No 3rd-party indemnification for workers’ comp payments

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Construction contracts are often multi-party contracts, and general contractors routinely include indemnification clauses in the agreements with subcontractors. In one recent case, an employer required indemnification for workers’ compensation benefits the employer would have to pay if its worker was injured by a third party. In a case that made its way to the Hawaii Supreme Court, the subcontractor challenged the indemnification provision, arguing that the employer had to follow the procedure outlined in the workers’ compensation statute in order to collect from a third party. Who was right?

The case

Hawaiian Dredging Construction Company, Inc. (HDCC) hired Fujikawa Associates, Inc., to make repairs to Edmonson Hall at the University of Hawaii at Mānoa. The subcontract agreement between HDCC and Fujikawa provided:

To the fullest extent permitted by law, Subcontractor shall indemnify, and save harmless Contractor and Owner, and their agents and employees, from and against all Liabilities on account of: … (B) the filing of any claims by persons or entities furnishing labor, materials, equipment or other services or facilities in connection with the Work; (C) any breach or default by Subcontractor of its obligations under this Agreement; or (D) any and all damage or injury to person or property arising directly or indirectly from the performance of the Work and/or the operations of Subcontractor to the extent any such damage or injury is attributable in whole or in part to the acts or omissions of Subcontractor, anyone directly or indirectly employed by Subcontractor or anyone for whose acts Subcontractor may be liable; and, when requested by Contractor, Subcontractor shall defend any and all actions and pay all charges of attorneys and other expenses arising therefrom.

The subcontract defined “Liabilities” as:

Separately and collectively, any loss, injury, damage, fine, penalty, cost and expense (including legal fees and costs) and other liability whatsoever, and any action, suit, proceeding or claims, relating to such liability.

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Demand for indemnification

HDCC sent Fujikawa a notice of claim and demand for indemnification asserting that on June 26, 2012, one of HDCC’s employees, Gabriel Balon, a 55-year old laborer, sustained injuries at the project site when he was struck by a piece of an air duct being installed by Fujikawa. As a result of this accident, HDCC said, Balon suffered a concussion and contusions of his back and leg, and had not returned to work. Balon also filed a claim for indemnity and medical and rehabilitation benefits under Hawaii’s Workers’ Compensation Law, and HDCC was making payments as required under the law.

HDCC demanded that Fujikawa indemnify it “and its insurer(s) from and against any and all liability, costs and expenses … incurred in connection with the subject accident and the resolution thereof.”

HDCC subsequently sued Fujikawa, alleging that it had breached the subcontract by refusing to indemnify HDCC for the amounts it had paid on account of the bodily injury to Balon.

The trial court granted summary judgment in favor of Fujikawa. It found no clear and unequivocal assumption of liability to pay workers’ compensation benefits for a work-related injury under the terms of the subcontract.

The Hawaii intermediate court of appeals vacated the trial court’s judgment, concluding that the subcontract’s indemnification clause encompassed workers’ compensation benefits. The appellate court held that the subcontract included the clear and unequivocal agreement of Fujikawa to assume all liabilities arising from its acts or omissions, including costs and expenses related to Balon’s workers’ compensation claim.

The dispute reached the Supreme Court of Hawaii.

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The Hawaii Supreme Court’s decision

The Hawaii Supreme Court vacated the appellate court’s judgment on appeal and affirmed the trial court’s judgment.

In its decision, the court ruled that an employer may not recover workers’ compensation payments under a contractual indemnification provision between the employer and the third-party who caused injury to the employee, reasoning that employers had “an exclusive statutory reimbursement remedy” under Hawaii’s workers’ compensation law (WCL).

Thus, the court said, any contractual provision that conflicted with this statutory remedy was invalid, and HDCC therefore was not entitled to contractual indemnity for workers’ compensation payments made as a result of Balon’s injury.

The court explained that the “comprehensive scope” of the workers’ comp law, by detailing specific methods for compensation reimbursement, suggested that the legislature’s intent “was to provide an exclusive method for recovering workers’ compensation payments from a third party.”

The court declared that an employer may not “unilaterally vary those rules through agreements with its subcontractors,” and that HDCC’s breach of contract claim accordingly failed. In the court’s opinion, even if the parties had intended the subcontract’s indemnity clause to encompass workers’ compensation payments, “that agreement would be invalid” because an employer may “not contractually require a third-party tortfeasor to indemnify it for workers’ compensation payments.” Rather, the employer must follow the statutory procedure provided by the state’s workers’ compensation statute.

The case is Hawaiian Dredging Construction Co., Inc. v. Fujikawa Associates, Inc.

Editor’s Note: In its decision, the Hawaii Supreme Court noted that this was a case of first impression in interpreting the section of the workers’ compensation statute in dispute. The court reviewed the statute’s detailed procedure for recovering against a third-party that had caused a worker’s injury and concluded that the employer should have followed the procedure in the statute. Employers in Hawaii would do well to familiarize themselves with the workers’ compensation law’s requirements before seeking indemnification.

Related: Last call! NU’s Excellence in Workers’ Comp Award open for submissions

Steven A. Meyerowitz, Esq., (smeyerowitz@meyerowitzcommunications.com) is director of FC&S Legal, editor-in-chief of Insurance Coverage Law Report, and founder and president of Meyerowitz Communications Inc.