Source: http://www.natlawreview.com, May 24, 2013
By: Scott R. Fradin, Much Shelist, P.C.
On a recent trip with my son to an extreme sports facility, I was presented with a rather lengthy form that I was asked to sign before my son would be allowed to participate. The following provisions grabbed my attention:

I certify and promise that I have adequate insurance to cover any injury or damage that may be caused by my participation and suffered upon my person, my property or other persons. I agree to pay the entire costs associated with injury to or damage to myself, my property or other persons and their respective property. I agree to hold harmless and indemnify the Released Persons for all costs associated with injury to or damage to myself, my property or other persons and their respective property.

I fully acknowledge and understand that the employees of the Released Persons may be negligent and reckless in supervising and maintaining equipment and facilities owned and operated by the Released Persons. I fully understand and accept the risk associated with employees’ negligence and recklessness that may or may not occur in the monitoring, supervising, and maintenance of the equipment and facilities owned and operated by the Released Persons.

These provisions raised two important issues. First, I was certifying that I had adequate insurance to cover an injury. Second, not only was I acknowledging that the facility was not responsible for anything that could happen to my son while playing at the facility (even if they acted negligently or recklessly) but I was agreeing to indemnify the facility even if a claim arose out of their negligence. Being the ever-careful lawyer, I carefully considered the import of what I was being asked to sign, looked at my son and, of course, signed it.
But I still had questions. Did I have insurance to cover the risk and, even if I did, was the agreement I had just signed covered? What about the indemnity? Is the promise to indemnify someone from their own negligence even legal under Illinois law? And most importantly, how do these questions relate to construction contracts?

Anatomy of an Indemnity Provision in a Construction Contract

At its most basic level, the concept of indemnification is simple: it is an agreement to assume a specific liability in the event of a loss. It may mean a shifting of risk from one party to another. As a general matter, it is perfectly legal under Illinois law for the owner of the facility to shift the risk of loss to me by requiring me to indemnify the facility from its own negligence — despite all of its shortcomings, Illinois still recognizes the freedom of contract.
But this is not the case in construction. In the construction context, the Construction Contract Indemnification for Negligence Act, also known as the Anti-Indemnity Act, voids any provision that indemnifies a party for its own negligence. This act provides:

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.

The act is intended to address the practice of a contractor requiring its subcontractors to indemnify itself and the project owner from all liability for injuries on the construction project. The purpose of the act is to improve workplace safety by preventing a party from insulating itself from its own negligence. (Estate of Willis v. Kiferbaum Constr. Corp. 357 Ill.App.3d 1002 (1st Dist. 2005).)
If the indemnity provision in your construction agreement violates the act, it is likely that a court will void the provision. Thus, when drafting and negotiating the indemnification provision, regardless of your role in the construction project, the provision must be drafted to avoid running afoul of the act.
To understand how easily an indemnity provision can violate the act, we must start with the provision itself. The following provision is not atypical:

The Contractor shall indemnify, defend and hold harmless the Owner, the Lender and their respective agents and its officers, directors, principals, officers, managers, members, attorneys, representatives, and employees of any of them (collectively “Indemnitees”) from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, (each a “Claim”) arising out of or resulting from the performance of the Work regardless of whether such Claim is caused by an Indemnitee’s active or passive negligence.

The problem with this provision is that it is not limited to the conduct of the person providing the indemnity, i.e., the “indemnitor.” As drafted, the contractor, or the “indemnitor,” is being asked to indemnify the owner, etc., or the “indemnitees,” from an indemnitee’s own negligence. This clearly violates the Anti-Indemnity Act.
In order to bring this provision into compliance with the act, the provision could be re-written as follows:

To the fullest extent permitted by law, the Contractor shall indemnify, defend and hold harmless the Owner, the Lender and their respective agents officers, directors, principals, officers, managers, members, attorneys, representatives, and employees of any of them (collectively “Indemnitees”) from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, (each a “Claim”) arising out of or resulting from performance of the Work regardless of whether such Claim is due to an Indemnitee’s active or passive negligence, but only to the extent such Claim is caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts the Contractor may be liable.

Because the indemnity obligation is expressly limited to the extent of the negligent acts of the contractor or anyone for whom the contractor is legally liable, it is likely that a court would find that this provision complies with the act. The addition of “to the fullest extent permitted by law,” while not essential, assists a court in interpreting the provision in a manner consistent with the act.
The next issue is insurability. It is equally important that the indemnity provision be drafted in way that does not diminish the indemitor’s insurance. An uninsured indemnity is, literally, not worth the paper it is printed on. The way to address this issue, however, depends on whether the indemnitor is a design professional or a contractor. While the provision, as drafted above, would be insurable under the contractor’s commercial general liability insurance policy, the same provision would not be insurable under the design professional’s professional liability insurance policy.
To meet the requirements of the insurance policy and the Anti-Indemnity Act, the provision in the design professional’s agreement could be rewritten as follows:
To the fullest extent permitted by law the Design Professional shall indemnify, defend and hold harmless the Owner, the Lender and their respective agents and its directors, principals, officers, managers, members, attorneys, representatives, and employees of any of them (collectively “Indemnitees”) from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work professional services under this Agreement, but only to the extent such Claim is caused by the negligent acts or omissions of the Design Professional, and that of its Consultants, anyone directly or indirectly employed by them or anyone for whose acts the Design Professional may be legally liable.
These changes are based on the uniqueness of the coverage provided by professional liability insurance. (While beyond the scope of this article, it has to do with the concept of “liability assumed under contract.”) The first change is the elimination of a prospective defense obligation. A prospective defense obligation means that if the indemnified party is sued for something that the design professional allegedly did, the design professional would be required to pay, up front, for the cost of defending the indemnitee regardless of whether the design professional is ultimately found liable. This is not covered by the design professional’s professional liability insurance. A professional liability insurance policy will only pay for the indemnitee’s cost of defense if the design professional is ultimately found liable. But, as drafted, if the design professional is found liable, the costs that the indemnitee incurred in defending itself in the lawsuit are likely to be paid under the professional liability insurance policy.
The second change concerns the parties the design professional can indemnify so as to maintain coverage. A professional liability policy will only provide coverage under an indemnity to those with whom the design is in privity, i.e., the client with whom it has a contract and anyone that is directly part of the client entity. So, by agreeing to indemnify entities such as the lender, agents, attorneys and representative — people with whom the design professional is not in privity — the design professional has agreed to an uninsured risk.
In the construction context, maintaining the enforceability and insurability of an indemnification provision is critical to providing maximum protection to all participants in the process. Whether you are the person being indemnified or the person providing the indemnity, you should check with knowledgeable legal counsel or an insurance specialist before you sign on the dotted line.