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“Risk-y” Business: Who Bears Financial Responsibility When a Loss Occurs in an Industrial Setting?

Commercial Litigation

01/10/2018

By: Dan Centner

Accidents happen on a job site, and when they do, lawsuits often follow. Where multiple people or companies may have been involved in the chain of events leading up to an accident, the injured party has every incentive to sue as many of those parties as possible in order to maximize possible recovery. Where some or all of those parties arguably had a hand in causing the accident, this naturally gives rise to the question of who bears financial responsibility for the loss.

The answer, particularly in construction or oilfield settings, may surprise you. Obviously it is common, especially on larger-scale projects, for parties to be responsible for performing only certain portions of the work—for example, a general contractor on a construction project will subcontract out some or all of the work owed to the customer, or an oil and gas operator will hire a service provider to oversee a particular aspect of a drilling project. Contractual documents typically specify who will perform what work on the project, and many times provisions attempting to shift the financial burden for accidents that may occur during the course of the project may be buried within those documents.

These provisions are known as contractual defense and indemnification provisions. In their simplest form, they may say something like, “Subcontractor hereby agrees to defend, indemnify, and hold harmless the General Contractor from and against any and all liabilities that may arise out of Subcontractor’s work at the site, regardless of whether that liability arises, in whole or in part, from the acts or omissions of the General Contractor.”

Simply put, the general contractor in the above example is trying to ensure that if it gets sued for something that happens on the site, the subcontractor that may have caused the accident ends up being the party responsible for paying the general contractor’s legal fees, and any judgment that may be rendered against the general contractor as a result of that suit. In addition to minimizing its own risk, the general contractor will also likely want to avoid having the loss be charged to its own liability insurance. While beneficial to the general contractor, this arrangement can become very problematic for the subcontractor, as the legal fees that the general contractor is attempting to pass down to the sub can be substantial. These problems are compounded if the subcontractor’s liability insurer tries to deny coverage for the general contractor’s claim, ostensibly leaving the subcontractor on the hook.

However, in practice the application of these defense and indemnity provisions is not as simple as it may seem at first blush. Subcontractors often lack the negotiating power to avoid these “defense and indemnity” provisions, and, perhaps in recognition of this fact, the Louisiana legislature has enacted certain statutes that govern when, if at all, defense and indemnity provisions like the sample language quoted above are enforceable. See, e.g., La. R.S. 9:2780 and La. R.S. 22:9:2780.1. These statutes have particular application in the oil and gas and construction industries. As a general matter, if the contract at issue falls within the scope of the applicable statute, the defense and indemnity obligation runs the risk of being invalidated—especially if the language suggests that one company (“A”) is protecting the other (“B”) against B’s own negligence. Often times, litigating this ancillary defense and indemnity issue results in additional litigation between the two companies as they try to assess costs between themselves while also simultaneously defending the plaintiff’s claims.

The possible application of these “anti-indemnity” statutes is a key consideration in negotiating the terms of a work agreement. Similarly, if a lawsuit arises, it is important to know your rights to avoid getting stuck with a bill that you are not legally required to pay. Balancing your risk from the start and knowing your rights can help you avoid wasting money and resources attempting to enforce an unenforceable defense and indemnity provision against your counterparty.

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Dan Centner is a commercial litigator who focuses his practice on matters pertaining to the oil and gas and construction sectors, insurance coverage and breach of contract disputes. To learn more about his experience and areas of practice, view his profile.

The content of this article is not intended to serve as an exhaustive review of the laws, statutes or issues related to commercial litigation matters and is not intended to provide legal advice. The opinions expressed through this article may not reflect the opinions of the firm, individual attorneys or clients.