CHAPTER 10 BOILERPLATE INDEMNITY AND INSURANCE PROVISIONS—A CAUTION TO CHECK THEM BEFORE THEY “BOIL” YOUR CLIENT

• Jurisdiction: United States

Mining Agreements III
(May 1991)
CHAPTER 10
BOILERPLATE INDEMNITY AND INSURANCE PROVISIONS—A CAUTION TO CHECK THEM BEFORE THEY "BOIL" YOUR CLIENT
Catherine J. Boggs
Stoel Rives Boley Jones & Grey
Portland, Oregon

"'Boilerplate' — Language which is commonly in documents having a definite meaning in the same context without variation."¹

I. INTRODUCTION.

After hard-fought negotiations and precise drafting of many of the unique portions of a mining contract, attorneys often resort to standard "boilerplate" indemnification and insurance provisions to include in a contract. These provisions are often broadly drafted and the parties, in their rush to conclude the deal, assume that such boilerplate agreements will be more than sufficient to provide the all encompassing protection from unknown liabilities for which they are looking.² By employing very general language, the parties hope to avoid having to predict what future liabilities might arise; however, the question of which future liabilities were intended to be covered may come back to haunt a party when a court declares the indemnity provision ambiguous and seeks to establish through parol evidence the intent of the parties.³

As the discussion below points out, oftentimes the intent of at least one of the parties in inserting boilerplate indemnity provisions may be changed and significantly abrogated by statute or judicial interpretations of standard language commonly used in contracts, which attorneys incorrectly assume has definite meanings. States vary significantly in the manner in which they treat "standard" language and interpret what is covered under such general provisions. Therefore, it behooves the drafter of a mining contract to think seriously about what he or she intends an indemnification provision to accomplish,

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check the controlling authority in the state under which the contract will be interpreted and carefully tailor an appropriate provision.

This paper will discuss some basic interpretations of indemnity provisions, certain relevant statutes and recent case law in a variety of states in which mining is conducted, as well as the considerations an attorney should give in negotiating indemnification and insurance provisions in a mining contract. Finally, in this age of multimillion-dollar judgments under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),⁴ a party's greatest concern in dealing with mining properties is often the unknown and undefinable environmental liability that may arise in the future. Responsible parties have looked to insurance coverage to pay these judgments. There will be a brief discussion of the problems that an insured faces in seeking reimbursement from insurance companies for environmental liability.

II. INDEMNITY PROVISIONS.

The word "indemnity" is defined in a variety of ways although most definitions generally encompass two concepts: (1) the giving of security against loss or damage and (2) compensation for actual damages.⁵ The obligation to reimburse another for loss, expense, or damage arises either by express contractual provisions or by the imposition of equitable common law considerations.⁶ This paper will not address implied indemnification, but rather will focus on express contractual provisions.

Contractual indemnity provisions are a negotiated means of shifting the risk of loss or payment of damages from one party to another. These provisions arise in a variety of mining contracts, including agreements for the purchase or sale of mineral properties, leases, exploration reconnaissance or joint venture agreements, contract mining or other service agreements, and construction contracts for the development of mineral sites. In purchase and sale agreements, the indemnification may serve to shift the risk of unknown

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environmental liabilities to the seller, who presumably knows the most about those historical activities on the property which may give rise to future environmental liability. On the other hand, a seller may wish to be removed totally from dealing with any problems that develop in the future and will bargain to shift all such risk to the buyer. With respect to liabilities and claims of personal injury or property damage resulting from activities that take place on the subject property during the performance of a contract, the indemnity provision may be used to shift these risks to the party who is in control of the property and, arguably, most able to prevent such liabilities. The financial consideration and relative bargaining strength of the parties will determine which party bears the burden of being the indemnitor.

Historically, indemnification provisions have not been favored by the courts and, as a result, are strictly construed.⁷ Courts believed that such provisions violated public policy because they removed the motivation for an indemnified party to act in a safe manner and guard against the consequences of negligence at all times⁸ ; however, widespread use of insurance as a means of allocating risks revised judicial thinking.⁹ The trend changed to allow parties to negotiate specifically as to who would bear the liabilities of actions or activities conducted on the property.¹⁰

Courts will interpret indemnity provisions using general contract principals.¹¹ The intent of the parties must be found within the corners of the contract or the court will look to parol evidence of the parties' intent to construe the ambiguous clause. While indemnity provisions are generally construed against the drafter, jurisdictions are split as to whether an ambiguous provision is construed in favor of or against indemnity. In Colorado, the Colorado Supreme Court

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will resolve ambiguities against a party seeking indemnity because "the burden of indemnity is so onerous that we hesitate to impose it unless the language used clearly requires such a result."¹² But in Arizona, the courts have resolved doubts in favor of the indemnitee.¹³

General indemnities are those in which the indemnitor agrees to hold harmless the indemnitee against all claims, costs, expenses, liabilities or causes of action of "whatsoever" kind. The issue in most of these cases has concerned whether such general language will indemnify the indemnitee against its own negligence. The issue arises particularly in construction actions where the employee of a subcontractor or contractor is injured and, after collecting workers' compensation from the employer, the injured employee sues the contractor or owner of the property under various tort theories. While a majority of states require that "clear and unequivocal" language be used to hold an indemnitee harmless for its own negligence,¹⁴ the varied holdings of these courts reflect the fact that jurisdictions have different standards as to what is considered clear and unequivocal; commonly used words do not necessarily always have the same meaning in different jurisdictions.

In Arizona and Wyoming, a contract of indemnity will not be construed as covering losses caused by the indemnitee's own negligence, absent specific language addressing the matter.¹⁵ "No words of general import can establish it."¹⁶

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Whereas, Alaska and Washington appear to have relaxed this strict constructionist view and may find that the intention to afford protection for an indemnitee's own negligence is covered by construing the indemnity in light of the whole contract, the surrounding circumstances and the purposes and objects of the parties.¹⁷ The Alaska Supreme Court, in particular, seems to recognize commercial realities; with respect to construction activities, the financial risk of personal injury or property damage will be shifted in any event by the parties to their insurance carriers, and the cost of such insurance will be included as part of the consideration for which the indemnifying party will ask.¹⁸

The Texas Supreme Court meanwhile has abandoned its "clear and unequivocal" test and adopted an even stricter standard of "express negligence."¹⁹ "Parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms...within the four corners of the contract."²⁰ This standard is applied also to parties seeking to indemnify for joint and concurrent negligence.²¹ In Ethyl Corp. v. Daniel Construction Co., the Texas Supreme Court held that an indemnity for "any loss" as a result of operations did not meet the "express negligence" test. Therefore, the owner, who was found

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partially liable for injuries to the contractor's employee, was not entitled to indemnity from the contractor.

While this test looks surprisingly like the "clear and unequivocal" test previously applied in Texas and other states, the exacting effect of the new standard can be seen in subsequent decisions. In Singleton v. Crown Central Petroleum Corp., the Texas Supreme Court applied the new standard to an indemnity that purported to indemnify an owner against "any and all claims, demands, actions, [and] liabilities...excepting only claims arising out of accidents resulting from the sole negligence of the owner."²² The jury found that the plaintiff's injuries were not due to the sole negligence of the owner. The Texas Supreme Court reversed the trial court's order for the contractor to indemnify the owner for the owner's share of liability because the indemnity clause failed to state specifically what negligence was covered (concurrent and joint negligence).²³

Some state courts, in determining whether or not an indemnitee's negligence is covered, have adopted a passive/active negligence analysis.²⁴ If the active negligence of an indemnitee is to be covered, the language of the contract must be specific.²⁵ Other states have moved away from this dichotomy and examine simply the general or specific nature of the indemnity language to determine the intent of the...