Court Limits Indemnity Agreements: Reverses $237K Legal Fee Award
A January 20, 2023, Appeals Court decision reversed a lower court decision that expanded indemnities in a buyer’s purchase order by requiring a legal defense of all claims against the buyer for a purchase-related lawsuit and also by permitting a legal fee award for a buyer enforcing the seller’s obligation to defend the buyer.
A recent decision by the Appeals Court, Gorelick vs. Star Markets Company, Inc., vs. Stanley Access Technologies, LLC, had the potential to bring about a significant change in risk management in Massachusetts if it had affirmed the Superior Court decision that Stanley Access Technologies (Stanley) had appealed.
Shaw’s Supermarkets (Shaw’s), an affiliate of Star Markets, had purchased sliding automatic doors produced, installed, and maintained by Stanley, under a purchase order from Shaw’s providing that all services would be executed in a workmanlike manner and that the automatic doors would be free of faults. Stanley also promised to defend Shaw’s against any and all claims arising from or related to Stanley’s breach of any covenants, warranties, or representations in the purchase order.
Three years after Stanley installed the doors, a Shaw’s customer claimed the automatic doors had malfunctioned and injured her. Eventually, The customer and her husband filed a lawsuit for bodily injuries and loss of consortium. The customer alleged she had been struck and injured by the automatic doors due to Stanley’s carelessness and negligence in its installation, sale, servicing, inspection, and maintenance, as well as its failure to provide Shaw’s with the required warnings, instructions, and information regarding the automatic door. They also sued Shaw’s for negligence.
A jury found no liability on the customer’s claims following an eight-day trial. The jury found that Shaw’s was negligent, but that its negligence was not a substantial cause of the customer’s injuries. The jury also found that Stanley was not negligent.
During the bodily injury suit, Stanley had refused to defend Shaw’s claiming the lawsuit against Shaw’s only alleged Shaw’s negligence. However, the Superior Court ultimately ruled that Stanley had the duty to defend Shaw’s irrespective of “whether Shaw’s itself may be found to be negligent.”
The import of the Superior Court ruling was that a purchase order indemnity between a buyer and seller might impose a general duty on a seller to defend the entire lawsuit, similar to the broad duty to defend under a general liability policy, which requires the insurer to defend all counts in a complaint if one claim against the insured might be covered. The Superior Court court also extended to the purchase order context, the rule that an insured who has to sue to prove that an insurer has breached its duty to defend can recover their legal fees.
Based on its ruling, judgment entered against Stanley for Shaw’s legal costs and prejudgment interest
Stanley appealed to the Appeals Court. The Appeals Court decision reversed the Superior Court ruling, making it clear that routine contractual indemnity contracts are outside the expansive rules applicable to liability insurance policies.
The purchase order for the automatic doors and its indemnity agreement
In 2009, Shaw’s purchased six sets of automatic doors designed and manufactured by Stanley as part of the construction of a new supermarket store Shaw’s was opening in Chestnut Hill.
On October 2, 2009, Shaw’s sent a two-page Purchase Order #256255, revision 3, to Stanley. The first page of the Purchase Order described the goods sold as six Stanley DuraGlide 3000 Bi-Part Sliding Doors System for $37,375.50. There was an additional charge “to remove existing doors and put in new thresholds” for $2,500.00.
Shaw’s boilerplate additional terms and conditions appeared on the second page, including several warranties by the “Supplier” (i.e., Stanley), including that “all services shall be performed in a good workmanlike manner,” that “all Goods delivered hereunder are free from defects in design, material, and workmanship,” and that “the Goods will be merchantable and suitable for the purposes intended.”
The purchase order also contained on its second page, the following contractual duty to defend provision:
[Stanley] hereby indemnifies, defends, and holds harmless [Shaw’s and] its affiliates …. . . from and against any and all claims, actions, fines, penalties, liabilities, damages, injuries, costs, and expenses (including, without limitation, costs and expenses for investigation and litigation and reasonable attorneys’ fees) which arise out of or in connection with [Stanley] or any of its employees, agents, subcontractors, or independent contractors’ breach of any covenants, warranties or representations made herein.”
In a separate document, Stanley provided a three-year warranty on parts and labor from the installation date of the automatic doors.
On October 1, 2009, and October 12, 2009, Stanley installation specialists installed the doors that Stanley supplied. Due to the fact that these doors were installed during construction, a Stanley service specialist had to return to the store on November 2, 2009, to modify the motion sensors of the doors in question.
The customers’ lawsuit against Shaw’s
On July 9, 2012, within Stanley’s three-year warranty period, a customer of Shaw’s fell as she tried to exit the store through the doors Stanley had installed.
The customer claimed that the doors opened and then closed upon her throwing her to the floor. Shaw’s employees offered to call for medical assistance, but the customer declined any medical aid and left the store with her husband.
The customer and her husband filed suit in April 2014, originally naming Shaw’s as the only defendant and alleging that “[t]he dangerous and defective condition of the automatic door . . . was due to the carelessness and negligence of” Shaw’s and its agents. After Shaw’s filed a third-party complaint against Stanley seeking indemnity under the purchase order, the plaintiffs amended their complaint to add Stanley as a defendant, alleging, among other things, that Stanley was negligent “with respect to the installation” of the automatic door.
The customer’s theory at trial was that Stanley was negligent because it improperly installed the motion sensor on the automatic door and that Shaw’s was negligent because it failed to conduct “a daily safety check” and preventative maintenance on the door.
After Stanley and Shaw’s separately defended the respective claims against them during an eight-day trial, a Superior Court jury returned a verdict in their favor.
While the customer did not appeal the jury verdict, the lawsuit continued between Shaw’s and Stanley over the issue of Stanley breaching its duty to defend Shaw’s under the purchase order indemnity.
Shaw’s recovery of $237,438.37 for defense costs and interest from Stanley
In several letters sent by Shaw’s to Stanley in 2014 and early 2015, Shaw’s tendered the defense of the plaintiffs’ claims to Stanley under the purchase order. When Stanley refused to assume the defense, Shaw’s moved for summary judgment as it related to Stanley’s duty to defend, arguing that the purchase order obligated Stanley to defend Shaw’s against the entire lawsuit. Stanley countered that its duty to defend did not extend to claims that Shaw’s itself was negligent in inspecting and maintaining the automatic door.
In a June 2015 order, the Superior Court rejected Stanley’s argument and granted summary judgment for Shaw’s “on the issue of Stanley’s duty to defend,” concluding that the allegations of the amended complaint triggered the duty to defend irrespective of “whether Shaw’s itself may be found to be negligent.”
In making this decision, the Superior Court imported from the insurance context the “in for one, in for all” rule that requires an insurer to defend all claims in a complaint brought against an insured if at least one claim falls within the scope of the insurer’s duty to defend. The Superior Court also adopted another insurance rule which obligated a liability insurer to pay an insured’s legal fees in establishing a duty to defend.
Thus, the Superior Court entered judgment in favor of Shaw’s against Stanley. The Court’s ruling found the purchase order’s terms obligated Stanley to reimburse Shaw’s for the costs Shaw’s incurred in defending the customer’s lawsuit and in establishing Stanley’s duty to defend under the purchase order indemnity agreement.
The final Superior Court award of $237,438.37 against Stanley covered Shaw’s attorney’s fees and prejudgment interest.
Stanley appealed to the Appeals Court.
The Appeals Court refuses to apply insurance contract rules to purchase orders
The Appeals Court did not find the Superior Court’s reasoning persuasive. It rejected the Superior Court judge’s ruling, finding that Shaw’ purchase order did not impose on Stanley the obligation to defend Shaw’s against all claims in the lawsuit, including those that alleged Shaw’s own negligence. The court found that the purchase order only obligated Stanley to defend Shaw’s against claims that arose out of or were in connection with Stanley’s breach of the warranties in the purchase order.
The Court did not accept Shaw’s argument that the purchase order’s indemnity was “analogous” to an insurance agreement and obligated Stanley to defend the entire suit under the “in for one, in for all” rule.
The “in for one, in for all” rule, also known as the “‘complete defense’ rule,” “requires that, where an insurer is obligated to defend an insured on one of the counts alleged against it, the insurer must defend the insured on all counts, including those that are not covered.”
The Court also noted that the purchase order did not specify that Stanley’s duty to defend extended to claims arising from Shaw’s own negligence. Instead, the purchase order only stated that Stanley would indemnify, defend, and hold harmless Shaw’s from and against any and all claims arising from Stanley’s breach of the warranties in the purchase order.
The court also found that the Superior Court’s application of liability insurance law principles, such as the “In for one, in for all” rule, was inappropriate because the purchase order was not an insurance contract and did not contain the same type of language or provisions typically found in insurance contracts.
In conclusion, the Court reversed the judgment awarding Shaw’s attorney’s fees and prejudgment interest and found that Stanley was not obligated to defend Shaw’s against all claims in the lawsuit, including those that alleged Shaw’s own negligence.
The court emphasized that the purchase order was a commercial contract and should be interpreted in accordance with general contract law principles, not insurance law principles.
The appellate court’s final judgment
The Appeals Court’s final order was a win for Stanley and other vendors who sell, lease, or rent products to buyers who put indemnity clauses on their purchase orders.
The Court’s order stated:
Shaw’s is entitled to recover only those attorney’s fees and costs that it incurred in defending the plaintiffs’ claims that Stanley was negligent…The judgment entered December 20, 2019, is therefore reversed, and the matter is remanded for further proceedings consistent with this opinion.
Twenty days to apply for further appellate review to the Supreme Judicial Court
The Massachusetts Appeals Court is an intermediate appellate court. The ultimate judicial authority resides with the Supreme Judicial Court. Parties dissatisfied with an Appeal Court’s decision may apply for further appellate review. However, the allowance of any further appeal is discretionary with the Supreme Judicial Court.
Under the Massachusetts Rules of Appellate Procedure, Shaw’s will have until February 9, 2023, to apply for further appellate review.
Agency Checklists will keep you posted
Agency Checklists will monitor this case and keep its readers posted on any further developments.
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Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
Connect with me directly, by calling me at 617-598-3801.
