Let’s turn to a topic that many of us haven’t thought about since 1L year, or maybe the bar exam: indemnification. It’s not the sexiest of subjects, but it can have major implications for in-house lawyers, as I learned at “Maximizing Insurance and Indemnity in High-Exposure Litigation,” a panel at the 2016 Annual Meeting of the Association of Corporate Counsel (ACC) featuring the following speakers:
- Damian Brew, Managing Director/FINPRO, Marsh USA, Inc.
- Pamela Hans, Managing Shareholder, Anderson Kill
- Darin McMullen, Product Leader, Cyber Insurance, AON
- Mariah Panza Garcia, General Counsel & Chief Legal Officer, The Conco Companies
- Aileen Schwartz, VP & Assistant General Counsel, Hill International, Inc.
Pamela Hans offered a quick refresher on indemnification. An indemnity agreement involves a promise to pay, on behalf of someone else, a settlement, judgment, or similar obligation. The parties to the agreement are the indemnitor, who pays out the money, and the indemnitee, whose obligation is being covered. The indemnity might be a standalone agreement, or it might be part of a larger contract.
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Hans offered this cute mnemonic: think of the indemnitOR as Eeyore, and the indemnitEE as Piglet aka Piggy, who’s happy (note the rhyming). The indemnitor, like Eeyore, is pretty much always unhappy (because it has to pay money); the indemnitee, like Piggy, is happy (because its debt is covered).
Imagine, for example, a construction project involving many contractors. As a result of negligence on the construction site, a pedestrian walking by gets injured, or a neighbor suffers property damage. Who has to pay any money judgment obtained by the injured pedestrian or neighbor? That’s controlled by the indemnification provisions of the various contracts.
Darin McMullan explained that there are three basic forms of indemnity:
1. Broad form. Pretty much everything gets covered by the indemnitor (possibly even the indemnitee’s own negligence, although that’s not allowed in some states). This form results in few disputes between the parties because it’s all on the indemnitor’s plate, but it might not be the right form for your particular deal.
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2. Limited form. This generally makes the parties responsible for their own obligations – for example, if a liability to a third party arises because of negligence, the party at fault is the party that pays. This can give rise to disputes between the parties as they argue over who’s at fault.
3. Intermediate form. This falls in between the other two forms, in terms of allocating burdens and in terms of how easily it gives rise to indemnification fights.
Why should in-house lawyers care about indemnification? Isn’t the indemnification provision in a contract just a bunch of boring boilerplate? That attitude is a mistake, according to Darin McMullen, given what can be at stake:
- Significant dollars, sometimes in “bet the business” amounts.
- A company’s market share and reputation.
- Business relationships, future and present.
- Stakeholder interests.
So that’s what an indemnity agreement is and why it matters. What practice pointers did the panelists offer for in-house lawyers in drafting and negotiation indemnification provisions? Here are some highlights:
1. Maximize OPM – “other people’s money.”
Try as much as possible to enter into indemnity agreements that limit your client’s liability and instead shift the burden of covering claims to indemnitors and insurers. Whether this can be done will depend on a variety of factors, including the leverage of the parties to the negotiation, but one mistake often made by in-house lawyers is not even trying to alter the default provision. You might not get the indemnity you want, but if you don’t even ask, then you definitely won’t get it.
2. Seek to limit your client’s liability.
This is a corollary of the OPM principle above. For example, Aileen Schwartz suggested trying to limit your client’s liability to its proportional share of the claim or obligation, or to what’s covered by insurance plus some additional amount (trying to keep that additional amount as small as possible, subject to the applicable law).
Another example: think about getting a “litigation as a non-party” indemnity provision. This means that if you get dragged into litigation that you’re not a party to – for example, because you get served with a non-party subpoena – the indemnitor will cover your legal fees (which can be considerable).
Finally, never indemnify a party for its own negligence (a provision that’s not even enforceable in some jurisdictions).
3. Know your dance partner, aka the other party to the indemnity agreement.
If a contract refers to an “additional insured,” you should know all the relevant details – how that company is capitalized, what kind of insurance it has, and what kind of retention or deductible might apply. If a company you’re contracting with is a subsidiary of a larger company, see if you can get an agreement that the parent company will cover obligations of the sub.
4. Review “reservation of rights” letters carefully.
An insurer sends an insured a “reservation of rights” letter, in which the insurer basically says that coverage for a claim may not apply. This allows the insurer to investigate or even defend the claim without waiving its right to later deny coverage.
When you get such a letter as in-house counsel, said Mariah Panza Garcia, don’t just skim it and dump it in a file; give it a close read. The insurer isn’t always right. The reservation of rights letter can be challenged, and the insurer will sometimes change its mind as a result of a dispute by the insured.
5. Don’t give away the farm because of inadvertence or inattention.
All too often, in-house lawyers end up costing their clients a lot of money because they just didn’t bother considering indemnification as an issue. This isn’t always entirely their fault; sometimes their business-side colleagues contribute to the problem by pressuring them to close the deal quickly, and sometimes outside counsel screw up by taking the lead on contract negotiation and then dropping the ball on indemnification. But it’s still bad when it happens.
At the end of the day, you might have to accept an indemnity agreement or indemnification language that you really don’t like — maybe because you didn’t have the leverage to negotiate anything better – and your client might have to pay out a lot of money. But at least you as in-house counsel can console yourself with the knowledge that you spotted the issue, tried to take action, and fought the good fight.
2016 ACC Annual Meeting [Association of Corporate Counsel]
David Lat is the founder and managing editor of Above the Law and the author of Supreme Ambitions: A Novel. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at [email protected].