Counsel to Counsel - September 2008 - (Page 25) run the risk of either not claiming all the protection laws allow, or of overdrafting indemnity clauses that could then be voided. This doesn’t mean, however, that companies must retain local counsel in every state a contract covers. “There is language you can use that suggests that the intent of the agreement is to provide the maximum indemnity allowable by law, but not to exceed that,” Mahaney explains. “In other words, there is a ‘default setting’ that you can use for a broad range of situations.” Act Fast Despite best efforts, even the most carefully drafted contracts still can lead to litigation. Whenever a claim arises, the earlier you act, and the more clearly you act, the better. “In most states it’s a general rule that if you make a timely demand for indemnity, and the party that owes you does not step in and provide that indemnity, then that party will be liable for any judgment against you, including legal fees,” Mahaney says. granted. They frequently rely on boilerplate that quickly becomes outdated or that fails to evolve with the company’s business. Just a little attention early on can greatly reduce the day-to-day risk every business encounters. “There are so many ways this can come up, it’s a standard tool every law department should use effectively,” Mahaney concludes. “A good indemnity clause either gives you the protection you want right up front, or a very good argument if you do end up in litigation. It’s the best way to ensure the cost of your risk is borne by someone else.” Insurance Issues Another issue that often arises is the coupling of an indemnity obligation with an insurance requirement. Some states require evidence of insurance for an indemnity provision to be valid, and in most situations it is a standard facet of the contract. “The problem I’ve seen is that many general liability policies exclude obligations assumed by contract,” Mahaney cautions. “You may have an effective indemnity agreement, but the party that owes you money may not have the resources to honor that obligation.” As a rule of thumb, if the contract is in any way significant to your company, you should not only couple the indemnity clause with an insurance obligation, but demand proof of insurance before closing. Companies may want to go as far as having the contract listed in the insurance policy and getting certification that you are listed as a coinsured. All too often companies make the fatal assumption that umbrella policies cover the contract and fail to do any further investigation. “It happens more frequently than you would imagine,” Mahaney says. But doing your homework pays off. In some situations careful drafting of an indemnity agreement can even make a company a first-party insured under the indemnitor’s policy, allowing it another course—suing the insurance company directly—if it is later denied indemnity. “A good indemnity clause either gives you the protection you want right up front, or a very good argument if you do end up in litigation. It’s the best way to ensure the cost of your risk is borne by someone else.” By not providing prompt coverage, the indemnifying party relinquishes all further legal courses of action—for example, disputes over litigation strategy or settlement amount—save challenging whether indemnity was owed at all. To ensure the maximum protection and most flexibility in litigation, a company that is owed indemnity should proceed quickly. This allows the company total control over the litigation and the opportunity to settle the dispute in a reasonable way if they see fit. “Typically, what I do in that situation is ask the court to bless the settlement as being in good faith, so I can go back and recover my client’s money from somebody who owes us indemnity,” Mahaney says. “That gives us a tremendous amount of leverage in litigation, and puts my client in a no-loss situation, because the indemnifying party will then have to cover legal fees as well.” The most common mistake companies make is taking indemnity language for Huddleston Bolen LLP is a law firm with over 50 attorneys practicing in offices located in Huntington, W.Va.; Charleston, W.Va.; Ashland, Ky.; and Louisville, Ky. The firm, founded in 1871, represents clients in many practice areas including banking and finance, health care, insurance, litigation, natural resources, real estate and transportation. Article Participant: John H. Mahaney Partner jmahaney@huddlestonbolen.com Peer Review Rated www.martindale.com/c2c SEptEmbEr 2008 25 http://www.martindale.com/c2c
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