Indemnification Agreements

Indemnification Agreements between Government and Private Actors

The term “Provider” refers to the company providing dockless vehicles. The terms “user” and “rider” refer to the customer renting said vehicle.

Problem: Extraordinary risk in the form of liability exposure for cities

Potential Solution: Indemnification agreement (ex. Culver City, CA)

Issues to Consider: Cost shifting to consumers

Nuclear waste disposal, weapons manufacturing, large scale construction, and riding dockless bikes and scooters; these are a few activities that many governments at the state and local level deem so inherently dangerous that they require contractual allocation of risk in the form of indemnification agreements.[1] State and local governments have a tremendous amount of responsibility (and risk) without an adequate amount of resources to assume this risk appropriately. Indemnification allows for an organization, like a local government, without sufficient capital to cover the costs of large and numerous lawsuits, to allocate the risk to a private party in exchange for the ability to do business in the city.[2] This means the ability of companies to operate within a certain jurisdiction is often bargained for in exchange for indemnification from liability. For example, Culver City, CA has developed an “Interim Operating Agreement” for scooter sharing companies wishing to operate in public space within the city limits. In the agreement, the city requires the electric scooter company to provide certain minimum levels of insurance as well as an agreement to indemnify and “hold harmless the city” against all losses in any way related to the operation of the dockless vehicles on public space, property, or right-of-way.[3]

 

Insurance requirements and indemnification agreements are closely related and serve similar purposes but are in fact distinct. Both act to allocate the risk of loss, and the duty to indemnify is actually one of the contractual duties of an insurer. Local governments such as Culver City require Providers to carry insurance in order to protect themselves as well as the general public. By requiring the Provider to carry insurance, the injured user of a dockless vehicle and injured third-parties, will be able to recover, regardless of the Provider’s ability to pay a judgement, where they are injured as a result of the use of the vehicle (assuming, of course, the accident and the at-fault party are covered by the insurance policy). In the event of a loss, the Providers’ financial ability to pay a judgement will not prevent the injured party from recovering as long as the Provider is maintaining the required level of insurance and the claim is covered under the policy. Indemnification acts to protect the city from having to make the injured party whole without incurring the cost of carrying their own insurance policy. In short, indemnification allocates the risk of loss, among solvent parties, whereas insurance covers the costs associated with the loss.

 

Indemnification agreements can range from comprehensive to specific. For instance, the Culver City agreement demands essentially complete indemnification. The city requires the Provider to defend, indemnify, and hold harmless “from and against any and all losses, damages, liabilities, penalties, fines, forfeitures, demands, claims, causes of action, suits, costs, expenses and reasonable attorneys’ fees and judgments.”[4] The drafters of the Culver City agreement were also wise to include language that lists, without limiting, the types of liability they are seeking to avoid including loss or damage to persons or property and third-party tort liability.  Furthermore, they included language that allocates the risk of loss regardless of whether the city, the Provider, or the rider was at fault.

 

A more specific and limited version of an indemnification agreement is that contained in a typical automobile insurance policy. In those agreements, the insurer only bears the risk of loss for certain conduct (typically negligence) stemming from certain acts related to the operation of the listed motor vehicle, as defined in the policy. By drafting the “contract” or the operating agreement with terms of art and express language, cities are able to protect themselves to the maximum extent and allocate risk to the Providers assuming they remain solvent. 

 

This system of risk allocation allows cities to protect themselves from liability while the Providers capitalize on valuable markets. However, there are still risks and concerns for the consumer. Providers are able to reach billion dollar valuations, afford large insurance policies, and assume liability by passing these costs on to consumers. This creates a conflict where cities want the population to have access to affordable transportation. It also may price-out underprivileged communities who might benefit from these vehicles the most. 

 

Identifying Key Language for Drafting an Indemnification Agreement

Below is the indemnification agreement used by Culver City, CA in paragraph nine of their interim operating agreement. The agreement is broken into segments with emphasized language followed by inset explanations of the importance of the terms selected. [5]

Provider shall defend (at Provider’s sole expense, with legal counsel approved by City, with such approval not to be unreasonably withheld or delayed), indemnify and hold harmless the City,[…]

• “shall”: It is a general rule of legislative drafting that when directing an action to be taken it is best to use the term “shall” rather than “must”. [6]
• “Provider’s sole expense”: By including this phrase the drafter has considered how the rest of the legal language could be interpreted and more importantly how it could be twisted. This phrase leaves no question that the Provider and the Provider alone will be responsible for the expenses stemming from defending an action brought against the city.
• “hold harmless”: This is a legal provision meaning one party agrees that the other party will not be held responsible for any loss, damage, or legal liability.[7]

[…]members of its City Council, its boards and commissions, officers, directors, employees, agents, servants, successors, assigns and subsidiaries (collectively “the Indemnified Parties”),[…]

• By listing these parties the drafter is encompassing all parties they believe need to be indemnified, preventing the Provider from arguing any of the parties are not covered by the indemnification agreement with the city. It is important to be comprehensive when listing parties intended to be included because any party not listed is presumed to have been excluded from the list intentionally and thus outside the scope of the agreement.

[…]from and against any and all losses, damages, liabilities, penalties, fines, forfeitures, demands, claims, causes of action, suits, costs, expenses and reasonable attorneys’ fees and judgments arising out of or in any manner related to this Operating Agreement, including, but not limited to loss or damage to persons or property, arising out of or in any way related to Provider’s use of the public space, public right-of-way, or public property . This indemnification includes, but is not limited to, tort liability to a third person for bodily injury and property damage.[…]

• Similar to the previous segment, this section of the agreement uses explicit listing in order to ensure various foreseeable types of loss and liability are covered by the agreement.
• “any and all”, “any way related”, “not limited to”: This section also includes carefully drafted language which works in conjunction with the lists to explicitly include the foreseeable costs and types of liability without necessarily excluding other potential or unforeseen costs and liabilities.

[…]Provider agrees that this obligation to indemnify, defend and hold harmless extends to liability and/or claims arising from Indemnified Parties’ active or passive negligence. Notwithstanding the foregoing, nothing herein shall be construed to require Provider to indemnify an Indemnified Party from any claim arising from the sole negligence or willful misconduct of that Indemnified Party. The duty to defend referenced herein is wholly independent from the duty to indemnify, arises upon written notice by City to Provider of a claim within the potential scope of this indemnification provision, and exists regardless of any determination of the ultimate liability of Provider, City or any Indemnified Party

• “Provider agrees”: Clarity is key when drafting legal language. By stating outright that the Provider is agreeing to have certain conduct included within the scope of the agreement the drafter has left little to no room for interpretation.
• “regardless of any determination”: Again, clarity is key. The drafter wants to ensure the Provider understands that the duties stemming from this agreement are contractual and enforceable regardless of how a judge or jury apportions fault in tort action. A suit may be brought and judgement may be entered against the indemnified party but the Providers duty to indemnify arises regardless.

[1] O’Connell, Shane Murphy, “Contractual Indemnification by the Federal Government” (2014). Law School Student Scholarship. 279.https://scholarship.shu.edu/student_scholarship/279

[2] Id.

[3] City of Culver City, “Interim Operating Agreement” ¶ 9(f) https://www.culvercity.org/home/showdocument?id=14408

[4] Id.

[5] Id.

[6] Ira B. Forstater, “House Legislative Counsel’s Manual on Drafting Style”, 1995. (The Office of the Legislative Counsel U.S. House of Representatives) https://www.llsdc.org/assets/sourcebook/manual_on_drafting_style.pdf

[7] Will Kenton, “Hold Harmless Clause” (2018). https://www.investopedia.com/terms/h/hold-harmless-clause.asp