Indemnity Overview
Businesses and individuals enter into indemnification or hold harmless agreements to protect one party of the transaction from the risks or liabilities created by the other party of the transaction. To defray the costs in defending against claims and lawsuits, insured parties routinely turn to their insurance company when the other party to the transaction seeks indemnity pursuant to an indemnification agreement. These demands for indemnity are often fact intensive based on specific contract language and can lead to potential coverage issues.
In these claims for indemnity, Courts from various states have been asked to assess whether indemnity is owed under substantially the same indemnification agreement language. Despite the similar language, Courts from different states have reached different conclusions. Thus, both insureds and insurers are cautioned that while the facts and terms of indemnification provisions guide the conversation on whether indemnification is owed, the state law used to interpret these provisions will often dictate the outcome of that conversation.
The Quest for Indemnity
Most recently, the Alabama Supreme Court weighed in on this issue in Mobile Infirmary Association v. Quest Diagnostics Clinical Laboratories, Inc. In March 2014, Quest and Mobile Infirmary entered into a Laboratory Management Agreement (“the LMA”), in which Quest agreed to manage Mobile Infirmary’s onsite clinical laboratory facilities and to provide clinical testing services used by Mobile Infirmary’s medical staff to diagnose and treat patients. The LMA also contained indemnity provisions whereby the parties agreed to indemnify each other against losses caused by the party’s own acts or omissions.
In 2017, the wife and personal representative of a Mobile Infirmary patient commenced a wrongful-death action against Mobile Infirmary, other medical facilities, and doctors after the patient presented to Mobile Infirmary with flu-like symptoms and died shortly thereafter. According to the complaint, the patient died as a proximate result of the acts or omissions of Mobile Infirmary and its staff in failing to properly diagnose and treat the patient’s condition.
Eventually Mobile Infirmary settled the Estate’s claims against it. Shortly before the Estate’s claims against Mobile Infirmary were dismissed, Mobile Infirmary sought contractual indemnity from Quest for claims arising from Mobile Infirmary’s own alleged negligence or, alternatively, for the percentage of its losses attributable to Quest’s alleged negligence under a proportionate fault scheme.
During discovery exchanged between Mobile Infirmary and Quest, Mobile Infirmary admitted the patient’s death was caused, in part, by the negligence of Mobile Infirmary. Quest filed a dispositive motion on this basis, which the trial court granted. Mobile Infirmary appealed.
Indemnity Must be Clear and Unequivocal
On appeal, the Alabama Supreme Court affirmed summary judgment and held if parties “clearly” and “unequivocally” enter into an agreement whereby one party agrees to indemnify the other against the indemnitee’s own wrongs then such agreements will be upheld. In reviewing the LMA indemnity provision language, the Court held the provisions do not clearly and unequivocally address what happens when a claim arises out of acts of both parties. In the Court’s view, the LMA’s provisions require indemnification for all liability; but, if both are at fault, the agreement is unclear how both can be liable in full. The Court criticized the lack of clear language that, in the event there is a claim that arises out of partial liability or concurrent acts by both parties, indemnification will be required for a proportionate share. Without a “clear” and “unequivocal” agreement addressing how indemnification is owed in such a concurrent-fault situation by way of a proportionate fault formula or otherwise, Alabama Courts will not superimpose one into the parties’ agreement.
While the reasoning of this ruling may be confined to Alabama, the decision highlights the importance of which state’s law controls the interpretation of the indemnification agreement. When addressing difficult decisions to accept a tender for indemnification both insureds and insurers must not only look at the facts and terms of the indemnification provision to determine whether to accept the tender, they must also look at applicable law that will interpret the indemnification agreement to fully assess whether indemnity is owed under the agreement and whether coverage may be triggered.