Indemnity: Don’t get harmed by your “hold harmless” agreement!

May 23rd, 2017 By Eric S. Peabody

At a certain level of sophistication, contracting parties begin incorporating indemnity provisions in their contracts as a risk-assignment mechanism. Without input from knowledgeable counsel, these provisions can impose an unexpected burden on unsuspecting parties, fail to offer the protection sought by the provision’s proponent, or lull the parties into believing that insurance is unnecessary or redundant. The arcane rules governing the enforcement of indemnity agreements and the continuing confusion surrounding their application make them the ultimate “trap for the unwary.”

Texas “fair notice” standards for indemnity agreements

Contractual agreements that are “used to exculpate a party from the consequences of its own negligence” are subject to “fair notice requirements” because they represent an “an extraordinary shifting of risk.” Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993).  “Fair notice” consists of two elements: the express negligence rule and conspicuousness.  Id. The express negligence rule states that “a party seeking indemnity from the consequences of that party’s own negligence must express that intent in specific terms within the four corners of the contract.”  Id. Conspicuousness mandates “that something must appear on the face of the [contract] to attract the attention of a reasonable person when he looks at it.”  Id.  Compliance with both of the fair notice requirements is a question of law for the court. Dresser Indus., 853 S.W.2d at 509. An agreement that does not “satisfy either of the fair notice requirements when they are imposed is unenforceable as a matter of law.” Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex. 2004) “However, if both contracting parties have actual knowledge of the plan’s terms, an agreement can be enforced even if the fair notice requirements were not satisfied.” Id.

Although it involves an objective “reasonable person” standard, conspicuousness has a subjective feel to it – if the indemnitor insists she did not notice the indemnity clause, is she unreasonable?   Conspicuousness does not excuse a contracting party’s duty to read the contract it signs and also does not require a particular size or font for contractual provisions; it merely requires that the indemnity provision draw attention to itself in a way that separates it from the remaining provisions through contrasting font style, size, color, capitalization, bolding, or headings.  When in doubt, BRING IT OUT.

The “express negligence” test requires that the liability to be covered be clearly and expressly stated; liability by implication – no matter how logical – is fatal.  For example, a clause “excepting only claims arising out of accidents resulting from the sole negligence of the Owner” is insufficient to require indemnity of the Owner’s negligence because it is merely an “implicit indemnity agreement requiring [the indemnitor] to deduce his full obligation” rather than an express agreement. Atlantic Richfield Co. v. Petroleum Pers., Inc., 768 S.W.2d 724, 725 (Tex. 1989). Because indemnity agreements are strictly construed, they must “expressly identify the precise category of liability for which indemnification was sought.”  Quorum Health Res., L.L.C. v. Maverick Cty. Hosp. Dist., 308 F.3d 451, 467 (5th Cir. 2002).  The same is true for the indemnity of strict products liability and claims with a heightened intent or culpability. See Houston Lighting & Power Co. v. Atchison, Topeka, & Santa Fe Ry. Co., 890 S.W.2d 455, 459 (Tex. 1994);  Hamblin v. Lamont, 433 S.W.3d 51, 57 (Tex. App.–San Antonio 2013, pet. denied).

Don’t confuse indemnity with insurance

Application of the express negligence rule does not turn on whether the indemnitee is ultimately found liable but is instead “established as a matter of law from the pleadings.”

Fisk Elec. Co. v. Constructors & Assocs., Inc., 888 S.W.2d 813, 815 (Tex. 1994). The indemnitee’s assertion that it is not liable in negligence (or other theory subject to the fair notice requirements) is irrelevant to whether the express negligence rule applies. Safeway, Inc. v. PDX, Inc., No. 15-10552, 2017 WL 243337, at *5 (5th Cir. Jan. 19, 2017).  The rule applies based on the pleadings, regardless of the outcome of the claims. Id. If the indemnity agreement does not expressly cover a cause of action, the indemnitor cannot be required to pay defense costs related to that action. Fisk Elec., 888 S.W.2d at 815. “Either the indemnity agreement is clear and enforceable or it is not. “  Id. In other words, indemnity agreements do not require an indemnitor to defend claims not clearly covered by the agreement.

The strict construction of indemnity agreements against indemnity stands in contrast to the liberal interpretation of insurance policies in favor of coverage.  In insurance, ties go to the insured; in indemnity, ties go to the indemnitor. Therefore, even if the indemnity agreement obligates the indemnitor to “defend” claims, the indemnitee should not expect the same kind of protection the indemnitee would enjoy as an additional insured under an insurance policy that provides defense of the “suit” even when most of the claims are not covered under the policy.