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Construction Engineering 380

Indemnification. Can have varying ?degrees" of responsibility (liability)First instance vs. ultimatePassive s. activePrimary vs. secondaryContractual vs. non-contractualCourts and the industry try to keep all liability and indemnification cases as contract (not tort). Indemnification. Purpose o

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Construction Engineering 380

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    1. Construction Engineering 380 Indemnification, Sureties, and Bonding

    2. Indemnification Can have varying “degrees” of responsibility (liability) First instance vs. ultimate Passive s. active Primary vs. secondary Contractual vs. non-contractual Courts and the industry try to keep all liability and indemnification cases as contract (not tort)

    3. Indemnification Purpose of indemnification is to consolidate risk, create efficiency, and define losses Losses are assigned to those who can most cheaply avoid the harm, rather to those who are responsible (at least in part) for the loss Some courts and legislatures are hostile because it violates one of the basic principles of law (cost is assigned to those responsible)

    4. Joint Liability and Indemnity Indemnity clause- agreement that one party will bear all the risks for various events (wind, fire, risk, etc.) Types of clauses Limited- limited form indemnity clause restatement of the law- each party responsible for their share Intermediate form indemnity clause- one party will pay for all damages if it is partly responsible (makes insurance easier and cheaper) Broad from indemnity- one party will pay for all damages even if they have not caused any of the damages. Illegal in many states- under review

    5. Joint Liability and Indemnity Several people or companies may contribute to one loss. (case or tort is more complex) Each party will pay damages in proportion to the amount of their liability Joint liability is extremely common in construction- each party pays according to their proportion of cause (arbitrator assigns percentage)

    6. Joint Liability and Indemnity Claim that the “most responsible” should pay all is not a valid defense in U.S. unless there is a contractual clause to that effect Indemnity and contribution define the terms of the settlement Indemnity action- bringing in another party believed partly liable for some of the damages Contribution action- one party has already paid and seeks recovery or reimbursement from another party believed partly liable

    7. Joint Liability and Indemnity Insurance companies represent liable parties, but are not parties to the suit. Joint and severable liability- each tortfeasor is jointly liable with other tortfeasors for the total damages AND Each tortfeasor is also individually liable for all damages suffered should other parties not be able to pay (severability)

    8. Joint Liability and Indemnity Responsibility for contributory actions is on the other tortfeasors, not the damaged party Law on settlement by a jointly liable party varies by jurisdiction- some make non-settlers pay more, others will use settlement as the anchor for other party damage assignments

    9. Joint Liability and Indemnity Accepting liability (indemnifying others) is financially risky. Need to make sure insurance coverage is in place and high enough to cover potential loss Insurance policy will usually have a clause preventing you from from indemnifying others without notification. Indemnitor will pay more for insurance.

    10. Joint Liability and Indemnity Additional insured rider- extends your insurance coverage to another party. Same effect as broad form indemnity, but not legally as troubling. Usually applies to specific acts or assets (like your car) Insurance and broad form indemnity apply sometimes to officers of the company

    11. Surety and Bonds Surety is similar to insurance, but insurance covers specific loss to the insured. Surety guarantees the financial aspects of a project to a third party, not to the covered company Sureties paid to take risk, so the law views them as commercial, contractual parties Individual can act as surety, but if they are not paid the legal obligation is viewed differently Sureties provide bonds for contractors

    12. Surety and Bonds Three major types of bonds in construction: Bid bond- submitted at time of bid- guarantees that company will execute a contract if they are the low bidder Performance bond- guarantees that the contractor will complete the work defined by the contract documents Payment bond- guarantees that the contractor will pay all subcontractors, vendors, etc.

    13. Surety and Bonds Contractor can ask subcontractor for bonds (flow down principle) Who can sue for payment from a surety is a problematic legal issue- most jurisdictions allow a subcontractor or supplier to sue the surety for payment, but the bond language is important to determine this right

    14. Surety and Bonds Bonds remain valid if the contractor defrauds, but not if the owner does Surety has defense and remedy options against the owner or A/E similar to those of the contractor (unreasonable interference, failure to pay, etc) Bond limits protect the surety from scope creep Contractor bankruptcy does not relieve the surety from obligation to owner Sureties can place a claim for reimbursement from contractor, but rarely recover without “auction”

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