Court Opinion

ID: 9467637
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:52:52.469576+00
Date Added: 2024-06-11T17:40:26.547219
License: Public Domain

SEITZ, Chief Judge,
dissenting.
The district court held that Hess was entitled to indemnification because it suffered a loss as a result of Frederick’s demand for compensation for his injuries, and those injuries were caused by the act or neglect of D & M and its employees. The majority affirms the district court’s decision, emphasizing that the indemnity agreement extends to “all demands, loss or liability,” and that Hess was faced with a demand. I disagree with the district court and the majority because I believe they have misinterpreted the indemnity agreement. In addition, under my reading of the agreement, an important issue was overlooked that should be resolved by the application of traditional indemnity principles.
The district court and the majority emphasize that Hess was presented with a demand for compensation by Frederick. However, D & M’s obligation under the agreement to indemnify Hess is triggered only by a demand “for or on account of any injury . .. received or sustained by any person ... by reason of any act or neglect on the part of [D & M]. . . . ” The demand made by Frederick in his complaint was for compensation for injuries “wholly and proximately caused by the negligence of [Hess].” Frederick’s complaint does not allege any *56negligence on the part of D & M or its agents. Because the indemnity agreement must be strictly construed against Hess, its drafter, I would hold that Hess was not faced with a demand within the meaning of the agreement.
The indemnity agreement provides that D & M must also indemnify Hess for any “loss or liability” caused by an act or neglect of D & M or its agents. The district court found that Hess had suffered a loss covered by the agreement. It is clear, however, that if there had been no settlement of the action brought by Frederick, Hess would not have incurred any loss or liability.1 The trier of fact ultimately found that Hess was not negligent; therefore, because Hess was not a joint tortfeasor, it could not have been held liable in the Frederick action for any injuries caused by an “act or neglect” of D & M or its agents. The district court, however, stated that Hess’ right to indemnification should be determined “without regard to what may have been the result in a trial.” Thus, the district court has interpreted “loss or liability” to mean a potential loss or liability at the time of settlement. But the indemnity agreement sheds no light on whether D & M’s obligation to indemnify is triggered by compensation paid by Hess in response to a potential loss or liability. Because the intent of the parties cannot be ascertained by the terms of the agreement, it is necessary to refer to traditional indemnity principles to determine whether Hess must show potential or actual liability before it is entitled to indemnification. See Missouri Pacific Railroad v. International Paper Co., 618 F.2d 492 (8th Cir. 1980).
The general rule is that the indemnitee, in this case Hess, must show actual liability. See, e. g., Tankrederiet Gefion A/S v. Hyman-Michaels Co., 406 F.2d 1039, 1042 (6th Cir. 1969); 41 Am.Jur.2d Indemnity § 33 (1968). Many courts, however, hold that the indemnitee must show only potential liability if it settles a claim for a reasonable amount after giving the indemnitor an opportunity to approve the settlement or to defend the primary action. See, e. g., Parfait v. Jahncke Service, Inc., 484 F.2d 296, 304-05 (5th Cir. 1973); Morrissette v. Sears, Roebuck & Co., 114 N.H. 384, 322 A.2d 7, 9-11 (1974). Cf. Restatement of Restitution § 76, Comment f (1937). But see Daily Express, Inc. v. Northern Neck Transfer Corp., 490 F.Supp. 1304, 1307 (M.D.Pa.1980) (in any settlement indemnitee must assume risk of showing actual liability in action against indemnitor); Martinique Shoes, Inc. v. New York Progressive Wood Heel Co., 207 Pa.Super. 404, 217 A.2d 781, 783-84 (1966) (same).
The decision whether to require actual liability in all situations or to recognize a potential liability exception is an important one. On the one hand, if actual liability is always required, settlements will be discouraged because of the difficult burden placed upon the indemnitee to establish its right to indemnification. On the other hand, the rule adopted must not be unfair to the indemnitor, who should be able to show that the indemnitee was not under a legal compulsion to pay the settled claim. Because the district court did not have an opportunity to review these principles and apply them to the present case, I believe that it is inappropriate to do so on appeal, especially given the record before us.2 Therefore, in the interest of fairness, I would vacate the judgment of the district court and remand for proceedings consistent with this opinion.

. It should be noted that D & M expressly stated at the settlement conference that it was advancing half of the stipulated judgment “without prejudice” to any defense in the indemnity action.

. The parties did not raise the potential liability issue in the district court, and they did not brief this issue in the district court or in this court. In addition, the testimony and arguments in the district court were not transcribed for this appeal.