LIMITING LIABILITY EXPOSURE
ByAttorney Jonathan P. Sauer
I . Introduction
I saw a sign on a road traveled recently attributed to some general saying that in life there is no security but only opportunity. The same could be said for this subject of limiting one’s liability or exposure with regard to job site injuries.
From a legal standpoint, there are three key ideas to keep in mind and to give thought to with regard to this subject. First of all, have an insurance agent who has considerable experience and knowledge with regard to the particular needs of contractors. (Keep in mind that irrespective of how desirable it would be to only buy the correct insurance after there has been an incident, insurance companies, being the humorless institutions they are, take a dim view on selling insurance that way!) Then, use that agent prior to entering into contractual relationships above you (with first tier subcontractors, general contractors or owners) or below you with your subcontractors. Today, more and more insurance requirements listed in various bid books are increasingly more precise and specific, often requiring insurance companies to have specific Best ratings to have those insurance company products acceptable and requiring the insurance companies to take certain actions - such as waiving subrogation - that it would be unwise to assume that you will necessarily be able to obtain or on terms acceptable to you.
Secondly, and to the greatest extent possible under the law, make sure that those parties having contracts with your company below you have at least the same requirements for insurance that you are required to have, if not greater. Concomitant with having sufficient insurance, it is important that to the greatest extent possible you have both the broadest indemnification language allowable to you under law and that, to the extent possible, you have incorporated by reference into your subcontracts your indemnity and insurance and contractual obligations to those above you.
Lastly, one should keep in mind some of the key areas of importance involved with direct and vicarious responsibility for job site accidents, predominantly those involving personal injury. From a general contractor standpoint, having the ability to supervise the work as a whole often carries with it an assumed legal obligation to make sure the work site area is free and clear from obvious safety hazards. Keeping in mind that traditional Massachusetts common law has stated that violation of a regulation or statute is evidence of negligence, a subcontractor’s/general contractor’s failure to follow safety requirements, such as those prescribed by OSHA, can involve both direct and vicarious responsibility for the unwary/unfortunate subcontractor or general contractor.
The subject matter for this article is too great to be covered even in a sketchy fashion within the short period of time available to us. Consequently, as to the legal portion of the presentation, I will discuss three issues that are involved with both direct/indirect liability of subcontractors and general contractors on construction projects. These include: workers’ compensation subrogation exposure; contribution among joint tortfeasors’ exposure; and, the question of indemnity and appropriate indemnity language. These specific subjects are chosen as they are leading factors involving vicarious liability in the construction trade.
II. Workers’ compensation subrogation.
Massachusetts workers’ compensation statute specifically contemplates the situation where either an injured worker and/or the injured worker’s insurer can pursue so-called “third party rights”. That statutory section is contained within Chapter 152, Section 15 of the General Laws, pertinent portions of which are as follows:
§ 15. Legal Liability for Injuries; Election, etc.
Typically, under this type of procedure, the injured worker will collect from his employer’s worker’s
Thus, what happens typically is that the employee will accept comp which is, after all, ordinarily the only compensation available against one’s employer under ordinary circumstances. Then, the injured worker or the injured worker’s insurance company will evaluate so-called “third-party” actions. For example, a subcontractor’s employee receives a workers’ compensation accident at a construction site. To what extent did the activities of another subcontractor contribute to those injuries? Also, to what extent is the injury contributed to an overall lack of coordination of the job as a whole by the general contractor or due to the lack of proper coordination among the trades which even in a small way contributed to the injury. As will be discussed, infra, under the contribution among joint tortfeasors statute, typically, only a small percentage of contributing negligence - historically, as little as one percent - is enough to have a defendant pay essentially an equal share of any judgment. This is because Massachusetts does not have so-called ‘comparative’ comparative negligence but, instead, has a statute which posits potentially an equal amount of liability on any defendant providing that the liability of the plaintiff does not exceed fifty-one percent of the total liability for the causation of the accident.
One must keep in mind that traditionally in Massachusetts - by fairly recent figures - ninety-two to ninety-six percent of all civil cases settle before a full adjudication (decision by a judge or by a jury). Having worked for an insurance firm for a number of years, I did not see that many cases actually go to trial. Indeed, by the author’s own subjective experience, many of those cases that did go to trial had to do with coverage issues rather than with liability issues. In other words, the insurance company was contesting liability to an insured under a certain kind of insurance policy. These types of cases would involve, as an example, an issue as to what extent an insurance company might be responsible for an industrial hazardous waste spill under a policy with pollution exclusions.
Sometimes, the so-called “third party” actions involve actual product liability cases. An employee is injured at a job site while operating a certain piece of equipment. It takes very little under product liability law to find a product to be defective. For example, does the product (or the literature surrounding the product) sufficiently advise the person handling the product - such as a power tool - as to the tool’s operating characteristics and inherent dangers? So-called “ failure to warn” cases have traditionally been endemic in the civil justice system in the last ten to twenty years as a basis for finding third party liability. Thus, a failure to warn might mean McDonalds’ Corporation not advising its customers that its coffee is ten to twenty degrees hotter than its competitors’ coffee. It might mean in an above ground pool case that the pool did not have warning labels on the liner - or not enough of them or warnings in the wrong color - not to dive into the pool.
By statute, the employee has the first seven months to decide whether or not to bring an action from the date of injury after which time the insurer can also bring an action. Typically, an insurer who has paid workers’ compensation benefits advises the plaintiff’s attorney bringing the third party action as to the workers’ compensation lien, for the workers’ compensation carrier has to be reimbursed for the amount of workers’ compensation benefits paid out of the gross recovery. In construction cases out of this author’s own experience - particularly with death or extremely serious injuries - it is not uncommon for there to be ten or more defendants, depending upon the complexity of the project in question. Indeed, an injured worker will often sue the owner of the project in question on some kind of theory that the owner maintained its property in an unsafe condition. The law generally disfavors summary judgment action in negligence cases to “weed out” tenuous claims. Sometimes, through the unintentional or intentional obfuscation of the legal process - particularly involving indemnification claims - the interrelationship among all of the defendants become more complicated than the relationship between any particular plaintiff and any particular defendant. Although general civil practice does not allow a jury to be informed that any particular defendant has insurance, it is widely believed that all juries generally assume that any particular defendant does have insurance. (Woe to the defendant not having insurance on the type of claim that a jury would automatically assume that it has/should have insurance for!) Thus, giving some money to an obviously injured plaintiff does not really come out of the defendant’s pocket - or so the thinking goes. Unfortunately, people sometimes lose sight of the fact that insurance really is a pooling of shared risk and that ultimately no insurance company is going to take any adverse loss without attempting to see somewhere down the road that the rates are adjusted to reflect that particular loss experience.
III. Contribution among joint tortfeasors.
Massachusetts has a certain law as contained in Chapter 231 B of the General Laws known as the Contribution Among Joint Tortfeasors.
As that statute provides in Section 1(A): “... where two or more persons become jointly liable in tort with the same injury to person or property, there shall be a right of contribution among them even though judgment has not been recovered against all or any of them.”
Thus, to enforce the right of contribution one party being sued in negligence will frequently concurrently sue other parties potentially also contributing to the plaintiff’s claimed harm. That right can be asserted in an action brought against the original defendants. That could mean that the original defendants sue each other: so-called ‘crossclaims’. Or, it might mean that the defendants bring an action for contribution against unnamed parties, thus either adding defendants to the lawsuit or adding third party defendants to the lawsuit. However, if a judgment is entered against one negligent party, it can bring a separate action to enforce contribution within one year after the judgment has become final by lapse of time for appeal or after appellate review.
This is how contribution works. Assume that a jury apportioned negligence as follows: as to a specific personal injury the plaintiff was ten percent liable in causing his own harm. Defendant A was twenty percent liable. Defendant B was seventy percent liable for the injury. The total damages awarded were $100,000.
The plaintiff’s recovery is diminished by the percentage of its negligence. This is because of the law of comparative negligence which diminishes a plaintiff’s recovery by his/her own percentage of negligence up to fifty percent. (Negligence over fifty percent precludes recovery.) So, ten thousand dollars of damages are not recoverable and the plaintiff gets an award for $90,000.00. Even though the two defendants have different degrees of culpability - one of them twenty percent contributing to the damage and the other seventy percent contributing to the damage - either defendant has a right of contribution against the other for half of the amount of the damages recoverable from the defendants because there is no comparative contribution in Massachusetts.
This is because under Chapter 231 B, Section 2, the statute provides that: “In determining the pro rata share of tortfeasors in the entire liability (a) the relative degrees of fault shall not be considered; (b) if equity requires, the collective liability of some as a group shall constitute a single share; and (c) principles of equity applicable to contribution generally shall apply.
In reality, section (a) seems to the most operative part of this statutory section.
The basic point of law is that the contribution by a joint tortfeasor is apportioned on a pro rata basis and not on the basis of the relative degree of fault of the defendants for the plaintiff’s injuries. Zeller v. Cantu, 395 Mass. 76 (1985). As stated in the same case by the Supreme Judicial Court, it is the prerogative of the legislature, and not that of the courts, to change the method of apportioning liability of joint tortfeasors.
Why does the law read this way? Without knowing the specific legislative history of the statute, one must keep in mind that Massachusetts is a very liberal, pro-consumer state. Although the author learned principles of negligence in law school more than twenty years ago, it almost seems in today’s day and age that an injured party is entitled to compensation irrespective of any negligence on the part of the defendant. Again, the idea is that “the insurance company” should pay. This is a short sighted view taking the problem as a whole but seems to work reasonably well as to any specific injury and, every defendant engaged in business - certainly contractors involved in inherently dangerous work - are presumed to be properly insured. I am sure that the attendees’ experience matches the author’s own: all too often, there is no insurance to respond to the injury in question, or insufficient insurance or the wrong kind of insurance.
In the discussion of contribution, one must keep in mind the contribution will always be involved in situations where one potentially (or actually) negligent party is seeking contribution from another potentially negligent party. The basis of contribution are obligations created by negligence. A negligent act is a civil wrong involving various elements, including: (1) a duty; (2) a breach of that duty; (3) a proximate or causal relationship between the breach of the duty and the damage sustained; and, (4) damage.
Indemnity obligations are merely contractual obligations. Therefore, before a party can seek either implied (inferred) indemnity or express (provided for in a writing) indemnity, one is seeking to enforce a contractual right, a contractual cause of action. Thus, while the concepts of contribution and indemnity may both exist in terms of shifting the risk of a damage event, the basis of contribution is negligence while the basis of indemnity are claims founded on a contract. For, the elements of a contractual action are similar to those of a negligence action except for the element of proximate cause which pertains to negligence actions alone.
IV. Indemnity relationships and provisions.
The only statutory provision that this author is aware of with regard to indemnity obligations in Massachusetts applies to the indemnity relationship between the general contractor and the subcontractor as contained within Chapter 149, Section 29C. That provision provides, in pertinent part, as follows:
§. Indemnification by Subcontractor Provision Void.
Any provision for or in connection with a contract for construction, reconstruction, installation, alteration, remodeling, repair, demolition or maintenance work, including without limitation, excavation, backfilling or grading, on any building or structure, whether underground or above ground, or on any real property, including without limitation any road, bridge, tunnel, sewer, water or other utility line, which requires a subcontractor to indemnify any party for injury to persons or damage to property not caused by the subcontractor or its employees, agents or subcontractors, shall be void.
Under this provision, as interpreted by Massachusetts courts, indemnity provisions in construction contracts where a subcontractor is obligated by contract to indemnify any party for injury which is not caused by the subcontractor, or its employees, agents or subcontractors is void. Callahan v. A.J. Wellesley Equip. Corp., 36 Mass. App. 608 (1994). The same case, however, held that an indemnity clause in a construction contract which limited the subcontractor’s obligation to indemnify the general contractor for injury resulting from negligence or acts of omission of the subcontractor or its agents “to the fullest extent permitted by law” was not void.
What happens, then, when a provision giving broader indemnity is inserted in the contract? The basic answer to that is the same answer that would apply to any other provision in the contract which attempts to change a provision required by law in a matter inconsistent with public policy. (“Public policy” refers to those issues which are non-waivable in a contract, such as the prevailing wages requirement of a public contract or such as a provision attempting to void or prohibit mechanics’ liens.) That is to say, that so much of the provision as might be enforceable is enforceable and that portion of the provision which is not, is not, assuming that there is a sufficient amount of remaining valid provision left after the pruning has been done.. That explains one of the ‘catch-all’ provisions often found in construction contracts to the effect that the various provisions of the contract are seen as several provisions and that the fact that some provisions may not be enforceable because of being violative of some public policy does not affect the remainder of the provisions, which will stand in full force and effect.
Certainly, this indemnity provision as provided by statute cannot be varied and then be enforceable in terms of contractual indemnification clauses between a general contractor and a subcontractor. However, this writer is unaware of any other provisions in the law which limit the right of indemnity in relationships other than the relationship between the general contractor and the subcontractor. As to all of these other indemnity obligations, it would appear that the enforceability of the provisions contained in contracts is less significant than the creativity of the party drafting them and/or the willingness of the party owing the indemnity obligation to sign the contract. Certainly, indemnity obligations imposed from levels higher on the food chain - owner obligations as required of the general, for example - can be difficult to limit.
V. Conclusion and thoughts for limiting liability exposure.
This short paper does not begin to even suggest many of the other factors involved with issues as to how exposure can be created and, for that matter, how exposure can be limited. The author’s twenty-plus years of experience suggest the following comments for making one a smaller target, which, realistically, is probably the most achievable goal.
Initially, as to the actual drafting of indemnity provisions in a contract, as between a lawyer and an insurance agent, the insurance agent will probably be more helpful to a contractor in minimizing ultimate exposure. Exposure - like death, taxes, divorce and disease - is a fact of life that will never ultimately be able to be eliminated. Because of an absence of non-comparative comparative negligence in Massachusetts law, the facts are usually there to find that a general contractor will almost always be at least one percent negligent in any job site accident for legal, if not practical purposes. The fact is that a workers’ compensation carrier is always looking for potential third parties from whom to recoup some of its payments. And because there are particular rules which limit the ability of the general contractor to seek indemnity from the subcontractor, there can be all kinds of potential exposure which a general may be forced contractually to assume towards an owner which may not be capable of being passed on fully to lower tiers.
Suggestions? Like Frank Sinatra on the subject of ‘regrets’, I have a few.
As indicated earlier in this paper, it is very important to have a good insurance agent and to spend the time with the insurance agent prior to engaging in construction activities to make sure that one has the best level of insurance that one can reasonably afford. While it may seem almost too basic to state, some people and companies do not realize that they cannot purchase insurance after the event of an incident to cover that incident. Thus, insurance has to be in place before construction activity takes place to have any effect.
From the author’s professional experience, often having umbrella coverage can be helpful in providing either additional indemnity dollars or an additional party who may provide a defense in the event that there is some failure as to the primary coverage. This is particularly so for umbrella carriers who have so-called “first dollar” or “drop-down” defense.
Keeping in mind that violations of regulations and statutes are evidence of negligence, being reasonably aware of the various regulations pertaining to your particular construction activity and then effectuating programs to comply with the same can be very helpful in making a smaller target. For example, this writer has seen many circumstances where a plaintiff will allege that a particular OSHA standard or regulation was not complied with by a contractor. If the standard or regulation was not complied with, traditionally in Massachusetts that is “some evidence” of negligence. In other words, the plaintiff has one leg over the jury bar! Knowing what the regulations are which are applicable to your construction activity - often an extremely tall order - and then devising safety programs or other programs to effectuate these standards or regulations or to at least appear intended to effectuate the same - even a taller order - can go a long way towards making one a smaller target.
From a general contractor’s standpoint, it is important to recognize that the general contractor is legally and contractually liable for all construction activity engaged in at the site by the general contractor and its subcontractors. Running a tight ship in terms of insisting upon the best possible construction practices (safety practices) cannot be over-emphasized.
Some suggestions which might apply to good collection techniques also apply here. One would be to have good daily reports which clearly identify what goes on at the job, including any personal injuries, and who is on the site on any given day. (For collection purposes, any items of delay or of extra work or labor should be separately detailed; some contractors with sufficiently sophisticated job costing programs assign a different job cost control number to a delay.) Taking photographs of the construction site on a regular basis is very helpful. In construction litigation, a photograph is worth more than one thousand words, particularly where the events in construction are poorly understood by fact finders and tend to be dry and boring.
Like the unhappy events enumerated above, incidents are going to occur. If and when an incident occurs, a quietly pro-active approach may ultimately better position a contractor or subcontractor for ultimate litigation. For example, taking pictures of the construction accident scene from all angles on the day of the incident is very helpful. Often, this might involve taking video pictures as well. Obtaining statements from the injured party(ies) and from all witnesses in writing and signed by the witness (or injured party), which signatures are then witnessed by another person, cannot be over-emphasized. Stories change! Oftentimes, the closest that one is to the event produces the most honest observations as to how the event actually occurred. When people are in pain, shock or fearful, it seems that there is a human tendency to tell the truth rather than to make up a story. This particularly becomes a problem the greater the time period between the event and the recording of the event, where the injured party gets used to the idea of being injured and then begins to calculate how compensation for the injury (or a windfall) can be obtained. Again, workers’ compensation is a no-fault system which does not require a degree of fault to establish entitlement to payment. All other potentially responsible parties have to be at least in some manner negligent before liability attaches. Therefore, these ultimate contributing parties (and their assumed-to-be deep-pocketed insurance companies!) have to have done something wrong, whether real or imagined.
These various rules and ideas take a while to acquire and understand and the longer the time period between injury and documentation, the greater the chance there is going to be that the story is going to be different.
A war story - but not one of mine, one of an insurance agent friend of mine. A worker showed up at a job out of the union hall on his first day and said he was there to report to a specific trade. He was told to climb a set of stairs and to see a certain individual - let’s say, Joe. The worker climbed the stairs and found Joe and said that he was there to report an industrial accident. Joe was surprised and said: ‘How could you be injured when you’ve just shown up on the job?’ The worker said that in climbing the stairs and carrying his tool chest, he injured a leg.
The next week, however, the injury became an injury to his back and a workers’ compensation carrier ultimately paid $300,000.00 to get off of that particular risk. These types of stories are particularly rampant in workers’ compensation law, because of the fact that no fault is required to be found and because of the fact that the employer/insurance company seems almost presumed to be liable in almost any circumstance. So-called “soft tissue injuries” are very hard to disprove.
Other than properly documenting a potential event of loss, keeping track of the injured worker for the purposes of determining behavior inconsistent with an injury can also be fruitful. Often, workers’ compensation carriers and liability insurers engage private investigators to attempt to film so-called injured parties performing acts inconsistent with claimed injuries.
Another war story! The author had a case where a sometime-model received a nerve-stretching injury in her leg in a collision with a truck which was occasioned because of the fact that she was not wearing a safety belt. This is an injury which is not particularly extensive from a medical standpoint but because of the emotional and mental state of this particular woman, she attempted to portray herself (to herself?) and to the world as a semi-invalid. Having a very aggressive and fairly decent plaintiff’s attorney, demands were made upon the insurance company for the trucking company for several hundred thousand dollars to settle the case or to suffer the possibility of a triple damage action under Chapter 93A. The insurance company had an investigator follow her around and took a short movie - lasting only three or four seconds - of this woman running up a slight hill outside of a store after leaving her car. She looked like a gazelle! That case’s damage value decreased from a claimed several hundred thousand dollars to about thirty five thousand dollars to settle the case because of that short piece of film.
Another war story! A man claimed to have extensive neck injuries from an incident. A private investigator photographed him attempting to start a rotary mower with a pull cord which would not start. He must have pulled the cord for five minutes. Perhaps poignantly - certainly, with a degree of unintended humor - the private investigator took the video from his car with the radio playing the song from The Who which went “Who are you?”.
When you are engaged in a loss situation, not necessarily losing all contact with what your insurance company is doing should be a way to keep the insurance company from spending too much of its money, which could have some impact upon your ultimate rates, particularly for worker’s compensation purposes. The author is aware of one general contractor who reviews his open workers’ compensation files with a higher degree of scrutiny than would seem imaginable, realizing, for the effort, a great return in keeping workers’ compensation rates low.
Here is another thing to think about with regard to claims. If your insurance company declines coverage or defends under a so-called “reservation of rights”, here is some advice. The advice is: just because the insurance company says that you do not have coverage does not mean that, in fact, you do not have coverage. Insurance companies spend a great deal of time and effort (and money) in both attempting to write their insurance in the most narrow possible way and in attempting to get the most possible mileage out of all the numerous exceptions found in various coverages. An insured’s unwillingness to accept either a declination of coverage or a defense under a reservation of rights - where the insurance company defends the insured at its cost but does not agree to necessarily make a payment of any indemnity (loss) dollars necessary to settle the claim - are things which should not just be accepted because the letters asserting these claims seem so iron-clad. Insurance companies are generally regulated by the insurance commissioners of particular states, including Massachusetts. Also, an insurance company’s position in a close coverage question might be changed by the degree of resistance the insured mounts to the claimed reduced coverage and, for that matter, how much premium a particular insured pays.
Generally speaking, coverage questions are litigated in so-called declaratory judgments which may be relatively simple legal proceedings as compared with legal proceedings to establish, for example, negligence among several potential defendants. Sometimes, the declaratory judgment action to establish coverage might very well be ongoing during the same time that a company might be defending an insured under a reservation of rights on the very fact situation involved with the declaratory judgment.
Another war story. (What else would one expect from a warrior!!) A mechanical contractor’s comprehensive general liability insurance was not renewed unbeknownst to the mechanical contractor because of the rapidly declining state of health of its insurance agent. An electrocution took place. The primary insurance carrier declined coverage because of the fact that there was no primary insurance in effect at the time of the incident. The umbrella carrier, whose coverage overlapped the incident by a single day, declined coverage for a number of technical reasons. The author threatened various litigation against the carrier and asked for a meeting with the vice president of the insurance company at its offices in Chicago. At that meeting, the vice president extended coverage for the incident previously denied in writing from the claims representative and the insurance umbrella carrier then provided a vigorous defense for the case (costing at least $100,000.00) along with a sufficient contribution to settle the insured’s liability. The lesson learned from this war story is that the race does not necessarily go the slow and persistent or to the swift but to those who make the most noise! The most effective noise!
Keep in mind, also, that claims involving sexual harassment and employee discrimination are literally exploding in exponential numbers. The Mass Commission Against Discrimination asserts jurisdiction over employers having more than six employees - they have periodically attempted to lower that number - and the MCAD has some rather novel ideas about how little purportedly negative conduct is required before giving away astonishing amounts of your money. There have been several cases in recent years where the MCAD has issued awards for six figures - as much as two hundred and fifty thousand dollars - for so-called ‘emotional distress’. Although MCAD rulings are appealable throughout the court system, one statistic this writer has seen was that ninety percent of its findings are upheld by the court system, as the court system bows to MCAD’s legislatively designated and described expertise. Today, there are insurance products available to help businesses with this relatively new kind of exposure.
In conclusion, limiting exposure for potential personal injury is an unreachable goal in its totality. Accepting the fact that there will be personal injuries or other events which your company might be held liable for in a court of law, however scary and unhappy such a realization is, is the first step necessary before taking other steps which can tend to make your company a smaller target for the claims of third parties.
This article is not intended to be specific legal advice and should not be taken as such. Rather, it is intended for general educational purposes only. Questions of your rights and obligations under the law are best addressed to legal professionals. Sauer & Associates sees as part of its mission the providing information and education to the contractors it daily serves, which will hopefully assist them in the conduct of their business. Articles are available on a number of construction subjects (e.g. rights under payment bonds, how to present payment bond claims, the mechanics’ lien law, how to file a demand for direct payment) on this website.
Copyright Jonathan Sauer 1999
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