Settlement of Underlying Premises Liability Suit Does Not Invoke “Negligence Exclusion” in Contractual Indemnity Agreement Between Settling Indemnitee and Indemnitor

EC Levy Co et al v Hammer Trucking

This recent commercial business case points out two important principles frequently present in contractual indemnity actions between commercial enterprises.  First, a “settlement” agreement from an underlying lawsuit potentially covered by the indemnity agreement does not necessarily mean  that the indemnitee settled out because of his or her own negligence, and thus, it does not automatically invoke the “not responsible to indemnify for the indemnitee’s negligence” “exclusion” in the indemnity agreement.  Second, if you agree in a contract to indemnify someone, then you are obligated to provide a defense as well or you may be stuck paying the attorneys fees and costs of the indemnitee if he or she turns around and sues you for a failure to defend and indemnify.

In this particular case, a concrete company had a contractual indemnity agreement with a trucking company, whereby the trucking company agreed to indemnify the concrete company for any loss or claim unless the concrete company’s negligence caused the loss.  An employee of the trucking company slipped and fell upon the premises owned by the concrete company while making a delivery.  The trucking company’s employee sued the concrete company, which settled with him for $75,000.  The concrete company then sought indemnity from the trucking company, and the trucking company refused, citing the language of the “negligence exclusion” in the indemnity contract.

The concrete company sued the trucking company.  The trucking company asserted that the provision in the indemnity agreement would not allow recovery because the plaintiff in the underlying action claimed negligence in his premises liability action against the concrete company.  The trial court found that the condition on the underlying premises was “open and obvious” and constituted a defense of “no negligence” on the part of the concrete company.  Therefore, it was entitled to seek indemnity from the trucking company.

The Court of Appeals affirmed, holding that the trial court’s ruling that the condition was “open and obvious” precluded a finding of negligence on the part of the concrete company and left the trucking company with the obligation to indemnify.

A few important aspects of this case include the Court’s statement that the trial court’s determination in the suit between the concrete company and the trucking company (a virtual litigation of the liability claims in the underlying lawsuit (even thought it actually settled before litigation)) was preclusive of the trucking company’s right to rely on the provision in the indemnity agreement that it would not indemnify for negligence caused by the concrete company.  More importantly, the Court reiterated the familiar principle in Michigan that if there is an indemnity agreement, the indemitor, i.e., the company that is obligated to indemnify, must undertake to defend the indemnitee or be liable for any reasonable settlements entered in good faith by and between the indemnitee and the plaintiff in the underlying action.  Moreover, as with most indemnity agreements, the indemnitor that refuses to defend will also be liable for the costs and attorney fees incurred in both the underlying action and the action by the indemnitee to recover indemnity from the indemnitor.

Bottom line:  If you are the “indemnitor” in this situation, you will want to carefully read your contract.  It is also wise to get involved in the defense, which will allow you to at least avoid the attorneys fees and costs associated with having to defend a suit by the indemnitee after he has already paid his own defense lawyers to defend him in the underlying lawsuit.

Practice Caveat:  Beware of Conflicts of Interest:  If you are the lawyer representing the “indemnitor” and you advise that it is responsible to at least defend the indemnitee, it is important to separate the “defense” duties from the advisory duties pertaining to the indemnity obligation under the indemnity contract.  While some law firms might get away with performing both functions by erecting a so-called “Chinese wall” between the indemnity counsel and the defense counsel, the more advisable strategy is to recommend that the indemnitor retain a different lawyer or law firm altogether.  If the lawyer is going to choose to keep all the work in his or her firm, it would also be advisable, in addition to the erection of the Chinese wall, that agreement with this be obtained by the indemnitee’s counsel.  In fact, the astute attorney who represents the indemnitee should demand that the latter occur.  It is, however, acceptable if you are an indemnitee dealing with the indemnitor’s actual insurance carrier for different “in house” counsel to deal with coverage and defense issues.  However, those insurance carriers usually know to hire different “coverage” and “defense” counsel.

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