Insurance Requirement Allows Voidable Indemnity Clause To Be Enforceable

Can a party be indemnified for its own negligence? In many states, such provisions are void as against public policy. Other some states allow enforcement of indemnification for the indemnitee’s own negligence when the clause expressly references “negligence.” Likewise, many states will enforce indemnities where the indemnified party is strictly liable because of its status as an owner or operator if the clause refers to “strict liability”. As a result, environmental  indemnity clauses often contain a parenthetical reference to “including strict liability”  to ensure that such liability is covered.

Even in those states that where indemnification for the indemnified party’s negligence is void as a matter of public policy, there may be circumstances that allow enforcement of such a provision. For example, a New York case recently allowed enforcement of an indemnity where the tenant was required to obtain an insurance policy for third party liability.

In DiBuono v Abbey, LLC, et al, 2011 N.Y. App. Div. LEXIS 2822 (App. Div.-2nd Dept. 4/5/11),  the plaintiffs commenced an action for property damage related to contamination that had migrated from three nearby  service stations. One of the defendants, L.M.C. Partners, LLC (LMC) filed a third party complaint against its former tenant, Palisades Resources, Inc. (Palisades), alleging that Palisades breached its the lease by failing to defend and indemnify LMC and for not obtaining insurance.

LMC moved for summary judgment.Palisadesargued that the General Obligations Law (GOL) § 5-321 prevented enforcement of the indemnification provision in the lease. GOL § 5-321 provides that exculpatory clauses that purports to exempt a lessor from its own negligence are void and unenforceable.  However, the trial court said that GOL § 5-321 does not apply to an indemnification provision in a commercial lease negotiated at arm’s length between two sophisticated parties when coupled with an insurance procurement requirement. Under such circumstances, the trial court explained, the purpose of the indemnity clause is not to exempt the lessor from liability to the victim, but to allocate the risk of liability to third parties between the lessor and the lessee. The said the lease indemnification provision operated as such an allocation since LMC and Palisades agreed in that Palisades would be responsible for liability to third parties arising from damages incurred during the lease period. Accordingly, the trial court granted summary judgment to LMC. The appellate division affirmed that the indemnification clause was enforceable but modified the order so that the indemnification was limited to damages incurred during the term of the lease.