Thakur Law Firm, APC (“TLF”) recently secured a critical arbitration ruling on behalf of a medical group (the “Group”) in a dispute with a hospital (the “Hospital”) over indemnity obligations. Although California law interprets indemnity obligations broadly, this ruling reinforces the fact that there are limits to such obligations where the indemnifying party has not expressly agreed to assume them.
Background
Years ago, the Group entered into a written contract with the Hospital setting forth the terms under which physician employees of the Group would work at the Hospital. The contract contained a boilerplate indemnity clause which required the Group to “protect, defend, indemnify and hold harmless” the Hospital against all liabilities “arising out of or in consequence of, the work to be performed by Group and [the Group’s] Physicians” pursuant to the contract. The purpose of this provision was to have the Group foot the bill for any acts of malpractice or negligence committed by one of the Group’s physicians against one of the Hospital’s patients while working at the Hospital. This makes sense, since the employer of the supposed negligent physician would be the Group, not the Hospital.
Later, a patient at the Hospital was injured due to the negligence of a physician not employed by the Group. A Group physician was merely a member of the team caring for the patient. The patient hired legal counsel and then sued the negligent physician and the Hospital, but not the Group physician or the Group (even though the patient and his attorney knew of the Group and the Group physician’s role in caring for the patient). The Hospital filed no cross-complaint against the Group either. Years later, however, after the plaintiff and the Hospital had already litigated the case, the Hospital sent a tender of defense and indemnity to the Group, demanding that the Group handle the defense of the case and indemnify the Hospital for money paid pursuant to the Hospital’s settlement with the patient. The Group, understandably, rejected the tender.
The Arbitration
Intuitively, it seems like a slam dunk that the Group should not have to pay the Hospital any amount since no Group physician ever committed a negligent act against the patient. It is noteworthy, however, that California law imposes a liberal interpretation of broad, boilerplate indemnity clauses like the one in the Group’s contract with the Hospital, particularly with respect to the duty to defend. Courts have concluded that an indemnifying party must defend the party seeking indemnity: (1) if the plaintiff alleges negligence against the indemnifying party or its agent, whether or not such person actually was negligent; and (2) if the party seeking indemnity alleges negligence against the indemnifying party in a cross-complaint. (See Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541; Centex Homes v. R-Help Constr. Co., Inc. (2019) 32 Cal.App.5th 1230; and UDC-Universal Dev., L.P. v. CH2M Hill (2010) 181 Cal.App.4th 10.)
The difference in this arbitration, as TLF argued to the arbitrator, was that neither the plaintiff patient nor the Hospital alleged negligence against any Group physician in the underlying lawsuit. Even under California’s liberal construction of broad indemnity clauses, this arbitrator correctly concluded that, subject to express terms to the contrary in an indemnity agreement, a party who has agreed to defend and indemnify another party need not defend or indemnify if negligence was never alleged against the indemnifying party or its agent. Even though not binding precedent, this decision is important in that it helps explain how arbitrators, mediators, and potentially courts will likely view similar cases moving forward. As a result, the Group was not required to defend or indemnity the Hospital, and the Hospital was required to reimburse the Group for costs.
Key Takeaways
The most important lesson to be learned from this arbitration is not in fact the arbitrator’s central decision about the extent of broad indemnity clauses. Rather, the critical lesson here is to avoid the issue in the first place by carefully crafting indemnity clauses that are narrowly tailored to the particular circumstances at hand. Here are some ideas to consider incorporating into your indemnity agreements:
- If possible, eliminate the duty to defend from the indemnity obligation.
- Clearly state that the duty to defend is not triggered unless the plaintiff alleges negligence against the indemnifying party or its agent in the complaint.
- Impose time limitations on the ability of the party seeking indemnity to tender defense (e.g., within 15 days after receiving notice of the plaintiff’s complaint).
- Require the reimbursement by the party seeking indemnity of costs where the plaintiff alleges negligence against the indemnifying party or its agent but no negligence is ultimately found. In the event of a settlement, the parties can negotiate a partial reimbursement.
- Add a provision for proportional indemnification, meaning that if multiple parties are found liable, the indemnifying party’s indemnification obligation will not be greater than the extent of its liability. (This should be argued even if not present in the clause, but it is much safer if it is expressly written.)
These are just a few tools that can be employed in order to mitigate some of the unforeseeable risks of indemnity clauses. If you would like assistance crafting an indemnity clause, evaluating a current contract, asserting rights under such a clause, or defending against the unfair invocation of the indemnity obligation against you or your business, the experienced attorneys at TLF can provide you with the counsel and representation you need. Learn more at https://www.thakurlawfirm.com/.