Court “Fl[u]shes Out” Leaking Loo Litigation

Victor Metsch | Smith, Gambrell & Russell

A ceiling fixture falls on a tenant in his apartment. Shortly before the incident a toilet leaking from the unit above was replaced. The tenant blames the owner. And the owner blames the plumber. Case closed. Not. Issues of fact as to causation and notice. Claims for contribution and indemnification. Cross-claims for negligence. A textbook case worthy of a bar exam question.

Daniel Ebalo claimed that he was injured when a ceiling light fixture in his bathroom fell onto him due to the negligent installation of the toilet in the apartment above his by the Trustees of Columbia University, Columbia University, the property owners, and Titan PH LLC, a plumbing contractor.

Columbia filed a third-party action against Titan alleging causes of action for contribution, indemnification, and breach of contract. Titan moved (1) for summary judgment dismissing as against it, the sole cause of action of the amended complaint and the third-party claims, and (2) a sanction for spoliation of evidence in the form of (a) dismissal of the Ebalo’s amended complaint and Columbia’s third-party claims as against Titan; or (b) precluding Ebalo and Columbia from introducing evidence at trial that Titan failed to properly install the toilet that leaked and allegedly caused the light fixture to fall on him or (c) an adverse inference at trial.

It was undisputed that, on December 4, 2013, Ebalo suffered serious injuries when he was struck by a light fixture in his bathroom in unit 2D at 90 Morningside Drive, which is owned by Columbia. Both Ebalo and his partner, Alan Stewart, stated that they had complained to Columbia about the leaks. Ebalo also claimed that the fixture fell from his ceiling after becoming waterlogged from an allegedly leaking toilet in Unit 3D of the building, the unit directly above the one where he resided. Ebalo claimed that the leak was caused, at least in part, by the negligent installation of the toilet by Titan three months earlier, in September 2013. It was also undisputed that, approximately one week after the accident, Columbia hired Alafogiannis Plumbing and Servicing to do repairs and replace the toilet installed by Titan. On December 11, 2013, APH disposed of the toilet installed by Titan.

A landowner has a duty to maintain premises in a reasonably safe condition. Landowners may be held liable for failing to maintain premises if they either created a dangerous condition thereon or had actual or constructive notice within a sufficient time prior to the accident to be able to remedy the condition. Thus, in premises liability matters, defendants moving for summary judgment have the initial burden of making a prima facie showing that they neither created the hazardous condition nor had actual or constructive notice of its existence for a sufficient length of time to discover and remediate. In order to constitute constructive notice, a defect must be visible and apparent for a sufficient length of time to permit discovery and remediation.

In support of the motion to dismiss the complaint, Titan relied upon the deposition testimony of numerous witnesses: (1) Ebalo; (2) Alan Stewart; (3) Consolcio Herrera, building superintendent; (4) Joseph Alafogiannis, the owner of the plumbing company that replaced the toilet in Unit 3D; (5) Gisela White, the occupant of apartment 3D; (6) Cathleen Ryder, the Director of Residential Services for Columbia-owned buildings; (7) Spiros Skendros, the APH plumber who installed the replacement toilet; and (8) Carlos Ulloa, one of the two Titan plumbers who installed the toilet that allegedly leaked.

These submissions did not prima facie eliminate the existence of triable issues of fact as to Titan’s negligent installation of the toilet. Ebalo and Stewart stated they had experienced leaks in his bathroom and reported them to Columbia. Herrera testified that when the toilet was replaced, Skendros advised him that there was a leak in the right-hand corner on the back side of the toilet. Furthermore, Alafogiannis, the owner of APH, testified that a leak, such as the one alleged to have occurred, can be the result of the seal between the toilet tank and the bowl not being installed correctly and tightened down. Alafogiannis further testified that he would not anticipate being able to see the leak immediately and that sometimes it can take a day or even a week for the leak to present itself. According to Alafogiannis, the pressure of someone sitting on a improperly installed toilet can cause the bowl to move and over time a leak can develop.

APH’s employee, Skendros, also testified that, when a toilet is not set properly, a leak between the tank and the bowl can develop. He testified that the leak generally develops when the rubber seal between the tank and the bowl gets pinched, which can occur when the bowl is moved around too much while it is being installed; and, consistent with Affogianni, he testified that it cannot always be told from looking at the toilet if the seal has been pinched or spot the leakage right away. Ulloa, who replaced the toilet along with Skendros, likewise testified that a leak can develop when the plumber does not tighten the fasteners between the tank and the bowl properly. Specifically, if the screws or fasteners that connect the tank and the bowl are not tight enough upon installation, then the gasket can move as a result of normal use of a toilet when leaned on by the user. That testimony raised triable issues of fact as to whether the toilet bowl was properly installed.

Moreover, even if Titan had met its prima facie burden in the first instance, both Columbia and Ebalo raised triable issues of fact with their submissions. Ebalo’s expert, Frank Musella, a licensed plumber with more than 30 years of experience in installing and repairing the same model toilet bowl, opined that “absent evidence of any other contributing factors, negligent installation is the only plausible explanation of the leaking toilet.” Musella unequivocally stated that the accident would not have occurred if the tank-to-bowl gasket and tank-to-bowl bolts were properly set upon installation by Titan. And Ryder testified that Alafogiannis told her that there was something wrong with the toilet, but that she did not recall what it was.

Ebalo also relied upon the deposition testimony of Titan’s CEO Peter Skyllas who testified that he believed that a leak from the back of the toilet could have caused the leak, but also testified that it would be detectable upon installation. However, Skyllas admitted that the original work order prepared when Titan installed the toilet did not specifically indicate that the technicians checked to see if the toilet was installed properly, and opined that the employees who installed the toilet were typically “lazy.”

Ebalo also submitted an unsigned letter from Alafogiannis to Ryder stating that APH had responded to a heavy water leak, performed a fixture test and found that the existing toilet was “leaking from the bottom of the toilet tank.” The unsigned letter stated that: “The seal between the toilet and tank was not set right. Every time the toilet flushed the toilet leaked from the seal in the back.”

Titan argued that the letter was inadmissible hearsay that the court could not consider on a motion for summary judgment. However, as Ebalo correctly argued under these circumstances the court could consider the document in opposing summary judgment regardless of whether a trial judge ultimately finds it to be hearsay. The Court found that, given the quantity of other evidence, the report, which clearly support Ebalo’s contention that there was a triable issue of fact as to Titan’s negligence in installing the toilet, the court could consider the unsigned letter. Thus, Titan’s motion for summary judgment dismissing Ebalo’s complaint was denied.

Titan moved for summary judgment dismissing Columbia’s third-party claims for indemnification, contribution and breach of contract to procure insurance.

To establish a claim for common law indemnification, a party must show that (1) it has been held vicariously liable without proof of any negligence or actual supervision on its part, and (2) the proposed indemnitor was either negligent or exercised actual supervision or control over the injury-producing work. Similarly, contribution is only available where two or more tortfeasors combined to cause an injury and it is determined in accordance with the relative culpability of each such person. As such, in order to prevail on a motion for summary judgement dismissing the claims for common-law indemnification and contribution, the third-party defendants must establish, prima facie, that they were not negligent. The Court found that Columbia established that the leak which ultimately caused Ebalo’s injury may properly be found to be a result of an improperly installed toilet by Titan. Thus, Titan’s motion for summary judgment dismissing Columbia’s claims for common-law indemnification and contribution was denied.

In support of its summary judgment motion seeking to dismiss Columbia’s claim for contractual indemnification, Titan submitted its agreement with Columbia under which it seeks indemnification, a provision states in relevant part:

  • In addition to any liability or obligation of the Contractor to the Owner under other provisions of this Agreement or at law or in equity, the Contractor, to the fullest extent permitted by law, shall be liable to, hold harmless, defend and indemnify the Owner and its directors, officers, agents and employees (the Indemnitees) against any and all damages, suits, claims, liabilities, costs and expenses (including actual attorneys’ fees) resulting from bodily injury, sickness, disease or death or destruction of tangible property (exclusive of the Owner’s property insurance, if any, pursuant to Paragraph 9.2 hereof), including loss of use resulting therefrom, arising out of or relating to the performance of Work by the Contractor, Subcontractors and suppliers, and anyone directly or indirectly employed or retained by any of them. However, the Contractor shall not be required to indemnify or hold harmless an Indemnitee against liability for damage arising out of bodily injury to persons or damage to property caused by or resulting from the negligence of such Indemnitee.

Since the agreement stated that Titan may be required to indemnify Columbia for any bodily injury “arising out of or relating to the performance of Work by the Contractor,” and Titan may properly be found to be negligent, summary judgment dismissing Columbia’s claim for contractual indemnification was also denied.

To obtain summary judgment on a claim for breach of contract for failing to procure insurance, Titan was required to demonstrate that there was either no contract provision requiring Titan to procure insurance or that it did comply with such an underlying requirement.

Titan contended that it was entitled to summary judgment because it purportedly procured an aggregate of $6 million in “liability insurance coverage” and thereby satisfied its obligation to procure insurance. But Article 9 of the agreement required Titan to maintain:

  • Commercial General Liability Insurance written on an occurrence form covering all operations by or on behalf of the Contractor and the Owner with minimum limits of coverage not less than $5,000,000 per occurrence and in the annual aggregate unless otherwise approved by the Owner against claims for personal injury, bodily injury and property damage (including all XCU hazards). Products and completed operations insurance shall be maintained for one (1) year after the expiration or termination of this Agreement. (emphasis in original)

To prove compliance with the provision, Titan submitted two insurance declaration pages: one from their commercial liability umbrella insurance policy and the other declaration from Titan’s commercial general liability insurance policy. The declaration for the commercial umbrella liability policy described the commercial general insurance liability policy as underlying insurance under Titan’s umbrella policy. Titan argued that when the coverage amounts in these two policies were aggregated, those declarations showed that Titan procured $6,000,000 in personal injury, bodily injury, and property damage insurance coverage per occurrence, thereby satisfying its agreement with Columbia.

Those declarations, did not, on their face eliminate triable issues of fact as to whether Titan complied with insurance requirements under the agreement. The agreement specified that Titan must maintain “general commercial liability insurance” “with minimum limits of coverage not less than $5,000,000 per occurrence and in the annual aggregate unless otherwise approved by the Owner against claims for personal injury, bodily injury and property damage.” The limit per occurrence on the face of the declaration for general commercial liability insurance is only for $1,000,000.00 rather than the $5,000,000.00 as the agreement requires.

Furthermore, the agreement specifically mentioned maintaining commercial general liability insurance in bold letters and did not state that Columbia Titan could satisfy this condition by maintaining a commercial general liability policy with only $1,000,000 of coverage per occurrence and then aggregating additional coverage under a commercial umbrella policy. Titan submitted no proof that this was “approved by [Columbia];” that Columbia was aware that Titan structured its insurance coverage in this fashion; or that Columbia intended something other than what the agreement said. As the best evidence of what parties to a written agreement intend is what they said in their writing, there were triable issues of fact on the record as to whether Titan breached the agreement with Columbia.

Titan also argued that it was entitled to summary judgment dismissing the cause of action because Columbia could not prove the necessary element of damages for its breach of contract claim for failure to pay insurance. Titan argued that damages resulting from a breach of a contract to procure insurance are limited to out of pocket damages such as the cost of Columbia purchasing its own insurance. The Court held that if a party sues for a breach of another party’s obligation to procure insurance it is limited to recover premiums for its own insurance if that insurance covered the injury. However, regardless of whether Columbia purchased its own insurance, which was not established in the record, Columbia satisfied the element of damages. If Titan is found liable at trial for failing to procure insurance for Columbia, Columbia will either recover damages equal to premiums it paid for its own insurance or, if Columbia did not have insurance, its claimed damages will be the money it would have recovered from Titan’s insurance provider if Titan had complied with the agreement to obtain coverage. Thus, summary judgment dismissing the cause of action for breach of contract was denied.

Under New York law, spoliation sanctions are appropriate where a litigant, intentionally or negligently, disposes of crucial items of evidence involved in an accident before the adversary has an opportunity to inspect them after being placed on notice that such evidence might be needed for future litigation. The court had broad discretion to provide proportionate relief to the party deprived of the lost evidence, such as precluding proof favorable to the spoliator to restore balance to the litigation or employing an adverse inference instruction at the trial of the action.

On a motion for spoliation sanctions, the moving party must establish that (1) the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) the records were destroyed with a `culpable state of mind,’ which may include ordinary negligence; and (3) the destroyed evidence was relevant to the moving party’s claim or defense. In deciding whether to impose sanctions, courts look to the extent that the spoliation of evidence may prejudice a party, and whether a particular sanction is necessary as a matter of elementary fairness. The burden is on the party requesting sanctions to make the requisite showing.

Striking a pleading is a drastic sanction to impose in the absence of willful or contumacious conduct. The imposition of such a sanction is only appropriate where the evidence was destroyed with a culpable state of mind. The sanction of striking a pleading is warranted only where the alleged spoliation prevents the movant from inspecting a key piece of evidence which is crucial to the movant’s case or defense or has left the movant prejudicially bereft of the means of presenting their claim. The Court found that this was not the case here.

The Court found that there was no grounds for sanctions against Ebalo because he was never in custody or control of the toilet.

Columbia claimed that APH disposed of the toilet when in installed a replacement seven days after the incident; APH did so in the ordinary course of business; and Columbia had no culpable state of mind in the failure to preserve the toilet. And the Court agreed that Titan had not demonstrated that that Columbia was guilty of willful or contumacious conduct in an effort to frustrate discovery.

There was merit to Titan’s contention that Columbia was on notice that there was a significant probability that the accident would result in litigation. Columbia’s superintendent, Herrera, witnessed Stewart taking photographs of the accident and took his own photographs of the light fixture. When asked why he took photographs, Herrera testified that he took photographs “for evidence” because he “[knew] there is going to be a lawsuit” and he wanted to “show the manager what happened. Exactly what happened [sic].” Herrera further testified that he accompanied Ryder to inspect Ebalo’s apartment and apartment 3D on the day of the incident. Thus, Columbia was, at a minimum, negligent in not directing APH to preserve the toilet and should have known that it had a duty to take steps to ensure that the toilet was preserved for inspection in the likely event of litigation. As such, the court concluded that, while striking the answer was not warranted, spoliation sanctions against Columbia in the form of an adverse inference charge and preclusion of evidence could can be requested at the time of trial.

Whatever remedy the trial court deemed appropriate would prevent Columbia from using the disposal of the toilet by its agent that repaired the toilet to its tactical advantage. Such sanctions could be appropriately tailored to restore the balance between Columbia’s right to defend itself and the prejudice to Titan that would arise if Columbia were to offer evidence relating to Titan’s culpability for any negligence related to the accident.

Trade Contractors, Worker Safety, Indemnity, and COVID-19

Carol A. Sigmond | Porzio Bromberg & Newman

Generally, project owners, construction managers and some general contractors have been investigating ways to maintain progress on their project in face of ‘social distancing’  and ‘stay at home’ orders from governmental authorities.   Many workers and subcontractors have joined in the clamor to continue working.  However, financially stable trade contractors may see this issue differently.  Many trade contractors perceive significant risk in working during the pandemic. 

COVID-19 is a highly contagious respiratory disease for which, to date, there is no effective treatment.  People who are asymptomatic can spread the disease.   The virus survives on surfaces for up to 5 days (wood, glass, metal, paper and ceramics).  It is also spread by close personal contact remaining suspended and alive in the air for up to 4 hours.   To limit the spread of the virus, Americans and others around the world have been asked to practice “social distancing”,  that is staying at least 6 feet away from other people.  Recently, the CDC added the recommendation that people wear masks or scarfs over their noses and mouths in public.  Approximately 2% of the confirmed victims of COVID-19 will die.  

In face of a growing pandemic, weeks ago, many cities including Seattle, San Francisco, Detroit, New York City, Chicago and  New Orleans,  and in 42 states, mayors and governors  have issued ‘stay at home’ or ‘shelter in place’ orders to enforce ‘social distancing.’  At this point, there is a patch work of orders with varying provisions as to what is essential work and a further patch work of exceptions.   Moreover, there is yet another patch work of travel restrictions in place. 

This patch work of state ‘stay at home’ and travel orders creates risk for trade contractors based in states adjacent to the project site.  Consider, a job could be deemed ‘essential’ in one state but it is illegal to order someone to work in the adjacent state where the job is not deemed ‘essential.’  This creates a significant risk for the trade contractor for: 1)  charges of violating the government orders, and 2) law suits from employees for putting them at risk for or actually contracting  corona virus.  

Trade contractors have other risks.  Many sophisticated construction managers and contractors have comprehensive contracts that impose requirements and risks on trade contractors.  These include a prohibition on introducing hazards or hazardous substances to the job site; imposing indemnity obligations; and creating third party liability to other trades for safety violations.    Moreover, the Trade Contractors are employers with obligations under the OSHA General Duty Clause and for contractors working in New York, the Industrial Code.  

A fair interpretation of the typical contract clauses imposes liability, including an indemnity obligation, on the trade contractor running in favor of  the construction manager or general contractor if a worker employed by the trade contractor has the virus and introduces it to the project site creating delays or disruptions.  The trade contractor may also be liable to other trades on site, or their employees or others for damages arising out of exposure of the latter’s work force to the virus.   Since ordering the workers to work is a voluntary action that may be unlawful, there is the further a risk that insurance policies will not respond to claims. 

OSHA has not issued regulations respecting COVID-19.   OSHA has issued a guide that may be found here.   The guide contains general guidance on disease prevention, social distancing, hand washing, cleaning, and engineering for offices, personal protective equipment (“PPE”) and other general information.  It does not contain any specific guidance for construction sites, such as cleaning tools, equipment or the project.   The OSHA guidance does contain a reminder that the General Duty Clause is applicable.  Without specific regulations, Trade Contractors do not have any safe harbor, no specific guidance on safe work practices, which only serves to increase the risk of working. 

For trade contractors dealing with persistent demands to return to sites, particularly sites that have had workers with COVID-19 on the site, the doctrine of  “inevitable accident”  may provide a defense to allegations of breach of contract.  Under this doctrine, where there is a contingency in contract performance that was not planned under the contract that will cause death or injury to a worker, the employee of others or a member of the general public, performance is excused.  

In conclusion, well financed trade contractors risk much by continuing to work, unless the general contractor, construction manager or owner are prepared to assume these dangers.  

Reference Section

 1The OSHA General Duty Clause provides: 

“Each employer (1) shall furnish to each of his employees employment and a place of employment which are free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees; (2)  shall comply with occupational safety and health standards promulgated under this Act.”

Section 5(a)(1) of the Occupational Safety and Health (OSH) Act of 1970, 29 USC 654(a)(1)

The New York Industrial Code General Duty Clause provides:

“All places where employees are suffered or permitted to perform work of any kind in construction, demolition or excavation operations shall be so constructed, equipped, arranged, operated and conducted as to provide reasonable and adequate protection for the lives, health and safety of such persons as well as of persons lawfully frequenting the area of such activity. To this end, all employers, owners, contractors and their agents and other persons obligated by law to provide safe working conditions, personal protective equipment and safe places to work for persons employed in construction.”

12 NYCRR § 23-1.5.

2 On April 14, OSHA issued interim guidance for workplace inspections at hospitals and health care facilities.

Another Twist on Uniwest and Indemnification

Christopher G. Hill | Construction Law Musings

Welcome to 2020!  I thought I’d start with a case that adds a twist to the Uniwest case that has been discussed previously here at Construction Law Musings.  Uniwest essentially held that indemnification provisions in construction contracts that purport to indemnify an indemnitee for its own negligence violates Virginia Code Sec. 11-4.1.  In short, Uniwest and later cases applying it state that an indemnification provision that does not add an exception for an indemnitees own negligence should be held void and unenforceable.

A case out of the City of Roanoke, Virginia Circuit Court extends this principal beyond the simple words of the contract.  In Morris v. DSA Roanoke, the court considered a third party claim for indemnification where the indemnification provision of the operative construction contract did not on its face violate either statute or Uniwest. The basic facts are that Morris sued DSA purely on theories of negligence.  DSA brought a third party complaint against Thomas Builders based upon its indemnification rights under its contract with Thomas Builders.  Despite finding that the indemnification provision itself did not violate any statute or case law (as I stated above), the Court determined that the indemnification provision could not be enforced and granted a demurrer by Thomas Builders, stating:

Nonetheless, the Court holds that the grant of demurrer is appropriate in an instance where an indemnification provision in a construction contract can only function to indemnify a party from damages caused by its own negligence. This conclusion accords with the public policy goals behind Virginia’s restrictions against provisions that provide such indemnification.

The Court then went on to explain that in the factual instance here, where the operation of the indemnification provision would necessarily require the possibility of indemnification of DSA for its own negligence, the fact that Thomas Builders may have contributed to the issues through its negligence does not save the claim.  In short, the Roanoke court extended Uniwest beyond the four corners of the contract and examined the fatual scenario before it to determine if the actual result of the indemnification clause would violate public policy.

As always, I highly recommend that you read the case (linked above) for yourself and that any analysis of possible claims or defenses relating to indemnification be don with the assistance of an experienced Virginia construction attorney.

Indemnify is a Funny Word Carrying Historical Baggage—Be Aware and Use with Care

Glenn West | Weil, Gotshal & Manges

Despite the proliferation of R&W insurance as the sole recourse for buyers with respect to sellers’ breach of representations and warranties, an indemnification remedy against sellers (subject to a cap) continues to find its way into many private company acquisition agreements.  Indemnification, as a concept, originated in the context of one party to a contract agreeing to ensure that the counterparty was held harmless against claims by third parties for which the indemnifying party had agreed to be responsible.  In other words, indemnification was not a concept that ordinarily applied as a means of ensuring that a non-breaching party was compensated by the breaching party for direct losses the non-breaching party sustained by virtue of the breaching party’s breach of contract.  Indeed, absent an exclusive remedy provision, a non-breaching party is entitled to damages under the common law for a breaching party’s failure to abide by the terms of the contract irrespective of whether that contract contains an indemnification clause.  Nevertheless, indemnification provisions in most acquisition agreements today purport to cover losses sustained by a non-breaching party, whether those losses arise directly from the breach or arise as a result of a third party claim.  But the historical fact that indemnification was not normally associated with direct (or first party) claims continues to cause courts some confusion and requires care by deal lawyers to avoid misunderstandings and unintended results.

The dictionary definition of “indemnify” includes both “secur[ing] against hurt, loss, or damages,” as well as “compensat[ing] for incurred hurt, loss, or damage.”  Nonetheless, cases across the country have suggested that there is a presumption that the term “indemnify” only applies to losses arising from third party claims, not losses incurred directly by a party as a result of a counterparty’s default under a contract.[1] While most of these cases do not involve the indemnification provisions contained in private company acquisition agreements, and are focused on whether the indemnification provision allows recovery for attorneys’ fees related to direct claims between the parties,[2] it is not clear that they can be completely discounted on that basis. 

To overcome the general presumption that an indemnification provision only covers third party claims, it is important to state in clear and unequivocal terms that the indemnification provision applies to both direct and third party claims.  Language that simply provides that the breaching party shall indemnify the non-breaching party for losses sustained by the non-breaching party, as a result of the breaching party’s breach of representations, warranties or covenants set forth in the agreement, may be deemed insufficient to clearly cover first party (or direct) claims, as opposed to be presumed to only apply to third party claims.  While we have addressed this issue before in a series of posts to Weil’s Global Private Equity blog,[3] some recent Delaware cases have suggested that a reminder of these principles may be in order.

For example, in a recent Delaware Superior Court decision, Sarn Energy LLC v. Tatra Defence Vehicle A.S., C.A. No.: N17C-06-355 EMD CCLD, 2019 WL 6525256 (Del. Super. October 31, 2019),  a party’s claims for attorney’s fees and costs incurred in pursuing its claim for damages against the breaching party were denied despite the existence of the following indemnification clause in Section 11 of the Agreement:

11. Indemnification. Parties shall defend, indemnify and hold harmless each other and its officers, directors, employees, agents, parent, subsidiaries and other affiliates, from and against any and all damages, costs, liability, and expense whatsoever (including attorneys’ fees and related disbursements) incurred by reason of (a) any failure by Parties to perform any covenant or agreement of the Parties set forth herein; (b) injury to or death of any person or any damage to or loss of property which is due to the negligence and/or willful acts of the Parties; or (c) any breach by Parties of any representation, warranty, covenant or agreement under this Agreement. (emphasis added)

Notwithstanding Section 11’s seeming breadth, the court held that: “Section 11 is a standard indemnity provision that applies to third party actions not to first party claims like the one asserted here by [plaintiff].” And, as such, it did not otherwise qualify as a valid fee shifting clause that overrode the American Rule which “provides that litigants generally are responsible for their own litigation costs.”

Similarly, in a granted motion for re-argument in Winshall v. Viacom International, Inc., C.A. No.: N15C-06-137 EMD CCLD, 2019 WL 5787989 (Del. Super. November 6, 2019), the court held that the following indemnification clause in Section 8.6 of the Merger Agreement only applied to third party claims, not to first party claims:

a) Indemnification. Subject to the limitations set forth in this Article VIII, from and after the Effective Time, each of Parent [Viacom] and MergerCo, jointly and severally, shall indemnify, defend and hold harmless each Merger Consideration Recipient [Mr. Winshall and the other Harmonix Shareholders] against any and all Losses actually incurred or suffered by any such Merger Consideration Recipient as a result of:
(i) the breach of any representation or warranty of Parent or MergerCo set forth in this Agreement or in any Ancillary Document; and
(ii) the breach of any covenant or agreement of Parent or MergerCo contained in this Agreement or in any Ancillary Document.

Losses were defined in the Merger Agreement as follows:

any and all losses, liabilities, damages, claims, awards, judgments, diminution in value, Taxes, fees, costs and expenses (including reasonable attorneys’ fees and expenses, expenses of investigation, defense, prosecution and settlement of claims (including any claims under Article VIII hereof), court costs or enforcement of the provisions of this Agreement) suffered or incurred by such Person, plus any interest that may accrue on the foregoing.

According to the court, the absence of explicit language covering the reimbursement of attorneys’ fees for directly enforcing the breaching party’s obligations (i.e., first party claims), which were the only claims asserted, meant that the indemnification clause was limited to third party claims.  Hmmmm.

But, in Collab9. LLC v. En Pointe Technologies Sales, LLC, C.A. NO. N16C-12-032 MMJ CCLD, C.A. NO. N19C-02-141 MMJ CCLD, 2019 WL 4454412 (Del. Super. September 17, 2019), the court was able to conclude that the indemnification provision covered both direct and third party claims (this case did not, however, involve a dispute over the recovery of attorney’s fees).  After noting that typically “indemnification [only] comes into play when one party to a contract agrees to indemnify a second party to the contract for liability resulting from third-party claims against the second party,” the court note that the Asset Purchase Agreement “states that Seller indemnification may apply ‘whether or not involving a third party claim’ resulting from ‘any breach or inaccuracy of a representation or warranty….’” The court further noted additional language that made clear that indemnification was available for both direct and third party claims. 

The good news is that most private company acquisition agreements cover this issue explicitly and make clear that despite the historical limitations placed on the word “indemnify,” both direct and third party claims are intended to be covered by the indemnification regime.  Moreover, the indemnification provisions in many private company acquisition agreements use terms more expansive than simply “indemnify, defend and hold harmless,”[4] which are terms more traditionally related to third party claims.  But many ancillary agreements do not explicitly cover this issue or use the more expansive terms. 

Perhaps we would all do well to heed this observation from a 2012 Delaware Superior Court case attempting to decipher an indemnification provision: 

When the Court considers the indemnity clause here, even if the Court was kind in its description, it would have to guess that it was written by counsel who never litigate, whose days are filled with the excitement of writing contract terms that only they will understand or can reasonably interpret, and who obviously have lost the ability to write in a clear and common-sense manner. While this may be a well-respected and sought-after art form, it does not help the client insure their expectations and demands are understood by all parties. Instead, the Court is left with the challenge of deciphering terms that were perhaps in vogue in the nineteenth century but whose days have clearly passed.[5]

Remember, the word “indemnify” carries historical baggage; be aware and use care. 

Endnotes    (↵ returns to text)

  1. See e.g., TranSched Sys. Ltd. v. Versyss Transit Sols., LLC, 2012 WL 1415466, at *1-*2 (Del. Super. Mar. 29, 2012); Hopper Assoc., Ltd. v. AGS Computers, Inc., 548 N.E.2d 903, 905 (N.Y. 1989); Hot Rods, LLC v. Northrup Grumman Sys. Corp., 272 Cal. App.4th 1166, 1179 (2015); Claybar v. Samson Exploration, LLC, NO. 09–16–00435–CV, 2018 WL 651258, at *3 (Tex. App.—Beaumont Feb. 1, 2018); see also Kenneth A. Adams, A Manual of Style for Contract Drafting §13.416 (4th Ed. 2017).
  2. See Richard L. Levine, Peter Feist and Jessica N. Djilani, Clarifying the “Unmistakable Clarity” Standard in Contractual Indemnification Provisions,  85 U.S.L.W. 1391 (April 13, 2017), reproduced here.  The fact that many of these cases concern the recovery of attorneys’ fees is relevant because of the strong presumption imposed by the “American Rule,” which states that in the absence of a “specific and explicit” provision in a contract or statute requiring a party to pay the attorneys’ fees of the other party, each party is responsible for their own attorneys’ fees.  Indeed, the American Rule’s presumption is so strong that the United States Supreme Court recently held (unanimously) that a statute requiring one party to pay “all expenses of the proceedings” was not sufficiently clear and explicit to rebut the American Rule’s presumption that each party was required to pay their own attorney’s fees.  Peter v. Nantkwest, Inc., No. 18-801, 589 U.S. __ (Dec. 11, 2019, Sotomayor, J.).  Thus, it may be that it is the American Rule’s presumption that is sometimes at work more than the presumption that the word “indemnify” ordinarily only applies to third party claims.
  3. Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 1, Weil’s Global Private Equity Watch, June 9, 2016, available here; Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 2, Weil’s Global Private Equity Watch, June 14, 2016, available here; Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 3, Weil’s Global Private Equity Watch, June 23, 2016, available here; Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 4, Weil’s Global Private Equity Watch, July 7, 2016, available here.
  4. Such terms may include “pay, compensate, and reimburse for,” in addition to “defend, indemnify, and hold harmless from and against.”
  5. TranSched Sys. Ltd. v. Versyss Transit Sols., LLC, 2012 WL 1415466, at *3 (Del. Super. Mar. 29, 2012).  I suspect contract drafting guru, Ken Adams, would agree with those sentiments.  See  Kenneth A. Adams, A Manual of Style for Contract Drafting, “Introduction,”  xxxvi-xxxvii (4th Ed. 2017).

Attorneys’ Fees and Costs for the Prevailing Insured

Deborah Trotter | Property Insurance Coverage Law Blog | May 26, 2019

It has been almost eight months since Hurricane Michael devastated the eastern side of the Florida Panhandle. Not surprisingly, many residents and business owners are exhausted. Exhausted in the deepest sense—exhausted from waiting, exhausted from hoping, exhausted from failed promises made by their insurer, which benefited from premiums faithfully paid, only to find out that their insurer has “exhausted” its obligation to them. What is the recourse for the insured who has purchased insurance coverage to protect against a catastrophe such as Hurricane Michael? Will an insured be indemnified under its contract of insurance, including recovery of the costs and expense to pursue the benefits of the policy in court if necessary?

These are the typical topics on the minds of the insureds reeling after Hurricane Michael. A lot of misinformation makes its way around a catastrophe area. One of the more prevalent bits is “if you hire an attorney, you will have to pay all attorneys’ fees and costs unless a judge awards those fees and costs after a successful trial, and most cases are resolved before a trial.”

As a result, many of the insureds we have spoken with regarding their options and next steps are concerned that the expense of hiring an attorney to pursue their contractual rights will preclude them from obtaining any actual recovery or the insurance proceeds necessary to make or complete repairs to their homes or businesses. The good news is that in the context of insurance contracts others have blazed this trail and the courts have addressed statutes and rules embracing public policy to make the prevailing party whole.

Generally, prevailing party fee and cost provisions are to put the prevailing party in the position it would have been in if the matter was resolved without the need to litigate.1 In Florida, a prevailing party is one that prevails on the significant issues in the case or obtains the benefits sought in the litigation.2 In the context of the prevailing insured, the Florida Supreme Court has extended the application of statutory entitlement of attorneys’ fees under FL Stat. § 627.428 (2018) beyond obtaining a judgment against the insurer. In Wollard v. Lloyd’s, the court held that the insurer’s post-suit payment to an insured constitutes a “functional equivalent of a confession of judgment,” which satisfies the requirement of a “judgment or decree.”3

Some of the misinformation regarding the need for a trial judgment may have its roots in the proposition promoted by some defense firms that a finding of wrongful denial or bad faith denial is necessary prior to applying the statutory entitlement of attorneys’ fees under FL Stat. § 627.428. However, in Johnson v. Omega Insurance Company,4 the Florida Supreme Court held that the narrow application of the fee statute as argued by Omega was inconsistent with the court’s prior ruling in Ivey v. Allstate,5 which established that an award of attorneys’ fees under FL Stat. § 627.428 requires merely that an insurer incorrectly denied policy benefits. Justice Lewis wrote: “Here, the facts are undisputed that Johnson submitted a claim, Omega denied that claim, Johnson filed an action seeking recovery, and Omega subsequently conceded that it had incorrectly denied the benefits based on an inaccurate report. These facts alone warrant an award of attorneys’ fees to Johnson under Section 627.428.”

The court explained the public policy behind the fee statute, “Once an insurer has incorrectly denied benefits and the policyholder files an action in dispute of that denial, the insurer cannot then abandon its position without repercussion. To allow the insurer to backtrack after the legal action has been filed without consequence essentially eliminates the insurer’s burden of investigating a claim.” The court then went on to hold, “Section 627.428 provides that an incorrect denial of benefits, followed by a judgment or its equivalent of payment in favor of the insured, is sufficient for an insured to recover attorney’s fees.”

In addition to entitlement of statutory attorneys’ fees, FL Stat. § 57.041 (2018), Title VI – Civil Practice and Procedure, provides for recovery of legal costs: “(1) The party recovering judgment shall recover all his or her legal costs and charges which shall be included in the judgment;…” Consistent with the provisions of the fee statute above, the “confession of judgment rule” and the prevailing party analysis may also provide the insured recovery for costs associated with the litigation.

In Sands on the Ocean Condominium Association v. QBE Insurance,6 Sands on the Ocean and its insurer disagreed on the amount of the loss. Sands on the Ocean filed suit before either party demanded appraisal. Four months after suit was filed, QBE filed a motion to compel appraisal of the loss. The trial court ordered appraisal and stayed the case pending the conclusion of appraisal. As a result of appraisal, QBE paid Sands on the Ocean $931,596.53—a “confession of judgment.” Sands on the Ocean moved to lift the stay and confirm the appraisal award. After concluding it would not disturb the appraisal award confirmation, the trial court ruled it was equally appropriate to enter final judgment for Sands on the Ocean and that Sands on the Ocean was entitled to attorneys’ fees as the prevailing party. Also, the trial court found that Sands on the Ocean, as the prevailing party, was entitled to costs under Federal Rules of Civil Procedure 54(d)(1).

In sum, no white flags based upon misinformation—take the Hill!

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1 Grider-Garcia v. State Farm Mut. Auto., 14 So.3d 1120 (Fla. App., 2009); See also Mikes v. City of Hollywood, 687 So. 2d 1381, 1384 (Fla. 4th DCA 1997)(finding that “Costs, a compensatory monetary award to the winning party, is a judicial attempt to make the winning party as whole as he was prior to the litigation. The theory being that the prevailing party should not lose anything, at least financially, by virtue of having established the righteousness of his claim”).
2 Trytek v. Gale Industries, Inc., 3 So.3d 1194 (Fla. 2009), citing Moritz v. Hoyt Enterprises, Inc., 604 So.2d 807 (Fla. 1992).
3 Wollard v. Lloyd’s & Cos. of Lloyd’s, 439 So. 2d 217, 219 (Fla. 1983).
4 Johnson v. Omega Ins. Co., 200 So.3d 1207  (Fla. Sept. 29, 2016).
5 Ivey v. Allstate Ins. Co., 774 So. 2d 679 (Fla. 2000).
6 Sands on the Ocean Condo. Assoc., Inc. v. QBE Ins. Corp., 2012 U.S. Dist. LEXIS 177380 (S.D. Fla., Dec. 13, 2012).