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What Does Indemnity Mean? – Part 1

question mark blue and white.jpgIndemnity

Most contracts contain an indemnity provision. While indemnity is neither exciting nor easy to understand, recognizing how it will affect your promises and expectations is very important.

There are two major kinds of indemnity, express indemnity and implied indemnity. Express indemnity is a provision in a contract where the parties spell out who is responsible for what. Implied (or equitable) indemnity arises when there is no express indemnity provision. This blog deals with express indemnity.

Indemnity has been defined as “the obligation resting on one party to make good a loss or damage another party has incurred.” Rossmoor Sanitation v. Pylon (1975) 13 Cal. 3d 622, 628. “[T]he question whether an indemnity agreement covers a given case turns primarily on contractual interpretation, and it is the intent of the parties as expressed in the agreement that should control. When the parties knowingly bargain for the protection at issue, the protection should be afforded.” Id. at 633. The parties have great freedom to allocate responsibility in indemnity and defense provisions of their contract, as long as those arrangements do not violate public policy. E. L. White v. City of Huntington Beach (1978) 21 Cal. 3d 497, 507.

As a practical matter, when you indemnify another person in a contract, you agree to be responsible for a range of problems that arise from the contract. This can be true even if the other party caused the problem. This means that you, or your insurance company, may have to defend the other party and ultimately settle a dispute.

There are Different Kinds of Express Indemnity

Modern cases recognize that each express indemnity provision must be dealt with on a case-by-case basis according to its own facts and the language used by the parties. Rossmoor Sanitation v. Pylon (1975) 13 Cal. 3d 622, 633. However, being creatures of habit, lawyers and judges like to think of a common framework when evaluating indemnity provisions. Forty years ago, a handy three-part framework was developed in a case named MacDonald & Kruse v. San Jose Steel (1972) 29 Cal. App. 3d 413. That case referred to express indemnity classifications as Type I, II, or III.

Type I indemnity provides that the party promising (the indemnitor) to protect the other (the indemnitee) will do so ‘expressly and unequivocally’ even if the indemnitee was negligent. MacDonald & Kruse at 419. The words of a Type I indemnity agreement typically include a phrase promising indemnity regardless of the active or passive negligence of the indemnitee. Type I indemnity is no longer available in all circumstances.

Type II indemnity goes almost as far, but does not include acts of “active” negligence of the indemnitee. This means that if the indemnitee caused the problem through affirmative acts, the indemnity might not apply.

Type III indemnity is even more restrictive. It comes into effect only when the problem was caused by the fault of the indemnitor (the promising party).

In construction contracts, by law, one cannot indemnify another for their ‘sole or willful negligence.’ Additionally, there have been a number of significant changes to indemnity in construction agreements since 2009. It is important to know what is no longer ‘on the table’ when it comes to indemnity. Consult an experienced construction attorney for your particular needs.

This blog is continued in Part 2.

This information is provided for informational purposes only and should not be construed as legal advice. It should not be acted upon without consulting a licensed California attorney about the facts, particular needs and questions of the person or entity considering these issues. Contact our office for assistance in understanding, negotiating, or litigating indemnity and defense obligations.