Drafting Indemnification and Hold Harmless Provisions in Commercial Contracts Negotiating Scope and Exclusions, Overcoming Enforcement Hurdles, Navigating Interplay With Insurance Coverage

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Presenting a live 90-minute webinar with interactive Q&A

Kenneth M. Gorenberg, Partner, Barnes & Thornburg, Chicago

Katie Pfeifer, Partner, Dorsey & Whitney, Minneapolis

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DRAFTING CONTRACTUAL INDEMNIFICATION AND HOLD HARMLESS

AGREEMENTS

Kenneth M. Gorenberg Barnes & Thornburg LLP

Chicago, Illinois 312-214-5609

kgorenberg@btlaw.com

Katie C. Pfeifer Dorsey & Whitney LLP Minneapolis, Minnesota

612-492-6947 Pfeifer.Katie@dorsey.com

October 14, 2014

What We’re Going to Talk About • Common Law/Statutory Considerations • Key Provisions • Exculpatory Clauses • Enforcing Indemnification Provisions • Interplay with Insurance Coverage • Example Language

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Indemnification Agreements

Simple concept: A contract that transfers risk.

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STATUTORY/COMMON LAW LIMITATIONS • Limits on transferring risk of your own

negligence or intentional acts • Statutory anti-indemnity laws • Interplay with workers’ compensation

COMMON LAW LIMITS ON TRANSFERRING RISK OF YOUR OWN NEGLIGENCE OR INTENTIONAL ACTS

Restrictions on Indemnifying Negligent Conduct • Indemnity agreements are generally going to be strictly

construed • In order to transfer risk of your own negligence to another

party, you generally need to be unequivocal in your indemnification agreement about that intent

• For example, in California, unless explicitly stated otherwise, indemnity clauses only cover passive negligence (nonfeasance), not active negligence • See, e.g., Crawford v. Weather Shield Mfg. Inc., 44 Cal. 4th 541,

552 (Cal. Ct. App. 2008)

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Restrictions on Indemnifying Intentional Conduct • A number of courts have held that it is against public

policy to provide indemnification for intentional acts/punitive damages • But see Mont. Code. Ann. § 28-2-2111 • New York: can indemnify one whose intentional act causes an

unintended injury • Potential distinction from agreements to indemnify contained in

insurance policies (and applicability to punitive damages)

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Restrictions on Indemnifying Intentional Conduct • In any event, drafting is key: the modern trend is that

provisions stating “any and all losses or claims” will only include negligence • See Gibbs-Alfano v. Burton, 281 F.3d 12, 16 (2d Cir. 2002); Buenz

v. Frontline Transp. Co., 882 N.E.2d 525 (Ill. 2008)

• Note that strict liability generally can be indemnified the same as negligence; it is not intentional conduct • See, e.g., Deminsky v. Arlington Plastics Machinery, 657 N.W.2d

411, 420-21 (Wis. 2003)

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Other Common Law Restrictions • Agents: implied by law that agent is entitled to

indemnification by principal • Obligation does not extend to damages suffered by

reason of the agent’s own fraud, misconduct, negligence or other tort, or to the extent the agent exceeds his or her authority • 3 Am. Jur. 2d Agency § 243

• Parties can contract around these restrictions

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Statutory Anti-Indemnity Laws

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Construction Industry • 41 states have some form of anti-indemnity statute

preventing Party A to a construction contract from indemnifying Party B for Party B’s negligence • Different standards regarding what types of construction

contracts/projects are affected • Different scopes

• Some prohibit indemnification for “sole negligence” or “willful misconduct”

• Some prohibit outright indemnification but permit contribution

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Construction Industry • An exception to the prohibition against indemnification of

Party B for its own negligence: require Party A to purchase insurance to cover the Party B • See, e.g., Ark. Stat. Ann. § 4-56-104 • But some states extend their anti-indemnity prohibition to additional

insured requirements • Minnesota recently moved away from this exception: see Minn.

Stat. § 337.05 (2013)

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Motor Carrying Industry • As of 2013, 39 states had some type of anti-indemnity

statute with respect to the transportation industry • Some prohibit motor carriers from being required to indemnify a

shipper against the shipper’s negligent and intentional acts • Some prohibit unspecified third parties (i.e., a shipper, broker, etc.)

or non-motor carriers from requiring motor carriers to indemnify the third party for negligent and intentional acts

• Some prohibit indemnification for negligence-based or intentional act-based liability in any provision that affects a motor carrier agreement

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Oil Industry

• Louisiana, New Mexico, Texas and Wyoming have anti-indemnification statutes specifically for the oil industry • La. Rev. Stat. § 9:2780 • N.M. Stat. Ann. § 56-7-2 • Tex. Civ. Prac. & Rem. Code § 127.001 et seq. • Wyo. Stat. § 30-1-131 et seq.

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Health Care Industry • Some jurisdictions prohibit indemnification of hospitals or

other essential public services for their own negligence • Illinois: 215 ILCS 134/95 (“Nothing in this Section shall relieve any

person or health care provider from liability for his, her, or its own negligence in the performance of his, her, or its duties arising from treatment of a patient.”).

• California: Tunkl v. UC Regents, 60 Cal.2d 92 (Cal. 1963)

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The Interplay Between Workers’ Compensation and Indemnification

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Typical Case: • Factory worker is injured on the job by heavy machinery • Worker collects worker’s compensation from his employer

for his injuries • Worker sues the machine manufacturer for negligence • Machine manufacturer has an indemnification agreement

with the worker’s employer

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Is the Indemnification Obligation Affected by the Worker’s Compensation Limitations?

• The majority of states: No • But some states require the indemnity clause to

specifically express the intent that worker’s compensation will not bar indemnification • See, e.g., Gatley v. UPS, Inc., 662 F. Supp. 200 (D. Me. 1987)

(noting that a waiver of worker’s compensation immunity must be clear and specific)

• Often called a “Kotecki Waiver,” named after Kotecki v. Cyclops Welding Corp., 585 N.E.2d 1023 (Ill. 1991)

• Worker’s compensation policy may exclude indemnity

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The Exceptions to the General Rule: • The Montana and Oregon workers’ compensation statutes

bar indemnification completely • See Burlington Northern RR v. Farmers Union Elevator Co., 717

P.2d 535 (Mont. 1985) • See Roberts v. Gray's Crane & Rigging, Inc., 697 P.2d 985 (Or.

1985)

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Exculpatory Clauses • Also known as waiver, release or assumption of risk

• Unenforceable in Louisiana, Virginia and Montana

• Disfavored and strictly construed

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ENFORCEMENT OF INDEMNITY PROVISIONS

• First/Third Party Claims • Notice • Defense • Statutes of Limitations • Exclusive Remedies/Limitations on Damages or Liability • Choice of Law

First Versus Third Party Claims • Two parties enter into a contract that includes an

indemnification provision: “Company A hereby agrees to indemnify Company B from and against any and all claims that arise from or in connection with this contract.”

• Company A is now suing Company B for a claim arising out of the contract.

• Company B calls you: Is Company A required to indemnify me?

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First Versus Third Party Claims • Some courts say yes

• Zalkind v. Ceradyne, Inc., 194 Cal. App. 4th 1010 (Cal. Ct. App. 2011) (finding indemnity clause included direct actions)

• Other disagree • Mead Corp. v. ABB Power Generation Inc., 319 F.3d 790 (6th Cir.

2003) (finding indemnity clause did not include direct actions)

• Drafting is once again key: be clear about your intent

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First Party Claims: Attorneys’ Fees • Delaware law does not allow recovery for attorneys’ fees

for first party claims, even if the text of the indemnification provision discusses attorneys’ fees • See In re West Pan, 372 B.R. 112 (S.D.N.Y. 2007) (applying

Delaware law)

• New York does not cover attorneys’ fees for first party claims unless specifically provided • See Hooper Assocs. v. AGS Computers, 74 N.Y.2d 487, 492 (N.Y.

1989)

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Notice • Most indemnification clauses require notice • If notice was properly given, courts generally enforce the

indemnification provision • See, e.g., Nesterczuk v. Goldin Mgmt., Inc., 911 N.Y.S.2d 367 (NY

2010)

• Some courts apply a prejudice standard, however, especially where notice is not a condition precedent • See, e.g., Smurfit Newsprint Corp. v. Southeast Paper

Manufacturing Co., 368 F.3d 944 (7th Cir. 2004) (predicting New York law)

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Notice • To avoid litigation on notice issues, parties should clearly

state in the indemnification clause whether indemnification is conditioned on notice, and may want to consider stating whether litigation expenses incurred before notice are covered

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Duty to Defend

• Under most states’ common law, there is no duty to defend unless it is included in the contract • And without a duty to defend, there often is no right by the

indemnified party to recover attorneys’ fees for its defense • But see Klock v. Grosodonia, 674 N.Y.S.2d 187 (N.Y. App. Div.

1998) (concluding that the right to indemnity includes recovery of the reasonable costs of defense incurred in good faith)

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Duty to Defend • California common law has the opposite presumption, and

parties must contract NOT to defend • Unless otherwise stated, the contractual duty to defend includes all

claims potentially subject to indemnification. See, e.g., Crawford v. Weather Shield Mfg., Inc., 44 Cal. 4th 541 (Cal. Ct. App. 2008).

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Control of the Defense • Parties should include control of the defense provisions to

avoid conflicts • Parties should identify the party responsible for controlling

the defense and that the other party has an obligation to cooperate with the defense • Many default to the indemnifying party taking on the duty to defend

and the control of the defense • Need to consider the risks of that type of provision and the type of

claims that could be subject to indemnification

• Similar language should be included regarding settlements

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Third Party Claims: Attorneys’ Fees • Seventh Circuit frequently allows indemnitee to recover

attorneys’ fees for enforcing indemnity as a “make whole” remedy • Medcom Holding Co. v. Baxter Travenol Lab., Inc., 200 F.3d 518,

520-21 (7th Cir. 1999) • Balcor Real Estate Holdings, Inc. v. Walentas-Phoenix Corp., 73 F.

3d 150, 153 (7th Cir. 1996) • Krien v. Harsco Corp., 745 F.3d 313, 318 (7th Cir. 2014)

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Statutes of Limitations • State statutes of limitations on contract claims typically

include indemnification claims • The running of the statute of limitations may depend on

the indemnification language • If the indemnification provision indemnifies damages, the indemnifying

party becomes liable—and the SOL clock starts running—once the indemnified party suffers an actual loss

• By contrast, if the indemnification clause indemnifies liabilities, the indemnifying party becomes liable—and the SOL clock starts running—as soon as the indemnified party becomes liable, regardless of damages

• And the duty to defend obligation arises immediately upon a claim– and therefore the SOL clock starts running then as well

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Statutes of Limitations

• Of course, parties may contractually shorten the statute of limitations

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Damages Limitations • Scenario

• Contract includes a consequential damages limitation • Also includes a broad indemnification clause, covering “any and all

claims, damages, losses …” • Can you be held liable for consequential damages (especially

consequential damages asserted in a third-party claim) through the indemnification clause? MAYBE

• Need to coordinate any damages limitation with the scope of the indemnification clause

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Limitation of Liability • Similar issue with limitations of liability (e.g.,

caps/baskets) in the broader contract • Need to coordinate the indemnification clause with any

limitations of liability

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Exclusive Remedy Provisions • These provisions limit the indemnified party’s ability to

pursue recourse for claims not covered by the indemnification provision

• Courts usually enforce these provisions except in cases of fraud

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Choice of Law Provisions • Choice of law provisions are certainly advisable, but . . . • Choice of law is for entire contract • You may not be able to contract around anti-indemnity

statutes • Louisiana and New Mexico will not enforce choice of law provisions

that undermine their respective oil-industry anti-indemnification statutes

• Oregon courts will not uphold choice of law provisions when used to circumvent Oregon’s workers’ compensation law, which prohibits contractual indemnity provisions

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INTERPLAY WITH INSURANCE COVERAGE • Insurance and indemnity provisions are often construed

together. • But insurance requirements are not strictly construed. See, e.g.,

Exide Corp. v. Millwright Riggers, Inc., 727 N.E.2d 473, 483 (Ind. App. 2000)

• Purchasing the required insurance may bar common law claims for contribution or indemnity. See, e.g., Morsches Lumber, Inc. v. Probst, 388 N.E.2d 284 (Ind. App. 1979)

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“Insured Contract” • ISO CGL standard definition f:

• That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for "bodily injury" or "property damage" to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.

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“Additional Insured” • Multiple ISO endorsements available

• Who will be an “additional insured”

• Name

• Category, e.g., vendors, owners, contractors, lessors of equipment

• Agreed in writing

• Causation

• Ongoing operations or completed operations

43

Deepwater Horizon “[BP], its subsidiaries and affiliated companies, co-owners, and joint venturers, if any, and their employees, officers and agents shall be named as additional insureds in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of this Contract.”

44

Deepwater Horizon “[BP], its subsidiaries and affiliated companies, co-owners, and joint venturers, if any, and their employees, officers and agents shall be named as additional insureds in each of [Transocean’s] policies, except Workers’ Compensation, for liabilities assumed by [Transocean] under the terms of this Contract.”

45

“Insured Contract” – 2013 • ISO endorsement CG 24 26 04 13 changes standard

definition f: That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for "bodily injury" or "property damage" to a third person or organization, provided the "bodily injury" or "property damage" is caused, in whole or in part, by you or by those acting on your behalf. However, such part of a contract or agreement shall only be considered an "insured contract" to the extent your assumption of the tort liability is permitted by law. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.

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“Additional Insured” – 2013 changes “However, the insurance afforded to such additional insured: 1. Only applies to the extent permitted by law; and 2. Will not be broader than that which you are required by the contract or agreement to provide for such additional insured.”

47

“Additional Insured” – “you/your” • Named Insured • Additional Insured • Additional Named Insured

• Exclusions for “your product” and “your work”

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“Additional Insured” – privity? • CG 20 33: “you and such person or organization have

agreed in writing in a contract or agreement that such person or organization be added as an additional insured”

• CG 20 38 – “and…Any other person or organization you are required to add as an additional insured under the contract or agreement”

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“Additional Insured” – Conflicts • Separation of defense between Named Insured and

Additional Insured • Insurer’s duties to Named Insured regarding Additional

Insured • Named Insured often wants Insurer to accept Additional Insured’s

tender • Paid for endorsement • Limits contractual indemnity exposure

• But what if Named Insured has a high deductible or SIR?

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“Additional Insured” v. “Other Insurance” • Additional insured endorsement

• Primary and non-contributory endorsement

• Other insurance clause

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Multiple indemnitors and AI insurers

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Sample Language

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Sample Language: Shifting Risk of Own Negligence

“This indemnification provision applies regardless of whether or not the claim at issue was caused or alleged to be caused in whole or in part by the party to be indemnified.”

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Sample Language: First Versus Third Party Claims • To limit the indemnity provision to just third party claims:

“Indemnitor at its own expense will indemnify, defend, and hold harmless Indemnitee from any third party suit, claim or other legal action that alleges …”

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Sample Language: First Versus Third Party Claims • To permit indemnification of both first and third party

claims: “Indemnitor at its own expense will indemnify, defend, and hold harmless Indemnitee from and against all claims, demands, actions, suits, damages, liabilities, losses, settlements, judgments, costs and expenses, whether or not involving a third party claim …”

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Sample Language: Notice/Condition Precedent “Each party as an Indemnitee under this Section shall, as a condition precedent to defense and indemnification, (a) promptly provide notice of the claim and reasonable cooperation to the Indemnitor; and (b) not make any admissions to any third party regarding the claim or settle any indemnified claim except as approved by the Indemnitor in writing.”

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Sample Language: Notice/Lack of Prejudice “Whenever an Indemnitee becomes aware of a potential Claim, it shall give notice in writing to Indemnitor as soon as commercially reasonable after first notice thereof (provided, however, that the failure of the Indemnitee to provide such notice shall not affect Indemnitor’s obligations under this Section X if such failure does not prejudice Indemnitor).”

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Sample Language: Defense “The indemnifying party shall engage counsel, subject to the approval of the relevant indemnified party (which approval may be withheld by such indemnified party in its sole discretion), and shall assume control of the defense of the Claim and pay all expenses incurred in connection with such defense . The indemnified party may, but does not have the obligation to, engage its own counsel, at its own expense, and monitor or associate in the defense of any such matter.”

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Sample Language: Exclusive Remedy Provision “The parties acknowledge and agree that their sole and exclusive remedy with respect to any and all claims (other than claims arising from fraud, criminal activity or willful misconduct on the part of a party hereto in connection with the transactions contemplated by this Agreement) for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement, shall be pursuant to the indemnification provisions set forth in this Article X. In furtherance of the foregoing, each party hereby waives, to the fullest extent permitted under Law, any and all rights, claims and causes of action for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement it may have against the other parties hereto and their Affiliates and each of their respective Representatives arising under or based upon any Law, except pursuant to the indemnification provisions set forth in this Article X.”

Avery & Perricone, Trends in M&A Provisions: Indemnification as an Exclusive Remedy, 16 MALR 1349 (Sept. 2013). 60

Sample Language: Coordination of Limitation of Liability with Indemnification “Notwithstanding anything to the contrary provided herein, including Article X (Indemnification), Party A shall not be required to defend, indemnify or hold harmless Party B under this Agreement or applicable law (1) unless the aggregate amount of Claims during [the relevant time period] exceed $ _____ [basket], in which case only the excess shall be indemnified, or (2) to the extent the aggregate amount of all Claims during [the relevant time period] exceed $ _______ [cap].” [Subject to any exceptions.]

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DRAFTING CONTRACTUAL INDEMNIFICATION AND HOLD HARMLESS

AGREEMENTS

Kenneth M. Gorenberg Barnes & Thornburg LLP

Chicago, Illinois 312-214-5609

kgorenberg@btlaw.com

Katie C. Pfeifer Dorsey & Whitney LLP Minneapolis, Minnesota

612-492-6947 Pfeifer.Katie@dorsey.com

October 14, 2014

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