Three years ago, I wrote this brief post about how to interpret an indemnity claim.  I wrote that post to remind readers that the California Civil Code not only defines “indemnity”, it provides a series of interpretational rules.  According to the Code, “indemnity” is “a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person.”  Cal. Civ. Code § 2772.

If A indemnifies B, is A obligated only to answer for claims brought by third parties against B or may A be liable for damages suffered directly by B?  In other words, does a contract of indemnity reach only third party claims or may it also extend to first party claims?  That question was addressed recently in Hot Rods, LLC v. Northrop Grumman Systems Corp., 2015 Cal. App. LEXIS 1094 (Nov. 6, 2015).  According to the Court of Appeal, indemnity provisions usually extend to third party claims, but if the parties so intend, they may also cover direct claims.

In Hot Rods, the plaintiff had purchased environmentally compromised real property from the defendant.  The purchase and sale agreement included a broadly worded environmental indemnity provision.  Eventually, the plaintiff sued and won a judgment of over $1 million for impaired use of the property and lost rents.  On appeal, the seller argued that the plaintiff could not sue under the indemnity for its own damages.  In an opinion by Eileen C. Moore, the Court of Appeal affirmed finding that the contractual language was quite broad and that overall intent of the parties had been to protect the plaintiff from the costs of environmental problems.

For the plaintiff, however, the appeal was a battle won and lost.  The Court of Appeal found that the determination of the damages was not supported by substantial evidence and it slashed the award to approximately $117,000.