The time has come to limit risk-transfer clauses

But ASA needs industry support

By Donald Croysdale
Executive Director
ASA of Greater Milwaukee

Donald Croysdale Executive Director ASA of Greater Milwaukee

For the past decade, the American Subcontractors Association, both nationally and here in Wisconsin, has sought industry support for limiting risk-transfer clauses in construction contracts.

Those clauses include indemnification, hold-harmless clauses, waivers of subrogation and additional-insured endorsements.

Escalating insurance costs and the potential loss of coverage have brought the issue of unfair risk transfers to a head. It has never been clearer that the time has come to agree upon limits to risk transfers.

Nationally, ASA launched the Subcontractors' Transfer of Risk Action Plan and has successfully lead educational efforts from coast to coast. In Wisconsin, a carefully drafted bill (AB 606) was introduced and brought to a public hearing.

Fifteen industry groups have now joined together to support limits to risk-transfer clauses. Most recently, the American Council of Engineering Companies of Wisconsin endorsed this proposed bill.

The ACEC WI board indicated that the bill was "well written and beneficial to the entire design community." Further, ACEC WI expressed they "are willing to actively support future legislative activity, provided language changes do not change the legislation's intent."

ASA of Greater Milwaukee gratefully accepts this support from the design community.

Joining forces

An Engineering News-Record poll reported that 89 percent of survey respondents felt that "contract documents unfairly shift risks on construction projects." The time has come for all within our industry to come together.

Wisconsin can again take a leadership role in raising the standards by which we conduct business. By limiting risk-transfer clauses -- but not eliminating the clauses altogether -- all members of the construction team can benefit.

We believe the rationale for prime contractors to support limits on indemnification and hold-harmless clauses is as compelling as it is for subcontractors. All members of the construction team will benefit from restoring limits to these clauses.

Here are specific reasons why prime contractors and general contractors, together with subcontractors and design professionals, should support the proposed bill in the January 2003 session:

• Prime contractors, or general contractors, would no longer be required to accept transfer of liability from owners for owners' negligence.
  
  
• The prime contractor, or general contractor, would no longer be required to accept transfer of liability from the architect or the architect's consultants for their negligence.
  
  
• The likelihood of litigation would be reduced because all entities would be insured for their own negligence. Litigation frequently arises when one entity is forced to pay for a claim when it was not the cause.
  
  
• Unfair competition from out-of-state contractors who promise to indemnify and hold harmless the owner -- by passing the liability onto the subcontractors even when the owner is negligent -- would be reduced.
  
  
• The risk that one or more subcontractors will refuse to sign an unlimited clause -- thereby leaving a gap in the risk transfer that could revert back to the general -- would be reduced or eliminated. Also reduced or eliminated would be the risk that a subcontractor cannot or will not obtain insurance to cover the owner's, general contractor's or other's negligence. Without such insurance, a failed subcontractor could leave the general contractor with the risk of full liability.
  
  
• Delays, legal wrangling and costs of arguing about unlimited clauses and who pays for the related insurance costs would be substantially reduced.
  
  
• Project safety should be improved -- and costs lowered -- by more directly linking the entity that is negligent with the cost of being negligent. Overall liability risks on projects would be reduced -- and by extension, costs lowered -- by more easily linking insurance coverage to the entity that negligently created the claim.
  
  
• Chances of adverse judicial rulings in interpreting clauses -- where slight wording differences can alter substantially the meaning of the clause itself -- would be reduced.
  
  
• Relationships with subcontractors would be enhanced by not requiring the subcontractor, or its insurer, to pay for a claim caused by another's negligence. Fair indemnification clauses are one of the best ways to motivate a subcontractor to be a team player.
  
  
• Restoring statutory language assuring fair allocation of liability risk would bring our state's statutes back in line with the most frequently used, neutral forms provided by the American Institute of Architects. Forty-one of the 50 states provide statutory protections against unfair indemnification clauses. Wisconsin is one of the nine states that currently do not.

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