Contracting parties use contractual indemnity provisions to customize risk allocation.  Indemnification clauses vary widely and are typically heavily negotiated; however, if the events and related damages covered under the indemnity are appropriate in nature and scope, parties can manage risk expectations and avoid disputes.  In order to select the appropriate indemnification scheme for any contract or project, it is vital to assess risk in terms of events and consequences, and the likelihood that those events or consequences will occur.

Under the indemnification regime known as “knock-for-knock”, each party contractually accepts liability for its own people and property regardless of any parties’ negligence or fault, including that of the indemnified parties.  In other words, each party’s indemnity undertaking amounts to, My people, my property, my problem”, regardless of fault.

This amounts to a contractual agreement replacing the default rule at law which would otherwise make each party liable for its own negligence or fault. Essentially, a knock-for-knock indemnification regime bases liability on ownership or control, rather than negligence or fault.

This arrangement can be attractive for multiple reasons.  First, because it avoids the complications of determining proportionate fault among the parties, it should reduce legal costs.  This is particularly important where there are numerous parties present (with their respective personnel and property) at a project site, performing their respective services in close physical proximity to one another.

Second, if the knock-for-knock indemnification regime is consistently applied across all contracts for work on a single project, a single indemnitor should indemnify and defend all the parties against whom a claim is made, which reduces the litigation costs related to that claim.

Exclusions to the “regardless of fault” concept within a knock-for-knock regime are often used for the purpose of excluding claims arising from particularly egregious behavior.  Gross negligence and willful misconduct are commonly excluded for this reason, sometimes to conform to the public policy of some states, and also because such claims may not be insurable by the indemnitor.  For the same reasons, parties sometimes exclude claims that arise out of the sole negligence of the indemnified party.

A knock-for-knock regime is likely not desirable for contracts where there is no common project site, as the parties’ people and property are not likely to cause harm to one another.  It is also not desirable for contracts where the risks to one party’s people and property are significantly greater or lesser than the risks to the other party’s people and property, for example where a contractor enters a project site with limited personnel and property to perform very dangerous work for a large and valuable facility with many employees and other contractors present.

If a knock-for-knock regime is used, it is extremely important to ensure that the same knock-for-knock regime is used in all of the contracts of every contractor present at the project site.  This is vital to ensure that every party at the site ultimately takes sole responsibility for claims for injury to its people and damages to its property regardless of fault.  Any inconsistencies in those indemnification regimes could lead to a party being left holding the bag for injury to people other than its own and damages to property of others, which is not the desired goal of a knock-for-knock regime.

It is also important to understand and comply with state law requirements and limitations regarding knock-for-knock regimes.  Because a knock-for-knock regime, by its nature, requires each party to indemnify the other party for certain claims regardless of fault, including the indemnified party’s own negligence, some states require such indemnification provisions to be expressly stated in a conspicuous manner in the contract.  Also, some states have anti-indemnity statutes which prohibit certain types of contracts from requiring one party to indemnify another party for liabilities caused by the indemnified party’s own negligence.  These anti-indemnity statutes most commonly apply to contracts involving motor carrier transportation, construction, and oilfield work.  There are ways to bring knock-for-knock indemnity schemes into compliance with such anti-indemnity statutes, often through the use of insurance.  Parties should consult their legal counsel to ensure compliance, as these laws can be somewhat complicated to maneuver.