Today, the vast majority of commercial contracts include this provision, though few understand its meaning. In litigation, this legal concept serves as a shield protecting one party against claims arising from another party’s conduct. In a commercial contract, an indemnity provision is a party’s most effective tool for shifting risk and mitigating the financial cost of litigation.
Obtaining indemnification, however, is often an uphill battle. No one wants to pick up the check or bear the risk of exposure. It is therefore crucial to practice persistent advocacy for the enforcement of this contractual obligation.
Indemnity Defined
Indemnity is a legal obligation to protect another party from financial loss. An indemnification provision serves as a contractual remedy to redress a party’s financial loss resulting from litigation. An indemnity provision requires one party (the “indemnitor”) to agree to compensate another party (the “indemnitee”) for losses and/or damages arising from a claim, breach of duty, or some other event or condition set forth. It obligates the indemnitor to defend and indemnify the indemnitee. To “defend” and “indemnify” are distinct, important responsibilities assigned to the indemnitor to protect the indemnitee:
- Duty to Defend: requires the indemnitor to manage litigation tasks, including engaging counsel for representation, financing the defense, and reimbursing the indemnitee for any costs incurred from defending the claim.
- Duty to Indemnify: requires the indemnitor to compensate the indemnitee for its losses or damages that arise from a settlement or a verdict.
Together, these duties offer comprehensive protection against covered claims.
Indemnification by Application
Indemnification, however, is broadly applied. It arises from both actual and threatened claims, so no official filing is required. The indemnitor may also indemnify the indemnitee at any time, as there is no single deadline or triggering event for indemnity to attach. In short, there is no precise moment when indemnity attaches other than when the indemnitor agrees. Foreseeably, this creates a vast gray area in which the indemnitor typically resides.
For these reasons, identifying the indemnification provision and its obligations is merely half the battle. Although parties are quick to contract into these provisions, they are seldom as quick to perform their obligations upon receiving the demand. Whether it is the attorney, the client, or an insurance carrier, parties often drag their feet when the call for indemnification arrives. Patient persistence is therefore necessary in securing indemnification from another party.
How and When to Demand
From the initial notice of the claim through final judgment, an indemnitor may tender indemnification to the indemnitee. Early and consistent pressure is key, especially as favorable facts emerge.
As early as the initial claim, a claimant sets forth allegations against the parties. The indemnitee must use these allegations to determine whose conduct (or lack thereof) caused the loss and then leverage them against the indemnitor in a tender demand. If the demand for indemnification fails, the indemnitee should renew and strengthen the demand upon every significant development of the facts that further prove the indemnitor as the cause of the loss. The complaint, interrogatory responses, document production, and depositions may all yield evidence identifying the primary liable party. Every new finding should be included in the next demand, as the prior demand remains unmet.
A demand for indemnity may take many forms. It may be made formally or informally. A combination of both approaches is often most effective, particularly when the party continues to evade tender. The initial demand for indemnity should be made formally in a letter that includes the contract’s indemnification language, the claimant’s allegations, and an analysis showing how those allegations fall within the indemnity provision’s coverage. As discussed above, that letter should be renewed and strengthened following each significant development, incorporating more favorable facts as they emerge. Between formal requests, phone calls and follow-up correspondence (i.e., informal methods) should be used as a supplemental tool to keep pressing the party to tender. Eventually, escalation may become necessary, and a crossclaim may apply even more pressure to the indemnitor, as it will draw a larger audience.
Again, a party may indemnify another at any time. Whether the method is as significant as a crossclaim or as simple as a follow-up email, you never know which straw may be the last to cause the indemnitor to forfeit its position and to meet its contractual obligation to indemnify.
For more information about indemnification provisions and how to ensure their enforcement, please contact me or any other member of our litigation team.
William R. Philpot is an associate in the firm’s Birmingham office and focuses his practice on civil litigation, including insurance defense, construction, transportation, product liability, and premises and general liability. He assists in all phases of the litigation process, from initial case assessment through trial and appeal.
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