March 17, 2014 – A general contractor’s employee was injured when he fell from scaffolding supplied by a subcontractor. The employee reached a settlement with the subcontractor, and now the general contractor must indemnify the subcontractor.
That’s what the U.S. Court of Appeals for the Seventh Circuit ruled in Harsco Corp. v. Riley Construction Co., No. 13-2272 (March 13, 2014). A three-judge panel also ruled that the subcontractor, Harsco Corp., gets attorney fees and prejudgment interest.
Riley Construction Co. was the general contractor on a construction project in Wisconsin. Riley hired Harsco to supply the scaffolding. Robert Krien, a Riley employee, sustained serious injuries when a scaffolding plank broke and he fell.
Krien sued Harsco, and the parties ultimately reached a $900,000 settlement. Prior to settlement, Harsco had filed a third-party complaint against Riley seeking indemnification for any judgment or settlement that Krien won against Harsco.
This aspect of the case went to federal court on diversity jurisdiction, but the U.S. District Court for the Eastern District of Wisconsin applied Wisconsin contract law to conclude that Riley was not required to indemnify the subcontractor Harsco.
Reversing, a three-judge panel for the Seventh Circuit Court of Appeals ruled that Riley must indemnify Harsco for the loss pursuant to the contract between the parties, which used a form contract from the Associated General Contractors of America.
The contract said Riley employees could use Harsco’s equipment but Riley “shall defend, indemnify and be liable to [Harsco] as provided in Article 9 for any loss or damage (including bodily injury or death) which may arise from such use.”
A mirror provision imposed the same indemnity obligation on Harsco for use of Riley’s equipment. Indemnity was not required if the damage resulted from negligence.
For instance, Harsco had no indemnity right if a Riley employee was injured using Harsco equipment, and vice versa, and Harsco’s negligence caused the injury.
Krien had argued that the broken plank was defective, and it was Harsco’s fault. But the three-judge panel noted that the negligence issue was never resolved.
“The plank may have been supplied by Harsco and may have been defective, as claimed by Krien,” wrote Judge Richard Posner for the three-judge panel. “But there has never been a judicial resolution of these questions, because Krien’s suit against Harsco was settled before there was any judgment.”
The panel rejected Riley’s claim that settlement proved Harsco’s negligence, noting that “settlement is not a determination of liability.”
Riley also claimed, unsuccessfully on appeal, that the parties crossed out indemnity language later in the contract that essentially nullified Riley’s indemnity obligation.
The panel also rejected Riley’s claim that indemnification would violate Wisconsin’s worker’s compensation laws. It would be as if Krien sued Riley, Riley argued, and employees cannot sue employers in tort when worker’s compensation is available.
“[T]here is nothing in Wisconsin law to prevent Riley from waiving its worker’s compensation exemption,” explained Judge Posner, noting that Riley specifically agreed to indemnification for damages to Riley employees who used Harsco’s equipment.
Finally, the court rejected Riley’s equity claim that if Harsco was negligent, requiring Riley to indemnify Harsco would be unthinkable. “Not so,” wrote Judge Posner.
“Indemnification is a form of insurance. Liability insurance provides indemnity for damages caused by the insured’s negligence. The indemnity provisions in the contract between Riley and Harsco were the equivalent of provisions in insurance policies.”
The three-judge panel also ruled the Riley was on the hook for the “several hundred thousand dollars of legal expenses incurred by Harsco in defending against Krien’s suit and also in litigating the current suit,” as well as prejudgment interest.
