Allocating risk of loss is a vital component in a contract. Risk allocation clauses can be found in a multitude of contracts including snow removal, construction, landlord/tenant, transportation of goods or people, cleaning, maintenance, licensing agreements, product sales/distribution and equipment leases. The standard reaction is to draft an indemnification clause. However, the Pennsylvania Supreme Court has repeatedly stated that it disfavors such clauses and the courts are to narrowly construe them against their intended purpose as in Bernotas v. SuperFresh Food Markets, 581 Pa. 12, 21 (Pa. 2004) Greer v. Philadelphia, 568 Pa. 244, 795 A.2d 376 (Pa. 2002) Ruzzi v. Butler Petroleum, 527 Pa. 1, 588 A.2d 1, (Pa. 1991): and Perry v. Payne, 217 Pa. 252, 66 A. 553 (Pa. 1907). Because indemnification clauses are so disfavored by the courts, parties and insurance carriers routinely ignore them or take the tactical position to resolve the “indemnification issue” at the end of the case. Often that tactic results in avoiding the obligation by sheer attrition.
Parties can get away with such tactics during litigation because the duties under an indemnification agreement are usually dependent upon the actual findings by the judge or jury that a party’s conduct was the cause of the injuries. An insurance carrier has no direct duty to an indemnitee under the standard insurance policy. Coverage for such claims falls under the “insured contract” provisions of the standard general liability policy. The insurance company need only reimburse its named insured for losses assessed against it through an indemnification agreement. While justified, this “wait and see” approach to indemnification can be quite frustrating, especially to those who have made the effort to use all the “magic words” in their contract.
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