By: Brandon Clapp

Liability insurers frequently confront tenders or demands involving indemnity agreements entered by their insureds. The effect of an indemnity agreement may also implicate additional insured coverage. States differ drastically on the permissible scope of an indemnity agreement, especially when the indemnity agreement requires the indemnitor to indemnify the indemnitee for claims arising from the indemnitee’s sole negligence. Thus, it is critical to understand the state’s law governing the interpretation of the indemnity agreement when faced with a demand for indemnification.

Generally, Alabama law recognizes the ability of parties to enter into valid indemnity agreements that allow an indemnitee to recover from the indemnitor even for claims resulting solely from the indemnitee’s negligence. However, these agreements are carefully scrutinized, and such an agreement is enforceable only if the language is unambiguous and unequivocal. Additionally, Alabama law limits the permissible scope of indemnification provisions for public policy reasons.

In the summer of 2021, the Alabama Supreme Court addressed the permissible scope of an indemnity agreement in Nucor Steel Tuscaloosa, Inc. v. Zurich Am. Ins. Co., 2021 WL 2621430 (Ala. June 25, 2021).

In that case, Nucor entered into a “Temporary Services Agency Agreement” with Onin, a personnel-staffing agency, whereby Onin was to manage the employment of technical-school students selected by Nucor for its internship program. The agreement included a broad indemnity provision that required Onin to defend and indemnify Nucor provided that any such damages were caused in whole or in part by any act or omission of Onin regardless of whether or not any such damages were caused in part by the concurrent negligence of Nucor. Nucor was also named as an additional insured under Onin’s general liability policy issued by Zurich.

In 2014, an intern was killed by a 30-ton gantry crane being operated by a Nucor employee. The intern’s mother filed a wrongful death lawsuit against Nucor alleging Nucor’s negligence caused the intern’s death. Onin was not named as a defendant in the wrongful death lawsuit because it was the intern’s employer and immune from tort liability under Alabama’s worker’s compensation laws. Nevertheless, Nucor tendered its defense to Onin and Zurich based on the indemnity agreement, but they rejected the tender. Nucor settled the wrongful-death action for a confidential amount and filed suit against Onin and Zurich based on their refusal to defend and indemnify Nucor for the settlement of the wrongful-death action.

The trial court granted summary judgment in favor of Onin and Zurich because the indemnity agreement was either not triggered or was unenforceable for public policy reasons. On appeal, the Alabama Supreme Court affirmed the trial court and reiterated it must consider “the degree of control retained by the indemnitee over the activity or property giving rise to liability.”

The court found Onin's role in the intern’s employment was strictly administrative and that Nucor exercised exclusive control over the intern’s employment and its facility. The court further held Onin's role was strictly administrative in nature while Nucor exercised complete control over all aspects of the intern’s work, including his training and the area in which he performed his work. Relying on the court’s prior holding in City of Montgomery v. JYD International, Inc., 534 So. 2d 592, 594 (Ala. 1988), the court held the indemnity agreement was inapplicable and unenforceable as a matter of public policy because Onin exercised no control over the circumstances leading to Nucor’s liability. The court also held Nucor was not entitled to additional insured coverage under Zurich’s policy because the indemnity agreement did not apply.

Thus, the Nucor Steel Decision reaffirms an indemnity agreement is void as a matter of public policy if it amounts to an agreement by which an indemnitee attempts to obtain indemnification for its own negligence in an area where the indemnitor has no right or ability to exercise control over the events giving rise to the claim. As the court previously held in JYD International:

[T]o allow the indemnitee to transfer financial responsibility to the indemnitor under such circumstances would be totally at odds with the tort system's incentives to encourage safety measures.... Any argument that the agreement simply shifts the burden to the indemnitor to take such measures is untenable if the indemnitor has no right to exercise control over the potentially hazardous area or activity....

534 So. 2d at 595.

As demonstrated above, interpreting indemnity agreements requires careful attention to the provisions of the agreement, the facts and circumstances giving rise to the claim and the governing state’s indemnity statutes or common law. Thus, interpreting indemnity claims can often be a minefield full of nuances, but Nucor hopefully provides clarity on the limitations of an enforceable indemnity agreement in Alabama.

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Brandon J. Clapp

It is critical to understand the state's law governing the interpretation of an indemnity agreement.
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