United States: An Introduction To Indemnity Law

When a complaint comes in, it's natural for attorneys to read it and immediately start addressing the elements and defense to the plaintiff's claim. In a legal-malpractice claim, for example, the first direction you may turn is to the case-within-a-case requirement. Or maybe you'll skim through a couple old briefs to refresh your memory about the statute of limitations.

In addition to attacking the claims of the plaintiff, it's crucial that attorneys take time to understand where else they need to focus their attention: Is there someone else to blame? Or, asked differently, what about indemnity? Unfortunately, a lot of attorneys think they understand indemnity law until it actually comes up. And then they don't.

Here's how the Michigan Supreme Court recently described indemnity: "Generally, indemnification is an equitable doctrine that shifts the entire burden of judgment from one tortfeasor who has been compelled to pay it, to another whose active negligence is the primary cause of the harm."¹ Or, more simply, "indemnity seeks to transfer the entire loss imposed on a tortfeasor to another, who in equity should pay."²

That makes sense. But how do you figure out if you should worry about or assert indemnity? And, even if you do figure that out, how do actually do that? And then what do you do if the other party doesn't agree with you?

The purpose of this article is to dip our toes in the indemnity-law pool and, hopefully, start to answer those questions. If an attorney is able to navigate the indemnity waters from the outset of a case, he or she has a significant chance of saving his or her client a lot of time and money.

I. Types of Indemnity

In Michigan, you're likely to run into indemnity-law issues in three different scenarios: contractual indemnity, common-law indemnity, and implied-contractual indemnity. Contractual indemnity, as you'd expect, is based on contract principles. Common-law indemnity, which has nothing to do with contracts, is more equity-based. And implied-contractual indemnity is sort of based on both, but it isn't really based on either.

A. Contractual Indemnity

Perhaps the most frequent situation where attorneys run into indemnity is in a contract. Rarely do they show up as stand-alone agreements. Instead, you see them as a so-called (and probably boilerplate) "indemnity" clause in a contract. Examples of contracts that might have an indemnity clause include agreements like real-property leases or rental agreements. The reason these types of contracts often include indemnity clauses makes sense: One party (the indemnitee) won't agree to do something, e.g., lease an office space or rent a car, unless the other party (the indemnitor) is willing to indemnify it.

Indemnity clauses, like any other contract clauses, are generally interpreted and applied as written.³ Unfortunately, like a lot of other contract clauses, they can also be filled with legalese and, as a result, difficult to interpret and apply—much less interpret and apply in a way that all parties believe is correct. And that interpretation and application often depends on what state's statutory-construction rules apply. For example, in California, if a party wishes to contract for indemnification against his or her own negligence, the indemnity clause must explicitly refer to negligence.⁴ Conversely, in Michigan, such an explicit reference to negligence isn't necessarily required.⁵

It's also true that, again like other contract clauses, indemnity clauses are construed against the drafter (and/or against the indemnitee).⁶ But this narrow statutory-construction rule is subordinate to the much broader rule of interpreting and applying contract clauses in a way that reflects the parties' intent: "While it is true that indemnity contracts are construed strictly against the party who drafts them and against the indemnitee, it is also true that indemnity contracts should be construed to give effect to the intentions of the parties."⁷ The Supreme Court has summarized the analysis as having three steps: (1) Is the indemnity clause ambiguous? (2) If so, what interpretation does extrinsic evidence suggest the parties intended? (3) And if extrinsic evidence doesn't clear it up, then—and only then—should courts interpret and apply the clause in a way that favors one party over the other.

But, of course, if you don't have a contract with an indemnity clause, none of this matters. Instead, you need to rely on something else. And under common law, you may still be in luck.

B. Common-Law Indemnity

Common-law indemnity has nothing to do with contract law at all. Instead, it arises solely out of equity: An innocent person should not be held liable for another person's wrongful acts.⁸ Unlike contractual indemnity, common-law indemnity's roots are in equity, so fault is its centerpiece: The indemnitor has no common-law obligation to indemnify unless he or she is at fault, and the indemnitee is not entitled to indemnity unless he or she is free from fault.⁹

So was your client free from fault? The answer to this question often comes down to whether or not your client was "actively" negligent.¹⁰ To determine whether that's the case, courts look to the primary plaintiff's complaint and ask whether it alleges "active," as opposed to "passive," negligence.¹¹ And if it does, he or she is likely out of luck.¹² But when the primary complaint alleges both active and passive negligence alternatively (or just passive negligence), the indemnity issue likely won't be resolved until the jury decides whether the principal defendant is liable and why via a special-verdict form.

Perhaps the best example of the active-versus-passive-negligence debate comes from the employer-employee context.¹³ That is, when an employee injures someone while on the job, it's certainly possible that the employer could be held vicariously liable for its employee's actions. The employer, then, could turn to the employee for common-law indemnity. However, if the employer was also actively negligent, this type of indemnity would be precluded. Moreover, practical economic concerns usually result in the employer deciding against doing so.

Similarly, another common example comes from auto lawsuits involving Michigan's owner's-liability statute, MCL 257.401.¹⁴ That is, when someone is injured in a car accident and sues one of the car's owners (despite the fact that the owner wasn't involved in the accident itself), the owner can still be held liable by operation of law. However, the owner can also turn to the driver for indemnity—unless, of course, he or she was actively negligent in some way. The most likely example of this involves negligent-entrustment claims. That is, a plaintiff not only claims that the car's owner is liable by operation of law as the owner but also that the owner is liable because he or she (actively) negligently entrusted the car to the driver. In that circumstance, indemnity alone might not be enough.

But if you don't have a contract with an indemnity clause, and you don't think common-law indemnity will save the day, your options get a little muddier.

C. Implied-Contractual Indemnity

In that situation, you're probably left with implied-contractual indemnity, which is, sort of, the halfway point between the two. Like common-law indemnity, fault plays (or at least could play) a significant role. But, like contractual indemnity, implied-contractual indemnity is based largely (or at least theoretically) on a contract—albeit one that's implied in fact based on the parties' actions and not an express agreement.

The best way to illustrate how this type of indemnity works is to turn to the case that it (arguably) stems from: Hill v Sullivan Equip Co.¹⁵ In that case, the principal plaintiff was injured at work when his arm got stuck on a screw conveyor.¹⁶ He sued the company that designed, manufactured, and installed the conveyor, but the manufacturer filed a third-party complaint against the employer, blaming the employer for requiring it to install the conveyor without a protective cover and falsely assuring it that the conveyor would be inaccessible to employees.¹⁷ At this point, you're probably thinking something like this: "Wait, it sounds like the manufacturer and the employer might have both been actively negligent." You're probably right, which is why the Court of Appeals held that common-law indemnity did not apply.¹⁸

But, after doing that, the Court turned to the manufacturer's alternative reliance on "an implied indemnity contract."¹⁹ It explained, "To determine whether a third-party plaintiff has stated a cause of action for indemnity based on an implied contract, the court must look to the third-party complaint as well as the original complaint."²⁰ Appreciating that the employer "unqualifiedly rejected a proposed protective cover for the machine which injured plaintiff and advised [the manufacturer] that the machinery would be situated and used so that it would be inaccessible to works while in operation," the Court of Appeals reversed the trial court's summary dismissal of the manufacturer's indemnity claim.²¹

The Court of Appeals explained its decision like this:

If you're thinking that sounds like a hard rule to apply in fact scenarios other than one that's practically identical, you're not alone. The reality is that it's fairly hard to guarantee when, if ever, implied-contractual indemnity is a sure thing. And, to make the muddy waters even muddier, it's not really clear whether a party asserting implied-contractual indemnity must be free from fault, which seems to directly contradict Hill v Sullivan Equip Co, the case where it comes from.²³

II. Indemnity in Practice

So you run into an indemnity issue—let's say it's a contractual-indemnity issue seeing as that's the most common. You represent a law firm that rents offices on the ninth and tenth floor of an office building in Southfield. When the firm's lights go out on the tenth floor, its office manager naturally contacts the building's maintenance supervisor to arrange repairs. The maintenance supervisor, in turn, hires an outside company that sends an employee to make the necessary repairs. But, when doing so, that employee is electrocuted and passes away because the maintenance supervisor negligently left a live wire uncovered.

Despite being (literally and figuratively) in the dark about the whole thing, the employee's estate files a wrongful-death lawsuit against several defendants including the firm. You represent that firm. Now what?

First, you'll turn to your lease: Does it include an indemnity clause? It probably has one like this:

Certainly sounds like the office building might need to indemnify, defend, and hold harmless the law firm in this case. So, again, now what?

First, you'll want to send a letter on the firm's behalf to the landlord as your "tender of defense" in the lawsuit. In that letter, you'll clearly ask the landlord to accept the firm's tender of defense in the case. Then you'll articulate exactly why you believe indemnity is required. So, here, you'll point to the fact that the estate alleges that the employee was electrocuted and ultimately died because the maintenance supervisor negligently left a live wire uncovered. You'll point out that, because the maintenance supervisor is the landlord's agent or employee, the landlord has contractually agreed to "indemnify, defend, and hold harmless" the firm from third-party claims, liability, and costs—all of which, you'll argue, it must do in this case.

But what if you didn't send that letter? Thankfully, in a lot of cases, that failure may not matter. In Ajax Paving Industries, Inc v Vanopdenbosch Constr Co, for example, the defendant argued that the plaintiff waived contractual-indemnity protections by failing to identify the same in the principal lawsuit.²⁴ But the Court of Appeals rejected that argument for a very straightforward reason: "[T]here is no contractual provision in this matter requiring that defendant be put on notice of an underlying lawsuit or that there be a tender of defense for the indemnification provision to apply."²⁵ "Because the contract itself contains no notice or tender-of-defense requirement and expressly provides for the recovery of all fees and costs associated with defending the underlying litigation, without limitation," the Court continued, "plaintiff is entitled to recover the entirety of those fees and costs."²⁶

Then, depending on where litigation stands, you'll likely end up needing to file a cross-complaint against the landlord, too. In that complaint, you'll walk through the factual background like we did above, you'll analyze the indemnity clause's language, you'll praise yourself for sending the "tender of defense" letter, and you'll ask the court to enter a judgment in favor of the firm and order the landlord to indemnify, defend, and hold harmless the firm from any and all claims, liability, and costs alleged by the estate as well as costs, attorney fees, and interest that the firm (wrongfully) incurred in the case.

But filing the cross-complaint, alone, obviously isn't the end of the road. And it's rarely as easy as a simple dispositive motion. Were any of the firm's employees around that uncovered live wire before or after the maintenance supervisor was? What if the supervisor testifies that he specifically recalled covering that wire? Does the firm, the landlord, or the outside company have any maintenance records that might tell us when that wire actually became uncovered? Questions like these are all factual issues that you may have to resolve before you file a motion for summary disposition. So it will likely prove necessary to send and answer some interrogatories and requests to admit, to take the office manager's and maintenance supervisor's depositions, and so on. And the answers to those questions could have a big impact on where you go from there.

To this point, this section of the article has largely focused on asserting indemnity against another party. But what happens when the tables are turned and you receive that "tender of defense" letter instead? The answer to that question depends on the specific circumstances of each case. For example, if you deny (or don't respond to) the request, you'd arguably be on the hook for the tendering party's costs and attorney fees. But if you accept the request, you could also be on the hook for that party's liability, which could be significant. And then you also have to consider your client's relationship with the other party: Will refusing to defend the tendering party end, or at least hurt, the business relationship? Ultimately, deciding how to handle a "tender of defense" letter can be one of the most significant decisions an attorney makes with his or her client in any given case.

And the way both parties handle a "tender of defense" letter can have even more consequences if the primary lawsuit settles. For example, "if an indemnitee settles a claim against it before seeking the approval of, or tendering the defense to, the indemnitor, then the indemnitee must prove its actual liability to the claimant to recover from the indemnitor."²⁷ Conversely, "the indemnitee who has settled a claim need show only potential liability if the indemnitor had notice of the claim and refused to defend."²⁸ Considering the likelihood of settlements today, this distinction can frequently make or break an indemnity claim. 

III. Conclusion

We've only dipped our toe in the indemnity-law pool in this article. And, in reality, the pool can seem more like the Pacific. And this article could go on for days, asking and trying to answer endless questions. What happens when a contract provides for the landlord to indemnify the tenant but common-law indemnity would require the tenant to indemnify the landlord? How does tort reform impact this analysis? What's the difference, theoretically and practically, between indemnity and contribution? Hopefully, once you poke holes in the opposing party's claim and figure out whether indemnity plays a role, you can cannon-ball into these questions as well.

Footnotes

1. St Luke's Hosp v Giertz, 458 Mich 448, 453; 581 NW2d 665 (1998).

2. Id.

3. See, e.g., Auto-Owners Ins Co v Campbell-Durocher Group Painting & General Contracting, LLC, 322 Mich App 218, 225; 911 NW2d 493 (2017).

4. See, e.g., Goldman v Ecco-Phoenix Elec Corp, 62 Cal 2d 40, 44; 396 P2d 377 (1964).

5. Compare Vanden Bosch v Consumers Power Co, 394 Mich 428, 428; 230 NW2d 271 (1975), with Fireman's Fund American Ins Co v Gen Elec Co, 74 Mich App 318, 323-324; 253 NW2d 748 (1977).

6. See, e.g., Reed v St Clair Rubber Co, 118 Mich App 1, 8; 324 NW2d 512 (1982).

7. Sherman v DeMaria Bldg Co, Inc, 203 Mich App 593, 596; 513 NW2d 187 (1994).

8. Lakeside Oakland Devel, LC v H & J Beef Co, 249 Mich App 517, 531; 644 NW2d 765 (2002); Sachse Const & Devel Co, LLC v AZD Assoc, Inc, unpublished per curiam opinion of the Court of Appeals, issued April 3, 2014 (Docket No. 310026), p 3.

9. Portland v Citizens' Telephone Co, 2016 Mich 632, 636; 173 NW 382 (1919); Williams v Unit Handling Sys Div of Litton Sys, Inc, 433 Mich 755, 760; 449 NW2d 669 (1989).

10. Hill v Sullivan Equip Co, 86 Mich App 693, 696; 273 NW2d 527 (1978).

11. Id. at 696-697.

12. Id. at 697.

13. See, e.g., Provencal v Parker, 66 Mich App 431, 438-439; 239 NW2d 623 (1976).

14. See, e.g., Tahash v Flint Dodge Co, 399 Mich 421, 425-428; 249 NW2d 110 (1976).

15. Hill v Sullivan Equip Co, 86 Mich App 693; 273 NW2d 527 (1978).

16. Id. at 695.

17. Id. at 696.

18. Id. at 696-697.

19. Hill, 86 Mich App at 697, citing Dale v Whiteman, 388 Mich 698, 705; 202 NW2d 797 (1972).

20. Id.

21. Id. at 698.

22. Id.

23. See, e.g., Hadley v Trio Tool Co, 143 Mich App 319, 330-331; 372 NW2d 537 (1985); Lawrence v Group Admin Agency, Inc, 467 Mich 884; 651 NW2d 392 (2002) (Markman, J., dissenting).

24. Ajax Paving Industries, Inc v Vanopdenbosch Constr Co, 289 Mich App 639, 648; 797 NW2d 704 (2010).

25. Id. at 649.

26. Id.

27. Grand Trunk Western RR, Inc v Auto Warehousing Co, 262 Mich App 345, 354-355; 686 NW2d 756 (2004).

28. Id. at 355.

Originally published by The Michigan Bar Journal, March 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.