Indemnity is an “obligation resting on one party to make good a loss or damage another party has incurred.” Essentially, indemnity involves a transfer of risk from one party to another, where one party agrees to protect another for its losses. The indemnitor is the party who is obligated to indemnify or protect the other party. The indemnitee is the party receiving protection for its actions.
In California indemnification may be
(2) equitable (encompassing implied contractual indemnity); or
(3) statutory. We explore express indemnity below.
Express indemnity is an obligation arising from contractual language between two parties where one party holds the other party harmless upon the “occurrence of specified circumstances.” A common scenario is this: A agrees to indemnify B. Later, when B is sued by C, A reimburses B for C’s claims against B, provided the claims fall within A and B’s agreement.
Drafting Indemnification Agreements
Freedom to Allocate Indemnification Responsibilities
Parties have “great freedom to allocate [their indemnification] responsibilities[,]” and courts will enforce an express indemnity contract according to the terms of the parties’ agreement. Courts will, however, fill in gaps in the indemnification agreement according to a list of rules laid out in California’s Civil Code, unless the parties state otherwise.
Civil Code Section 2778 provides a list of rules for interpreting indemnification contracts which include
- Upon an indemnity against liability, the indemnitee may recover upon being liable;
- Upon an indemnity against claims, demands, damages, or costs, the indemnitee may not recover without payment;
- An indemnity against claims, demands, or liability embraces the costs of defense against claims;
- The indemnitor is bound, upon request of the indemnitee, to defend actions brought against the indemnitee, but the indemintee still has the right to conduct his defense if he chooses;
- If the indemnitor fails to defend the indemnitee, a recovery against the indemnitee is conclusive in the indemnitee’s favor against the indemnitor;
- If the indemnitor whether a principal or surety in the agreement, does not have reasonable notice of the claim against the indemnitee or is not allowed to control the defense, then a judgment against the indemnitee is only presumptive evidence against the indemnitor; and
- A stipulation that a judgment against the indemnitee is conclusive upon the indemnitor does not apply if the indemnitee had a good defense but failed to establish it in his action.
Contractual Limitations – Unlawful Acts, Punitive Damages, & Negligence
While contracting parties may voluntarily define their duties to each other, there are limitations on indemnity agreements; that is, one party cannot agree to indemnity another for everything. In California, parties cannot create indemnification agreements for future, known unlawful acts but can make agreements for a past known unlawful act, except for felonies. California’s public policy also prohibits indemnification for punitive damages.
Parties can contract to indemnify for negligence. California courts distinguish between active and passive negligence.
Design and Construction Contracts
Special rules apply to indemnification agreements involving design and construction contracts. Design professionals, for example, have different duties to defend and indemnify from those described in Section 2778(3).
There are only some of the rules that apply to indemnification agreements. Other issues which may be the subject of future articles include the duty to indemnity versus duty to defend; effects of the statute of limitations; limitations on liability; and equitable and statutory indemnity. Thoughtful and careful drafting of indemnification agreements helps eliminate conflicts and alleviate problems. If you have questions or concerns regarding indemnification or need help interpreting or drafting an indemnification agreement, please contact an attorney.