In its simplest and most frequently-seen form, “indemnification” in the context of insurance describes the right of one party (the “indemnitee”) to be protected by a second party (the “indemnitor”) from liability to a third party. The right of indemnification may arise as a matter of common law or as the result of a formal, contractual agreement; a liability insurance policy, for example, is itself a common form of indemnification agreement.
Contractual indemnification is a means by which two parties to a common enterprise, such as a construction project, will allocate some of the risks that may naturally accompany the project. Often, what is actually being shifted is not the risk itself but the burden and expense of obtaining insurance to cover the risk.
There is no particular language specified by law to create a valid contractual indemnification agreement. However, the interpretation of an indemnity agreement is a question of law, Hutchinson v. Sunbeam Coal Corp., 519 A.2d 385, 390 (Pa. 1986), and a Pennsylvania court called upon to determine the validity of an exculpatory agreement will apply principles of strict construction. Any ambiguities will be construed against the party seeking indemnification. Brown v. Moore, 247 F.2d 711, 722 (3d Cir. 1957).
Ultimately, the goal is to determine as closely as possible the intentions of the parties. An issue often arises as to how broad the court’s inquiry should be in determining the parties’ intentions. If the indemnity clause itself is clear and unambiguous, then the intentions of the parties should be ascertained primarily by looking to the language used in the clause. Fallon Elec. Co., Inc. v. The Cincinnati Ins. Co., 121 F.3d 125, 127 (3d Cir. 1997). However, if the court determines that the indemnity clause is ambiguous, it may consider the circumstances under which the contract was signed. East Crossroads Ctr., Inc. v. Mellon Stuart Co., 205 A.2d 865, 866 (Pa. 1965). It should also be kept in mind that an indemnity clause is not ambiguous simply because the parties disagree about its interpretation. Metzger v. Clifford Realty Corp., 476 A.2d 1, 4 (Pa. Super 1984).
An indemnity agreement that seeks to protect the indemnitee from a loss due to his own negligence must be clear and unequivocal. The Pennsylvania Supreme Court first set forth this principle in the well-known case of Perry v. Payne, 66 A. 553 (Pa. 1907) when it stated as follows: “… a contract of indemnity against personal injuries, should not be construed to indemnify against the negligence of the indemnitees, unless it is so expressed in unequivocal terms. The liability on such indemnity is so hazardous, and the character of the indemnity so unusual and extraordinary, that there can be no presumption that the indemnitor intended to assume the responsibility unless the contract puts it beyond doubt…” Perry, 217 Pa. at 262, 66 A. at 557.
The Perry rule was revisited and updated in the case of Ruzzi v. Butler Petroleum Co., 527 Pa. 1, 588 A.2d 1 (1991). In Ruzzi, a property owner agreed to indemnify a renovation contractor “from any and all liability for claims for loss, damage, injury or other casualty to persons or property caused” by the project. The court held that this language was not specific enough to require the homeowner to indemnify the contractor against a claim arising from the contractor’s own negligence. The court’s holding on this issue, which has come to be known as the Perry-Ruzzi Rule, was enunciated as follows: “We conclude that the only intent that can be gleaned from this document is that the parties did not intend to indemnify for acts of the indemnitee’s negligence, since words of general import are used. We can discern no reason to abandon the Perry rule of contract interpretation which is still a valuable rule of construction, rooted in reason and authority…” Ruzzi, 527 Pa. at 9, 588 A.2d at 5.
What about the liability of an indemnitor for losses contractually assumed by the indemnitee? In Jacobs Constructors, Inc. v. NPS Energy Services, Inc., 264 F.3d 365 (3rd Cir. 2001), the United States Court of Appeals for the Third Circuit concluded that the Pennsylvania Supreme Court would apply the Perry-Ruzzi Rule, requiring that “…such an obligation must be stated plainly, in clear and unequivocal language.”
The state and federal appellate courts of Pennsylvania have made it clear that an indemnification clause or “hold harmless agreement,” to be enforceable, should clearly and unequivocally state the intentions of the parties at the time they entered into the agreement. Where the contract language is ambiguous, particularly as to the obligation to hold the indemnitee harmless from claims arising from his own negligence, the court is likely to find that the parties did not intend a right of indemnification at all, and that the indemnification provision is nothing more than an invalid exculpatory clause.