If you have been in the business world for any reasonably length of time, or if you have leased property or entered into a contract for construction or remodeling, you have probably been a party to a contract that contains an indemnification provision.

Indemnification Provisions

The concept of the indemnification provision is generally very simple. If one contracting party (the indemnitee) becomes liable to a third party as a result of wrongful conduct on the part of the other contracting party (the indemnitor), the at fault party (the indemnitor) must compensate or indemnify the party who is not at fault.

Indemnification provisions are prevalent in construction contracts, independent contractor agreements, leases and other business arrangements where there is a possibility that one party might get sued as a result of someone else’s conduct.

The problem is that few people appreciate the significance of the indemnification provision or how it works and Florida courts have reached some decisions that would likely be surprising, if not shocking, to the uninitiated.

“I might have to pay because I’m potentially liable?”

Assume you sign a contract in which you agree to indemnify another party. If that party gets sued by a third party, you may be liable for indemnification even if you are not directly liable to the third party. Perhaps even more startling, you may be liable for settlement agreements entered into by the indemnitee, even if you are not a party to the settlement agreement. Courts have described this as the “vouching in” rule, and it basically means that if you have an indemnification obligation, you are bound by any judgment entered against the indemnitee, as long as you had notice and there is no fraud or collusion.

Lessons Learned from Camp, Dresser v. Howard

The case of Camp, Dresser & Mckee, Inc. v. Paul N. Howard Co., 853 So.2d 1072 (Fla. 5th DCA 2003) demonstrates the potentially devastating effects of an indemnification provision. The case arose out of a construction project in which a worker, Mr. Eiler, was permanently injured. Mr. Eiler filed suit against a number of parties including the project engineer (CDM) and the general contractor (Howard).

Howard initially prevailed in defending the claims based upon workers compensation immunity and was removed from the lawsuit. CDM Smith was not entitled to immunity and later settled the lawsuit by paying Mr. Eiler in excess of $3,000,000. Following the settlement, CDM sought indemnification from Howard for the settlement payment it had made, even though Howard was no longer a party to the lawsuit and even though Howard had not agreed to the settlement. The court determined that as long as Howard was potentially liable for the claims, CDM could be entitled to indemnification for the settlement payment it made to Mr. Eiler.

Practice Pointer

Indemnification provisions can arise in a wide variety of circumstances and the implications can vary drastically depending upon the contractual language involved. Be sure to read your indemnification language carefully and consult an attorney with any questions you may have. I may be reached at matthew.belcastro@henlaw.com or by phone at 239-344-1205.