The Minnesota Supreme Court recently issued its highly anticipated decision in the Bolduc case, reversing the Court of Appeals and holding that a second-tier subcontractor (Bolduc) was not liable to the subcontractor (ECI) for damages under the subcontract’s indemnification provision, where a jury found that Bolduc was not negligent. The Supreme Court also held that the insurer, Travelers, was not liable to ECI under the additional insured provision of the insurance policy, because ECI’s coverage, as an additional insured on Bolduc’s general liability policy, was expressly tied to Bolduc’s liability.

The case involved Minnesota’s anti-indemnity statute, which bars enforcement of indemnification agreements in building and construction contracts if the damage is attributable the wrongful act of the indemnitee, and the statutory exception to that rule, which permits indemnification for an indemnitee’s own negligence only where the promisor agrees to provide insurance to cover the risk. Such “broad-form indemnity” provisions are common in the construction industry, but Minnesota law requires a clear and unequivocal expression of intent to create a broad-form indemnity obligation.

The Court of Appeals had held that the subcontract’s requirement for indemnification for all claims and damages “caused or alleged to have been caused by any act or omission” of Bolduc required Bolduc to indemnify ECI regardless of fault. The Court of Appeals also found Travelers liable to ECI, because the insurance policy did not limit ECI’s coverage for damages to those caused by the negligent acts or omissions of Bolduc.

The Court of Appeals decision created uncertainty regarding the contractual language needed to create a broad-form indemnity obligation. The Supreme Court’s decision, while limited to the facts of the Bolduc case, is considered a victory for subcontractors and insurers.

Legal Background

Minnesota law provides that an “indemnification agreement contained in…a building and construction contract is unenforceable. . . except to the extent that. . . the . . damage is attributable to the negligent or otherwise wrongful act or omission . . . of the promisor. . . .” Minn. Stat. § 337.02 (2012). The statutory exception to this rule permits indemnification for the indemnitee’s own negligence when the promisor agrees to provide insurance to cover the risk. Minn. Stat. § 337.05, subd. 1. Minnesota case law has made it clear that these types of indemnification agreements are not favored, and will not be enforced unless the intent to indemnify for the indemnitee’s own negligence is expressed in clear and unequivocal terms in the indemnification agreement. See, e.g., Nat’l Hydro Sys., a div. of McNish Corp v. M.A. Mortenson Co., 529 N.W.2d 690, 694 (Minn. 1995).

The Facts of the Bolduc Case

Plaintiff ECI was a first-tier subcontractor who subcontracted with Defendant Bolduc for work on a sewer pipeline project. Bolduc contracted to build “cofferdams,” a shoring system created by driving metal sheeting into the ground to act as walls for the pit during excavation and construction. Bolduc was to drive the sheeting into the ground “per ECI location.” The subcontract required Bolduc to indemnify ECI from all claims and damages “caused or alleged to have been caused by any act or omission of [Bolduc]” or anyone that performed work in prosecution of the subcontract.

Bolduc was also required to purchase commercial general liability (CGL) insurance to cover the indemnity obligation, and was required to include ECI as an additional insured. Travelers was the insurer on the CGL policy. The endorsement provided coverage to ECI as an additional insured:

a) Only with respect to liability for . . . ‘property damage’. . . ; and

b) If, and only to the extent that, the injury or damage is caused by acts or omissions of [Bolduc] or [its] subcontractor in the performance of ‘[Bolduc’s] work’. . .[ECI] does not qualify as an additional insured with respect to the independent acts or omissions of [ECI].”

In December, 2007, ECI discovered damage to the underground pipeline, caused by one of Bolduc’s metal sheets which was driven through the edge of the pipe. ECI allegedly spent $235,339 to repair the pipe, and refused to pay Bolduc the remaining amount due under the subcontract. ECI submitted a claim to Travelers seeking reimbursement of the pipe repair expenses as an additional insured under the endorsement in Bolduc’s policy. Travelers refused, asserting that Bolduc was not the cause of the damage.

The Lawsuit

ECI brought suit against Bolduc and Travelers, asserting claims of negligence and breach of contract against Bolduc, and breach of contract against Travelers. The parties stipulated to bifurcation of the negligence and breach of contract claims. The issues to tried to the jury were “(a) ECI’s claim that Bolduc’s negligence resulted in damage to the pipe. . ., (b) Bolduc’s defense that it was ECI’s negligence that resulted in damage to the pipe, and (c) the amount of damages, if any, to which ECI is entitled if it prevails on its negligence claim.” The jury found that Bolduc was not negligent, had not breached the subcontract, and owed ECI nothing.

Following trial, ECI brought motions for summary judgment on its claims against Travelers and its breach of contract claims against Bolduc. Travelers also brought a motion for summary judgment, asking the court to find that the additional insured endorsement did not provide coverage to ECI. Because a jury determined that Bolduc was not negligent, Travelers urged the court to find that the damaged pipe was not “caused” by Bolduc, and ECI was therefore not entitled to coverage. ECI asserted that because it was undisputed that Bolduc did, in fact, hit the pipe, “the damage was, by definition, caused by Bolduc’s ‘acts or omission.’” ECI also argued that Travelers’ interpretation of the policy rewrote the policy to include coverage only for Bolduc’s negligent acts or omissions.

Bolduc also brought a motion for summary judgment, arguing that the indemnity provision in the subcontract was unenforceable because any obligation to indemnify ECI violated Minn. Stat. § 337.02. Bolduc further argued that the exception provided under Minn. Stat. § 337.05, subd. 1, limited any obligation to indemnify ECI to the required provision of insurance. Bolduc also argued that the subcontract did not require Bolduc to indemnify ECI for ECI’s own negligence.

The district court granted Bolduc’s and Travelers’ motions in their entirety, and dismissed ECI’s claims with prejudice, finding that the subcontract did not require Bolduc to indemnify ECI for ECI’s own negligence, and that ECI was not entitled to coverage as an additional insured “for damage caused by the independent acts or omissions of ECI.”

The Minnesota Court of Appeals Decision

The Court of Appeals reversed, finding that the phrase “caused or alleged to have been caused by an act or omission of Bolduc” meant that Bolduc had agreed to indemnify ECI without regard to fault. The court stated that it declined to read the word “negligent” into the subcontract. Travelers was also liable because its insurance policy was not limited to injury or damage caused by negligent acts or omissions.

The dissent in Bolduc noted that Bolduc was found not negligent by the jury, and ECI was awarded no damages. ECI was the only other party that could be negligent under the facts of the case; therefore, Bolduc was asked to indemnify ECI for its own negligence. Because there is no specific, clear, unequivocal term in the subcontract providing for indemnification for the indemnitee’s own negligence, the exception provided under Minn. Stat. 337.05 should not apply.

The Minnesota Supreme Court’s Decision

The Supreme Court reversed. The Court first addressed Travelers’ liability under the CGL policy. The Court construed the policy as a whole and found that ECI’s coverage under the additional insured endorsement could not be “divorced from the concept of fault.” Most important to the Court’s analysis was that ECI only qualified as an additional insured under the endorsement “with respect to liability for . . . ‘property damage.’” The Court reasoned that ECI could only have liability for property damage in one of three ways: (1) direct liability, (2) vicarious liability for property damage “caused by acts or omissions of [Bolduc],” or (3) if ECI assumed liability for Bolduc’s actions in a contract. Coverage for ECI’s direct liability was specifically excluded under part (b) of the endorsement. Vicarious liability could only be imposed upon ECI for Bolduc’s acts or omissions if Bolduc were liable in the first instance. Because the jury determined that Bolduc was not liable for the damage, ECI could not be vicariously liable. Finally, the Court found that the policy’s specific exclusion for contractual liability applied to the endorsement, and therefore ECI could not be liable for Bolduc’s actions even if ECI had assumed contractual liability in its contract with the general contractor. Thus, because ECI could not be liable for property damage, ECI was not entitled to insurance coverage as an additional insured under Bolduc’s CGL policy.

The Court next considered whether Bolduc was obligated to reimburse ECI under the indemnification provision of the subcontract, and determined that this was an issue of statutory interpretation. The Court found that the indemnification agreement was unenforceable under the plain language of section 337.02 because the jury determined that the damage was not attributable to Bolduc’s negligence, and thus, was not attributable to the “negligent or otherwise wrongful act or omission . . . of the promisor.” Thus any obligation by Bolduc to indemnify ECI would violate section 337.02 unless that obligation was accompanied by a coextensive insurance agreement under section 337.05. Because the Court already determined that no insurance coverage was available to ECI under the policy, ECI could only receive indemnification for breach of an agreement to insure. The Court found that ECI waived any argument that Bolduc failed to provide the insurance required under the subcontract because ECI did not make this type of breach of contract claim in its original complaint, in its motion for summary judgment, or at the district court’s hearing on the summary judgment motions. ECI, therefore, could not assert this claim on appeal.

Although the Supreme Court’s decision addressed only the particular language of the non-standard-form contract between ECI and Bolduc, it is considered a victory for subcontractors and insurers throughout the state. The Court of Appeals decision’s broad interpretation of the indemnity provision created uncertainty for subcontractors and insurers regarding existing language that was not intended to create a broad-form indemnity obligation. The Supreme Court’s decision restores certainty to the industry regarding the language of existing contracts and insurance policies.