Opinion ID: 1689483
Heading Depth: 1
Heading Rank: 6

Heading: Settlement of Underlying Claim.

Text: McNally argues that it does not seek indemnification based on any damages resulting from a defect in the crane. Instead, it argues that it has evidence to establish that the damages sustained by Lawson resulted from Neumann's negligence in failing to properly maintain and operate the crane, which makes Neumann responsible for indemnification under the expressed agreement as well as its theory of implied indemnification. McNally asserts it is entitled to a trial to establish Neumann's negligence and its responsibility for indemnification. Before beginning our analysis of this claim, we acknowledge the complexity of the law of indemnification and the challenges that can confront judges and lawyers in its application to particular factual circumstances. See Woodruff Constr. Co., 406 N.W.2d at 785. Essentially, the historical complexity in this area of the law can be traced to the competing legal and equitable interests that give rise to the doctrine, as well as an array of public policy considerations. Indemnity is a mix of contract and tort law, together with an array of equitable considerations. Thus, specific rules applicable to contractual indemnification may not neatly apply to other types of indemnification, and vice versa. See Liberty Mut. Ins. Co. v. Pine Bluff Sand & Gravel Co., 89 F.3d 243, 247-48 (5th Cir.1996); E.L. White, Inc. v. City of Huntington Beach, 21 Cal.3d 497, 513, 146 Cal.Rptr. 614, 622, 579 P.2d 505, 510 (1978). Because of this, the basic concepts supporting indemnification must be placed at the forefront of our analysis, as well as the particular contract provisions at issue. This case gives rise to two important and related concepts of indemnification. The first principle is that a party who seeks to establish a right to indemnity in an independent action must normally plead and prove it was liable to the injured party. Ke-Wash Co. v. Stauffer Chem. Co., 177 N.W.2d 5, 9-10 (Iowa 1970). The rationale for this rule is tied to the fundamental concept that indemnity involves the shifting of responsibility of liability for loss from one who is legally responsible to another. Id. at 10. Thus, if an indemnitee had no liability for the loss in the inception, then any payment made by the indemnitee is considered purely voluntary and not subject to indemnification. See id. at 10-11. Indemnity against loss[] does not cover loss[] for which [an] indemnitee is not liable to a third person.... 41 Am.Jur.2d Indemnity § 46, at 380 (1995). The requirement to plead and prove liability established in Ke-Wash applies in independent actions for indemnity where the underlying claim for damages was settled without an adjudication of liability. Ke-Wash Co., 177 N.W.2d at 11-12. Normally, a judgment in the underlying action will establish the essential liability to pursue indemnification. On the other hand, a settlement does not constitute an adjudication of the issues of negligence with the injured party and does not, by itself, bar further adjudication on the merits of a claim against another party. See Brosamle v. Mapco Gas Prods. Inc., 427 N.W.2d 473, 475-76 (Iowa 1988); Buchhop v. Gen. Growth Props. & Gen. Growth Mgmt. Corp., 235 N.W.2d 301, 302 (Iowa 1975) (settlement of underlying claim for damages does not necessarily defeat right to indemnification). Thus, an indemnitee who settles the underlying claim must establish the existence of its liability to the injured party as an element of recovery for indemnification. Ke-Wash Co., 177 N.W.2d at 11. Additionally, the indemnitee must establish the settlement was reasonable, and that the indemnitor had a duty to indemnify the indemnitee. Id. The importance in this case of the rule that requires the indemnitee to be liable for the damages is brought to life by Neumann's argument that proof by McNally that it was liable for the loss or damage will defeat the claim for indemnity because the duty to indemnify under both claims for indemnification asserted by McNally does not cover liability or loss attributable to a defect in the crane or McNally's conduct relating to the defect. McNally responds that the rule requiring proof of liability is inapplicable to its claims of expressed or implied contractual indemnification and does not apply to claims for indemnity based solely upon Neumann's own negligence. We specifically indicated in Ke-Wash that the need for the indemnitee to prove its liability to the injured party does not apply where there is an expressed agreement for indemnification providing otherwise. Id. However, this exclusion was not intended as a blanket limitation for all claims based on expressed indemnification, but exists to recognize that express indemnification agreements can alter the common law rules on indemnity by calling for indemnification in the absence of underlying liability between the indemnitee and the injured party. See 42 C.J.S. Indemnity § 23(b), at 112 (rule that indemnity does not protect the indemnitee against loss through voluntary payments may be affected by the terms of the indemnification agreement). We specifically recognized this type of exclusion in Ke-Wash, where we cited Robert & Company Associates v. Pinkerton & Laws Co., 120 Ga.App. 29, 31-32, 169 S.E.2d 360, 362-63 (1969), as an example of the express agreement exception. See Ke-Wash Co., 177 N.W.2d at 11. In Pinkerton, the language of the express agreement revealed it was the intention of the parties that Pinkerton should indemnify Robert & Company Associates irrespective of whether any claim arose by reason of the negligence of Robert & Company Associates, or for any reasons. Robert & Co. Assocs., 120 Ga.App. at 32, 169 S.E.2d at 363. Thus, the express indemnification exception recognizes that contract law can alter the common law concepts of indemnification, and impose obligations not otherwise supported by those equitable principles that drive noncontractual indemnification. On the other hand, if an expressed agreement does not reveal an intent to alter the rule against voluntary payment, the fundamental rule of liability for loss to the injured party applies, and the claim for indemnity must be viewed in its traditional form as shifting liability for a loss from one person who is legally responsible to another person. We have previously determined in this case that the only limitation placed in the indemnification agreement was liability or loss based on a defect in the crane. However, there is no further indication the parties intended to alter the concept of indemnification by imposing a duty on Neumann to reimburse McNally in the event McNally paid for the damages to an injured person when it was not liable to the injured person for the damages. Alternatively, McNally argues that the Ke-Wash rule against voluntary payments is a product of tort-based indemnification and was never intended to apply to implied contractual claims for indemnification, such as those claimed in this case. Thus, McNally argues that the rule in Ke-Wash does not apply to claims for implied indemnification based on the breach of independent duty arising from a contract. [2] We agree with McNally that the rule against voluntary payment established in Ke-Wash arose from a tort-based claim for indemnity. See Ke-Wash Co., 177 N.W.2d at 7-8. In Ke-Wash, a distributor of a defective product that caused damage to a consumer claimed its liability was secondary to the primary liability of the manufacturer. Id. at 7. We recognize vicarious liability to be one of the circumstances supporting a claim for indemnification based in tort. Hansen, 630 N.W.2d at 823. This type of claim is not contractual in nature, but is founded on the principles of equity derived from the vicarious aspect of the liability. Thus, we must determine if the Ke-Wash rule should be confined to the circumstances from which it arose. In fact, McNally suggests that the rule must be restricted to tort-based claims for indemnity because it would otherwise create an irreconcilable conflict with the claim for implied indemnity based on a breach of an independent duty recognized in Woodruff. This conflict is traced to the condition imposed in Woodruff that indemnification will only be implied when the indemnitee did not negligently contribute to the hazard. Woodruff Constr. Co., 406 N.W.2d at 786. McNally argues that one rule of implied indemnity cannot require an indemnitee to establish its own negligence while another rule of implied indemnity prohibits indemnity when the indemnitee is negligent. McNally further asserts the conflict offends public policy because an indemnitee of an employer would never be able to settle with an injured employee of the employer. We think the apparent conflict is resolved by recognizing that the implied indemnification adopted in Woodruff is not a broad concept. Instead, it is viewed as a remedy in those situations in which a breach of a duty imposed under a contract between the two parties caused injury to a third party for which the nonbreaching party was not primarily liable, but only secondarily liable. See id. at 785-86. We, of course, recognize indemnity based on vicarious or derivative liability in a tort setting, but a separate remedy is necessary when the source of the duty arises from a contract instead of tort and equitable principles. Thus, while the concept of shifting responsibility for loss from one who is secondarily liable to one who is primarily liable remains the same, the different source of the duty requires different theories of recovery. Accordingly, we discern no inconsistency between the general rule against voluntary payments recognized in Ke-Wash and the rule limiting the implied indemnification concept recognized in Woodruff to indemnitees who did not aid in creating the hazard. An indemnitee can be liable to the injured party by operation of legal principles, yet not actually contribute to the hazard which caused the injury. In truth, we would create an inconsistency in our law if we adopted McNally's argument. We conclude the rule expressed in Ke-Wash applies to McNally's claim for implied indemnification asserted in this case. The second rule that comes into play in this case is that a claim for contractual indemnity must be covered by the contract. See Ke-Wash Co., 177 N.W.2d at 11 (there must be a duty on the part of the indemnitor to indemnify [an] indemnitee). This rule seems simple enough, but it expresses an important fundamental principle, again based largely on the idea that indemnification involves reimbursement for liability or loss from one person to another. Absent specific provisions otherwise, an indemnitee must show the circumstance of the original claim asserted by the injured party that resulted in the liability or the loss by the indemnitee was covered by the contract of indemnification. See Consolidated Rail Corp. v. Ford Motor Co., 751 F.Supp. 674, 676 (E.D.Mich.1990). In other words, the underlying action by the injured party must include a claim within the scope of the indemnification agreement. See Hoffman Constr. Co. of Alaska v. U.S. Fabrication & Erection, Inc., 32 P.3d 346, 352 (Ala. 2001). This concept is consistent with our general rule that an indemnitee must show actual liability to recover against an indemnitor, and distinguishes indemnification contracts from other types of contracts to pay. See Dana Corp. v. Fireman's Fund Ins. Co., 169 F.Supp.2d 732, 737-38 (N.D.Ohio 1999). See generally 41 Am.Jur.2d Indemnity § 4, at 349-50; 42 C.J.S. Indemnity § 4, at 76-77. We have previously determined that the indemnification agreement in this case does not alter the requirement for McNally to show that it was liable to the injured party. Yet, the only limitation upon the shifting of liability from McNally to Neumann was that the injury resulted from a defect in the crane. In that situation, Neumann had no duty to indemnify McNally because it was not covered in the agreement. Conversely, any other circumstances were covered. Thus, to recover under the agreement, McNally would only be required to show its liability is not based upon a defect in the crane prior to delivery. If McNally was liable for other reasons, including Neumann's negligence, Neumann would have a duty to indemnify under the contract. Generally, issues of liability presented in an indemnification action are not suitable for summary adjudication without a prior judicial determination of the issues. When an indemnitee settles the underlying action for damages, a subsequent action for indemnification normally requires a judicial determination of the issues raised in the case. However, the need for a hearing will ultimately depend upon the terms of the indemnification agreement and the scope of the allegations of the underlying claim by the injured party. In this case, the underlying claim that gave rise to McNally's liability or loss was restricted to allegations of McNally's own negligence. Moreover, those allegations of negligence were not covered under the indemnification contract. The indemnification contract specifically excluded liability based on defect. Thus, any liability that could have been imposed on McNally in the underlying action could only have been based on a defect in the crane, which was a noncovered claim. Therefore, it is not enough that Neumann may have been negligent and that its negligence was covered under the agreement. Instead, McNally must show the loss it suffered or the liability it incurred was covered. Neumann's negligence could not have been the basis for McNally's liability under the allegations of the underlying action, and an indemnitee cannot transform the underlying claim by the injured party into a different lawsuit by making allegations of negligence against the indemnitor in a subsequent action for indemnity. When the underlying litigation settled by a potential indemnitee was limited to allegations of the indemnitee's own negligence not covered under the indemnification agreement, there can be no claim for indemnity because the amount paid in the settlement could only have been the result of the indemnitee's own noncovered negligence. See Olin Corp. v. Yeargin Inc., 146 F.3d 398, 405 (6th Cir.1998) (no indemnification when settlement by indemnitee only pertains to its own liability); Fifield v. S. Hill Ltd. P'ship, 20 F.Supp.2d 366, 371-72 (D.Conn.1998) (when lawsuit by injured party is based solely upon independent negligence of the indemnitee, no contractual indemnification is available); Gray v. Cleaning Sys. & Suppliers, Inc., 834 F.Supp. 123, 127-28 (S.D.N.Y.1993) (contract for indemnification that excludes liability based on indemnitee's own negligence is not applicable when indemnitee can only be liable to the injured employee of the indemnitor in the underlying action for damages if indemnitee was negligent). We emphasize that the settlement of the underlying case by an indemnitee does not always constitute a waiver of the right to seek indemnification. See Liberty Mut. Ins. Co., 89 F.3d at 248. Certainly, a n indemnitee should not lose any right to indemnification by settling the underlying claim rather than contesting it. Heckart v. Viking Exploration, Inc., 673 F.2d 309, 313 (10th Cir.1982). Yet, McNally is not denied indemnification in this case because it settled the underlying claim, but because the circumstances of the underlying claim were not covered by the indemnification agreement. In each case, the right to pursue an independent action for indemnification following a settlement will depend upon whether the circumstances of the indemnitee's liability for damages were covered in the agreement.