Federal Court Incorporates Contractual Insurance Requirement Into Contractual Indemnification Clause to Achieve Compliance With Fla. Stat., 725.06

FEDERAL COURT INCORPORATES CONTRACTUAL INSURANCE REQUIREMENT INTO CONTRACTUAL INDEMNIFICATION CLAUSE TO ACHIEVE COMPLIANCE WITH FLA. STAT., 725.06

By: Harry Malka, Esq. and Larry Leiby, Esq.

About the Author: Larry Leiby, Esq. was the founder and first chairman of the Florida Bar Construction Law Committee in 1976. He is the author of the Florida Construction Law Manual. He is Board Certified in Construction Law and was on the Construction Law Certification Committee that creates and grades the tests for construction law board certification. He was awarded the lifetime achievement award by the Florida Bar Construction Law Committee and teaches construction law at the Florida International University College of Law. He can be reached at leiby@mkpalaw.com. For more information, please visit www.mkpalaw.com.

Indemnity agreements, or indemnity clauses, are often found in construction contracts. The function of these agreements, generally speaking, is to pass liability from one party to the other. For example, one component of an insurance contract is the insurer's agreement to indemnify the insured for the insured's liabilities that are covered by the insurance agreement. In the construction context, such agreements or clauses may be drafted by a general contractor with the intention of passing on to a subcontractor the liability the general contractor owes to an owner. A couple of the primary issues to consider in reviewing a proposed indemnity clause are (a) who is to indemnify whom (i.e., who is to bear whose liability) and (b) what types of liabilities are contractually being transferred?

As may be anticipated, many disputes over indemnity agreements involve one party attempting to enforce the indemnity obligation and the other party attempting to avoid it. In Lexington Insurance Company v. Morrow Equipment Company, LLC, 2010 WL 1029961 (S.D. Fla. March 16, 2010), Formworks, Inc. ("Lessee") leased a crane from Morrow Equipment Company, LLC ("Lessor"). The crane was placed in service and collapsed during Hurricane Wilma, causing damage to property owned by TW/Beach Residences-Hollywood, LLC ("Owner"). Owner and its insurer, Lexington Insurance Company ("Insurer"), sued Lessor for said damages. Lessor denied liability and sued Lessee for contractual indemnification from the claims asserted by Owner and Insurer. The lease agreement contained an Indemnity Clause, which stated:

Lessee shall defend, indemnify and hold [Lessor] harmless from any and all liability arising out of the possession, uses, operation, maintenance, erection, dismantling, loading, delivery, return of equipment and/or any other action or failure to act by the Lessee, its agents or employees, or for any other reason whatsoever unless caused by [Lessor's] sole fault.

The provision attempts to shift to Lessee the liabilities incurred by Lessor in connection with the possession, use, etc. of the crane, unless the liability was solely Lessor's fault. Note that it also would impose on Lessee the obligation (cost) of defending Lessor in any action to impose liability on Lessor for damages arising out the possession, use, etc., of the crane.

Lessee moved to dismiss Lessor's action for contractual indemnification, arguing that the above-quoted indemnification provision did not comply with Florida Statutes, section 725.06, which applies to construction contracts containing indemnification agreements that would shift liability from one party - for his own acts, omissions, or defaults - to the other party. One requirement for such an indemnification provision to be legal is that it be subject to "a monetary limitation on the extent of indemnification that bears a reasonable commercial relationship to the contract . . . ." That is, the person accepting the risk (the indemnitor) may only accept a reasonable amount of risk and the dollar amount of that risk must be express. Lessee argued that the above-quoted provision contains no such monetary limitation, as can be readily seen.

The trial court noted, however, that section 725.06 did not require the monetary limitation to be within indemnification provision. Rather, section 725.06 simply requires that the contract contains the monetary limitation. The lease agreement also contained an Insurance Clause requiring Lessee to liability insurance with liability limits of not less than $5,000,000 for property damage. The trial court found that the requirement of a monetary limitation was satisfied by the Insurance Clause. Thus, although the parties did not expressly state that Lessee's exposure for Lessor's liability was limited by the monetary terms of the Insurance Clause, the trial court interpreted the agreement that way.