The Oregon Supreme Court recently addressed an issue that has been the source of significant uncertainty in construction disputes: the extent to which construction agreements can require subcontractors to indemnify general contractors for damages caused by the negligence of others. This issue keenly interests coverage counsel because of the close connection between these contractual-indemnity provisions and the equally common requirement that subcontractors include the general contractor as an “additional insured” under their liability policies.
As any subcontractor knows, general contractors frequently seek to impose onerous contract terms on their subcontractors. One of the most common provisions requires subcontractors to indemnify general contractors for property damage or bodily injury, even for losses that are caused in whole or in part by the general contractor’s own negligence. Under Oregon law, such provisions are unenforceable. ORS 30.140(1) provides that any provision in a construction contract that requires a person or that person’s insurer to indemnify another person against liability for damage caused in whole or in part by the other person’s own negligence is void. But, in an important limitation, ORS 30.140(2) goes on to say that construction agreements may require a contractor to indemnify another person for losses that are the result of that contractor’s own negligence.
On its face, the statute seems clear enough. But what happens when a construction agreement requires a subcontractor to indemnify the general contractor for the subcontractor’s own negligence and the general contractor’s negligence? Is the entire indemnity clause void, or is the subcontractor still responsible for its own negligence? The Oregon Supreme Court recently addressed this exact issue in Montara Owners Ass’n v. La Noue Development Corp. (June 18, 2015).
In Montara, the Oregon Supreme Court adopted a hybrid approach: indemnity provisions are enforceable only to the extent that they hold subcontractors responsible for losses arising out of the subcontractor’s own negligence, but subcontractors can never be forced to pay for damages caused by the negligence of others. The Montara Court confirmed that ORS 30.140(2) requires trial courts to sever the invalid parts of an indemnity clause — those parts that violate ORS 30.140(1) — but give effect to the remainder of the provision.
In practical terms, the Montara decision likely means that general contractors will continue to attempt to impose broad indemnity obligations on their subcontractors, but that courts will closely scrutinize contractual indemnity clauses to determine the extent to which such clauses are enforceable, and that subcontractors will never be required to indemnify general contractors for losses arising from the general contractor’s own negligence. Like the recent Oregon appellate decisions refusing to enforce certain releases (see post by my colleague, Robert Wilkinson, here), parties and their lawyers must be aware that even the clearest contractual language may not be enforceable as written.