One of the most misunderstood concepts in construction contracts is the interplay between indemnification clauses and the immunity provided for employers under the Pennsylvania Workers’ Compensation Act. Because it is almost always the case – emphasis on almost – contractors and subcontractors assume they are immune from further liability as soon as payments are made to an injured employee under the workers’ compensation policy. The statute and Pennsylvania case law, however, say otherwise.
Most lawyers familiar with this area of the law refer to this issue as the Bester v. Essex Crane problem. This arises from the seminal case on when workers’ compensation immunity is waived by way of contract. At the risk of oversimplification in favor of brevity, the Workers’ Compensation Act in Pennsylvania provides that an employer may waive the immunity provided under the statute in a contract. The Courts have clarified the requirements to meet this waiver and settled on the premise that the language in the contract must set forth accurately and very clearly that the party waiving its immunity is doing so. Stated differently, the Court wants to be sure that the employer is knowingly waiving the immunity before it enforces such a clause.
In practical reality, the situation typically plays out in a contract-subcontractor context where an employee of the subcontractor is injured while working on a project. The subcontractor then pays workers’ compensation benefits to its injured employee. The employee then sues the general contractor and the owner (not the immune employer) for failing to keep the job site safe. Relying on its contract, the general contractor then joins the employer/subcontractor to the lawsuit claiming the subcontractor owes it contractual indemnity and the Bester v. Essex Crane problem become central to the case. Because there is usually a separate but related clause requiring the subcontractor to name the contractor as an additional insured, there is a parallel fight regarding this issue (more on that in another post).
The best way to avoid extensive litigation over the legal issues of whether the immunity is waived or not is for construction companies at all levels to carefully review contracts in advance of signing them. It is better to determine who will be responsible for the risk before the job starts and be clear in the contract than it is to spend thousands of dollars fighting about who is legally responsible to pay before you even get to the underlying issues of causation and damages. Often times, slight changes in the language of a contract can make a large impact in this subject matter. Consider investing a little more up front to avoid long term problems and more cost later.