My Company is Facing an Indemnification Claim. What Should I Do?

Indemnification claims can expose companies to substantial liability. They are also commonly misunderstood, and sometimes, companies face indemnification claims when no liability is warranted. With this in mind, if your company is facing an indemnification claim, what do you need to know? What do you need to do? An experienced Miami commercial litigation attorney explains:

What Is Indemnification?

Indemnification is an obligation to assume legal and financial responsibility for a liability claim filed by a third party. In the commercial context, companies routinely use indemnification clauses to shift liability for third-party claims when one company is at risk of liability arising from another company’s negligence or wrongdoing. Some examples of common scenarios in which companies use indemnification clauses include:

• Leasing companies requiring their customers to indemnify for claims arising out of the customers’ use of leased equipment or vehicles.
• Franchisors requiring their franchisees to indemnify for claims filed by the franchisee’s customers or employees.
• Companies requiring their data security vendors to indemnify for consumer and employee claims arising out of cybersecurity breaches.

Again, these are just examples. Indemnification claims can arise in an extremely wide range of circumstances, and companies in all industries use indemnification clauses to protect themselves. In many cases, both parties to a commercial contract will have indemnification obligations, and negotiating their scope will be a major focus during the contracting process.

Responding to an Indemnification Claim Involving Potential Third-Party Liability Exposure

With this in mind, if your company is facing an indemnification claim, there are some important steps that you should take promptly with the assistance of your company’s legal counsel. These steps include (but are not limited to):

1. Review the Relevant Contract Language (Including, But Not Limited To, the Indemnification Clause)

A key first step is to review the relevant contract language. This starts, but does not end, with reviewing the contract’s indemnification clause.

While indemnification clauses are often viewed as “boilerplate” terms, as noted above, they are often heavily negotiated. A well-drafted indemnification clause will reflect the nature of the parties’ commercial relationship and the unique risks involved.

Notably, many indemnification clauses include exemptions or carveouts—and these can play a key role in indemnification coverage claims. Continuing with our first example above, indemnification clauses in vehicle and equipment leases will often include carveouts for claims related to defects, since lessees have no control over whether the vehicles or equipment they lease are defective.

Along with reviewing the contract’s indemnification clause, it will be important to review any damage caps, insurance coverage obligations, and dispute-resolution provisions as well. These can come into play in various ways, and they can play a pivotal role in some cases.

2. Assess the Veracity of the Third Party’s Liability Claim

Another key early step is to assess the veracity of the third party’s liability claim. Just because a third party filed a claim doesn’t necessarily mean the claim is valid or can be proven. If your company is subject to liability under an indemnification clause, you will need to have a clear and comprehensive understanding of the relevant facts in order to make informed decisions about your company’s defense.

3. Determine if Your Company’s Insurer Needs to Be Involved

While companies will need to defend against third-party liability claims directly in some cases, these claims are often covered under their commercial general liability (CGL) insurance policies. If your company is facing a covered claim, you will need to promptly make an informed decision about whether to get your company’s insurer involved.

In many (if not most) cases, it will make sense to at least notify your company’s insurer that a claim is pending. Even if your company plans to dispute its purported indemnification obligation or challenge the merits of the third party’s claim, making your company’s insurer aware of the claim can be important for preserving the ability to seek coverage if necessary. Your company’s insurer may want to conduct its own investigation as well, and, in the end, it may ultimately take responsibility for defending against the claim.

4. Dispute the Claim for Contractual Indemnification Liability, If Warranted

Just as not all third-party claims are valid, not all indemnification claims are warranted. If a counterparty is seeking indemnification when indemnification isn’t warranted, protecting your company’s interests will involve defending against the indemnification claim rather than defending against the underlying third-party allegations.

Determining whether your company has an obligation to indemnify starts with examining the relevant indemnification clause. Is it clear that the clause either does or doesn’t apply? Or, is there room for interpretation? If there is room for interpretation, a dispute is likely (especially if the third party is seeking substantial damages), and resolving it will be necessary to determine which company is at risk under the underlying third-party claim.

5. Dispute The Claim for Third-Party Liability, If Necessary

Finally, if your company has an obligation to indemnify, it will need to defend against the third-party claim—either directly or through its insurer. At this stage, defending against the claim is similar to defending against any direct liability claim against the company. A comprehensive investigation is essential, and unless it is in your company’s best interests to settle, your company (or your company’s insurer) will need to defend against the claim in litigation. Your company (or your company’s insurer) will be able to obtain additional evidence through the litigation process, and this evidence will provide additional insights into the best approach under the circumstances at hand.

Speak with a Miami Commercial Litigation Attorney at Gonzalez Law Offices, P.A.

Is your company facing an indemnification claim in South Florida? If so, we can help, and we encourage you to contact us promptly for more information. To speak with an experienced Miami commercial litigation attorney at Gonzalez Law Offices, P.A., in confidence, please call 305-676-6677 or tell us how we can help online today.