Navigating the Illinois Anti-Indemnity Statue and Case Law

October 1, 2014 | Real Estate, Zoning & Land Use | Corporate

Construction is a risky proposition. Injury to workers and property loss are significant risks. Accordingly, parties to a construction project often attempt to shift these risks using indemnification provisions. In Illinois, the Construction Contract Indemnification for Negligence Act, 740 ILCS 35/0.01, et seq. (the “Act”),1 prohibits contract language that indemnifies a party for that party’s own negligence. The courts have narrowly interpreted this statutory restriction and have carved out certain exceptions. This article provides an overview of case law interpreting indemnity provisions under the Act regarding owner and higher-tier contractors’ attempts to maximize indemnification from lower tiers.

Three Types of Indemnity Provisions

Some courts and commentators have categorized indemnity provisions into the following three groups: (1) limited indemnity, (2) intermediate indemnity, and (3) broad indemnity. The limited indemnity extends only as far as the indemnitor’s own fault in the loss or damage. With the intermediate indemnity, the indemnitor assumes all of the indemnitee’s liabilities related to the parties’ agreement except for the loss or damage resulting from the indemnitee’­s sole negligence. With the broad indemnity, the indemnitor assumes an unconditional obligation to hold the indemnitee harmless for all liabilities associated with the parties’ agreement, including the indemnitee’­s sole negligence. The literal interpretation of the Act requires that only the limited indemnity is valid; the intermediate and broad indemnities are void.

Illustration of Valid Indemnity Provisions under the Act – Limited Indemnity

The following illustrates a limited indemnity provision:

“Contractor agrees to defend, indemnify and hold Owner harmless from and against any and all claims, damages, actions or causes of action, asserted by any person arising out of the work performed or to be performed under this Agreement caused by the negligence of Contractor.”

The above language comports with the Act because by the very terms of the clause, the indemnitor merely agrees to indemnify the indemnitee for the intemnitor’s negligence, not for the indemnitee’s negligence.

There is one additional type of indemnity that is valid on its face under the Act. This is where the indemnitee is indemnified for all claims arising from any causes, whether the indemnitor was negligent or not, except to the extent caused by the indemnitee’s own negligence (the “Carved-Out Indemnity”). This type of indemnity does not contravene the Act because the indemnitee is not indemnified for its own negligence.

Courts Have Narrowly Interpreted the Statutory Restriction

Where indemnity clauses are not explicit as to whether the indemnity duty covers the claims arising from the indemnitee’s own negligence, Illinois courts have consistently interpreted them as permitted indemnities by default and found them enforceable. The first decision where this general rule was established is Westinghouse Electric Elevator Co. v. La Salle Monroe Bldg. Corp., 395 Ill. 429 (1946), which predates the 1971 enactment of the Act. In Westinghouse, the disputed indemnity language states:

“The contractor … agrees to indemnify and hold the owner … harmless from any damages, claims, demands, or suit … arising out of any acts or omissions by the Contractor, his agents, servants or employes [sic] in the course of any work done in connection with any of the matters set out in these specifications. (Emphasis added). Id. at 432.

This indemnity clause is not explicit as to whether the indemnity duty covers the claims arising from the indemnitee’s own negligence. In upholding this clause, the Westinghouse court held that an agreement to indemnify a party for his own negligence would be so unusual and extraordinary as to require that the contract put the intent to indemnify “beyond doubt by express stipulation.” Id. at 434 (citing Perry v. Payne, 217 Pa. 252, 66 A. 553 (1907)). The rationale of the Westinghouse decision has been consistently followed in the construction contract context in the post-Act era. See Tatar v. Maxon Constr. Co., 54 Ill.2d 64, 66 (1973); see also McNiff v. Millard Maint. Serv. Co., 303 Ill.App.3d 1074, 1077 (1999) (holding that “Illinois courts have consistently held that indemnification contracts will not be construed as indemnifying against a party’s own negligence unless such construction is required by clear and explicit language of the contract, or such an intention is expressed in unequivocal terms. This has been the rule in Illinois since the Westinghouse case”).

Limitations on Voiding Indemnity Provisions

There are two lines of cases that have upheld otherwise clearly or arguably void indemnity clauses. The common thread among these cases is that they all involve a contribution claim in the context of an indemnity provision. In Illinois, contribution is a statutory right whereby one joint tortfeasor can recover from each of the others when that one person discharges the debt for the benefit of all.

An Otherwise Void Indemnity Provision May Be Upheld for the Purpose of Waiver of “Kotecki Cap”

Some Illinois cases have upheld an indemnity clause that would be otherwise void under the Act, where the question was whether the contractual language at issue operated as a waiver of the so-called “Kotecki Cap”2 or whether it was void for being in violation of the Act.

The seminal case was Braye. In that case, a construction worker sued the project owner for a jobsite injury, and the owner filed a third-party complaint for contribution against the worker’s employer, but not to exceed the Kotecki Cap. The issue was whether the contractual indemnity language in question operated as a waiver of the Kotecki Cap, or whether it was void for being in violation of the Act. The disputed indemnity language read:

“… [All Tri-R] shall take all necessary precautions to prevent the occurrence of any injury to person or damage to property during the progress of such work and, except to the extent that any such injury or damage is due solely and directly to [ADM’s] or its customer’s negligence, … [All Tri-R] shall pay [ADM] for all loss which may result in any way from any act or omission of [All Tri-R] ….” (Emphasis added). Id. Braye, 175 Ill.2d 201 at 204.

Under the literal interpretation approach, this provision would likely be held void as an intermediate indemnity provision. However, the Braye court upheld this provision, reasoning that statutes and laws in existence at the time a contract was executed are considered part of the contract (citing Larned v. First Chicago Corp., 264 Ill.App.3d 697 (1994)); therefore, at the time of the parties’ contract, they should be presumed to have known that indemnification promises violate public policy. Id. at 217. The court concluded that the employer-subcontractor was simply agreeing to waive the Kotecki Cap on its contribution liability and that the contractual language at issue was not void as violative of the Act. Id.

An Otherwise Void Indemnity Provision May Be Upheld as a Contribution Provision Rather Than an Indemnity Provision

In Virginia Surety Co. v. N. Ins. Co. of New York, 224 Ill.2d 550 (2007), the court affirmed the holding of Braye without relying on its reasoning. As in Braye, a waiver of the Kotecki Cap was at issue. In Virginia Surety Co., the disputed contractual language read:

“To the fullest extent permitted by law, the Subcontractor … shall indemnify and hold harmless the Owner, Contractor, … from and against claims … resulting from performance of the Subcontractor’s Work …, provided that such claim … is … caused in whole or in part by negligent acts or omissions of the Subcontractor … regardless of whether or not such claim, loss, or expense is caused in part by a party indemnified hereunder.” (Emphasis added). Id. at 553.

This provision can be construed to require the indemnitor fully indemnify the indemnitee for any claims arising from the indemnitor’s negligence, even if such claims were partly caused by the indemnitee. Under such interpretation, this provision would be void because it requires the indemnitor to indemnify the indemnitee for the indemnitee’s own negligence. However, the Virginia Surety court found this language “unambiguous” and read it to mean that the indemnitor is required to indemnify the indemnitee only for the indemnitor’s own negligence, despite any common liability on the part of the indemnitee. Id. at 564. Because the court found that this provision did not require the indemnitor to indemnify the indemnitee for its own negligence, it did not need to rely on the reasoning of the Braye decision, nor did it need to otherwise further analyze the validity of the provision under the Act. Nonetheless, the court elaborated on the legal distinction between “contribution” and “indemnification” and held that the contractual provision was merely a poorly-worded “contribution” provision, rather than “indemnification,” as both parties remained jointly and severally liable for any injuries to third persons. In so holding, the Virginia Surety court implicitly affirmed the proposition that was espoused by the lower court in Braye but was not dispositive in that decision — i.e., in a contribution claim, the Act is not implicated if the contractual language at issue can be viewed as a contribution provision rather than an indemnity provision.

This logic was dispositive in a subsequent appellate case. In Pierre Condo. Ass’n v. Lincoln Park W. Assocs., Ill.App.3d 770 (2007), a condominium association, which suffered damage during the excavation of an adjacent lot, sued the owner of the adjacent lot, its general contractor and the excavation subcontractor. The lot owner cross-claimed against the excavation subcontractor, seeking indemnification under the subcontract’s indemnity provision. The subcontractor then settled directly with the condo association and claimed that the settlement discharged it from contribution liability to the lot owner under the Illinois Joint Tortfeasor Contribution Act, 740 ILCS 100/, et seq. (the “Contribution Act”).3 In response, the lot owner asserted that even if the settlement was in good faith, the subcontractor could still be sued for contractual contribution, as the Contribution Act only protected the subcontractor from suits for statutory contribution. In this context, the validity of the subcontract’s indemnity provision set forth below was tested:

“The Subcontractor shall indemnify … the Owner … from and against claims … but only to the extent caused by the negligent acts or omissions of the Subcontractor … regardless of whether or not such claim … is caused in part by a party indemnified hereunder.” (Emphasis added). Id. at 774.

This indemnity clause is similar to the one at issue in Virginia Surety. Unlike the Virginia Surety court, however, the Pierre Condo court did acknowledge that this language may be read to require the indemnitor to indemnify the indemnitee for the indemnitee’s own negligence and therefore could be held void under the Act. Id. at 775. Nonetheless, the court ultimately held that because the disputed provision requires contribution, not indemnification, the Act is not implicated, and the subject provision is not void as against public policy. Id. Read together, Virginia Surety and Pierre Condo seem to support the proposition that where an indemnification provision can be read as one for contribution, the latter interpretation will apply, thereby making the Act irrelevant.

The two lines of cases discussed above indicate that Illinois courts have upheld otherwise clearly or arguably void indemnity provisions where a party seeks from another party unlimited full contribution based on comparative fault, i.e., not limited by the Kotecki Cap as in Braye, Liccardi and Virginia Surety or by the statutory bar under the Contribution Act applicable to a good faith settlement as in Pierre Condo. Stated differently, even otherwise void indemnity language can operate as a valid waiver of statutory limitations on contribution claims, and the invalidity of an indemnity clause under the Act will not operate as an affirmative defense to a contribution claim. The rationale for this proposition was best articulated in Virginia Surety, where the court held that that a waiver of a statutory limitation (the Kotecki Cap in that case) does not shift liability in the same manner that an indemnity agreement is intended to do because in a contribution claim, both parties remain jointly and severally liable for any injuries to third parties. Virginia Surety, 224 Ill.2d at 568.

Conclusion

Illinois courts have narrowly interpreted the statutory anti-indemnity prohibition, and where indemnity clauses are not explicit as to whether the indemnity duty covers the claims arising from the indemnitee’s own negligence, they have upheld such clauses as permitted indemnity. Further, even where indemnity clauses contain clearly or arguably void language, Illinois courts have upheld them when a party seeks from another party contribution based on comparative fault, rather than seeking to shift the entire loss or damage to that party. Accordingly, it seems that the validity of an indemnity provision in construction contracts in Illinois is ultimately determined by remedies sought after the fact rather than the literal terms of the indemnity clause itself.

That being said, following are some tips for owners and higher-tiered contractors to help them maximize indemnification:

  • Avoid using Intermediate and Broad Indemnity language.
  • Between the Limited Indemnity and Carved-Out Indemnity, use the latter to the extent possible as it provides a broader scope of indemnification. This will likely require drafting an indemnity clause customized in light of Illinois law rather than a typical indemnity provision found in standardized forms of construction contracts.
  • Include the phrase “to the fullest extent permitted” at the outset of the indemnity clause to enhance its enforceability. While no Illinois case has addressed the effect of this phrase in the context of enforceability of an indemnity clause under the Act,4 there is some out-of-state case law supporting that qualifying the indemnification provision with the phrase (as illustrated in both the AIA and ConsensusDocs contracts) may be enough to prevent a court from declaring the entire indemnification provision void.5

Additionally, it should be noted that while the statutory anti-indemnity prohibition does not apply to contractual provisions requiring a party to purchase insurance covering another party’s negligence, an insurance provision “inextricably tied” to an unenforceable indemnity provision is also void under Illinois case law. See Juretic, 232 Ill.App.3d at 812-13; see also GTE North, 245 Ill.App.3d at 325-26; see also Transcon. Ins. Co., 278 Ill.App.3d at 505-06. Accordingly, it is important that indemnity and insurance clauses be set forth separately and independently.

Finally, it should be noted that the Virginia Surety court ruled that a commercial general liability policy of insurance issued to a subcontractor does not provide coverage for damages above the Kotecki Cap. Therefore, higher-tiered contractors and owners must ensure that their contract with a subcontractor is drafted so as to require the subcontractor to provide umbrella/excess coverages and/or CGL endorsements with respect to damages above the Kotecki Cap and ensure that they are named as additional insureds on all of the subcontractor’s coverages.

1 Sections 1 and 3 of the Act, respectively, read as follows:

“With respect to contracts or agreements, either public or private, for the construction, alteration, repair or maintenance of a building, structure, highway bridge, viaducts or other work dealing with construction, or for any moving, demolition or excavation connected therewith, every covenant, promise or agreement to indemnify or hold harmless another person from that person’s own negligence is void as against public policy and wholly unenforceable.” 740 ILCS 35/1. (Emphasis added).

“This Act does not apply to construction bonds or insurance contracts or agreements.” 740 ILCS 35/3.

The purpose of the Act is to foster workplace safety by preventing a party from insulating itself from liability through the use of a contractual indemnification provision, which may deter the exercise of ordinary care. Braye v. Archer-Daniels-Midland Co., 175 Ill.2d 201, 216-17 (1997).

2 The Kotecki Cap is named for Kotecki v. Cyclops Welding Corp., 146 Ill.2d 155 (1991), which held that third parties held liable for a work-related injury may seek contribution from the injured worker’s employer, but such contribution is capped by the amount of applicable workers’ compensation benefits.

3 The Contribution Act provides in its relevant part that “the tortfeasor who settles with a claimant [in good faith] is discharged from all liability for any contribution to any other tortfeasor.” 740 ILCS 100/2 (d).

4 While the Virginia Surety court did note in passing that the disputed indemnity provision in that case contained this phrase, it did not address whether the phrase would prevent an otherwise void indemnity provision from being invalidated. See id. at 568.

5 See e.g., Brown v. Two Exch.. Plaza Partners, 146 App Div. 2d 129, 539 NYS2d 889 (1989, 1st Dept.).

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