Indemnity is a dry subject. No book on indemnity (assuming someone would actually write it!) will ever make the New York Times bestseller list. But indemnities transfer risk and can cost people lots of money. A recent federal court decision confirms that parties must review the terms of an indemnity carefully. Does the duty to defend depend on the duty to indemnify?
The decision, available here (subscription required) is in the case of Siemens Industry, Inc. v. Eire Electrical Corp., pending in the U.S. District Court in Massachusetts. The case arose from a boiler explosion in a recently-completed research building in Boston. Most of the case settled, without any determination of fault. Siemens, as a second-tier sub providing certain control equipment, sought recovery of its defense costs from Eire, a third-tier electrical sub hired by Siemens to wire the controls.
The pertinent subcontract language was: “Subcontractor [Eire] shall indemnify, defend, and hold Contractor [Siemens] harmless from any and all . . . costs of defense and settlement, arising out of or relating to any and all claims . . . to the extent arising, in whole or in part, out of any . . . improper, substandard, or inadequate performance or non-performance of this Subcontract . . . or . . . any negligent or wrongful act or omission of the Subcontractor . . .”
Massachusetts, like many other states, has an anti-indemnity statute to protect subcontractors from over-broad indemnity clauses. In Massachusetts, the sub’s indemnity is limited to damage that it has caused. So Eire argued that, since it only owed an indemnity if it caused the damage, its duty to defend was limited in the same manner. The federal judge ruled otherwise. The duty to defend does not require causation under Massachusetts law, and so Eire was obligated to cover Siemens’ defense costs arising from allegations about Eire’s work, even if Eire was not found to have caused the accident.
The lesson? Remember the distinction between duty to indemnify and duty to defend, and make sure your contract reads the way you expect.