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Colorado Just Says No to Anti-Indemnity Bill SB 142 Aimed at Diluting Permitted Indemnity Provisions in Construction Agreements

By Dale, Braden, & Hinchcliffe

Colorado Governor Bill Owens’ veto of Senate Bill 142 on May 31, 2005 is very good news for Colorado builders/general contractors, and their general liability carriers. The bill sought to significantly limit the ability of builders/general contractors to shift the risk of loss in construction agreements to their retained subcontractors through indemnity provisions in construction agreements.

SB 142 mirrors similar attempts through efforts of subcontractor coalition groups in many states. This pertains to both indemnity and additional insured provisions in subcontract agreements. SB 142, as presented, would have only permitted builders to seek indemnity from subcontractors, pertaining to a claimed loss, if the subcontractor was negligent, and only to the extent of that subcontractor's negligence. Thus, if SB 142 had become law, it would have left the builder, and the builder's general liability carrier, much more exposed to liability for construction-related claims for work the builder did not perform.

A key response to advocates of SB 142 is summed up by Governor Owens in his veto letter, in which he states, "In a construction setting, the ability to bargain for risk transference, indemnification and insurance to cover liability is essential. General contractors, investors, and property owners must be able to retain the right to bargain for protection from subcontractors -- those who perform the work."

This quote highlights a unique aspect of a construction agreement between a builder/general contractor and a subcontractor. That is, for the most part, the subcontractor is the party that is actually performing the work as agreed to between the subcontractor and the general contractor. Thus, as the law in Colorado has been, and will now remain, the subcontractor and its general liability carrier will bear the risk of loss for any claim or loss, so long as the claim arose out of that subcontractor’s work. It is not necessary for the builder to establish that there was actual fault/negligence on the part of the subcontractor, nor to determine the degree of such possible fault.

Finally, as Governor Owens notes, SB 142 would likely have added an extra layer of litigation to construction lawsuits, since it could create a second tier of litigation between parties to determine fault. The Governor comments that, in the current system this additional layer is somewhat avoided, as the insurance companies investigate and determine how to proceed, once the builder/general contractor tenders its defense and indemnity to potentially involved subcontractors and their general liability carriers.

In sum, the significant impact of the Governor's veto of SB 142 is to limit the potential exposure to liability on the part of builders and their general liability carriers. Builders will continue to shift the risk of loss to their subcontractors and carriers of subcontractors through the proper indemnification and additional insured provisions.