An Introduction To Indemnity Law

• Published date: 17 August 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Real Estate and Construction, Contracts and Commercial Law, Professional Negligence, Construction & Planning, Landlord & Tenant - Leases
• Law Firm: Collins Einhorn Farrell
• Author: Matthew S. LaBeau

When a complaint comes in, it's natural for attorneys to read it and immediately start addressing the elements and defense to the plaintiff's claim. In a legal-malpractice claim, for example, the first direction you may turn is to the case-within-a-case requirement. Or maybe you'll skim through a couple old briefs to refresh your memory about the statute of limitations.

In addition to attacking the claims of the plaintiff, it's crucial that attorneys take time to understand where else they need to focus their attention: Is there someone else to blame? Or, asked differently, what about indemnity? Unfortunately, a lot of attorneys think they understand indemnity law until it actually comes up. And then they don't.

Here's how the Michigan Supreme Court recently described indemnity: "Generally, indemnification is an equitable doctrine that shifts the entire burden of judgment from one tortfeasor who has been compelled to pay it, to another whose active negligence is the primary cause of the harm."¹ Or, more simply, "indemnity seeks to transfer the entire loss imposed on a tortfeasor to another, who in equity should pay."²

That makes sense. But how do you figure out if you should worry about or assert indemnity? And, even if you do figure that out, how do actually do that? And then what do you do if the other party doesn't agree with you?

The purpose of this article is to dip our toes in the indemnity-law pool and, hopefully, start to answer those questions. If an attorney is able to navigate the indemnity waters from the outset of a case, he or she has a significant chance of saving his or her client a lot of time and money.

I. Types of Indemnity

In Michigan, you're likely to run into indemnity-law issues in three different scenarios: contractual indemnity, common-law indemnity, and implied-contractual indemnity. Contractual indemnity, as you'd expect, is based on contract principles. Common-law indemnity, which has nothing to do with contracts, is more equity-based. And implied-contractual indemnity is sort of based on both, but it isn't really based on either.

A. Contractual Indemnity

Perhaps the most frequent situation where attorneys run into indemnity is in a contract. Rarely do they show up as stand-alone agreements. Instead, you see them as a so-called (and probably boilerplate) "indemnity" clause in a contract. Examples of contracts that might have an indemnity clause include agreements like real-property leases or rental agreements. The reason these types of contracts often include indemnity clauses makes sense: One party (the indemnitee) won't agree to do something, e.g., lease an office space or rent a car, unless the other party (the indemnitor) is willing to indemnify it.

Indemnity clauses, like any other contract clauses, are generally interpreted and applied as written.³ Unfortunately, like a lot of other contract clauses, they can also be filled with legalese and, as a result, difficult to interpret and apply—much less interpret and apply in a way that all parties believe is correct. And that interpretation and application often depends on what state's statutory-construction rules apply. For example, in California, if a party wishes to contract for indemnification against his or her own negligence, the indemnity clause must explicitly refer to negligence.⁴ Conversely, in Michigan, such an explicit reference to negligence isn't necessarily required.⁵

It's also true that, again like other contract clauses, indemnity clauses are construed against the drafter (and/or against the indemnitee).⁶ But this narrow statutory-construction rule is subordinate to the much broader rule of interpreting and applying contract clauses in a way that reflects the parties' intent: "While it is true that indemnity contracts are construed strictly against the party who drafts them and against the indemnitee, it is also true that indemnity contracts should be construed to give effect to the intentions of the parties."⁷ The Supreme Court has summarized the analysis as having three steps: (1) Is the indemnity clause ambiguous? (2) If so, what interpretation does extrinsic evidence suggest the parties intended? (3) And if extrinsic evidence doesn't...