Indemnity Claim: When Contractual Liability Shifts and Costs Must Be Reimbursed

While both seek monetary recovery, the legal rails are different. A Lawsuit for Damages typically arises from a direct Breach of Contract between two parties. An indemnity claim, however, often involves a third-party event. For example, if a third party sues Company A for a product defect caused by Company B, Company A initiates an indemnity claim against Company B to recover the costs of that lawsuit.

• Contractual Indemnity: 

Derived strictly from the language of the Indemnification Clause within a written agreement.

• Statutory Indemnity: 

Arises from state or federal laws (such as agent-principal relationships) even in the absence of a specific contract.

Most claims are triggered by a "third-party claim." This occurs when an outside entity sues the indemnitee (the party being protected). The indemnity claim ripeness depends on whether the contract covers "claims filed," "liabilities incurred," or "losses paid."

A critical, often overlooked component is the Duty to Defend. Unlike the duty to indemnify (which pays for the final Civil Settlement), the duty to defend is triggered early - often as soon as a lawsuit is served. If the indemnitor refuses to provide a defense, the indemnitee may incur significant defense costs that become part of the ultimate indemnity claim.

[Image: Flowchart of an Indemnity Trigger - Incident -> Third Party Lawsuit -> Tender of Defense -> Indemnity Claim]

The phrase "indemnify and hold harmless" is the gold standard. To "indemnify" means to reimburse for a loss, while to "hold harmless" means to release from liability. The scope determines which acts are covered: e.g., negligence, willful misconduct, or strict liability.

These are distinct legal obligations:

Duty to Defend: 

The indemnitor must hire and pay for lawyers to fight the underlying case.

Duty to Reimburse: 

The indemnitor pays the indemnitee back for the costs they already spent. Failing to recognize the difference can lead to a terminal payment obligation dispute.

The claimant must perform a forensic audit of the loss to ensure it falls within the "covered" categories. If the contract covers "property damage" but the loss is "purely economic," the indemnity claim may be denied. Furthermore, a link of causation must be established between the indemnitor’s actions and the third-party claim.

Most contracts require immediate "Notice of Claim." If you settle a case without notifying the indemnitor or giving them the chance to defend, you may inadvertently waive your right to an indemnity claim. This is a common point of friction where insurance claims & denials strategies overlap with contractual recovery.

Common "carve-outs" include:

• Sole Negligence: 
• The indemnitor is not responsible if the indemnitee was 100% at fault.
• Unreasonable Settlements: 
• The indemnitor argues the civil settlement was too high.
• Pre-existing Conditions: 
• The loss started before the contract was signed.

In many states, "Anti-Indemnity Statutes" prevent a party from being indemnified for their own gross negligence or intentional acts. This is a matter of public policy designed to prevent parties from being "too insulated" from their own dangerous behavior.

Many commercial contracts require the indemnitor to name the indemnitee as an "Additional Insured." This allows the indemnitee to skip the indemnitor and go directly to the insurance carrier for compensation payout.

If an insurance company pays for your loss, they may gain the right of subrogation - the right to step into your shoes and pursue the indemnity claim against the responsible party to recover their payout.