March 31, 2019 BY Earl King
Duty to Indemnify/Duty to Defend
When drafting contracts, parties must always consider the risk associated with the transaction. One of the most common ways to limit risk is by including an indemnity provision. However, as a best practice, indemnity alone is not enough to limit a contracting party’s risk. In addition, a duty to defend provision should also be included as part of the indemnity provision of every contract. This article will examine the significance of each.
Despite the enactment of Georgia’s apportionment statute (O.C.G.A. 51-12-33), it is well settled that Georgia law continues to recognize two broad categories of indemnity. These categories are indemnification created by contract, such as between a surety and a debtor, and common law vicarious liability between principals and agents.
Under Georgia law, the obligation to indemnify for damages and the obligation to defend against third-party suits are separate and distinct. Ashton Park Trace Apartments, LLC v. City of Decatur, 2015 WL 11618243 (N.D. Ga. Oct. 21, 2015). While the duty to defend arises if the facts as alleged in the complaint “even arguably” are within the coverage of the indemnification provision, the duty to indemnify arises only if liability actually exists under the indemnification language.
What is indemnification?
Generally, indemnification (or indemnity) is an undertaking by one party to compensate the other party for certain costs and expenses. In Georgia, indemnity is imposed either by law or contract.
State law indemnity is a remedy implied under common law or statute, and arises out of obligations imposed through a preexisting relationship. O.C.G.A. § 11-2-312(3). The extent to which this obligation is imposed depends on the applicable state law, the nature of the transaction, and the nature of the relationship between the parties. Generally, Georgia courts impose an implied indemnity on a contractual relationship only in the absence of an indemnification provision. For example, a claim for common law indemnification exists when a party is vicariously liable for a tort committed by another and is compelled to pay damages because of negligence imputed to him or her as a result.
Parties relying on implied contractual indemnity generally face unpredictable outcomes and may not be able to obtain certain types of reimbursement, for example, attorneys’ fees. To avoid uncertainty, the parties to an express indemnity provision may choose to include a disclaimer of the right to implied indemnity.
Parties to a contract use a contractual indemnity provision to customize risk allocation. Under Georgia law, the nature of an indemnity relationship is determined by the intent of the parties as expressed by the language of the contract. Georgia courts interpret indemnification agreements in the same manner as other contracts. Specifically, the indemnity agreement will be enforced according to its terms if the language is clear and unambiguous. If the language is ambiguous, courts strictly construe the language against the indemnified party with every presumption against an intention to indemnify; and construe any ambiguities against the drafter.
Indemnification clauses vary widely, but under a typical indemnification provision, the obligor (indemnifying party) promises to reimburse the obligee (indemnified party) from and against any and all “losses, liabilities, claims, and causes of action” (recoverable damages) incurred by the indemnified party that “cause,” “arise from,” or are “related to” (nexus phrase) the specified events giving rise to the indemnity obligation (covered events). An insurance policy is a classic example of a contractual indemnity.
In many cases, parties negotiating an indemnity clause also negotiate a “duty to defend” clause, under which, the indemnifying party promises to defend the indemnified party against third-party claims (e.g., litigation or arbitration), caused by or arising from either the indemnifying party’s breach of contract or the indemnifying party’s acts or omissions, even if the acts or omissions are not breaches.
Duty to Indemnify vs. Duty to Defend
Under an indemnity provision, the indemnifying party agrees to reimburse the indemnified party for costs and expenses (losses) resulting from direct claims (by the indemnified party against the indemnifying party), third-party claims, or both. Georgia courts require reimbursement for all incurred losses which are covered under the parties’ contract. In Georgia, a judgment fixing legal liability is not a condition precedent to recovery under an indemnity clause. O.C.G.A. § 51-12-32(c).
The obligation to defend is usually broader than the obligation to indemnify, because it will apply whether or not the third-party claim has merit. The obligation to defend requires the indemnifying party to reimburse for covered defense costs and expenses actually paid (losses), which may include costs and expenses associated with appeals. Moreover, depending on the terms of the contract, the indemnifying party may have the right to assume and control the defense of the claim. An indemnified party always wants the indemnification provision to expressly include the duty to defend because defense costs can often be substantial, even if the indemnified party prevails on the claim.
Indemnification and defense clauses are often highly negotiated, and it is important to understand the strengths and weaknesses associated with the inclusion or exclusion of either in any contract. If you are negotiating a contract, please contact the Drew, Eckl, and Farnham Corporate Team for advice on the construction of these and any other contractual terms.
The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved.
H. Michael Bagley