The Duty To Defend Under an Indemnification Clause, All Defendants Secure Summary Judgment – Two Wrongs (the Trial Court and Appellate Division) Don't Necessarily Make a Right, at Least as to a Question Not Answered by the New Jersey Supreme Court

New Jersey - Insurance Coverage

Key Points:

• An indemnitee was not entitled to reimbursement of defense costs when the indemnitor secured summary judgment and the clause required a finding of negligence.
• A question left open--when a business invitee alleged negligence by the owner, contractor and subcontractor, and all three obtained summary judgment, was the owner entitled to reimbursement of defense costs when the clause was not explicit as to the owner's alleged negligence but required protection against all work related claims?

In Kieffer v. Best Buy, 205 N.J. 213 (2011), the New Jersey Supreme Court addressed once again the often complex question of contractual indemnification. The issue was whether All Cleaning Solutions Co. (All Cleaning) was required by the terms of its indemnification agreement to pay the legal costs incurred by Best Buy and American Industrial Cleaning Co. (AIC) in defending a lawsuit that was dismissed against all three defendants for lack of evidence.

AIC entered into an agreement with Best Buy to clean and provide maintenance for its stores. AIC subcontracted with All Cleaning for the daily cleaning of the Best Buy store. While Tina Kieffer was shopping there, she fell and broke her ankle. She initially sued Best Buy only, alleging that Best Buy's negligent maintenance caused her to slip and fall in an aisle in the store. Following a third party complaint by Best Buy against AIC, claiming that AIC was contractually bound to defend and indemnify Best Buy (on an informal basis Best Buy also demanded additional insured protection), and a fourth party complaint by AIC against All Cleaning seeking the same relief, Kieffer filed an amended complaint in which she named Best Buy, AIC and All Cleaning. She alleged that her fall was caused by an unsafe, slippery floor. We are not told the time of her accident. Early on the day of the accident, All Cleaning had swept, mopped and scrubbed the floor. It had last waxed the floor three months earlier. According to the Best Buy manager's notation on a floor-maintenance form, the waxing was "satisfactory."

Kieffer's expert opined that in the area of the fall, the floor finish material was not properly applied and that "hazardous conditions" created by Best Buy, AIC and All Cleaning caused the fall.

The floor service agreement between Best Buy and AIC permitted AIC to delegate its duties to others, but AIC remained "solely responsible for the conduct of all such Subcontractors."

The Best Buy/AIC agreement also provided that AIC would indemnify, defend and hold harmless Best Buy for all "suits, causes of action, claims, and demands" which are asserted against Best Buy "by reason of, or arising from: (1) the breach of this Agreement by Contractor…."

 The agreement between AIC and All Cleaning, which AIC drafted, required All Cleaning to defend, hold harmless and indemnify AIC and Best Buy "from any connection with any act of negligence, omission, or conduct arising out of the operation of [All Cleaning's] business and [its] performance or non-performance of the services."

The trial court granted summary judgment in favor of all three defendants, concluding that they were not negligent or otherwise liable for Kieffer's injuries. The court noted that Kieffer did not know why she fell and that her only observation was that the floor was shiny. The court rejected her expert's conclusion that the floor was negligently maintained as nothing more than a bare conclusion unsupported by factual evidence, a "net opinion."

Best Buy moved to hold AIC liable for the costs of defending against the plaintiffs' suit. AIC apparently contested Best Buy's claim for relief (the decision does not say on what basis) and also moved to hold All Cleaning liable for its legal costs and those which AIC might owe to Best Buy.

Despite its finding of no negligence, the trial court granted summary judgment to both Best Buy and AIC. Accordingly, AIC was ordered to reimburse Best Buy's legal costs and expenses and All Cleaning was ordered to reimburse AIC for AIC's cost of defense and also for the amount AIC owed to Best Buy.

In denying All Cleaning's motion for reconsideration, the court made findings that indicated that it did not differentiate between the Best Buy/AIC indemnification agreement and the AIC/All Cleaning indemnification agreement. The court stated that each agreement was a "standard contract for defense and indemnification" and that each required the indemnifying party to indemnify and defend the indemnitee against "suits, causes of action, claims, demands" and other expenses and that both agreements were triggered by "claims," such as the one brought by Kieffer. The quoted language, however, was contained only in the Best Buy/AIC agreement.

The trial court never grappled with the actual language of the AIC/All Cleaning indemnity agreement. Indeed, because of the position taken by AIC in its initial successful pursuit of reimbursement from All Cleaning, the court was never called upon to consider whether the Best Buy/AIC indemnity agreement should have triggered a duty by AIC to reimburse Best Buy's defense costs.

In an unpublished opinion, the Appellate Division affirmed. The appellate panel – like the trial court – mistakenly attributed the language in the Best Buy/AIC indemnification agreement to the AIC/All Cleaning agreement.

Strangely, both the trial court and appellate panel had ordered All Cleaning to reimburse the defense costs of Best Buy and AIC even though All Cleaning (just like Best Buy and AIC) had obtained summary judgment as to the plaintiffs' claims and that neither indemnification provided in explicit terms for defense as to the indemnitee's own alleged negligence.

The Supreme Court granted certification. In a unanimous decision, it held that All Cleaning had no contractual obligation to indemnify AIC or Best Buy in the absence of a legal determination that All Cleaning caused, by its "negligence, omission, or conduct," the injuries suffered by the plaintiff. It focused upon the language of the AIC/All Cleaning indemnification provision—which had been somewhat lost in the shuffle by both the trial court and the appellate panel.

Justice Albin, writing for the Court, noted, by way of a footnote, that the Court was not disturbing the trial court's finding that, under the indemnification provision binding Best Buy and AIC, AIC was liable to reimburse Best Buy for its defense costs as that issue was not before the Court.

The Court recognized that the objective in construing a contractual indemnity provision is to determine the intent of the parties, citing to Mantilla v. NC Mall Assocs., 167 N.J. 262, 272 (2001). It cited the familiar concept that, if the meaning of an indemnity provision is ambiguous, it is strictly construed against the indemnitee because a party is ordinarily responsible for its own negligence, thus express language is required to shift liability to another party, and each party is responsible for its own attorney's fees absent statutory or judicial authority or express contractual language to the contrary.

The Court rejected AIC's argument that the language "connection with" and "arising out of" was a proxy for "claims" and "demands."

All Cleaning's indemnification obligations depended on a judicial finding of "negligence, omission, or conduct" on All Cleaning's part. The trial court found no evidence that any defendant exercised a lack of due care. There was essentially a judicial finding that Kieffer's injuries were not in "connection with any act of negligence, omission, or conduct arising out of the operation of [All Cleaning's] business." That finding, along with a plain reading of the AIC/All Cleaning indemnification provision, led the Court to the conclusion that All Cleaning was not contractually responsible for paying AIC's and Best Buy's defense costs.

Based upon the Court's ruling, All Cleaning owed no reimbursement to AIC for either the defense costs of AIC or Best Buy, but AIC still owed reimbursement to Best Buy for Best Buy's defense costs.

How might the Court have ruled if AIC had asserted that its agreement with Best Buy did not explicitly require AIC to defend or indemnify against Best Buy's own alleged negligence and that the trial court's finding of no negligence meant that neither AIC nor All Cleaning had breached AIC's cleaning services agreement with Best Buy?

AIC might have asserted that the Best Buy indemnification clause should not entitle Best Buy to either a defense or indemnification by AIC of a claim alleging Best Buy's own negligence because the clause did not contain explicit language that AIC had agreed to protect Best Buy against such claims. AIC could have also argued that the clause should be deemed to require a showing of a breach of the cleaning services contract in order to trigger a duty to reimburse Best Buy's defense costs.

While the Court did not reach this issue, its comments about the Best Buy/AIC indemnification clause, in comparing it favorably with the AIC/All Cleaning clause, suggest that the Court might have found that the Best Buy/AIC clause was sufficient to trigger a duty to reimburse notwithstanding the absence of a finding of a breach of contract or negligence by the contractor, or its subcontractor.

The Best Buy/AIC indemnification provision referred to claims by reason of or arising from breach of the cleaning services agreement. The Best Buy/AIC indemnification provision did not contain language that expressly required AIC to defend and indemnify Best Buy for Best Buy's own alleged negligence.

In Mantilla, a jury found both the indemnitee (the mall) and the indemnitor (the contractor) to be negligent. As in Kieffer, the indemnification clause in Mantilla did not explicitly provide for the mall to be defended or indemnified against its own negligence. Mantilla cited to Central Motor v. E.I. duPont deNemours & Co., 251 N. J. Super. 5 (App. Div. 1991), as setting forth a default or common law rule when the indemnification agreement does not explicitly foresee or address all contingencies. Under this rule, the court employs an after-the-fact analysis. If the indemnitee is adjudicated to be free from active wrongdoing regarding a plaintiff's injury and has tendered the defense to the indemnitor at the start of the litigation, the indemnitee can recover its defense costs and fees. Since the jury found the mall to be partially at fault, the Mantilla Court found that the mall was not entitled to reimbursement for its defense costs.

Central Motor dealt with a claim for common law indemnification and reimbursement of defense costs by a distributor against paint manufacturers under circumstances in which the distributor, being in the chain of distribution as to an allegedly defective product, claimed to be an innocent party, with potential liability only on a vicarious basis.

In Kieffer, was Best Buy, as a store owner whose business invitee claimed to have fallen in the aisle of the store on a slippery condition, similarly situated to the paint distributor in Central Motor? Was Best Buy's alleged negligence solely vicarious? A business invitee such as plaintiff in Kieffer might be expected to claim not only defective floor application work by the contractor, but also negligence by the owner and its employees for failure to observe and attend to the allegedly slippery floor area. Is this the kind of alleged independent negligence which would defeat the Central Motor default rule?

Kieffer leaves open the issue of whether a clause providing for defense and indemnification against "all claims… resulting from or arising out of… breach of the contract work" is sufficient to require an indemnitor to provide reimbursement of defense costs to the indemnitee any time the indemnitee is found to be free of fault, provided only that the claim is related to the contractor's work or, if the clause is deemed deficient, whether under Central Motor's after-the fact approach, an owner and/or contractor found to be free of fault (by summary judgment motion or verdict) who early in the case demands indemnification from a subcontractor would be entitled to reimbursement of defense costs, with the only required showing that the plaintiffs' theory of liability was the failure to properly perform the contracted for work.

The purpose of this article is to note a question not answered by the Kieffer Court and also the continuing complexity, for both the courts and counsel, in addressing indemnification issues and whether the duty to defend by an indemnitor is triggered when the indemnitee is also alleged to have been negligent and the indemnification clause does not explicitly require defense of the indemnitee for such claims.

Since in matters I am currently handling I am dealing with clauses which are arguably similar to the Best Buy/AIC clause, I am exercising the prerogative of not offering an opinion in this article as to what the Kieffer Court should have decided if it had been confronted with construing the Best Buy/AIC clause or considering the applicability of the Central Motor default rule. I will say that I do not read the Kieffer decision as providing clear dicta that an indemnification clause which reads like the Best Buy/AIC clause will necessarily trigger a duty to reimburse defense costs every time the indemnitee secures summary judgment or a defense verdict. In my judgment, that issue will still need to be determined by our courts.

*Dana is a shareholder in our Cherry Hill, New Jersey, office. He can be contacted at 856.414.6080 or dcargeris@mdwcg.com.

Defense Digest, Vol. 17, No. 4, December 2011