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Indemnification Agreements: Who Benefits From Your Coverage?

Indemnification Agreements: Who Benefits From Your Coverage?

Samantha Drake

Shifting financial liability through contractual apportionment of risk is nothing new. But issues such as the scope of indemnity, choice of law and naming additional insureds adds so many potential wrinkles to an already complex area in which attorneys must be sure to do their homework.

Indemnification agreements are “something with which people have a lot of familiarity, at least in concept, but in terms of practice the law has a lot of variations,” said Scott Godes of Dickstein Shapiro LLP.

Godes participated on a recent panel entitled “Additional Insured Issues and Indemnification Agreements” along with Timothy E. Delahunt, of Kenney Shelton Liptak Nowak LLP and Adam M. Shienvold, of Eckert Seamans Cherin & Mellott LLP. HB Litigation Conferences produced the panel.

Indemnification Agreements

In the context of contractual indemnity, indemnity is “an obligation by one party to make another party whole for a loss incurred by the latter,” Shienvold said. The right to indemnity on the part of one party (the indemnitee) from another (the indemnitor) may be secured through a contract between the two.

Indemnity can be either complete or partial. “Partial indemnity” refers to a contractual agreement whereby the indemnitee may receive compensation for that part of a loss not caused by the indemnitee’s own negligence, even if its own negligence contributed, in part, to the loss. This is frequently interpreted similarly to common law claims for contribution, where the paying party can recover from joint tortfeasors amounts paid in excess of its apportionment of liability.

In contrast, under “complete indemnity” or “total indemnity,” the indemnitor must pay any and all liability incurred by the indemnitee regardless of comparative fault.

It would seem to be cut and dried, right? Not necessarily. “It’s surprising in my experience how frequently people tinker with indemnity provisions in contracts,” noted Shienvold. In particular, contracts spanning multiple states and involving multiple parties can result in confusion and ambiguity. It doesn’t help that each state varies by statute or case law in terms of interpreting contracts.

Indemnity Against Own Negligence

As a general rule, a contract that obligates a party to indemnify another party for losses arising from the indemnitee’s own negligence are valid and enforceable unless prohibited by statute, Shienvold explained.

Every state permits such agreements, though the specifics vary between them, and some states prohibit the agreements in certain types of contracts. It is important to note that each state has its own unique requirements and the contract laws of the applicable state must be researched in each case, he pointed out.

To ensure that indemnity provisions will be upheld against any challenge:

• The contractual language must express clearly, unambiguously and beyond doubt state that the indemnitor agreed to indemnify the other for the other’s own negligence;

• The agreement must result from an arms-length transaction between parties of equal bargaining power; and

• The exculpation must not violate public policy.

Treatment By State

All states construe indemnity contracts strictly; however, states vary with regard to the standard that is required to establish a valid indemnification clause that shifts liability for the indemnitee’s own negligence. Again, it is important to research each state’s requirements, Shienvold emphasized.

A few states take a strict approach, requiring clear and unequivocal language in an indemnity agreement to cover the indemnitee’s own negligence. Some states take a more liberal approach and allow broadly worded indemnity provisions to cover an indemnitee’s own negligence. In such jurisdictions, contracts must clearly indicate intent to include the indemnitee’s own negligence and courts will construe broadly worded provisions literally, such as “any and all claims.”

Finally, other states take a middle ground and do not require explicit language specifically stating that the indemnitee’s negligence is included, but instead require that the intention to do so be clearly manifest in the agreement. Broad language may suffice, but a “clear and unequivocal” expression of intent may be required.

Choice of Law and Other Issues

Choice of law. “Most commercial contracts will have a choice of law provision,” said Shienvold. “Typically that choice of law provision, because it governs the making, execution and performance of the contract, will also govern the performance of the indemnity obligations under the contract.”

Multi-party indemnification obligations may mean multiple choice of law provisions, which become important if a dispute arises.

Multiple indemnity provisions. Contracts suffer from multiple indemnity provisions scattered in the documents. Where there are ambiguities, problems will inevitably follow, Godes said.

“The most important takeaway is it’s not just the language of the specific indemnification clause but also the general provisions of the contract that can create the assumption or the understanding that the court will accept that it’s not completely unequivocal,” said Shienvold.

Workers’ comp. Every state has some form of workers’ compensation which, for participating employers, bars some or all tort claims against the employer. Every state now allows exceptions to the general rule of workers’ compensation exclusivity, which would otherwise prohibit indemnity from an employer (e.g., a subcontractor) of an injured worker, Shienvold notes.

In the absence of an agreement providing for indemnification from the injured worker’s employer, workers compensation exclusivity may bar indemnity from that entity. Like other indemnity contracts, a few states require “magic language” to extend the indemnity to suits by injured employees, he said. Contract drafters should consider adding language specifically addressing workers compensation exclusivity.

Additional Insured Coverage

An additional insured is “a person or entity that enjoys the benefits and protections of being covered by an insurance policy in addition to the person that purchased the policy (the named Insured). Additional insureds become entitled to the benefits of the coverage. Additional insureds, like named insureds, have certain rights and obligations under the policy, which may be different than the named insureds, depending on the language of the policy,” said Delahunt.

In construction, for example, owners, financers, governments/municipalities, construction managers, general contractors, subcontractors, architects, engineers, financers, suppliers and others may need to be added for a certain period of time during a project, Delahunt noted. General contractors are typically contractually obligated to procure additional insured coverage for the entities “above” them, such as the project owner. They in turn require additional insured coverage for themselves and those above them from those “below” them, such as their subcontractors.

“In most cases there’s going to have to be a separate contractual requirement between the named insured and the putative additional insured for the additional insured coverage,” said Delahunt.

A “scheduled” additional insured endorsement lists the specific additional insureds. A “blanket” additional insured endorsement does not list specific additional insureds, and instead sets forth in general terms who qualifies as an additional insured and to what extent. Most blanket additional insured endorsements require that the named insured entered into a separate contract with the additional insured requiring such coverage.

Additional insured coverage in many “standard form” insurance policies may include standard exclusions for contractual liability, such as “‘bodily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.”

Godes noted, however, that there are exceptions to those exclusions. Such exclusions typically do not apply to liability for damages:

1. “That the insured would have in the absence of the contract or agreement”; or

2. “Assumed in a contract or agreement that is an ‘insured contract,’ provided the ‘bodily injury’ or ‘property damage’ occurs subsequent to the execution of the contract or agreement. Solely for the purposes of liability assumed in an ‘insured contract,' reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of the ‘bodily injury’ or ‘property damage.’”

Godes also referred to the “supplementary payments” provisions in many insurance policies. Under a policy’s supplementary payments provisions, an insurer may defend an indemnitee if certain conditions are met, such as:

“The ‘suit’ against the indemnitee seeks damages for which the insured has assumed the liability of the indemnitee in a contract or agreement that is an ‘insured contract’”;

“This insurance applies to such liability assumed by the insured”;

“The obligation to defend, or the cost of the defense of, that indemnitee, has also been assumed by the insured in the same ‘insured contract’”;

“The allegations in the ‘suit’ and the information we know about the ‘occurrence’ are such that no conflict appears to exist between the interests of the insured and the interests of the indemnitee” and

“The indemnitee and the insured ask [the insurer] to conduct and control the defense of that indemnitee against such ‘suit’ and agree that [the insurer] can assign the same counsel to defend the insured and the indemnitee.”

Godes and Delahunt concluded by offering these takeaways: When naming additional insureds in a policy, consider issues including:

The scope of the additional insured coverage

Additional insured endorsement language

The deductible amount and who pays the deductible

The need for “other insurance” clauses

Choice of law analysis

All too often, disputes over additional insured coverage arise between the carrier who issued the additional insured coverage and the carrier who issued the additional insured its own primary coverage. Attorneys must be mindful that when they assert arguments in one case, they could be opposing similar arguments in another case. “Carriers have to be very careful and be farsighted when picking their battles over additional insured coverage,” said Delahunt. Godes noted a situation where he was able to use a carrier’s inconsistent positions on policy language to win a favorable ruling for his client as an example supporting Delahunt’s point.