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We Agree to Provide Indemnification, Now What?

This article addresses certain problems to be encountered when a blasting contractor agrees to provide indemnification. Nearly 100% of all blasting work is performed pursuant to a contractual agreement. Whether the explosives engineering firm works directly for the property owner, or for a general contractor by way of subcontract, indemnification agreements are generally required to protect owners, operators, general contractors, and other interested parties in the event there is subsequent litigation. These contractual requirements are typically referred to as indemnification and "additional insured" agreements.


Introduction

 

Nearly 100% of all blasting work is performed through contractual agreements. In the past, most blasting contracts were general in nature. Some agreements were as simple as a work order, while others were no more than a letter confirming a description of the work with the applicable pricing. Explosives engineers presented by the job without regard to concepts such as indemnification hold-harmless clauses, additional insured clauses and subrogation waivers.

 

In today's market, customer expectations have increased to the point where blasting companies are called on to do much more than simply providing product and hardware. Today, most construction companies (quarry operations, road builders and coal mining companies) expect their blasting engineers to provide services such as pre-blast planning, technical advice, shot layout and certified professionals to "pull the trigger" on every shot. Comprehensive service is not al that is expected in today's marketplace. Companies also insist on legal protection from their explosives engineers on an ever expanding basis.

 

Typically, the contractors that hire professional blasting companies require indemnification and insurance for all claims or lawsuits which arise out of the work performed by the blasting contractor. In today's highly competitive marketplace, blasting companies are required to "sign off" on contracts with broad indemnification provisions just to secure the job. Many companies do not appreciate the wide ranging ramifications that attach once an explosives engineering firm agrees to an open ended indemnification agreement.

 

Let's begin with a basic definition of indemnification: Blacks Law Dictionary defines indemnity (in-dem-ne-tee) as: A duty to make good any loss, damage, or liability incurred by another; or the right of an injured party to claim reimbursement for its loss, damage or liability from a person who has such a duty; or reimbursement or compensation for loss, damage, or liability in tort; especially, the right of a party who is secondarily liable to recover from the party who is primarily liable for reimbursement of expenditures paid to a third party for injuries resulting from a violation of a common-law duty. Blacks Law Dictionary , Seventh Edition. Like most legal terms, the word indemnify comes from a Latin root word. " Indemnis" means to eliminate hurt, damage or harm.

 

Types of Indemnity

 

There are basically three ways that an explosives engineering company may indemnify a contractor for claims or lawsuits that arise out of work done by the blaster. First, the "common law" may impose a duty on the part of your company to indemnify the contractor. Common law indemnity arises regardless of whether or not there is a written indemnity agreement, but this type of indemnity is generally narrow in application. This obligation also varies from state to state. Second, a contractor and explosives engineer may enter into a written indemnity agreement setting out the parameters of a contractual indemnity agreement. Third, the contractor may be added as an additional insured to the explosives engineer's general liability insurance policy. In such a case, the scope of protection offered to the contractor will be governed by the language of the blaster's insurance policy.

 

The scope of indemnification varies with each one of the three situations discussed above. Blasting companies must be very careful in considering the manner in which an indemnity promise is memorialized. Proper consideration of the potential ramifications from blanket agreement is the only way to ensure that the project for which indemnity is given is actually a sound business decision.

 

Common Law Indemnity

 

Many states impose a duty to indemnity another party even in the absence of a written agreement. Generally, any party can seek common law indemnity from another party in situations where the party seeking indemnity has been sued solely based on the actions of the party from whom indemnity is sought. In the blasting context, the contractor would seek indemnity from the blaster in any blasting lawsuit by claiming that the only reason the contractor had been sued was because of the allegedly negligent blasting of the explosives engineer.

 

In most states, common law indemnity is not a concern in blasting cases. Many jurisdictions have held that blasting is what is known as an ultra-hazardous activity, and therefore, a non-delegable duty. Common law indemnity is generally not available in situations involving non-delegable duties. Also, many jurisdictions have replaced common law indemnity with statutes allowing comparative fault or contribution rights. In the absence of some written document memorializing the intent to provide indemnity, common law indemnity is not a problem for the explosives engineer. This is the reason why most companies demand written indemnity agreements.

 

Written Indemnification Agreements

 

Typically a blasting company is required to indemnify a contractor through a written agreement. To be valid, the agreement should be signed by both parties, and clearly outline the parameters of the protection offered by the blasting company. Due care must be given to the language of the indemnity agreement to ensure that the written words do not exceed the intent of the parties.

 

Some indemnity agreements are broad and tend to favor the contractor. In most jurisdictions, these agreements require the blaster to indemnify the contractor for any damages arising out of work performed by the blaster. As discussed in later sections of this report, this indemnity can prove dangerous.

 

As an illustration, assume the contractor is served with a lawsuit, which, among other things, states the claims for alleged damages caused by blasting. The contractor would then turn the lawsuit over to its lawyers, which in turn would contact the blasting company and demand indemnity for any claims related to work performed by the blaster. It is no defense to the indemnity claim that the blaster has not violated any applicable rules and regulations. Similarly, it is no defense that some of the damage claims may also partially arise from the work of others.

 

In contrast, other agreements are much more narrow in scope and limit indemnity to violation of applicable blasting regulations. With such agreements, the blasting company would be able to refuse to provide a defense and indemnity to the contractor if it had followed all applicable rules and regulations related to its conduct. In other words, so long as there were no violations of local, state, or federal rules of regulation related to blasting, the blasting company would not be required to provide any indemnity to the contractor. There would be no increased costs associated with that job (i.e. attorney fees, indemnity pay-outs, or defense costs) so long as the explosives engineer had complied with all applicable rules or regulations.

 

For obvious reasons, carefully drawn, limiting indemnity agreements are preferable for the explosives engineer. Generally speaking, contractors will not agree to indemnity that is overly restrictive, but they are wiling to negotiate a fair agreement that has some limits on indemnification.

 

Additional Insured Agreements

 

One increasingly popular way one can provide indemnity to a third party is by adding that party as an additional insured on its own insurance policy. This is one of the broadest types of indemnity which can be offered because, depending on the language of the blaster's insurance policy regarding additional insureds, the contractor may be provided full scope of coverage offered to the blasting company.

 

Unlike written indemnity agreements, where the scope and nature of the indemnity can be changed through negotiations between the parties, additional insured status is based on protection provided to additional insureds under the general liability policy of the blasting contractor. Adding a party as an additional insured can be the cause of confusion in some indemnity situations. For example, many times contractors insist on indemnity language in the contract related to the particular job, but also insist on being added to the blaster's insurance policy as an additional insured. This could give rise to a situation where the language of the indemnity agreement was very narrow, but the additional insured language contained within the policy is broad. In those instances, counsel for the blaster would have to argue that the written indemnity agreement is the best evidence of what the parties intended. However, the contractor would have a strong argument that the indemnity should extend to the full limits of the policy pursuant to the additional insured language.

 

Never agree to make any company an "additional insured" unless the same is approved in advance by your insurance carrier. In a tight insurance market, a request such as this may be rejected or it may result in additional premium charges. Remember, a company can be liable for breach of contract by agreeing to add an additional insured and then failing to do so.

 

How Does An Indemnification Clause Work?

 

Explosives engineers generally stand behind their work. The law requires no less. If a blaster's actor omission creates damages to persons or property, then the applicable state law will impose civil liability. However, in addition to facing potential liability for damages caused by blasting, an indemnification agreement may obligate the explosives engineer to assume any liability for other parties such as the owner or operator of a mine, quarry, construction or job site.

 

When an explosives company agrees to provide indemnification to the owner of general contractor on a project, it means that the blaster will "stand in the shoes" of the parties being indemnified. Based on the type of indemnification provided, an explosives engineer could be required to defend a general contractor, project owner, mine owner, quarry operator, or combination of parties of things that are out of the blasting engineer's control. When your company is providing indemnification on a job, you must become pro-active to deal with any and all complaints immediately in order to make every attempt to avoid a legal claim that could trigger an indemnity clause.

 

Some examples of problems inherent with quarrying, mining and construction activities, not limited to blasting, include the creation of noise and dust at the job site, as well as other environmental and statutory complications.

 

Whose dust is this?

 

Many indemnity agreements include language that makes the explosives engineer responsible for holding the project owner and general contractor harmless for any and all liability "relating" to the blasting company's work. Blasting creates dust, but so does equipment operation, earth moving, and weather conditions.

 

In lawsuits for nuisance concerning dust creation, should the dust be considered a product of blasting or is it part of the operational function of the quarry/construction site/surface coal mine? With a broad indemnity agreement, which obligates the explosives engineer to indemnify for all claims "relating" to blasting, any dust problems become the blaster's problems. The same can be said for noise. Sure, blasting creates noise, but so does the operation of earth moving equipment (especially if you have a 24 hour operation). If an indemnity clause requires your company to defend against any nuisance claims "relating" to your work, then you could be responsible for just about everything.

 

What about environmental liability?

 

How do you know if environmental problems are related to blasting? Mines, quarries and construction sites must meet strict environmental regulations. Indemnity agreements which require the blasting contractor to indemnity and hold harmless a contractor, mining operation or quarry operation for environmental liability are becoming more common. It is nearly impossible to separate blasting from the overall environmental picture.

Some companies believe that indemnification clauses only require action if the blaster causes damage to property through vibration or air waves. Those days are gone. Indemnity may require the explosives engineer to become involved in just about anything, including environmental issues.

 

Where the blasting contractor is only a peripherally involved component in the overall environmental picture, just imagine the problems that can arise when environmental violations are alleged to be related to blasting. Environmental problems such as carbon monoxide releases, sinkholes, disruption of wetlands, damage to wells and aquifers, landslides, and differential subsidence and settlement problems are just some examples or environmental occurrences that have been alleged to be "related" to blasting.

 

Additional Considerations

 

Potential Litigation
The language of an indemnity provision is of tantamount importance when trying to determine the potential costs of a project. Because of this, it is critical that an explosives engineer pay close attention to all contractual indemnification language. Do not agree to sign "boiler plate" or standard indemnification provisions in a form contract.

 

Due to the present "hard" insurance market, many blasting companies are being asked to bear a larger percentage of potential liability than ever before. Increased deductibles and self-insured retention limits mean that claims, lawsuits and legal fees have a greater effect on the bottom line of a blasting company. Because of this, the potential for liability claims arising out of any particular job must be seriously considered when estimating the bottom line profit and costs of a project.

 

In situations where the blasting company has provided very broad indemnity, or added the contractor as an additional insured to the policy, there will be increased cost, both for defense and indemnity, associated with any lawsuit based on allegations of blasting damage. In some jurisdictions, it is not unusual to see multiple lawsuits arise within one year of a new mining operation opening. In situations like this, the cost associated with indemnity can be extreme. A job, which might otherwise net a handsome profit, could easily have its profit margin cut in half or eliminated entirely by a rash of lawsuits and the resulting indemnity costs.

 

Local Rules and Regulations Related to Blasting

 

Many municipalities now have regulations limiting the acceptable ground vibration to under one-half inch per second. Even in the narrowest of indemnity agreements, the blaster may be required to indemnify the contractor in any lawsuit where there are allegations that local rules and regulations have been violated. Accordingly, attention must be paid to the proposed blasting plan and local rules to ensure that violations do not lead to indemnity claims down the line.

 

Conclusion

 

In today's legal environment, indemnity clauses are a requirement on almost every job. Indemnity claims, just like tort liability claims, should be avoided through careful planning and attention to detail. The best way to deal with the problems associated with providing indemnity is to have trusted lawyers draft narrow indemnity provisions that are fair and reasonable to both sides.

 

A different situation arises with the broad indemnity or when a company has been added as an additional insured. In those situations, the cost of indemnity is ultimately determined by the number of lawsuits filed or claims made.

 

Providing indemnification in a contract is a step that must be scrutinized well in advance of the time for executing the contract. It is an agreement that can tie an explosives engineer to a wide range of problems and situations well beyond those encountered in a typical blasting project.

 

In the final analysis, we must be more careful than ever in the promises we make, the contracts we sign and the work that we perform. Explosives engineers are being called on to guarantee that their work will not create any civil liability; and if it does, then indemnity agreements insure that any liability will fall back entirely on the explosives engineer.


Contributing Author:

Jeffrey E. Friedman
Jeffrey E. Friedman, Shareholder
Email Address jfriedman@friedman-lawyers.com
Direct Line 205-278-7010
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This client alert is provided solely for educational and informational purposes. It is not intended to constitute legal advice. No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers.