Making the Most of Standard Indemnity Clauses

Lesson To Be Learned

Like most legal disputes, the issues addressed in the Nusbaum case are driven by the specific facts involved. However, some helpful lessons can be drawn.

You will see that the duty to indemnify (and, hence, your right to be made whole under the indemnity clause) is not triggered until notice is given to the party from whom you are seeking indemnification. When a claim is made against you, you should review all of the applicable contracts and identify as early as you can all the entities against whom you may have a claim for indemnification. Put all of these parties on notice as promptly as you can.

Remember that indemnity is to make you whole and that you will incur fees and expenses in the defense of the underlying claim, as well as in your efforts to establish your right to indemnity. Unless the party that has agreed to indemnify you quickly and voluntarily agrees to do so without being coerced, your costs and fees to establish your right to indemnity could be significant. These expenses are not recoverable under the indemnity clause. You should probably track the costs and expenses separately, keeping the fees and expenses of establishing your right to indemnity separate and apart from the fees and expenses incurred in the defense of the underlying claim.

If you are making a claim under an indemnity agreement, like the one discussed here, you will likely only be indemnified in an amount that is proportionate to the negligence of the party that is going to indemnify you. As a result, you will likely only be awarded a proportionate amount of your fees, costs, expenses, and the damages you have paid.

History of the Case

In the Nusbaum case, the court dealt with the indemnity clause in the agreement between the general contractor and the subcontractor on a project that resulted in personal injury to a third party. There was also an indemnity clause in the agreement between the general contractor and the owner. The General Contractor—Subcontractor Agreement had the typical indemnity clause that read, in part, as follows.

… To the fullest extent permitted by law, the Subcontractor shall indemnify and hold harmless the Owner, Contractor, Architect, Architect's consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys fees, arising out of or resulting from performance of Subcontractor's work under this Subcontract, but only to the extent caused all or in part by negligent acts or omissions of the Subcontractor, the Subcontractor's Subcontractors, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expenses incurred in part by a party indemnified hereunder.…

The case arose from a person's fall on a walkway adjacent to a construction project. The owner of the project was made a defendant when the suit was first filed, and then the general contractor was added later. The owner filed a cross-claim against the general contractor, asserting a contractual claim for indemnification as provided in the contract documents. The general contractor then filed a third-party action seeking contractual indemnification or contribution from its subcontractor based on the general contractor's subcontract with the subcontractor.

Settlements were subsequently reached with the tort victim and the entities relevant for our purposes. The subcontractor settled with plaintiffs and secured a release not only for itself but also for both the project owner and the general contractor for liability arising out of subcontractor's negligence. The release between the plaintiff and the subcontractor provided that the plaintiffs were releasing the owner, the general contractor, and "all other companies, organizations or persons, who may have contractual, respondeat superior, or other derivative liability, for the alleged negligent actions" of the subcontractor in performing its work on the project.

The general contractor settled with the plaintiffs for $5,000 following the subcontractor's settlement. The settlement agreement between the plaintiffs and the general contractor released the plaintiffs' claim against the general contractor, but not the claims against the owner that may have arisen out of the general contractor's negligence. The owner then settled with the plaintiffs for $45,000.

Summary Judgment Motions and Rulings on the Indemnity Issues

The general contractor and the owner both filed motions for summary judgment on their respective indemnification claims. The trial court granted both motions.

At the hearing on the owner's claim for contractual indemnification against the general contractor, the owner sought $70,505.27, which represented the $45,000 settlement with the plaintiffs, its attorney fees and expenses for defending the plaintiffs' claim, and its fees in pursuing the indemnification claim. The trial court ruled in favor of the owner and ordered the general contractor to indemnify the owner in the amount of $68,994.77, which represented the owner's $45,000 settlement to the plaintiffs, and a portion of the owner attorney fees and expenses.

At the hearing on the general contractor's claim for contractual indemnification from the subcontractor, the general contractor sought $35,049.90, representing the $5,000 settlement with the plaintiffs and $30,049.90 for attorney fees and expenses in (1) defending the plaintiffs' claim and (2) establishing its right to indemnification. The trial court granted summary judgment in favor of the general contractor and against the subcontractor with the exception that the trial court did not award the general contractor the full amount of the legal expenses requested and did not award pre-judgment interest. The trial court ordered the subcontractor to indemnify the general contractor in the amount of $95,194.77, which represented the owner's recovery against the general contractor, the general contractor's $5,000 settlement with the plaintiffs, and a portion of the general contractor's attorney fees and expenses. The court also ordered the subcontractor to pay post-judgment interest on both the general contractor's and the owner's claims.

Everyone appealed. The subcontractor contended that the trial court erred in entering judgment in favor of the general contractor. Both the general contractor and the owner argued that the trial court erred in not awarding them the full amount of the legal expenses requested and in not awarding pre-judgment interest.

The general contractor appealed arguing the trial court erred in entering judgment in favor of the owner on the owner's claim for contractual indemnification for liability and expenses, including attorney fees the owner incurred as a result of defending against the plaintiffs' lawsuit.

Supreme Court Rulings

The supreme court held that the intent of the parties as expressed in the indemnification provisions of the contracts between the general contractor and the owner and between the general contractor and the subcontractor were questions of law for determination on appeal.

The Subcontractor—The General Contractor Indemnity Issue

On appeal, the subcontractor argued that because its agreement with the general contractor does not require it to indemnify the general contractor for the general contractor's own negligence, the trial court erred in entering judgment in favor of the general contractor and against the subcontractor on the general contractor's claim for contractual indemnification. As a result, the first issue presented is whether the general contractor's agreement with the subcontractor entitled the general contractor to receive indemnification for its own negligence.¹

Since Missouri law, like many, but not all states, provides that an indemnification contract "will not be construed so as to indemnify one against loss or damage resulting from his own negligent acts, unless such intention is expressed in clear and unequivocal terms," the court held that the phrase "to the extent caused" expresses an intention to limit the indemnitor's liability to the portion of fault attributed to the indemnitor.

The court held that the preferred construction of the indemnification provision is one that provides a reasonable meaning to each phrase of the provision, and, therefore, requires nothing more than that the subcontractor indemnify the general contractor for the subcontractor's negligence, even if the general contractor participates in part in the subcontractor's negligent conduct. The court concluded that to hold otherwise would make the intended expression "to limit liability to the acts of the indemnitor" meaningless.

The General Contractor/The Owner Indemnity

In its dispute with the owner, the general contractor argued that the trial court erred in entering judgment against the general contractor on the owner's claim for indemnification. The general contractor argued that the owner is not entitled to indemnification for the owner's defense of the plaintiffs' direct claim of negligence against the owner in that the indemnification provision does not clearly and unambiguously provide for indemnification for the owner's own negligence.

The owner's contract with the general contractor contains an indemnification provision substantially identical in all material respects to the provision contained in the general contractor's contract with the subcontractor. As held in the resolution of the general contractor/subcontractor dispute, the indemnification provision contained in the owner's Agreement with the general contractor does not indemnify the owner for the owner's own negligence.

Once the court determined that the indemnification provisions contained in the parties' agreements do not indemnify the owner and the general contractor for their own negligence independent of the indemnitor, the court considered whether the owner and the general contractor, were entitled to be reimbursed for the liability and legal expenses they incurred as a result of the plaintiffs' suit.

The owner, unlike the general contractor, did not concede that its settlement with the plaintiffs was for its own negligence independent of the general contractor's negligence. Therefore, the supreme court could not determine whether the trial court erred in finding that the owner was entitled to indemnification for its $45,000 settlement with the plaintiffs. This issue was sent back to the trial court for determination of what amount, if any, the owner settled the plaintiffs' claim against it for the negligence of the general contractor and the subcontractor.

If on remand the trial court would determine that the owner's settlement with the plaintiffs was merely an acknowledgment of its own negligence independent of the negligent acts or omissions of the general contractor and/or the subcontractor, then the owner is not entitled to receive indemnification for its settlement with the plaintiffs. If the trial court determines that the owner's settlement with the plaintiffs was based on the general contractor's and/or the subcontractor's negligence, the owner is entitled to be indemnified by the general contractor "to the extent" the owner's settlement with the plaintiffs reflects the general contractor's and/or the subcontractor's negligence.

If the general contractor is required to reimburse the owner for the owner's settlement with the plaintiffs, and the reimbursement includes money paid to settle negligence claims attributable to the subcontractor, then the subcontractor, in compliance with its contract with the general contractor, must reimburse the general contractor for those amounts.

Recovery of Legal Fees

The owner and the general contractor both incurred legal fees and expenses resulting from their respective defenses, and incurred legal fees and expenses in the defense of the negligence claims made against their respective indemnitors. Thus, a portion of the owner's legal expenses are attributable to the defense of itself for the alleged negligent acts or omissions of the general contractor and the subcontractor. Likewise, a portion of the expenses incurred by the general contractor resulted from the general contractor's defense of itself against the negligence of the subcontractor.

The owner and the general contractor are entitled to indemnification for legal expenses incurred as a result of defending against the negligence of their indemnitor and those for which their indemnitor was liable. The owner's and the general contractor's right to recover such legal expenses, however, did not arise until their indemnitor had notice of the lawsuit and an opportunity to defend.

After determining the portion of fault that is attributable to each party, the supreme court ordered the following reimbursements be made.

Based on the percentage of fault ascribed to the subcontractor, the subcontractor must reimburse the general contractor that same percentage of expenses and legal fees the general contractor incurred from the date that the subcontractor first received notice of the lawsuit to the date when the plaintiffs named the subcontractor as a defendant, if the subcontractor began fulfilling its obligation to defend against the lawsuit that it caused in part.
Based on the percentage of fault ascribed to the general contractor, the general contractor must reimburse the owner the same percentage of the expenses and legal fees the owner incurred from the date the general contractor first received notice of the plaintiffs' suit up to the date when the plaintiffs named the general contractor as the defendant.
Based on the percentage of fault ascribed to the subcontractor, the general contractor must reimburse the owner the same percentage of expenses and legal fees the owner incurred from the date the general contractor first received notice of the plaintiffs' suit to the date when the plaintiffs named the subcontractor as a defendant. In turn the subcontractor was required to reimburse the general contractor for all such amounts, because although they constitute legal expenses to the owner, they are indemnified liabilities and costs to the general contractor.

Recovery of Legal Fees in Pursuit of the Indemnity Claim

The owner and the general contractor both cross-appealed, contending the trial court erred in failing to award them legal expenses they incurred pursuing indemnification against their indemnitor. The supreme court held that while the indemnification provisions at issue provide for the recovery of legal expenses, including attorney fees incurred in the defense of a claim, nothing in the indemnification provisions suggest that it provided for the recovery of legal expenses incurred in establishing the right to indemnity. The supreme court ruled that the trial court was correct that the owner and the general contractor were not entitled to receive indemnification for legal expenses they incurred in pursuing indemnification against their indemnitor.

¹ Missouri Revised Statute 434.100 generally prohibits parties from entering into an agreement involving public or private construction work that calls upon one party to indemnify or hold harmless another person from that person's own negligence or wrongdoing. This statute applies only to contracts entered into after August 28, 1999. The relevant agreements in this case were all entered prior to August 28, 1999.