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August 27, 2020

NYS Appellate Court Issues Decision on Novel Indemnification Claim in Construction Case

In Lamela v. Verticon, LTD., the NYS Appellate Division, Third Department addressed whether a subcontractor who agreed to a one-way contractual indemnification provision in favor of a general contractor could seek common-law indemnification from the same general contractor for a settlement agreement that the subcontractor argued was entered into in bad faith. The court concluded the subcontractor’s common-law indemnification claim had no merit.

The claim arose from a construction site accident where the plaintiffs, who were employed by the subcontractor, were injured when an unsecured wall collapsed. The subcontractor was to indemnify the general contractor and the property owner for any liability arising from the subcontractor’s work to the fullest extent permitted by law (not for liability arising from the general contractor’s own negligence). The contract didn’t provide for indemnification from the general contractor to the subcontractor. In the lawsuit, the general contractor and the owner sought contractual indemnity against the subcontractor for any liability for the plaintiffs’ injuries.

The trial court found the general contractor and the owner strictly liable for the injuries suffered by the plaintiffs under the NY Labor Law. The parties agreed to a settlement by which the general contractor and the owner paid the plaintiffs approximately $2.2 million, of which $2 million was apportioned to the owner.

The subcontractor wasn’t a party to the settlement and objected that it was improperly designed in bad faith to shift the share of liability arising from the general contractor’s negligence to the non-negligent owner. The subcontractor argued this was done at the direction of the liability insurer for the general contractor and owner as the effect of this apportionment was to require the subcontractor to indemnify the owner for the general contractor’s negligence. The trial court rejected this argument and dismissed the subcontractor’s claims for common-law indemnification.

On appeal, the Third Department affirmed, holding the subcontractor’s common-law indemnity claims failed because indemnification was governed by the contract and only went one way—in favor of the general contractor—and the subcontractor was seeking indemnity for a voluntarily assumed contractual obligation flowing to the owner and general contractor, rather than one imposed vicariously or otherwise by operation of law. As such, the court upheld the dismissal of the subcontractor’s claim for common-law indemnity.

The decision in Lamela is a reminder that indemnification clauses are powerful risk-shifting tools, especially in tort cases involving multiple parties, and NYS courts will enforce them strictly. Parties to construction projects must review these clauses carefully before entering into contracts.

If you have any questions regarding the content of this alert, please contact Sanjeev Devabhakthuni, counsel, at sdevabhakthuni@barclaydamon.com; Brenda Baddam, associate, at bbaddam@barclaydamon.com; or another member of the firm’s Torts & Products Liability Defense or Insurance Coverage & Regulation Practice Areas.

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