Sixth Circuit Rules Indemnity Agreement Is Not an Insured Contract
December 2006
In Lubrizol Corp.
v. National Union Fire Ins. Co. of Pittsburgh, Pa. (6th Cir. (Ohio) Oct.
17, 2006), the Sixth Circuit Court of Appeals holds that an indemnity agreement
was not an "insured contract" within coverage of an umbrella policy, since it
did not contemplate assumption of another's tort liability.
by Kevin
Merriman
Goldberg
Segalla LLP
Lubrizol Corp. entered into an equipment purchase agreement with Valvoline,
pursuant to which Lubrizol purchased used equipment and replaced it with new
equipment. The agreement required that some of Lubrizol's employees work on
Valvoline's premises, and contained a mutual indemnity agreement, in which the
parties intended to indemnify one another for claims for their respective employees
arising from injuries suffered while work was performed. The agreement provided:
- Valvoline and Lubrizol shall indemnify, defend and hold harmless from
claims, demands, and causes of action asserted against each other by any
person (including, without limitation, Valvoline's and Lubrizol's employees)
for personal injury or death, or for loss of or damage to property that
results from the indemnifying party's negligence or willful misconduct hereunder.
Where personal injury, death, or loss of or damage to property is the result
of the joint negligence or misconduct of Valvoline and Lubrizol, each party's
duty of indemnification shall be in proportion to that party's allocable
share of such joint negligence or misconduct.
Lubrizol was insured under an umbrella policy, pursuant to which the insurer
agreed to pay sums that Lubrizol became "legally obligated to pay by reason
of liability imposed by law or assumed by the insured under an Insured Contract,"
a term that was defined by the policy as a contract under which Lubrizol "assumed
the tort liability of another party to pay for Bodily Injury … 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."
A Lubrizol employee was injured while working at the site, and filed a workers
compensation claim against Lubrizol, and a negligence claim against Valvoline.
Valvoline tendered its defense and indemnity to Lubrizol pursuant to the agreement.
Lubrizol informed its insurer of the suit, and later tendered the claim when
a settlement offer had been made by the underlying plaintiff.
Covered or Not Covered?
The insurer first communicated that the claim was covered by the umbrella
policy; however, it was later considered that the claim was not covered. Nevertheless,
the insurer attended a mediation conference to assist Lubrizol in obtaining
a structured settlement. During the conference, when it was revealed that the
case could not settle within Lubrizol's self-insured retention, the insurer
revealed for the first time that the claim was not covered by the policy.
First, the court considered whether the mutual indemnity agreement was enforceable
under Ohio law, and concluded it was not. The court found that the agreement
was unenforceable because it did not contain an express and specific statement
waiving Lubrizol's immunity from suit under Ohio statute and Constitution, which
provides:
- Where an employee brings a personal injury action against a company
other than his employer, and that company files a third-party complaint
against the employer … based upon an indemnification agreement between the
company and employer, summary judgment may properly be granted to the employer
on the third-party complaint if the indemnification agreement does not specifically
waive the employer's immunity under Section 35, Article II of the Ohio Constitution
and R.C. 4123.74.
Next, the court considered whether the indemnity agreement, if enforceable,
would have been covered under the umbrella policy. The court concluded the indemnity
agreement could not be an "insured contract," and, therefore, was not covered
by the policy. The court reasoned that an "insured contract" was one under which
Lubrizol "assumes the tort liability of another party to pay for Bodily Injury
… to a third person or organization." Since Lubrizol was required to indemnify
Valvoline only for damage resulting from Lubrizol's own negligence, and, in
cases of joint negligence, each party would be responsible for its allocable
share, the indemnity agreement did not require the assumption by Lubrizol of
Valvoline's liability, which was necessary to meet the policy's definition of
"insured contract."
The court also concluded that, even if the indemnity agreement were enforceable
and covered by the umbrella policy, there could be no recovery in this case,
since enforcement of the indemnity agreement required a finding of negligence.
In view of the settlement agreements, there was no adjudication of negligence,
and the insurer had not agreed to be bound by Lubrizol's characterization of
claim.
Finally, the court held that the insurer's defense was not barred by the
doctrines of waiver or estoppel. To establish the claim, Lubrizol was required
to demonstrate that it was prejudiced by its reliance on the insurer's initial,
but mistaken, acknowledgment of coverage. The court concluded that Lubrizol
failed to satisfy its burden, in that it failed to produce an affidavit from
someone at Lubrizol who had the authority and willingness to settle the claim
earlier.
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