Article Archives >> Lead Stories >> September 1-15, 2009
Indemnification Clause in Contract
Provides Phantom Protection for City
Nonprofit’s commitment to name City as additional insured,
defend, and indemnify fails against claim of intentional misconduct
Even carefully written contractual clauses for defense and indemnification may not provide the protection that the beneficiary anticipates.
A nonprofit’s commitment to name the City of Bethlehem as an additional insured on its own policy and to defend and indemnify the City against claims arising in connection with the annual Musikfest music festival does not protect the City against claims of intentional misconduct by City police, according to a recently published opinion of a trial court in Pennsylvania. The decision was rendered in a dispute between two insurance companies seeking to determine which one had to defend the City and its officers. (City of Bethlehem v. Artsquest, Ct. of Common Pleas, Northampton County (PA), No. C-0048-CV-2004-6699, 5/6/09.)
Musikfest, the predecessor to Artsquest, entered into two contracts with the City prior to the 2000 festival. Musikfest agreed to purchase and maintain comprehensive general liability insurance naming the City, its officers and employees as additional insured.
It also agreed that it would indemnify, defend, save and hold harmless the City and its officers and employees, from and against all suits or claims that may be based upon any damage or injury or death to any person that might occur in the course of the use of the Premises, whether or not it would be claimed that the damage or injury or death was caused through the negligent act or omission in whole or in part of the City and/or its officers and/or employees.
At the festival in 2000, three members of a family attending the event were involved in an incident with City police and ultimately filed a complaint in federal court for Section 1983 violations of their constitutional rights, plus intentional and negligent infliction of emotional distress. The City sought a defense from Artsquest and its carrier, but they refused. The City filed a declaratory judgment action, seeking to force them to provide the defense, and indemnification if required.
The City argued that Artsquest was required to defend under the contract. Artsquest said it was not required to defend against intentional torts because it was against public policy to defend another against intentional torts and because the contract limited the requirement to defend only against negligent acts or omissions.
The Court agreed that the parties were not free to contract for the defense and indemnification of intentional acts. It also agreed that the contract terms limited the commitment to negligent actions. And it found that “the gist” of the claims for negligent infliction of emotional distress claims were “clearly based on allegations of intentional conduct.” The Court held that the nonprofit had no duty to defend against the claims.
The City also claimed that Artsquest had breached its contractual duty to provide insurance to protect the City. Artsquest argued that it had provided the insurance that was required and had given the City the required certificate. The Court held that the insurance met the terms of the contract.
The City then argued that the carrier had to defend it from the claims. The policy provided that it did not apply to any occurrence not arising our of “your negligence.” The Court read the policy to provide that the word “your” applied only to the Named Insured (Musikfest), and not an additional insured, which was covered only when the term “insured” (without capitalization) was used. It held that the City was not covered for its own acts of negligence under the policy.
The City also argued that it was protected under the “insured contracts” provision of the policy. The policy was generally inapplicable to contractual liability, with the exception for liability for damages assumed in a contract or agreement that is an “insured contract.” This provision, the Court said, only required the company to indemnify for bodily injury or property damage for which either party might be found liable, but did not require the carrier to defend the City.
YOU NEED TO KNOW
Trying to fathom the intricacies of insurance contracts sometimes seems like counting the angels on the head of a pin, and the Court’s holding that the additional insured is not protected for claims for injury from its own conduct seems to negate the purpose of naming an additional insured. Were the claim only for simple negligence, perhaps this case would not have been necessary.
We have repeatedly warned against the risks of indemnification clauses (See e.g. Nonprofit Issues®, May 16, 2006), but even where a party thinks it is protected, it isn’t always the case. Indemnification clauses often serve as a vehicle for insurance companies to argue with each other, as they have in this case, about who has to defend and indemnify. The incident at the core of this controversy took place in 2000. Nearly nine years later, the insurance companies are still arguing with each other, the underlying controversy has not been resolved, and the parties have to spend their time and energy participating in a dispute between carriers in which they have little at stake. If each party had simply maintained its own insurance to protect its own interests, this case would probably have been resolved years ago.
Article Archives >> Lead Stories >> September 1-15, 2009
