What is the Difference Between the Duty to Indemnify and the Duty to Defend?
Many business contracts include duty to indemnify and duty to defend provisions. The question arises: What is the differences between the two duties?
This article delineates important differences. In short, the two duties are separate and independent. Furthermore, the extent of the obligations imposed depend on how the contract is drafted. You need a good business lawyer to review and scrutinize indemnity and duty to defend clauses to protect your business. Otherwise, you might end up on the wrong end of an expensive invoice.
What is the Duty to Indemnify?
A typical indemnification clause reads something like this: One party agrees that it “… will pay all sums that that the other party becomes legally obligated to pay as damages” for certain harms or injuries or occurrences defined in the contract. “Damages” generally means a court judgment. However, anyone involved in litigation knows that, often, the legal fees, costs and litigation expenses can exceed any judgment awarded by the court.
What is the Duty to Defend?
Since litigation costs can be very expensive, many contracts also include a provision that creates a duty to defend. The language is often something like this: one party “… shall defend the other party in any suit seeking damages” or certain harms or injuries or occurrences defined in the contract. This creates the obligation to pay the attorneys’ fees, costs and litigation expenses in addition to paying the court judgment.
Differences Between the Duty to Indemnify and Duty to Defend
The courts have made it clear the two duties are separate and independent. For example, they differ in their triggering. The duty to indemnify arises only at the end of the case after damages have been awarded. By contrast, the duty to defend arises at the beginning when the case is filed. In addition, the duty to indemnify involves the payment of money whereas the duty to defend, in theory, involves the rendering of a service (providing legal services to defense the lawsuit). The duty to indemnify is also considered by the courts to be narrower in scope than the duty to defend. Where both duties are imposed, you must defend the lawsuit even if you do not end up having to pay a judgment.
The Interplay Between the Duty to Indemnify and Duty to Defend
There is an interplay between the two. The party being required to indemnify often wants — positively insists upon — the ability to defend. Otherwise, that party might end up paying a judgment that the other party did not bother to defend or did not bother to defend aggressively. In addition, having the duty to defend and be able to defend, also allows the indemnifying party the right to be involved in any sort of settlement negotiations.
The Scope and Extent of the Duty to Indemnify and Duty to Defend Depend on What is Written in the Contract
The scope and extent of the duties depends on what is written in the contract. For example, if the contract says that one party has the duty to defend in a “suit seeking damages,” the California Supreme Court held that to mean that the duty to defend is limited to defending a civil action prosecuted in a court. See Foster-Gardner, Inc. v. National Union Fire Ins. Co., 959 P.2d 265 (Cal. 1998). Similarly, if the contract says that the indemnifying party shall pay “… all sums that the other party becomes legally obligated to pay as damages,” that is limited to money ordered by a court. Unless the contract says otherwise, the duty to indemnify and the duty to defend do not extend to an administrative agency investigations. See Lloyd’s Of London v. Superior Court, 16 P. 3d 94 (Cal. 2001).
You Should Consult a Good Business Lawyer regarding the Duty to Indemnify and Duty to Defend
Indemnification and duty to defend clauses are some of the most dangerous clauses that are routinely included in business contracts including leases and vendor/supply contracts. The clauses tend to be long and complex and, if not carefully reviewed by an experienced business lawyer, such clauses can be very expensive and disastrous for your business if something goes wrong.
Contact San Diego Corporation Law Today
If you would like more information about indemnification and duty to defend clauses, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” for 2016 by SuperLawyers.com. Mr. Leonard can review your contracts and help protect your business. Every business needs a good business attorney like Mr. Leonard to review, draft and assist in executing business contracts and with other business-related matters. Mr. Leonard can be reached at (858) 483-9200 or via email.