John, the owner of “ABC Alarm,” recently called me and said that one of his long-standing commercial subscribers, a public utility, refused to sign ABC’s standard form of commercial contract for a monitored location, as they objected to the indemnity clause. John asked for my help in working with this important client to maintain the indemnity protection.
Indemnity is a complicated topic. Essentially, it is an agreement by one party to pay for another party’s costs of defense (attorneys fees and other costs) and the amount of any settlement or judgment. The party providing indemnity is an indemnitor; the party receiving indemnity is an indemnitee. Technically, indemnity includes direct claims by one of the parties to a contract against the other (called first-party indemnity) and claims against the indemnitee by an entity not a party to the agreement (called third-party indemnity). I will focus here on on third-party claims.
Historically, electronic security providers have sought to require subscribers to indemnify the security provider for third-party claims arising from a loss — including losses caused by the security provider’s negligence or other wrongful conduct. Thus, even where the security provider’s mistake caused some portion of the loss, the security provider looks to the subscriber and the subscriber’s insurance to reimburse its defense costs and any settlement or judgment amount. As you might imagine, courts disfavor these sorts of indemnity provisions and will go out of their way to invalidate them. Among other things, courts refuse to enforce an indemnity clause for the indemnitee’s negligence unless the contract makes it crystal clear that was what the parties agreed to.
John explained that ABC monitored each location under a separate contract. After speaking with the subscriber’s general counsel, I learned that the subscriber’s real concern was what they believed to be their inability to insure against the risk of loss. In fact, counsel explained, they had consulted their insurance broker and insurance carrier and were told that the subscriber’s insurance policies would not provide subscriber insurance coverage to respond to ABC’s claim for indemnity.
Although I had not reviewed the subscriber’s insurance policies, my experience defending security providers in catastrophic losses led me to believe the subscriber actually was insured for the loss but didn’t realize it. I asked counsel to contact his agent and carrier and determine if subscriber had incidental or insured contracts coverage (I refer to it as an insured or incidental contract interchangeably).
Insured contracts coverage provides coverage where the insured assumes liability under a contract that is incidental to the insured’s business. Coverage is generally included under a commercial general liability (CGL) policy. An incidental contract means one that the insured enters into incidental to the insured’s business. In this case, the subscriber contracted with ABC for security monitoring services at one of its facilities, which certainly seems incidental to subscriber’s business. Another example of an incidental contract is a dealer agreement where an alarm dealer agrees to indemnify a monitoring facility.
Insured contracts coverage is an exception to the rule that the insurer has not provided insurance for contractually assumed liabilities. To have coverage, the insured must have made a specific assumption of liability (liability that arises from breach of contract is excluded from coverage). Whether the contract is an insured contract is an important issue and will be resolved by the portion of the policy that governs insured contracts coverage. From the security provider’s perspective, when you meet an objection to an indemnity provision, you may be able to argue that the obligation is likely to be insured under the subscriber’s policy.
The story has a happy ending — after several weeks of the subscriber working with the insurance professionals, the parties agreed that the monitoring agreements were insured contracts covered by the policy. The subscriber signed the new agreement and (hopefully) everyone will live happily ever after.
Eric Pritchard is a Philadelphia Lawyer who spends his workday making the world safe for electronic security providers. He can be reached at [email protected]. This column does not constitute legal advice; contact an attorney with questions.
