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Avoid contractual loopholes

September 2, 2022 By    

A common provision found in contracts is a defense and indemnity clause. In essence, this clause provides that one party to the contract agrees to defend and indemnify the other contracting party for its own negligence.

A recent lawsuit filed in a Pennsylvania court provides an example of how this clause works and how this clause may not provide all of the protection anticipated.

Contractor relationship

Photo: AndreyPopov/iStock / Getty Images Plus/Getty Images

Photo: AndreyPopov/iStock / Getty Images Plus/Getty Images

Murray Energy is a mining company. During its work, it damaged a home owned by the Riggle family. It subsequently provided the Riggle family a mobile home to live in.

Murray contracted with Harvey Services LLC to install gas service lines to the home. In the contract for this work, Harvey agreed to defend and indemnify Murray for any claims related to its work. The contract between Harvey and Murray also required Harvey to list Murray as an additional insured under its commercial general liability policy.

In July 2018, an explosion occurred at the Riggle home. The explosion injured Nicholas Riggle. He sued Harvey for negligent installation. He sued Murray for failing to supply a safe home and sued it for the negligent acts of Harvey, as the general contractor.

In August 2019, Murray requested that Harvey defend and indemnify it for the allegations raised in the Riggle lawsuit pursuant to that clause in its contract with Harvey.

Harvey’s insurer, Merchant Mutual Insurance Co., provided liability insurance to Harvey. It sent Murray a written denial of the request for defense and indemnity a month later. Merchant subsequently settled with Riggle on behalf of its named insured, Harvey, for a confidential amount. Riggle subsequently dismissed all claims against Harvey with prejudice. It appears Merchant paid out all of its available insurance to settle the case for its named insured, Harvey.

Merchant then filed a lawsuit in federal court asking the court to rule that it has no duty to defend and indemnify Murray because it has exhausted all of its available insurance under the policy of insurance held by Harvey. It also claims in the lawsuit that Murray is not an additional insured under the policy it issued to Harvey. Murray has yet to respond to the lawsuit.

Insurance dispute

Merchant elected to use the “pay and walk” doctrine to claim it no longer has any duty to defend and indemnify Murray. Under the doctrine, once the insurer has paid its policy limits and obtained a release for its insured, it has no further legal duties under that insurance policy.

Defend means to pay all fees and costs associated with a lawsuit for an insured. Indemnity is the money spent to settle a case. That amount is the face value of the insurance policy.

Merchant is making a preemptive strike by filing this lawsuit. It gets to pick the court for this legal fight. It chose federal court. There is a belief that federal courts are more conservative and more favorable in these fights.

In its lawsuit, Merchant claims Murray is not an additional insured under its policy with Harvey. This means Harvey or its insurance agent forgot to add Murray to its policy. If this is true, it also means Murray did not request and obtain a certificate of insurance from Harvey proving it as an additional insured. Therefore, fault goes to all.

This issue creates other issues. The insurance agent for Harvey might have a malpractice claim if Harvey requested the coverage but the agent just dropped the ball.

Teaching points

  • The lawyer who drafts the defense and indemnity clause should be familiar with the laws of the state where it is going to be used.
  • Specify the amount of insurance and types of insurance required in the contract.
  • Require insurance that is “A” rated. Request to be an additional insured under the policy.
  • Request a copy of the certificate of insurance showing you as an additional insured, and be sure you receive it.
  • If coverage is canceled, require you receive prompt notification.

John V. McCoy is with McCoy, Leavitt, Laskey LLC. His firm represents industry members nationally. He can be reached at 262-522-7007.

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