Tag Archives: Indemnity Clause

State Supreme Court Decision Highlights Need to Get Insurance and Indemnity Clauses Right in Construction Contracts

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Charles P. Edwards and Lara Langeneckert | Construction Law Blog

Parties to a construction contract are frequently surprised to discover that a contractual agreement to procure insurance may limit their liabilities to each other. A recent decision from the Indiana Supreme Court illustrates the effect of this rule. And, in a separate portion of the decision that will be equally significant to the construction industry, the court held that a customer’s acceptance of a contractor’s work strips third parties of the right to sue that contractor for property damage caused by the contractor’s alleged negligent workmanship. 

In light of this opinion, careful drafting of construction contracts is even more critical, particularly when it comes to the delicate interplay between insurance and indemnity clauses.

The Common and Recurring Fact Pattern

The March 2023 case, U.S. Automatic Sprinkler Corp. v. Erie Ins. Exch., involved a variation on a common and recurring fact pattern: a property owner (here, an office-complex tenant) hires a contractor (here, a sprinkler company) to perform work; the work is allegedly performed negligently and/or is defective; and the alleged negligence and/or defect causes property damage to the owner’s property and to third-party property (here, co-tenants’ property). In these circumstances, who is responsible – and to whom? Like most legal questions, the answer is “it depends.” 

The court held that the negligent contractor was not liable for the property damage – either to its customer or to the third parties whose property was damaged by its defective work – but the court’s reasons for each holding differed. The court unanimously held that the contractor was not liable to its customer because the parties’ contract placed responsibility solely on insurance. And a 4-1 majority of the court held that the contractor was not liable to the third parties under the so-called “acceptance rule:” Once the customer has accepted the contractor’s work, third parties can no longer hold the contractor liable for negligence or defects in that work.

Insurance as Sole Remedy

Construction and other service contracts often contain provisions addressing the risk of loss. These provisions may limit liability for future loss, they may assign responsibility for damage caused by the work to one of the parties through indemnification, or they may require one or both of the parties to insure against future loss. Where the insurance requirement is coupled with a waiver of subrogation, courts often hold that the parties’ rights and liabilities are limited to the required insurance – even where that insurance is inadequate to insure against the full loss. 

Subrogation is a legal doctrine whereby an insurance company, after paying a loss, steps into the shoes of its policyholder to recover its money from a party responsible for the loss. Importantly, the insurance company has no greater rights than its policyholder; so, if the policyholder waives its right to recover, that waiver also applies to its insurance company.

In U.S. Automatic Sprinkler, after the sprinkler system failed and flooded the building, the customer tenant’s insurer filed a subrogation claim against the contractor sprinkler company. But, the agreement between the customer tenant and the contractor sprinkler company contained a waiver of subrogation rights providing that, “[n]o insurer or other third party will have any subrogation rights against” the sprinkler company and that the tenant “will be responsible for maintaining all liability and property insurance.” The Indiana Supreme Court held that these provisions barred the insurer’s claim, explaining:

An agreement to insure is intended to provide both parties with the benefits of insurance regardless of the cause of the loss (excepting wanton and willful acts). Otherwise, each would provide his or its own insurance protection and there would be no need for the contract to place the duty on one of them. As a result, where one party agrees to purchase insurance for the benefit of both parties, this party has no cause of action against the other regardless of their fault in contributing to or inducing the loss. And the same is true for subrogated insurers, as their rights can rise no higher than those of the insured. (internal quotations and citations omitted)

Placing the risk of loss solely on contractually required insurance may not be problematic where both parties knowingly agree and the policy limits are sufficient to cover the loss. Often, however, property owners hiring contractors to perform work on their property assume the contractor will be liable for any damages resulting from any defective or negligent work, and are surprised to discover – often after a loss – that the contractor agreement limits their recovery not only to insurance, but also specifically to their own insurance.

In another Indiana case, Bd. of Comm’rs of Cnty. of Jefferson v. Teton Corp., a county entered into a contract for renovations to its courthouse. The parties entered into a standard American Institute of Architects (AIA) form contract that contained a waiver of subrogation for all “damages caused by fire or other perils to the extent covered by property insurance.” During construction, a subcontractor caused a fire that substantially damaged the areas being renovated and other parts of the courthouse. The county’s property insurer paid the loss and then brought a subrogation action against the contractor. 

The insurer argued that the subrogation waiver applied only to the “work” under the contract and not to other parts of the courthouse that were damaged and that it insured. The Indiana Supreme Court disagreed, holding that the waiver was not so limited on its face but rather applied unambiguously to any property insurance maintained by the county. 

In light of these rulings, it is important that policyholders examine the scope of any insurance requirement and subrogation waiver.

Similarly, parties should be clear about whether the waiver applies even if the insurance obtained is insufficient to cover all of the damages. The standard AIA waiver applies “to the extent” the damages are covered by insurance, but other language may be broader. In Morsches Lumber, Inc. v. Probst, the Indiana Court of Appeals held that an agreement to insure may limit recovery to insurance even where that insurance is insufficient to cover all of the losses. The court noted, “The fact that [the party] failed to take out a policy sufficient to cover the cost of the undertaking is a cost he will have to bear.” 

Provocative Move: No Liability to Third Parties

The more controversial portion of the U.S. Automatic Sprinkler decision is the 4-1 majority’s conclusion that the sprinkler contractor also was not liable for damage to the property of the other tenants with which it did not have a contract. The majority based that conclusion on Indiana’s common-law “acceptance rule,” which shields contractors from liability to third parties after the work is completed and the owner has accepted the work. 

The tenants sought to invoke an exception to this rule for “injury or damage to a third person … where it was reasonably foreseeable that a third party would be injured.” The majority, however, rejected this argument, holding that this exception applies only where personal injury “is a foreseeable consequence of a contractor’s allegedly negligent work.” The majority held that the exception did not apply to claims for property damage.

The majority noted that, “imposing third-party liability on companies – like U.S. Automatic Sprinkler – would force them to insure against a risk the amount of which they may not know and cannot control.” But, contractors insure against such risks every day in the form of commercial general liability (CGL) insurance, which applies to liability for bodily injury or property damage caused by an occurrence and generally includes so-called products and completed operations coverage. And, the majority of states – including Indiana – hold that faulty workmanship may be an “occurrence” when it causes such injury or damage. 

In U.S. Automatic Sprinkler, Justice Christopher Goff dissented from the majority’s application of the “acceptance rule,” concluding that there is no sound basis for the majority’s distinction between foreseeable personal injury and foreseeable property damage. Justice Goff posited that, “[r]easons of fairness and incentives support the general rule that those who negligently harm the person or property of others should bear the cost. There is no persuasive reason to give contractors special immunity from liability after negligent work has been accepted.”

The majority seems to have reached the conclusion that property insurance, not liability insurance, should be primarily responsible for property damage. Property insurance policies, however, contain exclusions that may apply to bar coverage in this context. For example, many all-risk property insurance policies exclude damage caused by faulty design or construction. One can imagine a scenario where faulty construction causes damage to the property of a third party whose property insurer denies coverage based on this exclusion. If the negligent contractor is not liable, then its liability insurer will not pay for the loss either, leaving the injured third party without recourse.

What About Indemnity? 

Under U.S. Automatic Sprinkler, a contractor may not be liable to third parties for property damage caused by its negligence or defective work after the customer’s acceptance of that work. The customer, however, may be liable to those third parties. In those circumstances, parties who hire contractors to perform work should consider adding indemnity language to cover future claims based on the work. Such indemnity typically is covered by the contractors’ CGL insurance as an “insured contract.” Indemnity in these circumstances places liability for defective work where it belongs – on the contractor who performed it and on its liability insurance.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

The American Rule Doesn’t Stand: Contractor Uses Offer of Judgment to Recover Attorneys’ Fees in Retention Dispute

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John Mark Goodman | BuildSmart

Last week we saw the Menard court reject the use of an indemnity clause to shift fees in a dispute between contracting parties. This week, a very recent decision from Nevada highlights another creative way to shift fees where there is no statute or contract provision on point: offers of judgment (see Helix Electric of Nevada v. APCO Construction, Inc., 2023 WL 2987662 (Nev. Apr. 17, 2023)). Helix Electric involved a payment dispute between the electrical subcontractor, Helix, and the initial general contractor, APCO Construction, which left the project before it was completed. The gist of the dispute was whether APCO owed Helix retention that had accrued when APCO left the project. APCO argued that it did not owe the retention because (1) under the contract the retention did not become due and payable until project completion and (2) Helix and the new general contractor entered an assignment and novation of the subcontract thereby relieving APCO of its obligations under the original subcontract. Helix argued the retention provision was an illegal and unenforceable “pay-if-paid” provision. The lower court ruled in APCO’s favor, and the Nevada Supreme Court affirmed. 

On the attorneys’ fees issue, the Nevada Supreme Court rejected APCO’s argument that it was entitled to recover under the fee-shifting provision in the contract. That’s because of the assignment and novation: Once the subcontract was assigned and novated, APCO was no longer a party to it and could not enforce it. Enter the offer of judgment, an often-overlooked procedural tool designed to encourage settlement that can be used to recover certain litigation costs and, in some jurisdictions, attorneys’ fees. In Nevada, Rule 68 of the Nevada Rules of Civil Procedure provides that any party may serve an offer of judgment at least 21 days before trial. If the offer is not accepted and the offeree fails to obtain a more favorable judgment at trial, the offerer may recover post-offer costs and reasonable attorneys’ fees. 

That’s exactly what happened in Helix Electric. APCO made an offer of judgment more than 21 days before the trial. Helix did not accept the offer, and then failed to obtain a more favorable judgment. Helix was therefore ordered to pay APCO’s post-offer attorneys’ fees and expenses. Note that while most jurisdictions have a similar procedural tool, the mechanics of making an offer of judgment and what can be recovered (e.g., costs, fees or both) varies from jurisdiction to jurisdiction. Nevertheless, the next time you find yourself with no clear path to recover fees, consider making an offer of judgment. It may just be your ticket to stick the other side with your fees.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

The American Rule Stands: Court Rejects Fee-Shifting Under Indemnity Clause

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John Mark Goodman | BuildSmart

The “American Rule” on attorneys’ fees is that each party pays its own lawyers, even if you win. As with almost any rule, there are exceptions. Sometimes there is a statute that requires the losing party to pay the prevailing party’s fees. For example, many states have enacted Prompt Pay laws that include a fee-shifting provision which applies to construction contracts. Sometimes contracting parties agree to include such a provision in their contract. Those provisions generally say that if there is a dispute, the parties agree that the loser pays the winner’s fees. 

Other times, there is no statute or contract provision on point, so clever lawyers may resort to more creative arguments to try and stick the other side with their client’s fees. Such was the case earlier this month in Menard v. DiPaolo Industrial Development, 2023 WL 2854291 (Ohio Ct. App., April 10, 2023). That case involved a dispute between two contracting parties: an owner and demolition contractor. The owner prevailed at trial and was awarded $274,000, including $180,000 for attorney fees. Although the contract between the parties did not have a fee-shifting provision, it did include an indemnity clause that was arguably broad enough to require the contractor to pay the owner’s fees. That clause required the contractor to indemnify the owner “from any and all liability, damages, expenses, claims, damages, actions or cause of action, including attorney fees, arising out of the performance of the Contract Documents, Agreements, and/or Work hereunder.” It also specified the owner’s rights if the contractor failed to step in and defend against an indemnified claim.

The trial court relied upon this clause in awarding attorney fees to the owner, who prevailed on the underlying claims. In reversing the trial court’s award of fees, the appellate court applied the normal rules of contract interpretation to conclude that, taken as a whole, the indemnity clause only applied to claims brought by third parties. The indemnity clause did not apply to or allow for fee-shifting in disputes between the contracting parties. This means the owner will recover less than $100,000 and is stuck paying its own attorney fees of $180,000.  Application of the American Rule therefore means the owner in this particular case will have a negative net recovery despite being the prevailing party.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

English v. RKK. . . The Saga Continues

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Christopher G. Hill | Construction Law Musings | September 18, 2019

Remember back in 2018 when I thought I’d told you the end of the English Construction story regarding its various consultants, etc.?  I was wrong.  The matter went up on appeal to the 4th Circuit Court of Appeals where the Appeals Court considered the summary judgment granted to the defendant Rummel, Klepper & Kahl (“RKK”) based upon what came down to a contributory negligence reading of the indemnity clause that was allowed to survive in the first district court opinion relating to these ambiguous contracts finding that English was negligent so couldn’t recover.  The 4th Circuit also considered the finding that defendant CDM Smith did not breach its contract as a matter of law and that English’s negligence was the cause of the damages.

The Court of Appeals reversed both of the holdings by the Western District of Virginia court, essentially stating that there was enough of a factual dispute to render any summary judgment to be premature.

As to English’s arguments regarding the indemnity scheme in the contracts, the court found that the interpretation was at least ambiguous enough that summary judgment was inappropriate, stating:

While we are not prepared to settle conclusively these interpretation disputes at the summary judgment stage, English’s proffered interpretation is, at the very least. reasonable. Indeed, of the two interpretations, English’s seems to be more closely aligned with the actual language in the contract. The district court thus erred in rejecting English’s interpretation and adopting RK&K’s interpretation as a matter of law.

[A]t bottom, while the district court was authorized to construe unambiguous language as a matter of law, it could not resolve genuine disputes regarding the meaning of ambiguous contractual language against the nonmoving party on summary judgment. We therefore vacate the court’s grant of summary judgment to RK&K and remand for further proceedings.

In short, while I don’t like ambiguity in the least when contracts are concerned, the ambiguity at least got English past summary judgment on this claim.  Furthermore, I think that English’s “comparative negligence” analysis is more proper.

As to the CDM Smith ruling by the District Court, the 4th Circuit found that there was enough there as far as the level of violation and what breaches of contract may or may not have occurred that summary judgment was inappropriate.

What does this mean, aside from having an experienced construction attorney such as those in this case is a great help?  First of all, some clarity in the various documents would have gone a great way toward lowering the expense of this litigation.  The ambiguity gave us lawyers something to argue about and because of that it has been close to three years and the case is just now moving forward on the facts.  Second of all, indemnity clauses will be looked at carefully.

As always, I recommend that you read the case for yourself and draw your own conclusions.  Once you’ve done that, please comment here. I always welcome input from readers.

Ways to Make Sure the Indemnity Clause You Just Negotiated Is Not Your Enemy

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Garry R. Boehlert and Trevor Ashbarry | For The Defense | February 2018

Look within the general conditions of virtually every construction contract and you will find a clause captioned “indemnity” or “indemnity and duty to defend.” Often these clauses have been cut, pasted, and cobbled together so many times that they become a jumble of concepts and difficult to interpret. Indemnity clauses govern potential future claims and liabilities that mature only if something goes wrong. As a result, indemnity provisions frequently receive relatively little attention while the parties focus on reaching consensus on a host of other terms that seem more central to actual work on the project. Consequently, many owners, contractors, subcontractors, and suppliers enter into contracts and purchase orders in blissful ignorance of the full scope and potential liability inherent in these provisions.

When problems arise—which is altogether too common on multi-year, complex construction projects—the parties inevitably begin to ask their lawyers questions such as:

• What, if anything, does this indemnity clause cover in terms of first-party claims (i.e., disputes between the contracting parties), or does it only cover third-party claims (i.e., disputes concerning parties that lack contractual privity with the indemnitee)?

• To what extent, if any, can I recover my attorneys’ fees and litigation expenses under this indemnity clause?

• Will I be able to recover my attorneys’ fees under this indemnity provision even though the clause does not mention them and there is no express prevailing party clause in the contract?

Two recent decisions, one from the Maryland Court of Appeals, Bainbridge St. Elmo Bethesda Apartments, LLC v. White Flint Express Realty Group, Ltd. P’ship, 164 A.3d 978 (Md. 2017), and the other from the District of Columbia Court of Appeals, James G. Davis Construction Corp. v. HRGM Corp., 147 A.3d 332 (D.C. 2016), have given broad interpretation to indemnity provisions, allowing the recovery of attorneys’ fees in first-party actions for breach of contract (much to the surprise and displeasure of the indemnitors). This article discusses emerging precedent governing the recovery of attorneys’ fees under indemnity provisions in construction contracts, identifies pitfalls and traps for the unwary, and offers practice tips on the interpretation and drafting of sound indemnity provisions.

Indemnity Provisions Covering Third-Party Claims

In its most basic form, indemnity is an obligation by one party (the “indemnitor”) to compensate for a loss suffered by another party (the “indemnitee”). Participants in construction projects commonly use indemnification to address exposure to claims asserted against the indemnitee (often the owner) by strangers to the contract (third-party claims). Indeed, public sector owners often rely heavily on these provisions to counterbalance the full scope of potential liability that is posed by a project in relation to the minimal level of control that an owner exerts over that project’s day-to-day operations.

For example, if a contractor’s plumbing system fails, causing water damage to an adjacent apartment building, the owner will call on the contractor to indemnify the owner against demands made to the owner by tenants of the adjacent building. Similarly, if a contractor’s crane collapses, causing death or personal injury to workers or members of the public, the owner will seek indemnity from the contractor to protect the owner from wrongful death and personal injury claims filed against that owner by third parties.

Most construction contracts contain indemnity provisions protecting against third-party claims. Such an example of coverage for third-party claims appears in frequently encountered Article 3.18 of AIA Document A-201-2017 “General Conditions of the Contract for Construction,” which provides in pertinent part:

§3.18.1

To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expense is caused in part by a party indemnified hereunder.

Such clauses are generally interpreted to cover third-party claims, given the “from and against” language in the clause. Courts reason that third-party claims constitute the type of demands that an owner can reasonably expect to be protected “from and against.” Similarly, clauses that address property damage “other than the work itself” are generally interpreted to cover third-party claims and the type of injury that is readily insured by the indemnitor’s insurer.

Contractual indemnity clauses covering exposure to third-party claims are similar in concept to common law theories of equitable indemnity. Both share the premises that everyone should be accountable for the damages that they cause and that parties without fault should not be held accountable for the financial consequences of the actions of others over whom they have no control. Where the theories differ is that the precise language of contractual indemnity provisions will be strictly construed to determine what the parties agreed is covered in the indemnity obligation, and conversely, what is excluded. A court will not substitute its notions of equity for the actual language adopted by the contracting parties.

Indemnity Provisions Covering First-Party Claims

In addition to addressing third-party claims, some construction contracts contain indemnity provisions covering the risk of loss arising from a party’s negligence or breach, or both, of the parties’ contractual obligations (first-party claims). Courts widely respect the concept of freedom of contract and grant broad flexibility to the parties to specify the nature of their own commercial bargains. Courts will generally enforce the indemnity clauses in those agreements based on the precise language chosen by the parties. In interpreting such provisions, courts are constrained by what is contained in the four corners of the parties’ written agreement and are reluctant to go beyond those express terms.

The following is an example of an indemnification clause taken from an owner’s contract with its design engineer, addressing both first- and third-party claims:

The Consultant is responsible for any loss, personal injury, death and any other damage (including incidental and consequential) that may be done or suffered by reason of the Consultant’s negligence or failure to perform any contractual obligations. The Consultant must indemnify and save the Owner harmless from any loss, cost, damage and other expenses, including attorneys’ fees and litigation expenses, suffered or incurred due to the Consultant’s negligence or failure to perform any of its contractual obligations.

In this clause, there is no need for damage to occur to a stranger before the consultant’s exposure to damages for breach of the parties’ contract, including the payment of attorneys’ fees and litigation costs, is invoked.

Although some argue that the concept of indemnity, and therefore, the reach of indemnity provisions, should extend to only third-party claims, there is considerable judicial authority rebutting that argument. For example, courts have explicitly rejected that notion by holding that the definition of “indemnity” itself contains no suggestion that the loss indemnified must involve a third party; rather, an indemnity provision is a comprehensive provision intended to make the wronged party whole. See Kraft Foods N. Am., Inc. v. Banner Eng’g & Sales, Inc., 446 F. Supp.2d 551, 577 (E.D. Va. 2006) (holding that the “plain meaning definition of indemnification does not limit reimbursement to losses suffered as a result of third party claims”); Rexam Beverage Can Co. v. Bolger, No. 06 C 2234, 2008 WL 5068824, at *2 (N.D. Ill. Nov. 25, 2008) (rejecting the argument that indemnification in first-party actions would be an unreasonable result), aff’d, 620 F.3d 718 (7th Cir. 2010); Medcom Holding Co. v. Baxter Travenol Labs., Inc., 200 F.3d 518, 519 (7th Cir. 1999) (“An indemnity clause is designed to make the wronged party whole—to put it in the same position it would have occupied had the other side kept its promise.”); Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1031–32 (9th Cir. 1992) (citation omitted) (stating that the word “indemnify refers to compensation for loss in general, not just particular types of loss… [and it] is not to compensate for losses caused by third parties, but merely to compensate”).

Recovering Attorneys’ Fees in Third-Party Indemnity Claims

The law of Maryland, similar to that of many other jurisdictions, is clear when it comes to the recovery of attorneys’ fees in third-party indemnity claims: the indemnitee is entitled as a matter of law to recover attorneys’ fees in defense of an action, irrespective of whether the parties’ contract or whether the clause in dispute mentions attorneys’ fees. See Jones v. Calvin B. Taylor Banking Co., 253 A.2d 742 (Md. 1969).

Jones served as a clear abrogation of the American rule when it established an implied right to attorneys’ fees and costs incurred in third-party claims, even when the indemnity clause was silent about attorneys’ fees. On appeal, the Jones court did not engage in any contract interpretation or construe any contract language to reach its decision. Instead, that court created a new exception to the American rule on the recovery of attorneys’ fees by implying a fee-shifting provision for all third-party indemnity claims. Id. at 748–49. In Maryland, for more than 45 years, third-party indemnification provisions have impliedly encompassed the recovery of attorneys’ fees without the need for any express reference to attorneys’ fees in the indemnity provision in question.

More than 55 years ago, the Virginia Supreme Court reached a similar holding in Hiss v. Friedberg, 112 S.E.2d 871 (Va. 1960). In Hiss, the court found reasonable attorneys’ fees to be recoverable even if the contract was silent on the issue of fees, stating, “where a breach of contract has forced the plaintiff to maintain or defend a suit with a third person, he may recover the counsel fees incurred by him in the former suit provided they are reasonable in amount and reasonably incurred.” Id. at 876. It is in this context that many have come to understand that attorneys’ fees will be recoverable for defending third-party claims.

Recovering Attorneys’ Fees in First-Party Indemnity Claims

The intersection of the American rule and the parties’ apparent intent, or lack of it, to include a fee-shifting provision has been the more problematic area for litigants and courts. In contrast to an implied right in many jurisdictions to recover attorneys’ fees for the defense of third-party claims, attorneys’ fees are recoverable in first-party actions when expressly provided by contract. See Atl. Contracting & Material Co. v. Ulico Cas. Co., 844 A.2d 460 (Md. 2004); Nova Research, Inc. v. Penske Truck Leasing Co., 952 A.2d 275 (Md. 2008). In both Atlantic Contracting and Nova Research, the Maryland court was examining indemnity clauses that were silent with respect to attorneys’ fees in the context of arguments that the right to recover attorneys’ fees should nevertheless be implied (as in Jones) to first-party indemnity actions. The Maryland Court of Appeals has been consistent, however, that the right to indemnification of attorneys’ fees in first-party claims can be contractually manifested by evidence of express intent to encompass recovery for first-party claims—even when the mention of attorneys’ fees is lacking in the subject clause.

In Atlantic Contracting, the Maryland Court of Appeals determined that the language of the indemnification provision provided sufficient evidence of the parties’ intent to encompass potential attorneys’ fees incurred in first-party claims, even though the clause at issue was silent regarding attorneys’ fees. 844 A.2d at 469–70, 477–79. In Atlantic Contracting, the plaintiff acted as a surety for the defendant and brought an action for indemnification for a payment bond made on behalf of the defendant. Id. at 464–66. The plaintiff also sought attorneys’ fees incurred during its pursuit of establishing its right to indemnity. Id. The indemnification provision obligated the defendant to “indemnify [the plaintiff] from and against any and all Loss,” and “Loss” was defined as “[a]ny and all damages, costs, charges, and expenses of any kind sustained or incurred in connection with or as a result of: (1)  the furnishing of any Bonds; and (2)  the enforcement of this Agreement.” Id. at 469. The indemnification provision did not mention attorneys’ fees. Therefore, Atlantic Contracting expanded the court’s earlier holding in Jones pertaining to third-party claims by adding a contractual exception to the American rule that applied to first-party claims.

Similar to the situation in Atlantic Contracting, in Nova Research the plaintiff was seeking attorneys’ fees incurred in pursuit of its right to indemnity from the defendant, but the indemnification provision was completely silent on the issue of attorneys’ fees. 952 A.2d at 278– 79. There, the defendant was obligated to “indemnify and hold harmless [the plaintiff]… from and against all loss, liability and expense caused or arising out of Customer’s failure to comply with the terms of this Agreement.” Id. The court found that this language was insufficient compared to the language that the parties used in Atlantic Contracting, and as a result, the court refused to imply a fee-shifting provision when the indemnity clause did not otherwise mention attorneys’ fees. Id. at 285, 289. The court explained:

Because of our holdings in Jones, that the indemnity agreement need not contain the express phrase “attorney’s fees,” and Atlantic, where indemnifying against loss “including in the enforcement of the agreement” encompassed first party attorney’s fees, we adopt the approach… that the contract provide expressly for recovery in first party enforcement actions.

Id. at 289.

The court’s holding in Nova Research is consistent with Atlantic Contracting in that the holding refused to imply a fee-shifting provision when there was no explicit inclusion of the phrase “attorneys’ fees” or sufficiently broad language to support a conclusion that the parties intended first-party claims to be covered.

In Bainbridge St. Elmo Bethesda Apartments, LLC v. White Flint Express Realty Group Ltd. P’ship, the Maryland Court of Appeals recently affirmed an award of $3,931,648 of attorneys’ fees and expenses in a breach of contract action between the contracting parties under an indemnification clause that provided as follows:

Indemnity. Bainbridge hereby indemnifies, and agrees to defend and hold harmless White Flint… from any and all claims, demands, debts, actions, causes of action, suits, obligations, losses, costs, expenses, fees, and liabilities (including reasonable attorney’s fees, disbursements, and litigation costs) arising from or in connection with Bainbridge’s breach of any terms of this Agreement or injuries to persons or property resulting from the Work, or the activities of Bainbridge or its employees, agents, contractors, or affiliates conducted on or about the White Flint Property, including without limitation, for any rent loss directly attributable to any damage to the White Flint Property caused by the construction of the Project.

164 A.3d 978, 979, 981 (Md. 2017).

The Maryland Court of Appeals rejected Bainbridge’s assertion that the indemnification clause covered only third-party claims against which Bainbridge was to “defend” and “hold harmless.” Id. at 987. In reaching that holding, the court noted:

There are four exceptions to the American Rule where a prevailing party may be awarded attorneys’ fees: (1) the parties to a contract have an agreement to that effect, (2) there is a statute that allows the imposition of such fees, (3) the wrongful conduct of a defendant forces a plaintiff into litigation with a third party, or (4) a plaintiff is forced to defend against a malicious prosecution. Id. at 985 (quoting Nova Research, 952 A.2d at 281). The court found that the indemnification clause contained in the parties’ contract fit squarely within exception “1,” above, to the American rule. Id. at 986–87.

The court rejected Bainbridge’s further assertion that to cover first-party claims, the clause needed to contain the exact language “in the enforcement of the agreement” that was present in the Atlantic Research clause. Id. at 988. In rejecting the premise that the clause needed any specific or “magic” language, the court said: “The language in Atlantic, however, is analogous to the case at issue, as an action for ‘enforcement of the contract’ is effectively the same as an ‘action for breach of contract.’” Id. (citation omitted). The court also noted that “[e]ach item in a string of terms, separated by the disjunctive ‘or,’ is given independent meaning.” Id. at 491. Also important is that Bainbridge was decided outside of the insurance and surety contexts, dispelling the sometimes mistaken belief that recovery of attorneys’ fees in first-party indemnity claims is limited to the insurance and surety industries.

In James G. Davis Construction Corp. v. HRGM Corp., 147 A.3d 332 (D.C. 2016), the District of Columbia Court of Appeals also awarded attorneys’ fees incurred by a plaintiff in its first-party claims under an indemnification provision. The Davis court also rejected the contractor’s argument that that indemnity clause needed to have any special or “magic” language to allow recovery of attorneys’ fees in a first-party claim for breach of contract— as long as the parties’ intention was clear from the words that they chose to use. Id. at 341–42.

The indemnification provision that the court addressed in Davis Construction provided that the defendant “shall indemnify and save harmless [the plaintiff]… from and against any and all claims, demands, losses, damages, liabilities,… costs and expenses (including but not limited to reasonable attorneys’ fees) arising directly or indirectly… out of any breach of the forgoing provisions.” Id. at 336 (emphasis in original). The court found that the “express reference to attorney’s fees” was an “unmistakable fee-shifting provision” and that the “any-and-all language… delineate[d] the provision’s scope in similarly expansive terms.” Id. at 341. The court determined that its decision did not offend Nova Research because Nova Research did not address the relevant issue, which was “under what circumstances a contract that does expressly make reference to attorney’s fees authorizes the recovery of such fees in first-party actions.” Id. at 342. The court in Davis Construction went on to conclude: “In light of this key difference, the absence of the word ‘enforcement’ in Article XXI is not dispositive, and Nova Research does not bar the award of fees in the circumstances of this case.” Id.

Highlighting the need to ensure that such a fee-shifting provision is clear is the New York Court of Appeals’ determination of the issue of the recovery of attorneys’ fees in a first-party indemnity action in Hooper Associates, Ltd. v. AGS Computers, Inc. 548 N.E.2d 903 (N.Y. 1989). There, as in the other authority cited above, the court found it possible to shift responsibility for attorneys’ fees in first-party indemnity actions for breach of contract. Id. at 492. Nevertheless, the court declined to assess fees in that case because the clause in question did not contain “unmistakably clear” language requiring indemnification for attorneys’ fees. Id. at 492–93. As in other jurisdictions, the courts of New York will not infer a party’s intention to shift fees unless the clause is explicit in its intent. As a consequence, each word of an indemnity clause needs to be scrutinized carefully to determine whether it embodies a clear intention to indemnify for attorneys’ fees in first-party actions.

Effect of Indemnity Provisions on Insurance Coverage

As much as clients dislike the surprise of paying the attorneys’ fees and litigation costs of counsel of their adversary, another important consideration for design professionals (and others who may look to insurance to cover their acts and omissions) is that reimbursement of an adversary’s attorneys’ fees may not be insurable under the standard errors and omissions (E & O) policy. Although traditional E & O policies cover a design professional’s liability for violation of the professional standard of care, and for the defense of claims arising out of such alleged violations, design professionals may experience coverage problems when they contract to pay another party’s attorneys’ fees for breach of contract. In fact, most professional liability policies exclude coverage for liability assumed by contract unless there would have been liability even without the contractual obligation. As a precaution, contractual indemnity provisions must be examined closely while assessing insurance coverage for a project. No design professional wants to find him- or herself in the uncomfortable position of not having coverage for liability unwittingly assumed by contract. Moreover, no owner wants the unwelcome surprise that the costs that the owner was expecting to have covered as the indemnitee are excluded by the indemnitor’s insurance. Such a situation often leads only to one direction, and that is a road to ruin for the design professional.

Practice Pointers for Crafting Indemnity Clauses

As counsel, we pride ourselves on our ability to identify and properly assign risk, and to plan for the eventuality that sometimes the risk becomes reality. Among the most overlooked risks of construction projects is the liability being assigned and assumed through indemnity provisions. When negotiating those provisions it is important to keep the following in mind because it is too late to do so when a problem arises:

• Indemnity clauses deal with potential future problems, errors, and omissions that parties seldom care to anticipate during the glow of putting together the framework for a new project.

• Indemnity provisions often are the product of “cut and paste” efforts to string together disparate concepts in an attempt to make them as comprehensive as possible—sometimes resulting in hopeless confusion.

• Indemnity provisions can cover both third- and first-party claims; only carefully selecting the words that you choose to include will establish what is covered by your indemnity clauses.

• Regardless of how carefully you may have considered the pros and cons of including a prevailing party clause in your contract to govern the award of Indemnity, from page 57 attorneys’ fees in the event of a dispute, the indemnity clause that you have negotiated may unwittingly permit recovery of attorneys’ fees for first- and third-party claims, even if the clause makes no mention whatsoever of attorneys’ fees.

• The indemnity language that you choose to include in your contract should be consistent with the insurance coverage obtained for the work that your client will undertake. This is especially important for design professionals.

While no client likes paying the attorneys’ fees and litigation expenses of an opponent, when the obligation to do so is unexpected, the prospect is even less palatable. To prevent unintended consequences, it is important that counsel, in concert with your insurance professional, pay particularly close attention to the language of the indemnity provisions of your contracts.