When the General Contractor is Partially at Fault

Ahmuty, Demers & McManus, New York and New Jersey Insurance Defense Lawyers

By Frederick B. Simpson and James A. Edwards

The Court of Appeals has just laid to rest an important issue that has plagued the State's Appellate Divisions for years: does the active negligence of an indemnitee void entirely its indemnity agreement with the indemnitor under general Obligations Law §5-322.1 in construction site litigation?

In other words, can a general contractor enforce to any extent a full hold harmless agreement against a subcontractor if the general contractor is partially at fault for the happening of the accident?

In the companion cases Itri Brick v. Aetna and Stottlar v. Ginsberg , the Court of Appeals answered "No." As with many cases involving construction litigation, this obscure legal issue has lurking beneath the surface of the fray the traditional combatants: General Liability and Workers' Compensation carriers.

Though seemingly a straightforward issue of contract law, the true import of these cases is this: which of these insurance companies' balloon shall be pricked?

Itri Brick and Stottlar are comfortable bedfellows. Their facts are almost identical. In both cases, an injured employee at a construction site sued the general contractor under the Labor Law and prevailed. In both, the general contractor subcontracted portions of the work out to the plaintiff's employer. In both, the subcontractor agreed to hold the general contractor entirely harmless.

In Itri Brick and Stottlar, the general contractor brought a third-party action against the employer for common law negligence and for contractual indemnification pursuant to the indemnity agreements.

These third-party actions triggered the obligations of the General Liability carrier to defend and indemnify the contractual indemnity claim against the employer, and the Workers' Compensation carrier through its Employer's Liability "1(B)" coverage, to defend and indemnify the employer for the common law contribution claims.

In both, an action was brought seeking a declaration as to the obligations of the General Liability and Workers' Compensation carriers. The general liability carrier in Itri Brick was Aetna. In Stottlar the general liability carrier was CNA. The State Insurance Fund was the workers' compensation carrier in each case. Sound familiar?

In Itri Brick, by stipulation, the general contractor was deemed to be 24.62 percent negligent and the employer 75.24 percent negligent. In Stottlar, a jury found the general contractor 50 percent negligent and the employer 35 percent negligent (with 15 percent of fault attributed to another party not involved in the coverage dispute).

Settlements were reached in each case with the interested carriers preserving their rights to pursue their declaratory judgment actions. In both cases, the singular issue was whether a general contractor, who was actively negligent, could enforce a contractual indemnity cause of action that purported to hold it harmless regardless of its own negligence.

The State Insurance Fund argued in both instances that the General Liability carrier was responsible to co-insure that portion of the judgment attributable to the employer. CNA in Stottlar and Aetna in Itri Brick argued that due to the liability finding against the general contractor, the contractual indemnity clause was "void" and completely unenforceable under General Obligations Law 5-322.1, hence, they had no obligation to indemnify the employer.

The statute at issue, General Obligations Law 5-322.1 provides in relevant part as follows:

A covenant, promise, agreement or understanding in, or in connection with…a contract or agreement relative to the construction, alteration, repair or maintenance of a building…purporting to indemnify or hold harmless to promisee against liability for damage arising out of bodily injury to persons or damage to property contributed to, caused by or resulting from the negligence of the promisee, his agents or employees, for indemnity, or that such negligence be in whole or in part, is against public policy and is void and unenforceable.

Although the statute appears clear on its face, due to the tortured legislative history, which involved innumerable amendments to the statute and mistakes in drafting, the Appellate Divisions had reached contradictory results, even within each department.

Appellate Division cases could be cited from each department that held that such an indemnity agreement was "void" in toto and that the indemnity provision was void only to the extent of the indemnitee's liability. The State Insurance Fund consistently took the position that these contractual indemnity agreements were void only to the extent of the indemnitee's negligence thus creating a cause of action of "partial contractual indemnity" in favor of the indemnitee.

The First Department in Itri Brick found that such a full indemnity clause was void and unenforceable requiring the State Insurance Fund to pay the entire judgment on behalf of the employer. One month later, the Second Department in Stottlar came to a contrary result finding that the indemnity clause was partially enforceable thereby requiring CNA to co-insure with the State Insurance Fund for the 35 percent portion of the judgment against the employer.

Both cases were not only almost identical in facts but also present pure questions of law as to the meaning of general Obligations Law 5-322.1.

On appeal, the Court of Appeals was faced with numerous contrary Appellate Division cases as precedent. Compounding the confusion, each Department had internally inconsistent holdings on this issue.

The only Court of appeals case which had touched upon this issue was Brown v. Two Exchange Plaza Partners . In Brown, there had been a 100 percent pass through to the employer. However, both the First Department and Court of Appeals' decisions, in dicta, had indicated that such an agreement would be void leaving common law contribution as the only surviving claim.

Faced with unwieldy Appellate Division precedent, the Court of appeals adopted its own dicta from Brown and held in the opening sentences of its decision:

These appeals pose a question left unanswered in Brown v. Two Exchange Plaza Partners (76 NY2d 172): whether, and to what extent, an indemnification agreement between the general contractor and subcontractor can be enforced where the general contractor has been found partially negligent in an action brought by an employee of a subcontractor against the general. We hold that, because the agreements in question contemplate full, rather than partial indemnification, the agreements are unenforceable under General Obligations Law 5-322.1 in the circumstances in these cases.

The Court emphasized that its decision was limited to those agreements that require full indemnification of an indemnitee. It specifically did not reach to the issue of the enforceability of an indemnity agreement that only required partial indemnification, as follows:

Moreover, whether or not 5-322.1 would allow enforcement of a "partial indemnification" agreement is relevant here; the agreements in these cases explicitly provided for complete indemnification and there were findings that the general contractor was negligent. The question whether a negligent contractor/promisee could enforce an indemnification agreement, notwithstanding §5-322.1, so long as the agreement did not purport to indemnify the contractor for its own negligence is not before us.

Though left unanswered, the Court appears to have hinted that it would rule in favor of enforcement of a partial indemnity clause that did not run afoul of GOL 5-322.1 by "purporting" to hold an indemnitee harmless for its own negligence. That, however, will be left to future litigation.

The true significance of these cases is their affect on coverage. Where an employer is impleaded in an action seeking contractual indemnity, and the contractual indemnity clause at issue is a "full" indemnification clause, the recurring tension between general liability carriers and workers' compensation carriers is renewed. The employer's general liability carrier may not owe indemnity where the impleading general contractor bears some fault.

In the past, when a third-party action was commenced against an employer containing a contractual indemnity claim and a common law negligence claim, the general liability carrier (who insures the contractual claim) and the workers' compensation and employer's liability carrier (who insures the common law claim) agreed as a matter of course to co-insure consistent with the Court of appeals decision in Hawthorne v. South Bronx Com. Dev. Corp .

What may occur now under circumstances such as Stottlar and Itri Brick is that the general liability carrier, while acknowledging a defense obligation, may not wish to indemnify until there has been a liability finding. This could take the form of a letter agreement to co-insure until there is a liability finding against the general contractor or something of that nature. Settlements may become more difficult.

Another potential issue left in the wake of Itri Brick/Stottlar is its effect, if any, on anti-subrogation. The Court of Appeals rules in Northstar Reinsurance

Under circumstances such as Itri Brick/Stottlar, the general liability carrier could ague that there can be no anti-subrogation determination until there has been a liability finding and anti-subrogation analysis is premature until such time. Appellate precedent might support this argument.

Counsel trying similar cases on either side of the equation may be placed in a quandary. It may be in the employer's interest to accept full responsibility for the accident to expand amount of coverage available to the employer (although this might be of little consequent since Worker's Compensation 1(B) coverage is unlimited).

Conversely, counsel for a general contractor faced with the potential of anti-subrogation might wish to accept partial blame in order to possibly defeat same. A general contractor might ultimately pay less by being partially responsible depending upon how the courts apply the holding in Itri/Stottlar to anti-subrogation.

The decision, combined with the Workers' Compensation Reform Act of 1996 (employers cannot be sued for contribution except in cases of "grave injury") could leave owners and general contractors standing alone in many Labor Law cases.

Although contractual indemnity claims survived the 1996 Reform Act in cases where Itri/Stottlar are applicable, and the general contractor is partially responsible, the general contractor will lose its right to pursue an employer in a third party action except in cases of "grave injury."

Due to overlapping insurance and insurance procurement requirements at construction projects, this should not be of great moment. It is common for a general contractor at a substantial project to require all subcontractors to procure insurance covering the general contractor. Numerous projects now employ a "wrap up" policy covering all contractors and their subcontractors at a job site.

Conclusion

These cases will have a tremendous impact on construction site litigation. The use of complete indemnity agreements is commonplace and employers are frequent targets in such cases. Whether an indemnity agreement passes muster under GOL 5-322.1, will likely become an active area of litigation. Fortunately, however, the Court of Appeals has answered one important question in Itri Brick/Stottlar that has plagued the bench and bar for years.