation
House Bill 424 seeks to reflect current Delaware, New York, and Ohio laws by prohibiting both broad and medium-sized forms of compensation. This change means the parties are entitled to limited compensation, which effectively removes the belt (compensation) from their belt and suspender toolkit. The current delay in the legislative process relates to the braces in this tool kit: the protection available to one additional insured.
The current version of the bill contains wording that creates confusion about how this could affect the ability of owners and general contractors to continue to obtain additional insurance status under the insurance of general contractors and subcontractors. Trade organization lobbying and negotiations between legislators continue, which in the short term could prevent any movement on the bill. If the law removes both belts and suspenders, it will be a major change that will make it impossible for property owners and general contractors to shift liability for personal injury and property damage “downstream” from contractual provisions.
Cohen Seglias attorneys will continue to monitor any developments that may arise from this legislation. If this legislation is adopted, this legislation will have a significant impact on construction companies operating in Pennsylvania and general contractors and subcontractors alike will need to prepare to comply with the new legislation.