Court Says GSA’s Contract Indemnified Contractor Even in Cases of Negligence; COFC No. 15-348C, Kansas City Power & Light C. v. United States

Government’s motion to dismiss a claim seeking reimbursement of the cost of settling a wrongful death suit that alleged negligence by the contractor is denied, where the contract did not carve out exceptions to indemnification due to negligence, nor state that the costs of litigation were not covered.

Kansas City Power & Light Co. sought reimbursement by the government for the cost of settling a wrongful death suit stemming from an electrical accident that occurred on property owned by the government. KCP&L alleged that it is entitled to recoup those costs because the General Services Administration breached its contractual obligation to defend and indemnify KCP&L with respect to the settled claims.

Previously, KCP&L moved to strike the government’s affirmative defense of offset, in which the government argued that payments KCP&L received from its insurer covered its losses. The Court of Federal Claims denied this motion, explaining that such a defense is not a claim under the Contract Disputes Act that should have been asserted by the agency in the proceedings before the contracting officer, but a defense argued against a claim, and that additional discovery was needed. Currently before the court is the government’s motion to dismiss.

The government argued that GSA was not obligated to defend and indemnify KCP&L in the wrongful death action. Generally, the government’s arguments concerned the breadth of the contractual indemnification provision, which included a duty-to-defend component.

The government argued GSA was not required to indemnify KCP&L in connection with the wrongful death action or, in the alternative, was not obligated to indemnify KCP&L for its litigation expenses. With respect to its broader argument, the government asserted that GSA was not contractually required to indemnify KCP&L for claims premised on KCP&L’s negligence—such as those pleaded in the wrongful death action—because those claims are not within the scope of the indemnification provision. According to the government, the contract does not reflect that the parties intended KCP&L to be absolved of liability for its negligence.

Before using an indemnification provision to shift liability for one’s own negligence to the indemnitor, the court noted that the Supreme Court has held that the contracting parties must “clearly and unequivocally” indicate their intention to shift the risk to the indemnitor, but are not required to include an indemnify and hold harmless clause or explicitly state that indemnification extends to injuries occasioned by the indemnitee’s negligence. Interpreting the Supreme Court’s holding, other courts have concluded that ‘indemnify and hold harmless’ language provides evidence of a mutual intent to indemnify the indemnitee against his own negligence.

Further, the holding that “hold harmless” language is not necessary for find the requisite intent raises the inference that a clause that does utilize “hold harmless” language indicates the intent of the parties for the indemnity to operate despite negligence by the indemnitee. In other words, if neither “hold harmless” language or an express disclaimer is required, the presence of either is a strong indication that indemnity is intended despite or regardless of the indemnitee’s negligence.

The court also explained that whether the parties agreed that the indemnitor must provide indemnification for “all claims”—or some variation thereof—must be considered. The inclusion of such language suggests that the parties intended for the indemnitee to be indemnified for its negligence.

In this case, the court held that the contractual language aligned with language other courts have concluded reflected the necessary intent to provide coverage for an indemnitee’s negligence. Specifically, the parties’ intention for KCP&L to be indemnified for its own negligence can be gleaned from their inclusion, in the contract, of a “save harmless” provision that applies to “all claims,” especially absent any countervailing evidence. In other words, KCP&L can be indemnified for its own negligence so long as the other conditions in the indemnification provision are satisfied. Therefore, the court held that the claim of KCP&L’s negligence alone does not foreclose KCP&L’s indemnification claim.

Next, the government asserted that GSA was not obligated to indemnify KCP&L for its litigation expenses in connection with the wrongful death action because those expenses do not satisfy the contractual perquisites for indemnification. Specifically, the government argued that those expenses are not indemnifiable because they were not for (1) a claim, demand, cost, or expense and (2) a loss, damage, or injury to persons or property.

With regard to the first condition, the government argued that KCP&L’s litigation expenses do not qualify as a claim, demand, cost, or expense pursuant to the meaning courts afford those terms in indemnification provisions. As to the second condition, the government maintained that KCP&L paid its litigation expenses to receive advice or obtain experts rather than for a loss, damage, or injury to persons or property.

However, the court found that indemnification agreements generally contemplate payment for attorney’s fees incurred in litigation with third parties concerning the matter indemnified against, regardless of whether they say so. Furthermore, indemnitees are generally permitted to recover reasonable and proper legal costs and expenses, even though not expressly mentioned.

The court found this presumption persuasive, as the very nature of indemnity is to make a party whole. Further, the government pointed to no contractual language explicitly excluding such expenses.

Finally, the court noted that the parties’ use of the phrase “all claims, demands, cost or expense” is consistent with language that other courts have found to encompass litigation expenses. The court also held that the phrase “cost or expense” would be meaningless if it did not reflect coverage for litigation expenses because any other indemnifiable expenditures are already covered by the requirement that the GSA indemnify KCP&L for “claims” or “demands.”

The government also sought to dismiss the portion of the complaint concerning GSA’s purported breach of its duty to defend KCP&L. First, the government argued that GSA was not required to defend KCP&L in the wrongful death action because the claimant pleaded claims based on negligence, and negligence claims are not covered by the indemnification provision. However, the court rejected the premise of this argument, because it already held that a claim based on allegations that the plaintiff was negligent is subject to indemnification, if the other conditions are satisfied.

Next, the government argued that GSA was not obligated to defend KCP&L because GSA and KCP&L had conflicting interests with regard to defending the wrongful death action. According to the government, if KCP&L’s liability in the wrongful death action had been presented to a fact finder at trial, KCP&L would have sought a finding that the victim’s injury occurred at or on GSA’s side of the point of delivery (a necessary condition for indemnification), while GSA would have sought a finding that the injury occurred on KCP&L’s side. Because of that conflict, the government maintained that GSA was not obligated to provide KCP&L with a defense in the wrongful death action.

However, the court found this argument misplaced. The language upon which the government relied did not provide that an indemnitor has no obligation to provide a defense when there is a conflict of interest between the indemnitor and indemnitee. Rather, the indemnitor merely cannot be “called on to take control of the defense” when there is a conflict. When a conflict of interest precludes the indemnitor from controlling the defense, the indemnitor fulfills its obligation to provide a defense by hiring or paying for separate counsel that is not acting pursuant to the indemnitor’s directions. Because the duty to defend persists despite a conflict of interest, the court held the government failed to demonstrate that GSA was relieved of its obligation to defend KCP&L.

Kansas City Power & Light Co. is represented by William L. Yocum and Roy Bash. The government is represented by Amanda L. Tantum, Department of Justice.