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Simple answers for construction litigation questions: if you represent contractors and you're struggling to get a grip on indemnity, workers' comp lien, and Kotecki waiver issues, this article is for you.

The other night while channel surfing, I ran across a program about the beginning of the universe. The voice behind the graphics exclaimed, "The Big Bang and Beyond!" a physicist explained this complex theory of time and space as if he were describing how to make a peanut butter and jelly sandwich.

The next day, I thought of him as I heard myself tell a colleague that "indemnity and Kotecki issues are complex." I paused and thought, "Just how complex?" Maybe Einstein was right. Everything is relative.

Inspired by the plainspoken scientist on TV, I took three construction issues and did my best to provide simple answers.

Can a party obtain indemnity in a construction case?

Suppose you represent a general contractor who has been sued by an employee of one of the subcontractors on the project for negligence. The contract states that your client may obtain indemnity from that subcontractor. Can you use the indemnity clause to force the subcontractor to pay any verdicts against your client, along with legal expenses?

No. Indemnity is dead in construction negligence cases after the 2007 first district court decision in Pierre Condominium Assn v Lincoln Park West Associates, LLC. (1)

Indemnity may have been dying long before Pierre. Indeed, its days appeared to be numbered in the early 1970s when the Illinois legislature passed the Construction Contract Indemnification for Negligence Act (Anti-Indemnity Act), which states as follows:
 With respect to contracts or agreements, either public or
 private, for the construction, alteration, repair or maintenance
 of a building, structure, highway bridge, viaducts or
 other work dealing with construction, or for any moving,
 demolition or excavation connected therewith, every covenant,
 promise or agreement to indemnify or hold harmless
 another person from that person's own negligence is void as
 against public policy and wholly unenforceable. (2)

But despite that language and long after the Act was enacted, the drafters of construction contracts continued to include indemnity provisions. The language was carefully and craftily worded to carve out "one's own negligence." The logic was that as long as a party was not seeking to be indemnified for his own negligence, he could obtain indemnity.

And it worked. Courts found that if the contract clause only sought indemnity for the other party's negligence, it was valid. The courts relied on the well-established principle of contract law that the parties are presumed to have entered into their agreement with knowledge of the existing law. Since the parties must have known that a clause seeking full indemnity would be invalid under the Act, the party seeking indemnity must only be trying to recoup the amount that is attributable to the other party's negligence. (3)

So what is the difference between this contractual indemnity for the other party's pro rata share and contribution under the Contribution Act? Nothing. you can call the clause whatever you want--indemnity, contractual contribution--but Illinois courts held that these indemnity provisions merely require "contractual contribution," not indemnification. (4) Accordingly, the Anti-Indemnity Act was "not implicated and the subject provision is not void as against public policy." This meant indemnity provisions limited to each party's own negligence were valid under Illinois law.

Then came Pierre. The obvious problem under the law to this point was that contractual contribution was redundant of remedies under the Contribution Act. The less obvious problem was that parties could use a contractual indemnity count to stop other parties from settling with the plaintiff directly and obtaining a good faith finding from the court under the Contribution Act.

Thus, the Pierre court held that indemnity/contractual contribution clauses are at odds with the express policy of the Contribution Act (5) encouraging good-faith settlements and therefore not valid or enforceable. (6) So even if the courts will go along with the argument that the clause labeled indemnity really only means contribution, under Pierre the clause is still invalid if it is being used to prevent another party from settling out of a case.

Maybe there is some wiggle room if a party can state its "indemnity" claim within the parameters of the Contribution Act or purely as a breach of contract claim. (7) A close reading of the Pierre case invites the possibility. And there is also a possibility that the other districts might disagree with Pierre. But again, if you are looking for the rule, indemnity provisions are void and unenforceable in construction cases.

Can a third-party employer wait until after a verdict to waive its workers' compensation lien?

Suppose you represent a general contractor and one of its employees was injured on a construction job. In addition to the workers' compensation case, your client has been added as a third-party defendant in the worker's lawsuit against one of the other companies on the job.

Your client will have a workers' compensation lien on anything the plaintiff recovers from the other company, but the company can also recover from your client on its third-party claim. If you waive the lien, your client will be dismissed from the case. Can you wait to see how well the plaintiff does against the other company before you decide whether to waive the lien?

Yes. Construction attorneys often must consider the effect of an existing workers' compensation lien on the case. For the employer, the issue is whether or not it should pursue or waive its workers' compensation lien when a defendant has named the employer as a third-party defendant.

The employer often wants to wait until the case has been developed to the point where the employer can assess the probability of success. The employer wants to see how big the verdict is against the defendant. Will it cover the lien? Will the employer have to pay more on the third-party claim than the lien is worth? It may seem prudent to wait until there is a verdict, but is there a point when it is too late for the employer to waive its lien?

A third-party employer can wait until after a verdict to waive its workers' compensation lien. (8) Maybe it seems unfair that an employer can wait to see how it does at trial to determine whether or not to waive its lien. If the defendant/third-party plaintiff is found to be mostly at fault and there is a sizeable verdict, the third-party employer stands to gain by recovering some or all of its workers' compensation lien.

So what is the incentive for an employer ever to waive its workers' compensation lien? Perhaps to avoid the cost of litigation as a third-party defendant and to avoid a lump sum payout in the third-party lawsuit.

But other than that, there is little downside to waiting. If the third-party employer does not waive the lien at all and recovers part of its lien from the lawsuit against the other party, the employer must pay 25 percent of the plaintiff's legal fees out of any reimbursement that it receives. The logic is that the plaintiff's lawyer's work provided the means by which the employer could recoup some of its workers' compensation lien. (9)

If the employer waives the lien, it does not have to pay any of these legal fees. Even if the employer waits until after a verdict to waive its lien, since the condition precedent under the Workers' Compensation Act of the employer having received the reimbursement never occurred, it still does not have to pay any of these legal fees. (10)

Can an employer contractually waive its workers' compensation protection?

Suppose you represent a general contractor and are worried it may have exposure to liability if an employee of one of the subcontractors is injured on the job. If one of the subcontractors' employees sues your client, you can file a third-party claim against the subcontractor employer for contribution. However, since the subcontractor was the employer, its liability will be capped under the Workers' Compensation Act. Is it possible to have the subcontractor contractually waive the Workers' Compensation cap?

Yes. An employer may enter into a contract that waives its cap under the Workers' Compensation Act. Such a provision is often referred to as a Kotecki waiver in Illinois, named after the landmark Illinois case which held that a third-party employer's contribution was limited to its statutory liability under the Workers' Compensation Act.

The result is that the employer will be treated like any other defendant and be subject to unlimited contribution to the other parties under the Contribution Act. Illinois courts have held that an employer may waive its Kotecki protection by contract and thereby be liable for its full pro rata share of contribution. (11)

And this takes us full circle. Illinois courts have held that an indemnity clause (when properly limited to exclude one's own negligence) shall be interpreted to waive a party's Workers' Compensation protection and thereby expose that party to unlimited contribution under the Contribution Act. (12) The indemnity provision discussed above may not allow a party to seek indemnity or contractual contribution, but it will allow a party to strike the employers' affirmative defense of a workers' compensation cap on liability.

(1.) 378 Ill App 3d 770, 778, 881 NE2d 588, 596 (1st D 2007).

(2.) 740 ILCS 35/1.

(3.) See Liccardi v Stolt Terminals, Inc, 178 Ill 2d 540, 549, 687 NE2d 968, 973 (1997).

(4.) Virginia Sur Co, Inc v Northern Ins Co of New York, 224 Ill 2d 550, 558-559, 866 NE2d 149, 155 (2007); Liccardi.

(5.) 740 ILCS 100/2.

(6.) See Pierre at 778, 881 NE2d at 596.

(7.) See, e.g., Vicorp Restaurants v Corinco Insulating Co, 222 Ill App 3d 518, 584 NE2d 229 (1st D 1991).

(8.) See LaFever v Kemlite Co, a Div of Dyrotech Industries, Inc, 185 Ill 2d 380, 706 NE2d 441 (1998); Kim v Alvey, Inc, 322 Ill App 3d 657, 749 NE2d 368 (1st D 2001).

(9.) 820 ILCS 305/5(b); LaFever.

(10.) LaFever at 401, 706 NE2d at 452; Corley v James McHugh Const Co, 266 Ill App 3d 618, 622, 639 NE2d 1374, 1377 (1st D 1994).

(11.) Liccardi; Braye v Archer-Daniels-Midland Co, 175 Ill 2d 201, 676 NE2d 1295 (1997); Virginia Sur at 558-59, 866 NE2d at 155..

(12.) Virginia Sur at 558-59, 866 NE2d 149, 155.

Joseph E. Rubas is an attorney with Hinshaw & Culbertson, LLP in Chicago where he focuses his practice in the representation of owners, general contractors, and design professionals in the litigation of construction and commercial disputes.
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Title Annotation:Illinois
Author:Rubas, Joseph E.
Publication:Illinois Bar Journal
Date:Dec 1, 2009
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