Let’s flip to a subject that many people haven’t considered since 1L yr, or perhaps the bar examination: indemnification. It’s not the sexiest of topics, however it could possibly have main implications for in-home legal professionals, as I discovered at “Maximizing Insurance and Indemnity in High-Exposure Litigation,” a panel at the 2016 Annual Meeting of the Association of Corporate Counsel (ACC) that includes the following audio system:
- 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 provided a fast refresher on indemnification. An indemnity settlement includes a promise to pay, on behalf of another person, a settlement, judgment, or comparable obligation. The events to the settlement are the indemnitor, who pays out the cash, and the indemnitee, whose obligation is being coated. The indemnity could be a standalone settlement, or it is perhaps half of a bigger contract.
Hans provided this cute mnemonic: consider the indemnitOR as Eeyore, and the indemnitEE as Piglet aka Piggy, who’s joyful (notice the rhyming). The indemnitor, like Eeyore, is just about all the time sad (as a result of it has to pay cash); the indemnitee, like Piggy, is comfortable (as a result of its debt is roofed).
Imagine, for instance, a development undertaking involving many contractors. As a results of negligence on the development website, a pedestrian strolling by will get injured, or a neighbor suffers property injury. Who has to pay any cash judgment obtained by the injured pedestrian or neighbor? That’s managed by the indemnification provisions of the numerous contracts.
Darin McMullan defined that there are three primary types of indemnity:
1. Broad type. Pretty a lot every thing will get coated by the indemnitor (probably even the indemnitee’s personal negligence, though that’s not allowed in some states). This type leads to few disputes between the events as a result of it’s all on the indemnitor’s plate, nevertheless it won’t be the proper type on your specific deal.
2. Limited type. This usually makes the events chargeable for their very own obligations – for instance, if a legal responsibility to a 3rd social gathering arises due to negligence, the social gathering at fault is the get together that pays. This may give rise to disputes between the events as they argue over who’s at fault.
three. Intermediate type. This falls in between the different two types, when it comes to allocating burdens and when it comes to how simply it provides rise to indemnification fights.
Why ought to in-home legal professionals care about indemnification? Isn’t the indemnification provision in a contract only a bunch of boring boilerplate? That angle is a mistake, in response to Darin McMullen, given what could be at stake:
- Significant dollars, typically in “bet the business” quantities.
- A firm’s market share and status.
- Business relationships, future and current.
- Stakeholder pursuits.
So that’s what an indemnity settlement is and why it issues. What apply pointers did the panelists supply for in-home legal professionals in drafting and negotiation indemnification provisions? Here are some highlights:
1. Maximize OPM – “other people’s money.”
Try as a lot as potential to enter into indemnity agreements that restrict your shopper’s legal responsibility and as an alternative shift the burden of masking claims to indemnitors and insurers. Whether this may be carried out will depend upon quite a lot of elements, together with the leverage of the events to the negotiation, however one mistake typically made by in-home legal professionals just isn’t even making an attempt to change the default provision. You won’t get the indemnity you need, however when you don’t even ask, you then undoubtedly gained’t get it.
2. Seek to restrict your shopper’s legal responsibility.
This is a corollary of the OPM precept above. For instance, Aileen Schwartz recommended making an attempt to restrict your shopper’s legal responsibility to its proportional share of the declare or obligation, or to what’s coated by insurance coverage plus some further quantity (making an attempt to maintain that further quantity as small as potential, topic to the relevant law).
Another instance: take into consideration getting a “litigation as a non-party” indemnity provision. This signifies that in case you get dragged into litigation that you simply’re not a celebration to – for instance, since you get served with a non-social gathering subpoena – the indemnitor will cowl your legal charges (which might be appreciable).
Finally, by no means indemnify a celebration for its personal negligence (a provision that’s not even enforceable in some jurisdictions).
three. Know your dance associate, aka the different celebration to the indemnity settlement.
If a contract refers to an “additional insured,” you need to know all the related particulars – how that firm is capitalized, what sort of insurance coverage it has, and what sort of retention or deductible may apply. If an organization you’re contracting with is a subsidiary of a bigger firm, see if you will get an settlement that the father or mother firm will cowl obligations of the sub.
four. Review “reservation of rights” letters rigorously.
An insurer sends an insured a “reservation of rights” letter, through which the insurer principally says that protection for a declare might not apply. This permits the insurer to research and even defend the declare with out waiving its proper to later deny protection.
When you get such a letter as in-home counsel, stated Mariah Panza Garcia, don’t simply skim it and dump it in a file; give it an in depth learn. The insurer isn’t all the time proper. The reservation of rights letter might be challenged, and the insurer will typically change its thoughts because of a dispute by the insured.
5. Don’t give away the farm due to inadvertence or inattention.
All too typically, in-home legal professionals find yourself costing their shoppers some huge cash as a result of they only didn’t hassle contemplating indemnification as a problem. This isn’t all the time completely their fault; typically their enterprise-aspect colleagues contribute to the drawback by pressuring them to shut the deal shortly, and typically outdoors counsel screw up by taking the lead on contract negotiation after which dropping the ball on indemnification. But it’s nonetheless dangerous when it occurs.
At the finish of the day, you may need to simply accept an indemnity settlement or indemnification language that you simply actually don’t like — perhaps since you didn’t have the leverage to barter something higher – and your shopper may need to pay out some huge cash. But no less than you as in-home counsel can console your self with the information that you simply noticed the concern, tried to take motion, and fought the good battle.
2016 ACC Annual Meeting [Association of Corporate Counsel]
David Lat is the founder and managing editor of Above the Law and the writer of Supreme Ambitions: A Novel. You can join with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you may attain him by e-mail at dlat@abovethelaw.com.
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