A Shield or a Roadblock: Competing Indemnification Provisions in Litigation
Whether you are a subcontractor working on a large-scale construction project or a business owner renting property to run your place of business, you will almost certainly have an indemnification clause as a crucial element of your contract. This agreement balances trust and promise: trust that the terms of the contract will be upheld, and a promise that one will agree to indemnify the other should the need arise. Understanding the basics of indemnification provisions, recognizing the importance of naming parties as additional insureds to your contract, and maintaining an awareness of the limitations of indemnification provisions can help you to better prepare for and protect yourself and your business.
What is Indemnity?
The first question is, what are indemnification provisions? Indemnification clauses are agreements determining which party will assume liability and reimburse the other party for a loss. In real life, this might happen in a construction project when the general contractor and premise owner contract with one another and agree that the contractor will indemnify the premise owner should it face a personal injury claim, or some other kind of third-party suit. If the general contractor has agreed to indemnify the premise owner and hold him harmless, then the general contractor has agreed to assume liability for and reimburse the premise owner should they become involved in a third-party lawsuit. However, simply having a policy and have signed a contract agreeing to indemnify or be indemnified does not preclude possibility of running into problems down the road. When parties settle a case and attempt to divvy up responsibilities in the wake of litigation, indemnity provisions can become an unanticipated bump in the road.
There are two primary contexts in which competing indemnity provisions come into play. The first instance arises between businesses. In business-to-business (B2B) settings, two (or more) defendant parties engaged in litigation will have indemnification provisions in place so that party A agrees to hold party B harmless as a part of their contract. Parties A and B would not be averse to one another should a third-party introduce a claim leading A and B to court. However, if defendant B is found to be a negligent party, defendant A may have no choice other than to be averse to defendant B in litigation. Thus, indemnification provisions do not necessarily rule out the possibility of both parties being opposed to one another in court.
The second context in which competing indemnity provisions arise is among insurance companies. When the core issue of litigation concludes, the battle will resume when insurance companies begin to examine who is going to be ultimately be held responsible for what. Returning to the example of a lawsuit in a construction case, if one defendant in the case was found to be negligent, then insurance companies would begin to step in and try to determine who must indemnify whom – and who will be ultimately responsible for paying the bill. When cases have many defendants, each of whom will have insurance policies and indemnification clauses with one another, a web of complications may follow leaving some defendants stuck in (or returning to) court.
Looking to recent case law in North Carolina can help to shed light on how courts are interpreting and making judgments on competing indemnification provisions. In Candid Camera Video World, Inc. v. Mathews, Candid Camera Video World sued the property manager when their store was the victim of theft. Plaintiffs argued that the defendant property manager was negligent and owed damages to Candid Camera Video World. However, there was an indemnity provision in place in which Candid Camera Video World agreed to indemnify the property owner for loss. On appeal, the North Carolina Court of Appeals noted that “in interpreting a contract of indemnity the court should give effect to the intention of the parties…[and] where the…language is clear and unambiguous the court must interpret the contract as written.” What indemnify provisions specify is crucial for deciding issues of conflict in court.
Similarly, in Hoisington v. ZT-Winston-Salem Associates, the NC Court of Appeals discussed the extent of indemnity provisions. In this case, the Plaintiff sued numerous defendants after she was horrifically assaulted in the store where she worked. In an appeal, the Plaintiff claimed to be a third-party beneficiary of the contract created between the property owner and the security company who worked the property grounds. Additionally, the property owner brought a claim against the security company, arguing that the security company needed to indemnify them. The Court determined that, though the Plaintiff incidentally benefitted from the contract between the property owner and the security company, she was not a beneficiary of the contract. The Court also found that the indemnity clause between the property owner and the security company specified that the indemnitee (the property owner) could only be indemnified if the indemnitor (the security company) was negligent. Finally, since the court had determined that the security company was not negligent in the matter of the assault, the security company did not have a duty to indemnify the property owner. The NC Court of Appeals once again confirmed that “Courts strictly construe an indemnity clause against the party asserting it.” Hoisington v. ZT-Winston-Salem Assocs., 133 N.C. App. 485, 494, 516 S.E.2d 176, 183 (1999).
What This Means for You
For business owners, now is the time to take a closer look at your insurance policies. To be able to enforce indemnification provisions, it is critical to ensure that parties are named as additional insureds to avoid being in breach of contract. Similarly, understanding which provisions will take precedence will be of utmost importance. As case law shows, courts examine at the nature of the contract at hand (whether it is a contract between businesses or for insurance companies) when making judgments. Courts will look to see if parties in contracts have relied, knowingly or unknowingly, on the terms they have agreed to. In addition to considering the contracts themselves, it is important to look at the language of settlement agreements. If the door for future claims is not tightly closed, parties should look carefully over their agreements to ensure that no avenues remain open for future litigation.
In contracts, clarity is key. Indemnification provisions and insurance policies can be the safeguards parties need to defend themselves and recoup losses. But the story doesn’t end with just having an indemnity provision in place.