A construction firm that was chosen by a railroad to build a locomotive fueling and servicing facility objected to including the railroad as an Additional Insured without limiting such coverage to only that required by the indemnity provisions in the contract. Arguing that otherwise the firm’s insurer would be obligated to defend and indemnify the railroad beyond that which it had agreed upon in the contract.
On the surface, this seems to be a fair argument. However, before limiting your insurance requirements to respond only to a contracts indemnity provisions, CRT Consulting, LLC recommends that you consider the following:
Tying insurance requirements to indemnity provisions can have an unintended consequence. In many jurisdictions, if the indemnification requirement is deemed to be unenforceable, that finding may also nullify insurance requirements pertaining or applicable to the nullified indemnity wording. In the words of some courts, the two provisions are so “inextricably tied” that the voiding of one inevitably makes the other unenforceable. This is said to occur where the insurance required in the contract is determined to be solely for the purpose of funding the Indemnitor’s obligation to indemnify.
Due to changing public policy and anti-indemnity statutes, courts are increasingly finding contract provisions requiring one party to indemnify another for the other party’s own negligence unenforceable.
The unintended consequence: If, for any reason, a contract requiring one party to indemnify another for the other party’s own negligence is found to be unenforceable it could result in the loss of commercial insurance to fund a loss associated with the agreement. Which could result in:
- Both the construction firm and the railroad having to pay losses out of operating income rather than from the commercial insurance they were relying upon.
- Both could experience costly litigation and/or prolonged negotiations before any loss is settled.
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