Indemnity Agreements and Negligence
Does an indemnity agreement provide protection when the obligated party has not been negligent? The answer depends on the language used.
In California, indemnity is defined as “a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person.” Cal. Civ. Code § 2772. The California Supreme Court has characterized indemnity as “the obligation resting on one party to make good a loss or damage another party has incurred.” Rossmoor Sanitation, Inc. v. Pylon, Inc. (13 Cal. 3d 622 at 628 (1975)).
As the cases discussed below make clear, the parties to an indemnity agreement are free to negotiate their own terms, subject to certain parameters. One issue that the courts have had to grapple with in interpreting these agreements is the impact of negligence (or lack of it) on the part of the person/entity supplying the indemnity. A related issue is the impact of negligence on the part of the person to be protected.
In this article, I will discuss some of the case law dealing with these questions and, in the process, explain key points to be considered by those engaged in drafting and negotiating contractual indemnities.
Core Concepts and Key Cases
The starting point in analyzing indemnity agreements is the case of MacDonald & Kruse, Inc. v San Jose Steel Company, Inc., 29 Cal. App. 3d 413 (1972). In that decision, the court of appeal outlined three types of indemnity clauses. The first—often referred to as a “Type I” clause—is one in which the “indemnitor” (that is, the person agreeing to provide protection) agrees to clearly and unequivocally indemnify another person (who is referred to as the “indemnitee”) for that person’s negligence, whether active or passive.
The second type of indemnity clause—“Type II”—is where the indemnitor is liable for loss and damage arising from the indemnitee’s passive negligence only. This version is also called a general indemnity clause.
The third type of clause discussed by the court—Type III—exists where the agreement provides indemnification for liabilities caused by the indemnitor only. See generally MacDonald & Kruse, 29 Cal. App. 3d at 420.
Although the tripartite rubric of MacDonald & Kruse appears straightforward, subsequent cases have moved away from the approach of trying to fit all indemnities into one of these three categories. Instead, later decision have focused on what the parties intended in the context of the given case. (This is the approach suggested by the dissenting justice in MacDonald & Kruse. See 29 Cal. App. 3d at 427.)
Only three years after MacDonald & Kruse was decided by the court of appeal, the California Supreme Court confronted indemnity issues in Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal. 3d 622 (1975). Rossmoor had engaged a contractor (Pylon) to construct a sewage pump station and sewer lines. Two workmen were injured by a collapsed trench and Rossmoor sought to enforce Pylon’s agreement. Pursuant to that agreement, Pylon committed to indemnify Rossmoor against all claims for damages arising out of construction work.
The state’s high court held that an indemnity agreement may cover an indemnitee’s own negligence but it must clearly and explicitly do so. Moreover, a general indemnity clause—meaning a clause that “does not address itself to the issue of an indemnitee’s negligence”—will not be interpreted to provide indemnity if the person seeking protection has been actively negligent. See Rossmoor, 13 Cal. 3d at 629.
However, the court acknowledged that this “active-passive dichotomy” was not “wholly dispositive” and went on to say that the effect of an indemnity agreement turns primarily on contractual interpretation and it is the intent of the parties that should control. Rossmoor, 13 Cal. 3d at 633.
The court concluded that Rossmoor was only passively, not actively, negligent. Because of that, Pylon was liable to indemnify Rossmoor since that was the protection the parties bargained for, given the language of the contract and the facts of the case.
Twelve years later, in Morton Thiokol, Inc. v Metal Building Alteration Co., 193 Cal. App. 3d 1025 (1987), the court of appeal faced a case where a worker was injured during construction due to the active negligence of the owner and contractor.
The owner-indemnitee sought indemnity from the contractor-indemnitor. Notwithstanding the owner-indemnitee’s active negligence and the fact that the indemnity clause was silent as to that circumstance, the court concluded that “denying indemnity here would deprive the [owner] indemnitee of the benefit of its bargain and read out of the contract essential provisions intended by the parties to govern their relationship.” Morton Thiokol 193 Cal. App. 3d at 1031. The court ruled in favor of the owner-indemnitee.
Rooz v. Kimmel
In Rooz v. Kimmel, 55 Cal. App. 4th 577 (1997), a title company delayed over 4 months before it recorded a security interest on a parcel of real estate. As a result, the secured party lost priority and the security interest ultimately proved to be worthless.
The secured party sued the title company but there was a twist: the title company was the indemnitee under an agreement with the secured party. The title company was able to avoid liability by relying on that agreement. The trial court held that but for the indemnity clause, the title company would have been liable for its own negligence.
On appeal, the indemnity clause was viewed as a release of liability (in essence, as an exculpatory agreement) rather than as an indemnity agreement. (The court of appeal noted, however, that the same rules of interpretation would apply to both types of contracts. See Rooz, 55 Cal. App. 4th at 583.) The court of appeal said that an indemnity agreement may provide for protection against the indemnitee’s own negligence but such agreement must be clear and explicit and will be strictly construed against the person seeking to enforce it. Rooz, 55 Cal. App. 4th at 584.
The Rooz court acknowledged the general rule expressed in Rossmoor, but observed that such a rule was merely a tool to ascertain intent, and the parties’ intention as expressed in the agreement controls; it may even create indemnity for the indemnitee’s active negligence. Rooz, 55 Cal. App. 4th at 584 quoting Rossmoor, 13 Cal. 3d at 634.
A further observation is in order. The Rooz court noted that the title company had only agreed to record the security as a favor, was driving no commercial benefit for doing so, and only agreed to do so if Rooz agreed to indemnify it from “any and all liabilities” in language broad enough to encompass the title company’s active negligence. The court concluded that it was the intention of the parties to release the title company from liability for its own negligence; to deprive the title company of the release from liability would be to deprive it of the benefit of its bargain. Rooz, 55 Cal. App. 4th at 587.
Accordingly, even though the indemnity agreement did not expressly address the issue of the indemnitee’s negligence and although the court criticized the contractual wording (Rooz, 55 Cal. App. 4th at 588), it held that the indemnity extended to the title company’s active negligence and released it from all liability.
Finally, in McCrary Construction Co. v Metal Deck Specialists, Inc., 133 Cal. App. 4th 1528 (2005), a general contractor-indemnitee sought to enforce an indemnity against a subcontractor-indemnitor for liabilities “on account of, or related to, any act or omission of the subcontractor” arising from a worksite accident where both parties were negligent.
The trial court enforced the indemnity on the basis of Morton Thiokol, holding that to do so would enforce the parties’ intent. On appeal, the court opined that Rossmoor’s “general indemnity” covered MacDonald & Kruse “type II” and “type III” clauses (133 Cal. App. 4th at 1539) and noted that under the MacDonald & Kruse approach the indemnity in question would be a “type III” clause. Under such a provision, the negligent general contractor-indemnitee, would not be indemnified. McCrary Construction, 133 Cal. App. 4thth at 1538. The court of appeal reversed the trial court and distinguished Morton Thiokol since, in that case, “the same contract requiring indemnity also required the indemnitor to assume full responsibility for precisely the hazard that resulted in liability” (133 Cal. App. 4thth at 1540), whereas in the present case the court found that the language of the indemnity clause did “not purport to require indemnity from [the subcontractor] for this conduct by [the general contractor]” and that there was nothing in the contract to suggest this was the parties’ intention. See 133 Cal. App. 4thth at 1542.
What If The Indemnitor Is Not Negligent?
Having reviewed cases assessing the effect on an indemnitor’s obligation to cover an indemnitee’s negligence, it is now time to review cases assessing an indemnitor’s lack of negligence altogether.
For example, in Continental Heller Corporation v Amtech Mechanical Services, 53 Cal. App. 4th 500 (1997), the court faced a case where neither the indemnitor nor the indemnitee were negligent. Nevertheless, the subcontractor-indemnitor in that context was found liable to indemnify a general contractor-indemnitee for loss and damage arising from the installation of a faulty valve installed by the subcontractor, even though the subcontractor was not negligent and did not proximately cause the loss and damage.
The subcontractor did not deny that its installation and the loss came within the wording of the indemnity. But the court found that the risk allocation reflected in the indemnity agreement was not unreasonable, since the subcontractor was in a better position to protect against loss arising out of its performance of the contract and both parties were large and sophisticated and could be expected to review, understand and bargain over the indemnity provisions. Continental Heller, 53 Cal. App. 4th at 507 and 508. The court also found that the indemnity was not unconscionable, since the subcontractor was a large company not a small-time subcontractor being saddled with ruinous liability. See 53 Cal. App. 4th at 508.
Moreover, the court noted that the indemnity agreement did not impose unlimited liability on the subcontractor since liability was tied to its acts or omissions in performing the contract and expressly did not extend to losses arising from the general contractor’s sole negligence or misconduct. 53 Cal. App. 4th at 508.
Another decision, Heppler v. Peters, 73 Cal. App. 4th 1265 (1999), concerned two broadly worded indemnity agreements whereby two sub-contractors agreed to indemnify the developer in a construction project for claims arising from the performance of the work.
In its ruling, the court noted the move away from the mechanical application of the passive/active negligence test of MacDonald & Kruse and towards an approach designed to determine the intention of the parties. The court discussed the range of options available to parties when they agree to an indemnity—from where the indemnitor must indemnify the indemnitee for the indemnitee’s active negligence, to where negligence by the indemnitor is a condition of the indemnity, and finally to where the indemnity operates even if the indemnitor is not negligent at all.
The Heppler court explained that under the facts presented, the work in question was of limited scope to be combined with other sub-contractor’s work, supporting the view that the sub-contractors’ indemnity obligations only arose if they were negligent. 73 Cal. App. 4th at 1279. The court distinguished Continental Heller on the basis that the indemnity language in that case made it clear conduct or fault was of no consequence in determining if the indemnity was triggered; the risk allocation was reasonable since the sub-contractor in that case was a large entity that negotiated the contract (unlike the small sub-contractors presented with pre-printed contracts in Heppler).
In addition, the Heppler court took note that the subcontractors in Continental Heller could control the work, unlike those in the present case who were under the developer’s supervision. If the “small-time” subcontractors were to be liable, the Heppler court stated, they would be faced with ruinous liability. 73 Cal. App. 4th at 1281.
General construction law also mitigated against finding the subcontractors liable in Heppler since doing so would have acted to transfer the strict liability imposed on developers to the sub-contractors without specific contractual language and, furthermore, in the face of the consistent refusal to do so in the case law based on public policy grounds. See Heppler, 73 Cal. App. 4th at 1280.
Noting that indemnity provisions are to be strictly construed against the indemnitee and holding that specific, unequivocal language was required to impose an indemnity obligation regardless of the indemnitor’s negligence, the court held that the language of the indemnities did not show a mutual understanding that the developer would be indemnified even if the work was not negligent. The court ruled that the sub-contractors had to be negligent before they were liable for contractual indemnity. Heppler, 73 Cal. App. 4th at 1279.
Although the MacDonald & Kruse categorization and the general rule in Rossmoor are still used by the courts to interpret indemnity agreements, the cases discussed above show that the courts will enforce indemnities that do not comply with these rigid formulations.
In both Rooz and Morton Thiokol, the courts imposed liability for an indemnitee’s negligence even though the language of the indemnities in those cases did not expressly address that issue (as apparently required by MacDonald & Kruse and Rossmoor). Rather, as the last four decades of decisional law have taught us, the touchstone is the intention of the parties as expressed in the agreement rather than any prescriptive categorization or prohibition.
Furthermore, while a traditional indemnity contract (as opposed to one operating as an exculpatory agreement) giving rise to an indemnity obligation where both the indemnitor and the indemnitee are negligent does not generally lead to an unconscionability analysis, it is noteworthy that the courts have subjected indemnities imposing liability on an indemnitor who has not been negligent to such an analysis, looking at both procedural unconscionability (the bargaining strength of the parties) and substantive unconscionability (the possibility of ruinous or unlimited liability).
As with any contract, the key to a well-structured indemnity agreement is clear language that properly expresses the true intention of the parties.
Brian McMahon is a San Jose based attorney specializing in commercial contracts and licensing.