In construction, it’s common for risk to get passed down the contracting chain. But it’s important that parties seek to properly balance and allocate risk, not just offload it wherever they can. A great example is indemnification. Indemnification is great on paper. But it’s only useful if the party providing it can back up that obligation. If they don’t have the funds to meaningfully indemnify, then that risk that was seemingly accounted for becomes a real gap.
That seems to be the situation in a recent case involving litigation over stucco failure at a lower Manhattan hotel. The owner’s $2.8 million claim has continued for years, and the courts are still sorting out who’s liable. Meanwhile, one subcontractor obtained a summary judgment against their sub-subcontractor who never appeared.
The Defect Claim Has Continued for Years
Engineering News-Record reports that high winds dislodged part of the stucco cladding from a 38-story hotel, which was completed around Christmas 2020. The developer sued the prime contractor, masonry subcontractor, and project architects in 2022.
The developer alleges poor workmanship and deteriorated fasteners caused the damage. It seeks about $2.8 million, including the cost to replace the stucco on one side of the building.
The prime contractor denies liability and has asserted claims against other project participants. The allegations remain disputed, and no trial determination has assigned responsibility for the cladding failure.
All told, there are millions of dollars on the line, and the obligations to indemnify and defend may roll downhill toward the parties who actually performed the work at issue.
A Default Judgment Advanced One Indemnity Claim
The masonry subcontractor, Bayport Construction, brought a third-party claim against Alfre and Sons Construction, its subcontractor who performed the allegedly faulty stucco work.
Court records indicate that Alfre was served through the secretary of state in March 2025 and received additional notice by mail in June. The company’s registered address is a single-family residence, where service presumably could not be made. A court-ordered mediation of the main case also failed in July 2025. Alfre never appeared there or in court.
Bayport then sought a default judgment. It submitted the parties’ contract and an affidavit stating that Alfre had agreed to indemnify and hold Bayport harmless. The court found that Bayport had submitted sufficient proof and granted an unopposed default judgment. It deferred the damages determination until the trial or another resolution of the main action.
It is certainly better to have a judgment than to lose it, just like it’s better to have indemnity than it is to not have indemnity from the parties you contract with. But we’re talking about (potentially) millions of dollars of liability and court costs. How likely is it that the masonry sub-subcontractor, who is several tiers down the contract chain and working from a residential address, can meaningfully indemnify and defend anyone? How likely is it that damages due from that sub-subcontractor will ever be paid? How will that help ensure the security and stability of the project?
While there are obvious procedural reasons that both had to be pursued, it’s likely that neither the indemnity nor the summary judgment are worth the paper they’re printed on. Hopefully, the other parties weren’t relying on the buck to stop there.
Key Takeaways: Indemnity Needs Financial Support
An indemnity provision may establish an obligation, but that obligation is more valuable when the responsible party has the resources or coverage to meet it. It’s important to understand the real-world connection between indemnity obligations and a party’s ability to fulfil them. Don’t just check the box on a negotiating term. Support material indemnity obligations for every project tier with:
- Verified insurance and additional insured endorsements
- Completed operations coverage for the period stated in the contract
- Appropriate coverage limits and project-specific endorsements
- Performance security, when the project’s risk warrants it
Establish a process for tracking renewals, cancellations, and coverage evidence through closeout and any required post-completion period.
Owners and contractors should map indemnity, defense, insurance, and bond obligations through the entire contract chain. Each subcontract should identify the incorporated prime contract terms and require appropriate flow-down provisions in lower-tier agreements.
The parties should also confirm that policy limits, exclusions, and completed operations coverage fit the work. A facade subcontract, for example, may create long-term water intrusion, attachment, and exterior-envelope exposures that continue after substantial completion.
Certificates can help track insurance information, but the required policies and endorsements determine the available coverage. Contract administration should include a process to review those documents and address gaps before work begins.
Give Dispute Resolution a Working Schedule
For projects using A201® – General Conditions of the Contract for Construction, Article 15 establishes a framework for claims, mediation, and the selected binding dispute-resolution method.
Project teams still need to administer that process. The agreement should identify who manages each step and establish workable dates for document exchanges, expert review, mediation, and escalation.
The parties should begin that process early. Waiting until discovery stalls or key project personnel leave can make the facts harder and more expensive to establish.
Align Risk Across the Contract Chain
Flow-down provisions can help carry relevant insurance, indemnification, and dispute-resolution obligations from the prime contract through lower-tier agreements. Learn how these provisions work and what contractors and subcontractors should review before signing.
