Indemnity clauses can give rise to a duty to defend or duty to indemnify. This post reviews some basics of when such duties arise under Texas, New York, and California law: Can the duty to defend or to indemnify be determined before all losses are tallied?
Texas
Under Texas law the duty to defend and the duty to indemnify are distinct and separate duties, and one duty may exist without another. D.R. Horton-Tex. Ltd. v. Markel Int’l Ins. Co., 300 S.W.3d 740, 741–44 (Tex. 2009). While the duty to defend is traditionally considered broader than the duty to indemnify, the duty to indemnify may exist even if the duty to defend does not.
Under Texas law, the duty to defend is triggered by the allegations in the pleadings and the language of the contract—almost always without reference to external evidence. The contract defines and establishes the scope of the duty to defend, while the pleadings assert facts that may or may not trigger that duty.
If a Texas court finds that a claim is potentially covered, the duty to defend is ordinarily triggered. This is known as the eight-corners rule, and doubts regarding coverage are often resolved in favor of the indemnitee, even if the allegations in the pleadings do not state facts sufficient to clearly bring the case within the established terms of the contract. Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491 (Tex. 2008).
Unlike the duty to defend, which exists as soon as a suit is filed, a Texas court generally cannot determine whether a duty to indemnify exists until the facts of the case are actually established. In other words, after there has been a judgment or settlement in the underlying suit. Hartford Cas. Ins. Co. v. DP Eng'g, L.L.C., 827 F.3d 423, 430 (5th Cir. 2016).
New York
Similarly, New York courts compare the allegations of the complaint against the terms set out in the contract when determining if the duty to defend has been triggered. If the allegations potentially fall within the scope of the contract’s terms, the duty to defend is triggered. The duty to defend can be triggered if the allegations are false or baseless, even if extrinsic facts suggest the claim will ultimately prove meritless. Auto. Ins. Co. of Hartford v. Cook, 850 N.E.2d 1152, 1155 (2006).
Under New York law, the duty to indemnify is only triggered after the underlying legal liability has been established, either by a court or after a settlement agreement has been reached. Westchester Fire Ins. Co. v. Utica First Ins. Co., 839 N.Y.S.2d 91, 93 (2007).
California
In California courts, the duty to defend is likewise typically triggered when a lawsuit is filed. California courts differentiate between threatened legal actions, administrative proceedings, and actual lawsuits—the latter is far more likely to trigger a duty to defend, although under certain circumstances an administrative suit may be classified as a “suit” for purposes of the duty to defend. Foster-Gardner, Inc. v. Nat'l Union Fire Ins. Co., 18 Cal. 4th 857, 882, 959 P.2d 265, 282 (1998); Ameron Int’l Corp. v. Ins. Co. of State of Pennsylvania, 50 Cal. 4th 1370, 1384, 242 P.3d 1020, 1028 (2010). In California the duty to defend is broad and may exist even if coverage under the contract terms is in doubt. Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 295 (1993).
As in Texas and New York, in California the duty to indemnify arises after there is an obligation to pay money damages.
Contracting parties should think clearly about their indemnity provisions when entering into energy contracts in order to (1) avoid waiting years after a third-party dispute begins to receive financial coverage for expenses related to that dispute, or (2) knowingly accept the risk that such a delay might occur.
Authored by litigators from our energy team, the Not Just Boilerplate series on Power & Pipes provides real-world examples of the impact that certain contract clauses can have on energy companies. Whether in repeat form agreements, employment agreements, or heavily negotiated one-off deals or mergers, there can sometimes be a tendency to just “grab” clauses from prior agreements, with the thinking that “it has always worked before . . .”
Our energy lawyers have experience with a wide array of litigation matters that have turned on various common contract clauses, some of which may have not received much attention at the time they were included in the agreement. We thought it might be useful to pass on some real-world “lessons learned” from the litigators who have actually fought the battles. Such perspectives might help to inform your next contract—or dispute.