Court of Appeals “Narrowly” Interprets Contractual Indemnification Agreement to Preclude Indemnification Where Plaintiff’s Suit Against Indemnitor Was Dismissed

In my judgment, this Court of Appeals opinion construes a contractual indemnity clause too narrowly in reversing a trial court’s judgment forcing the indemnitor to pay reasonable settlement value of a plaintiff’s premises liability suit.

The indemnitee was a trust (the Trust), which owned the commercial property upon which the accident that was the basis for the underlying liability suit occurred.  The Trust entered into a contract for an addition to its commercial property.  The general contractor sub-contracted the fire suppression work out to Brigade Fire Protection, Inc., the indemnitor (Brigade).  Brigade executed a contract with an indemnity clause in which it agreed to “defend, indemnify and hold harmless…the Trust…from and against all claims, damages, losses, demands, liens, payments, suits, actions, recoveries, judgments, and expenses, including attorneys’ fees…which are made, brought or recovered…by reason of or resulting from, but not limited to, any injury, damage, loss or occurrence arising out of or resulting from the performance or execution of this Agreement and caused in whole or in part, by the act, omission, fault, negligence or breach of this Agreement by [Brigade].

Brigade performed the work.  In February of 2008, two workers returned to the property to replace a valve on the fire suppression system.  To do so, they had to drain the lines in the system.  One of the drains emptied into the employee parking lot.  The next day the plaintiff slipped and fell on ice in the parking lot as she was leaving work.  She filed suit against the Trust, the general contractor and Brigade.

The trust tendered the claim to Brigade, invoking the “defend and indemnify” clause in the contract.  Brigade refused the tender.  The trial court subsequently granted Brigade’s motion for summary disposition, finding that plaintiff had failed to raise sufficient proof that the ice was caused by Brigade’s operations at the property.  The trial court, however, allowed the Trust to file a cross-claim against Brigade on the basis of the indemnity clause.  Plaintiff and the Trust settled the claim.  On the Trust’s motion, the trial court entered judgment against Brigade for the settlement amount.  Brigade appealed.

The Court of Appeals reversed, holding that the fact that the lawsuit against Brigade was dismissed gave Brigade an absolute defense because the Trust could not, as a matter of law, establish “that it reasonably settled [plaintiff’s] claims premised on Brigade Fire’s negligence.”  Slip Op. at 1.

The Court properly cited the law regarding indemnity agreements.  They are lawful and enforceable and the duty to defend and indemnify must be determined from the language of the agreement.  Id. at 4.  However, the Court then reasons that when the terms “act, omission, fault, negligence, and breach are read together, it is plain that Brigade Fire would only be liable to indemnify the Trust for its acts or omissions that involve some degree of culpability.”

After properly citing the law interpreting the plain language of indemnity agreements, the panel here inexplicably turns a disjunctive aspect of the operative language of the agreement (use of the word “or”) into a “conjunctive” requirement (improperly injecting “and” into the last sentence of the indemnity clause instead of construing “or”).  This allowed the panel to then conclude that read together, some element of “culpability”, i.e., negligence, must be shown to hold an indemnitor to the obligations contained within the indemnity clause.

However, this is not at all how the plain language of the indemnity clause, as a whole plays out.  The interpretation is also inconsistent with prevailing law.

First, Brigade had an obligation to defend and indemnify  the Trust from and against all claims.  The allegations in plaintiff’s complaint against the Trust and Brigade controlled this first obligation.  Brigade’s refusal to defend was a de facto breach of the indemnity clause, irrespective of the question of Brigade’s true liability.  That “breach” is encompassed in the operative language of the latter provision regarding Brigade’s duty to indemnify.  The Trust had to defend the lawsuit without Brigade’s acceptance of its tender under the indemnity clause.  This “breach” of the indemnity agreement therefore caused at least some loss to the Trust.

Moreover, the refusal to defend without a reservation of rights brings with it significant self-imposed sanctions in the law of insurance and indemnity.  Once an insurer or indemnitor refuses to pick up the defense without such a reservation, it is bound by the indemnitee’s settlement.

Secondly, the operative language of the duty to indemnify in the indemnity clause encompasses more than mere negligence.  This is where the Court of Appeals also significantly misconstrues the contractual language.  The clause requires Brigade to hold the Trust harmless for any act or omission alleged; including a breach of the indemnity clause itself, which, again, includes the obligation on the part of Brigade to pick up the defense of the Trust, irrespective of the merits of the underlying lawsuit.

Ordinarily, it would be prudent to include the term “settlement” in the indemnity clause to insure that the indemnitor can be held liable for settlements arising out of claims as well.  In the end, it may have been that Brigade was not at all responsible for the plaintiff’s injury in the underlying lawsuit.  However, this does not absolve it of its duty to defend and indemnify under the plain language of the indemnity clause.  When it chose to breach the agreement by refusing to pick up the defense of the Trust, it surrendered its right to object to a settlement between the Trust and the plaintiff and is bound to indemnify the Trust therefor.

This case demonstrates the importance of having a strong indemnity clause in these types of contract.  Perhaps a better crafted contract would have avoided the litigation in this case.  Having said that, I do believe the Court of Appeals erred in its narrow interpretation of the indemnity clause and its finding that, despite Brigade’s refusal to defend the Trust, it was not responsible for the latter’s settlement with the plaintiff in the underlying lawsuit.

If any one has any questions regarding this case, please do not hesitate to contact me.

Here is the opinion:  matusak v. houseman constr co et al

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