S.B. 07-087 AND THE ENFORCEABILITY OF INDEMNIFICATION PROVISIONS IN COLORADO CONSTRUCTION CONTRACTS

• Jurisdiction: Colorado

S.B. 07-087 and the Enforceability of Indemnification Provisions in Colorado Construction Contracts

by Brian G. Eberle

In April 2007, Governor Bill Ritter signed into law Senate Bill 087 (S.B. 07-087), which significantly affects the enforceability of indemnification provisions in Colorado construction contracts.¹ As of July 1, 2007, subject to certain qualifications and exceptions discussed below, S.B. 07-087 eliminated all broad form and most, if not all, intermediate form indemnity provisions in Colorado construction contracts by prohibiting businesses and individuals from transferring responsibility for their own negligence to another party.²

This article begins by discussing the background of indemnity in Colorado construction contracts before S.B. 07-087. It then addresses the purpose and scope of the statute. The article concludes by considering some practical implications of this important legislation for attorneys and their clients involved with construction projects in Colorado.

Pre-S.B. 07-087 Forms of Indemnity

Before S.B. 07-087, the principal statutory constraints on indemnity provisions in Colorado construction contracts were set forth in CRS § 13-50.5-102(8). Enacted in 1988, CRS § 13-50.5-102(8) renders unenforceable any provisions in public construction contracts intended to indemnify public entities from their own negligence. However, the statute affects only "indemnification of public entities for the negligent acts of the public entity."³ The statute therefore does not limit the scope of indemnification agreements in construction contracts between private parties.⁴

Generally unrestrained by legislation, owners, architects, contractors, and subcontractors have been free to negotiate the terms of indemnity provisions in Colorado construction contracts.⁵ At one extreme-known as "broad form" indemnity-Party A (the indemnitor) would agree to be liable for all damages incurred by Party B (the indemnitee), even if those damages were caused solely by Party B's own negligence. At the other end of the spectrum-known as "narrow form" indemnity-Party A would agree to be liable only for Party B's damages actually caused by Party A. Various "intermediate" or "medium" forms of indemnity also are sometimes negotiated for use in Colorado construction contracts. For example, Party A would agree to be liable for all of Party B's damages, even if they were caused at least in part (but not in whole) by Party B's negligence.⁶

Legislative Declaration Supporting S.B. 07-087

The Colorado General Assembly passed tort reform legislation in 1986. This legislation, among other things, abolished joint and several liability except in limited circumstances.⁷ In its place, the legislature implemented a system of comparative negligence, which limited a party's liability to an amount no greater than its proportionate share of negligence or fault.⁸ The legislature's goal was to improve the affordability and availability of insurance by making liability risks more predictable.⁹

Recently, the Colorado legislature has considered whether construction businesses were using broad and intermediate form indemnity provisions to shift financial responsibility for their negligence to others, thereby circumventing the intent of tort reform.¹⁰ As a result, general contractors in particular argued that it had become more difficult to obtain liability insurance.¹¹ In enacting S.B. 07-087, the Colorado legislature concluded that:

Reproduced by permission. ©2007 Colorado Bar Association, 36 The Colorado Lawyer 59 (Sept. 2007). All rights reserved.

[i]f all businesses, large and small, are responsible for their own actions, then construction companies will be able to obtain adequate insurance, the quality of construction will be improved, and workplace safety will be enhanced.¹²

The legislature therefore declared its intent to prevent any party to a construction agreement from transferring responsibility for its "own" negligence to another party.¹³

Scope and General Provisions of S.B. 07-087

S.B. 07-087 amends CRS § 13-21-111.5 by adding a new subsection (6).¹⁴ Effective for contracts entered into on and after July 1, 2007, the new statute generally voids provisions in construction agreements that require a party to indemnify, insure, or defend in litigation another person against liability for damage caused by the negligence or fault of the indemnitee or any third party under the indemnitee's control or supervision.¹⁵

Subject to certain exceptions discussed below, the "construction agreement[s]" to which S.B. 07-087 applies are broadly defined to cover:

a contract, subcontract, or agreement for materials or labor for the construction, alteration, renovation, repair, maintenance, design, planning, supervision, inspection, testing, or observation of any buildings, building site, structure, highway, . . . or other work dealing with construction, or for any moving, demolition, or excavation connected with such construction.¹⁶

To prevent parties from evading S.B. 07-087 through contractual choice of law provisions specifying application of another state's law, the statute mandates that Colorado law applies "to every construction agreement affecting improvements to real property within the state of Colorado."¹⁷ Significantly, this section of S.B. 07-087 is not limited to indemnification clauses and appears to require application of Colorado law to all terms of construction agreements affecting improvements to Colorado real property.

Qualifications to S.B. 07-087

Despite the seemingly broad language of CRS § 13-21-111.5(6)(b), S.B. 07-087 contains some important qualifications. The statute allows provisions requiring a negligent party to indemnify or insure other parties (including reimbursement for attorney fees and costs) to the extent of the "degree or percentage of fault attributable to the indemnitor or the indemnitor's agents, representatives, subcontractors, or suppliers."¹⁸ For example, S.B. 07-087 permits a contractor to indemnify an owner even when the contractor is not itself at fault, as long as the contractor's agents, representatives, subcontractors, or suppliers are at fault.¹⁹ Thus, the scope of a contractor's "own" negligence for which it can be held responsible under S.B. 07-087 is broader than the contractor's individual conduct.

S.B. 07-087 contains several additional qualifications set forth in CRS § 13-21-111.5(6)(d). The statute permits contract clauses requiring an indemnitor to purchase insurance covering its own acts and/or naming the indemnitee as an additional insured on the indemnitor's insurance policy covering the indemnitor's liability for its own acts.²⁰ S.B. 07-087 also does not apply to builder's risk insurance.²¹

Finally, S.B. 07-087 does not abrogate or affect (1) the doctrine of respondeat superior, vicarious liability, or other nondelegable duties at common law;²² or (2) the exclusive remedy available under the workers' compensation laws or the immunity provided to general contractors and owners under those laws.²³

Exceptions to S.B. 07-087

Significantly, S.B. 07-087 excludes the following from the definition of "construction agreement[s]" covered by the statute:

• property owned or operated by a railroad²⁴
• various types of water, sanitation, and sewage disposal districts²⁵
• lease or rental agreements between a landlord and tenant.²⁶

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