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Liability Insurance

The Future Is Now: When Eventual Indemnity Obligations become Present Defense Obligations

Steven Rawls | August 1, 2008

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General liability policies frequently cover contractual indemnity provisions in contracts between the insured and another party when those contracts fall within exceptions to the policy's contractual liability exclusion, such as the exception for an "insured contract" under the policy. 1

An insured's obligation to pay the attorney fees incurred by an indemnitee that defended itself in an underlying action should not transpose the indemnitee into a party entitled to a defense under the indemnitor's/insured's commercial general liability (CGL) policy where the indemnitee is not an insured under the policy. A federal court, however, recently issued an opinion that does just that.

Indemnity Agreements and Insurance Contracts

Indemnity is the obligation one party has to make good a loss or damage another party has incurred. An indemnitor is the party who is obligated to pay another. An indemnitee is the party who is entitled to receive the payment from the indemnitor. 2 Indemnification obligations often require that the indemnitor "defend, indemnify and hold harmless" the indemnitee from all claims and damages arising out of the indemnitor's performance of its contractual obligations. Although indemnity agreements may therefore require an indemnitor to defend the indemnitee, most courts consider such a requirement different than an insurer's duty to defend its insured.

The general rules for contractual indemnity apply to claims of indemnity in commercial transactions, rather than the specific rules governing an insurer's duty to defend.

Grand Trunk W. R.R. v. Auto Warehousing Co., 686 N.W.2d 756, 762 (Mich. App. 2004) (citations omitted). While rules governing contractual indemnity are derived primarily from insurance and construction cases, 3 the duty to defend under contractual indemnity law and insurance law is not the same. 4

Where parties have expressly contracted with respect to an obligation to provide indemnity, whether that duty also requires that the indemnitor defend the indemnitee must be determined from the language of the contract. 5 This is unlike the usual separate delineation of these obligations typically set forth in insurance contracts "where the duty to defend and the duty to indemnify are separate and distinct." 6

The court in Heppler v. J.M. Peters Co., 87 Cal. Rptr. 2d 497 (Cal. App. 1999) explained the distinction between the obligations assumed by an indemnitor and an insurer:

Contrary to plaintiffs' contentions, these subcontractors, who promised to indemnify Peters against damages caused by their negligent work, did not assume the role of liability insurers. Liability insurers protect insureds against damage or liability from generally defined risks in exchange for a premium. Insurers have a distinct and free-standing duty to defend their insureds as opposed to indemnitors, whose duty to defend is not triggered until it is determined that the proceeding against the indemnitee is 'embraced by the indemnity'.

Heppler at 512-513 (internal citations omitted).

Despite this, the court in Employers Ins. Co. of Wausau v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2008 WL 1777807 (M.D. Fla. 2008), finds no blurs the distinction between an insurer's duty to indemnify its insured for covered damages, which may include the amount of attorney fees incurred by an indemnitee in an underlying suit and an insurer's obligation to defend as required by the policy.

The Order

In Wausau, Employers Insurance Company of Wausau sought a declaratory judgment that the indemnitor's insurers owed a duty to defend Wausau's insured, Choice Hotels, the indemnitee in an agreement with Comfort Inn, and owed Wausau reimbursement for defense costs spent by Wausau defending Choice Hotels. In this case, the underlying plaintiff sued Comfort Inn and Choice Hotels, as franchisor, for damages arising out of a near drowning accident. The claims against each defendant were based on negligence and vicarious liability, respectively.

Comfort Inn had a primary policy of insurance issued by Underwriters at Lloyd's London and an excess policy issued by National Union Fire Insurance Company of Pittsburgh. Choice Hotels and Wausau each tendered the claim directly to Comfort Inn pursuant to the indemnity clause in the 2003 franchise agreement between Comfort Inn and Choice Hotels. The indemnification provision of the Franchise Agreement provided:

13. Indemnification. [Comfort] must defend, indemnify and hold harmless [Choice] ... from any claim, loss, cost, damage, expense and liability (a "Claim"), including reasonable attorneys' fees (whether or not a lawsuit has been filed) and any court costs, resulting from any damage or loss, including personal injury ... as a result of [Comfort's] ... error, omission, act or failure, even where negligence of [Choice] is alleged, except to the extent that the loss, costs, damage, expense or liability is proximately caused by the negligence of [Choice]. ... [Comfort] must reimburse [Choice] for all amounts we reasonably spend, including attorneys' fees and court costs, to protect [Choice] from, or to remedy, [Comfort's] defaults under this Agreement or claims arising out of [Comfort's] operation of the Hotel. [Choice] will have the sole and exclusive control (including the right to be represented by attorneys of [Choice's] choosing) over the defense of any Claims against [Choice] and over their settlement, compromise or other disposition.

Wausau at 2.

Subsequently, Wausau tendered Choice Hotels' claim for a defense and indemnification directly to National Union and Lloyd's. Comfort Inn had added Choice Hotels as an additional insured to the National Union umbrella policy but apparently "overlooked adding Choice Hotels as an additional insured under the Lloyd's policy." Wausau at 4 and 7, n16. The court found that the near drowning incident was a covered occurrence under the National Union policy and the policy covered the Franchise Agreement as an insured contract where Comfort Inn agreed to assume the liability of Choice Hotels. Finally, the court also found that Choice Hotels was an additional insured and National Union owed it a duty to defend.

In analyzing whether Lloyd's also had a duty to defend Choice Hotels, the court looked at the policy language and reviewed Florida indemnity law:

Common law indemnity is an equitable remedy that arises out of obligations imposed through special relationships, but contractual indemnity is not concerned with "special relationships" or vicarious, constructive, derivative or technical liability; it is concerned with the express terms of the agreement to indemnify.... In cases involving contractual indemnity, the terms of the agreement will determine whether the indemnitor is obligated to reimburse the indemnitee for a particular claim.... Common law indemnity requires that the party seeking indemnification must be without fault, and its liability must be vicarious and solely for the wrong of another.... Common law indemnity usually allows passively negligent tortfeasors to recover from actively negligent tortfeasors.

Wausau at 6 (internal citations omitted).

Further, under Florida common law indemnity, "an indemnitee is entitled to indemnification not only for the judgment entered against it, but also for attorney's fees and court costs." Hiller Group, Inc. v. Redwing Carriers, Inc., 779 So. 2d 602, 604 (Fla. Dist. Ct. App. 2001). An indemnitee's insurer is also entitled to recover those expenses. 7

The court looked at the Lloyd's policy and determined that Comfort Inn's contractual liability to Choice Hotels was covered because it fell within the exception to the contractual liability exclusion. The court reasoned that, even in the absence of the contractual indemnity provision in the Franchise Agreement, "Comfort Inn would still owe a duty of indemnification to Choice Hotels under common law indemnity" because Choice Hotels was being sued only under a theory of vicarious liability and there were no allegations of active negligence by Choice Hotels. Thus, the court explained, Lloyd's:

is ultimately responsible for all damages incurred by Comfort Inn within [the underlying action] including all indemnity damages that Comfort Inn will owe to Choice Hotels (Choice Hotels' costs, damages, expenses, liability, reasonable attorney fees, and court costs resulting from the [underlying action]).

Wausau at 7.

The court then transmutes Lloyd's duty to indemnify its insured for covered damages, including the amount of attorney fees incurred by an indemnitee in an underlying suit and awarded as damages in a subsequent indemnity action brought by the indemnitee, to an obligation to defend a party who was not an insured under the policy.

Since the exceptions to the exclusions found in the Lloyd's Policy cover the costs of Choice Hotels' attorney's fees and costs but do not specifically exclude Lloyd's duty to defend, this Court finds that such doubts as to whether a duty to defend exists should be resolved in favor of the insured. Accordingly, ... Lloyd's may pay for such defense by having one law firm represent both Comfort Inn and Choice Hotels (unless such firm demonstrates a conflict in representing both), or pay for a separate defense for Choice Hotels.


At this point in the order, the court explains that it is not equating the obligation to pay defense costs with the insurer's duty to defend. But this is apparently what the court does by concluding that:

Lloyd's and National Union owe Choice Hotels a duty to defend. Accordingly, Lloyd's, as the primary insurer, is subject to pay all damages that foreseeable flow from the breach of its duty to defend, including attorney fees and other expenses incurred by [Wausau] on behalf of Choice Hotels.

Wausau at 10.

Starplex, supra, appears inconsistent with the court's decision in Wausau. In Starplex, the Oregon Court of Appeals applied the standards governing an insurer's duty to defend to determine whether the indemnitor had a duty to defend the indemnitee. In determining that the indemnitor had a (non-insurance) contractual duty to defend, the court compared the indemnity agreement to the underlying plaintiffs' complaints and found that the complaints included "allegations that fall within the coverage of the indemnity provision" so that the indemnitor had a duty to defend the indemnitee against the entire complaint. Starplex at 8.

Starplex doesn't support Wausau because, while equating the indemnitor's duty to defend with that of an insurer, Starplex did not morph the indemnitee into an insured under the indemnitor's policy. 8

Even though the court stated that it wasn't equating the duty to pay with a duty to defend, the court held Lloyd's liable for breaching its duty to defend Choice Hotels where Choice Hotels was not an insured of any type under the policy and nothing in the policy transformed the indemnitee into an insured of any type. Ordinarily, an insurer has no defense obligation to a stranger to the policy. 9


The Wausau court's singular order erased the distinction between an insurer's duty to indemnify and its duty to defend. As a practical matter, an insurer may want to participate in or assume the defense of an indemnitee because the insurer can then better control the defense and choose counsel. However, choosing to defend a non-insured indemnitee is something that the policy does not require an insurer to do. The Wausau court imposed damages against Lloyd's for breaching a duty it never had and essentially, "punishes ... an insurance company for acting legally." ATOFINA at 10, Hecht, J., dissenting.

Contributing author Rebecca C. Appelbaum is a senior associate practicing in the area of third-party coverage at Butler Pappas Weihmuller Katz Craig, LLP.

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1 See Maryland Cas. Co. v. Bailey & Sons, Inc., 41 Cal. Rptr. 2d 519, 523 (Cal. App. 1995) (citation omitted).
2 These issues often arise in the construction context because typical construction contracts contain indemnity provisions providing that the indemnitor shall defend, indemnify, and hold the indemnitee harmless from claims and damages, including attorney fees, arising out of the indemnitor's performance of the work. See e.g., Parker v. John Moriarty & Assoc., Inc., 2007 WL 2429719, 2 (Mass. Super. 2007); see also Watral & Sons, Inc. v. OC Riverhead 58, LLC, 884 N.E.2d 1048, 1051 (N.Y. 2008) (quoting the indemnity provision in AIA Standard Form Agreement Between Owner and Contractor).
3 "A contract of indemnity is not construed in precisely the same manner as is an insurance contract, because it is not necessarily an adhesion contract as is an insurance policy." Hegwood v. Ross Stores, Inc., 2006 WL 3422221 (N.D. Tex. 2006) (citations omitted).
4 Lynn v. Detroit Edison, 2006 WL 1408443 (Mich. App. 2006); Contra National Union Fire Ins. Co. of Pittsburgh, Pa. v. Starplex Corp., 2008 WL 2474664 (Ore. App. 2008) (the standard for determining the duty of a contractual indemnitor to defend an indemnitee is the same as an insurer's duty to defend an insured).
5 Grand Trunk W. R.R. v. Auto Warehousing Co., 686 N.W. 2d 756, 763 (Mich. App. 2004) (citations omitted).
6 Lynn at 3; see also National Union Fire Ins. Co. v. Lenox Liquors, Inc., 359 So. 2d 533, 536 (Fla. 1977).
7 See Continental Cas. Co. v. City of S. Daytona, 807 So. 2d 91, 93 (Fla. Dist. Ct. App. 2002)(citations omitted).
8 See also Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 2008 WL 2405005 (Tex. 2008) (the court found the insurer's obligation to defend the indemnitee arose out of the indemnitee's status as an additional insured under the indemnitor's policy and not out of the indemnity agreement in the service contract).
9 See Nateman v. Hartford Cas. Ins. Co., 544 So. 2d 1026 (Fla. 3rd Dist. 1989) (an insurer has no obligation to provide a defense to a stranger). See also Crawford v. GuideOne Mut. Ins. Co., 420 F. Supp. 2d 584 (N.D. Tex. 2006).