Countless reams of paper have been expended over the last few years in Oregon on the issue of indemnity agreements in construction contracts and “additional insured” endorsements. (Note that we choose to save paper by writing electronically instead). After a period of flux and uncertainty in the law, a consensus on the scope of these agreements and endorsements may be forming.
The latest decision on the issue is Hoffman Construction Co. of Oregon v. Travelers Indemnity Ins. Co., 2005 WL 3689487, by Judge Ann Aiken of the U.S. District Court for the District of Oregon. The case was decided late last year, but published by Westlaw only yesterday, after several Oregon lawyers called Thomson West and asked them to get the case from the Court and put it online. Judge Aiken granted summary judgment to Hoffman on the duty to defend.
It is standard in the construction industry for the general contractor to have subcontractors sign an agreement providing indemnity to the general for certain injuries or damages involving the subcontractor. It is also standard for the general to require the sub to name the general as an additional insured on the sub’s liability policy. The scope and validity of these indemnity agreements and additional insured endorsements has been vigorously debated since the Oregon Court of Appeals decided Walsh Construction Co. v. Mutual of Enumclaw, 189 Or.App. 400, 76 P.3d 164 (2003). The case was later affirmed by the Oregon Supreme Court without substantially adding to the reasoning of the Court of Appeals. See 338 Or. 1, 104 P.3d 1146 (2005).
The issue is really two issues.
First, ORS 30.140(1) invalidates agreements in construction contracts that call for a subcontractor to indemnity a general contractor against the general’s own negligence. This type of statute has been sweeping the country in recent years, and is designed to correct what was seen by many as an abuse of superior bargaining power, where a “moral hazard” was created when general contractors didn’t pay the price for their own conduct. But ORS 30.140(2) declares construction agreements, and insurance endorsements, valid to the degree they indemnify and insure against the general’s liability if it arises out of the subcontactor’s fault, not the general’s.
Second, and involving a more nuanced analysis, is when does an injury arise out of the subcontractor’s conduct, and how can you tell, when the allegations of a complaint may not even even mention the subcontractor? This, by the way, is the usual state of affairs in these lawsuits: an employee of the subcontractor is injured, but does not sue the subcontractor because he is barred from doing so by Workers Comp statutes. He then sues the general contractor, usually for some form of vicarious liability, such as the Employer Liability Act. The allegations of the complaint against the general, therefore, don’t say much, if anything, about the acts of the subcontractor.
In Hoffman, an employee of a sub was injured and sued Hoffman. As one would expect, the complaint said as little as possible about the subcontractor, in part because any fault allocated to the sub would probably result in a reduction of any award from Hoffman. Travelers, the sub’s insurer, denied the duty to defend, citing the Walsh cases.
Judge Aiken, relying in part on an analysis in a prior case by U.S. Magistrate Judge Janice Stewart, pointed out that Walsh did not actually address ORS 30.140(2), because the parties in that case agreed that the second part of the statute was not implicated. Judge Aiken said that ORS 30.140(2) does not condition the validity of an additional insured endorsement on whether the sub is actually claimed to be liable for concurrent negligence. Instead, an additional insured endorsement can create a duty to defend merely if the general’s liability arose out of the subcontractor’s operations, and if there was a possibility that the subcontractor’s negligence led to the general’s liability.