Contractual Indemnity

paying the loss of another – an equitable (fairness) concept

American courts of the 19th Century typically would not enforce non-insurance policy contracts purporting to indemnify a person for their own negligence. Society prefers people gamble on their own success, or at least on things they do not control, rather than on the occurrence of disasters that they can control.

Free contracting led to a liberalization of the scope of indemnity agreements to allow one party to indemnify for their own negligence outside the sphere of “insurance.” Whereas with insurance, the more economically powerful party provides indemnity, with private contracts, the party that is demanding to be indemnified (the “indemnitOR”) usually is the party with greater economic power. Some ask then, what in the heck is good then about being an insurance company, to which some may retort: take a look at the analysis in Markley v. Beagle, 66 Cal.2d 951 (1967), and imagine if insurance companies did this to their insureds.

In construing general indemnity clauses where the indemnitEE (the party asking for indemnity) was at least partially at fault, case law concerning private indemnity has often focused on a dichotomy between whether the accident was caused by the indemnitee’s active versus passive negligence. Courts often struggle fitting complex factual scenarios within the active-passive dichotomy. As far as the kind of policy they can deliver, insurance is not concerned about this dilemna, From this it could be said that insurance is needed so that people can make their own mistakes without being forced to indemnify more economically powerful parties against their mistakes.

Judge Cole dissented from the majority decision in the landmark MacDonald v. Kruse decision. In Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal.3d 622, Justice Mosk attempted harmonize 20 years of confusing precedent concerning interpretation of indemnity contracts where the indemnitor was at fault, giving passive attention to MacDonald v. Kruse decision but focusing on the dichotomy & rules of contractual interpretation. MacDonald v. Kruse yet remains one of the most important decisions for analyzing contractual indemnity disputes.