Eric Kyler Explains Mastering Contractual Risk Transfer

Posted July 26, 2024

Author – Eric S. Kyler, Vice President – Sales, Horst Insurance

Mastering Contractual Risk Transfer: Broad, Intermediate, and Limited Form Indemnity

Understanding indemnity provisions in contracts can feel overwhelming, but getting a grip on the differences between Broad, Intermediate, and Limited Form Indemnity is essential for anyone drafting or signing construction agreements.  This guide will help clarify these terms and explain how they can impact you.  Below are the three types of contractual indemnification language and how they can affect your business:

Broad Form Indemnity

Broad Form Indemnity means one party agrees to cover another party’s liabilities, even if that other party is completely at fault. You can usually spot a Broad Form indemnity clause by the phrase “caused in whole or in part.”

In this situation, a contractor (usually the subcontractor) is often unknowingly excepting ALL of the responsibility for a lawsuit, even if the other party (usually the job owner or GC)  is fully or partially the cause of the loss.  It is highly recommended for contractors to not accept this kind of contractual language.

Intermediate Form Indemnity

Intermediate Form Indemnity is used to have one party cover another for their own negligence, as long as the negligent party isn’t solely at fault. Look for the phrase “caused in part” to identify an Intermediate Form indemnity clause.

In this case, a subcontractor would be accepting the liability of the owner and/or GC of a job, as long as the contractor has any sort of negligence in the situation.  It could be 99% the job owner’s negligence and 1% the contractor’s negligence and if the indemnity language is intermediate form, the contractor assumes all liability.

Limited Form Indemnity

Limited Form Indemnity doesn’t actually cover a party for their own negligence. Instead, it only covers the extent of the other party’s actions. The phrase to look for here is “only to the extent.” This ensures that each party is only responsible for their part of the fault, offering a fairer distribution of risk.

This is the most “fair” contractual language.  It is essentially stating that I will be liable for my negligence and you will be liable for yours.

Key Elements of Contractual Risk Transfer Agreements

Three additional elements help assign responsibilities and protect parties from financial losses due to someone else’s actions. Here are the additional components of risk transfer in contracts:

1. Hold Harmless Agreement/Indemnification Clause: This part explains the contractor’s duties, including defending other parties if claims arise from their work. It ensures contractors and suppliers are responsible for their own mistakes and negligence.
2. Insurance Procurement Clause: This requires third parties to have insurance, including a Certificate of Insurance (COI), to make sure the contracting party is protected by the contractor’s insurance if something goes wrong.
3. Waiver of Subrogation: This clause stops the contractor’s insurance company from seeking repayment from the contracting party if a claim is paid. It adds an extra layer of protection by ensuring the contracting party isn’t liable for losses, even if they were partly responsible.

By understanding the differences between Broad, Intermediate, and Limited Form Indemnity, and considering the key components and regulations of contractual risk transfer, you can be sure that you are making the best decision possible for your company when you are signing a contract.

If you’d like to learn more about Contractual Risk Transfer, please contact Horst Insurance.