Indemnification- A way around Workers Compensation exclusivity

Posted by Unknown | Mar 01, 2022 | 0 Comments

Normally, an employee's sole recourse against their employer is workers compensation benefits. Because of this, a third-party tortfeasor typically cannot sue that same employer for contribution or indemnification since this would defeat the purpose of the workers compensation exclusion (after all, otherwise every party sued would simply bring in the plaintiff's employer). Despite the legislative constructs that create this seemingly airtight rule, Wisconsin courts have found certain contracts allow exceptions – and those contracts need not explicitly spell them out, either. Indemnification clauses can allow a loophole that can prove expensive. Employers who do not read their contracts closely may be signing indemnification agreements that obligate them to pay both their employee's Workers Compensation and a judgment on damages.

Indemnification for a party's own negligence

To bypass the Workers Compensation exclusion, the indemnification clause must entitle the tortfeasor to indemnity from the plaintiff's employer, for acts arising out of the tortfeasor's own negligence. When a party claims entitlement to contractual indemnification for liability arising out of its own negligence, courts usually construe any interpretation of the contract against indemnification.[1] This means any phrase in the contract which leans against cross-negligence indemnification will be weighed favorably. See the following example below, from the court in Young v. Anaconda American Brass Co.,

[Ballard] (the indemnitor) shall at all times indemnify and save harmless Anaconda (the indemnitee) . . . on account of any and all claims, damages, losses, litigation, expenses, counsel fees and compensation arising out of any injury (including death) sustained by, or alleged to have been sustained by, the servants, employees or agents of Anaconda American Brass Company or the Contractor, its subcontractors or materialmen, the public and its servants, employees or agents, any or all persons on or near the work, or any other person or arising out of loss or damage to any property, real or personal, if such injury or such loss or damage is caused in whole or in part by the acts or omissions of [Ballard], its subcontractors or materialmen, or anyone directly or indirectly employed by them or anyone of them while engaged in the performance of this contract.[2]

Here, the indemnification language was not sufficient to obligate Ballard to indemnify Anaconda for injuries to Ballard's employee caused by Anaconda's negligence. The court determined that the clause specifically included a section clarifying that the indemnification only applies to injuries or losses caused in whole or in part by the indemnitor's own negligence. Thus, this section was enough to prevent indemnity, and the employee could not pursue their employer due to the Workers Compensation exclusion.

By contrast, the absence of such a section generally allows for indemnification, as seen in AFMIC v. Cintas Corp.,

[Becker](the indemnitor), at its own expense, shall defend, indemnify and hold harmless [Cintas] (the indemnitee) from any claim, charge, liability, or damage arising out of any goods or services provided by [Cintas] hereunder, including any failure of the goods or services to function as intended. [Becker] acknowledges that [Cintas] shall have no liability or responsibility for any loss or damage to persons or property resulting from any fire or equipment malfunction.[3]

This clause was upheld as providing indemnification, as it provided for indemnification for “any” loss or damage, as opposed to Young, which only provided indemnification for liability arising out of the acts of the alleged indemnitor. Therefore, the employee could in effect “bypass” the Workers Compensation exclusion, by pursuing a tortfeasor which could, in turn, pursue the employer for indemnification.

Thus, the “general rule” for this exception is that an indemnification provision needs to explicitly state that the clause is indemnifying for any liability (or at least the liability of the indemnitee) to “bypass” the Workers Compensation exclusion. Simple enough, right?

An expansion of indemnity- The exception within the exception

There is an exception to the “general rule” that creates the original exception, however. Other contractual language can create an obligation to indemnify “where it is clear [despite the absence of clear and unequivocal language] that the purpose and unmistakable intent of the parties in entering into the contract was for no other reason than to cover losses occasioned by the indemnitee's own negligence.”[4] This determination is up to the discretion of the court.

Much of this analysis comes from Mikula v. Miller Brewing Co. In Mikula, the indemnification clause at issue, on face value, appears similar to that in Young, in that it only indemnifies for the negligent actions of the indemnitor:

The Sub-Contractor [J.F. Cook] shall indemnify and save harmless the Owner [Miller], the Architect, the Contractor [Selzer-Ornst] and their respective agents from any and all liability, payments and expenses of any nature for injury or death to any person, or persons, or for damage to any property, caused <s>or alleged to have been caused </s>by the Sub-Contractor, or incidental to the execution of work under this contract by the Sub-Contractor, his agents or employees; and the Sub-Contractor shall maintain from the beginning until the completion of his work policies of insurance satisfactory to the Contractor, covering the liabilities above mentioned, such as employers' liability insurance, public insurance, contingent insurance, etc.[5]

The difference, however, lies in the fact that the contract includes a requirement that the indemnitor provide insurance for the indemnitee.

Who Is an Insured is amended to include as an insured any person or organization for whom you [Selzer-Ornst] are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization [Miller] is an additional insured only with respect to liability arising out of your ongoing operations performed for that insured. A person's or organization's status as an insured under this endorsement ends when your operations for that insured are completed.

“Your operations” was considered broad enough to include any work the employee was performing, and this was deemed to “clearly” show a purpose to cover losses by the indemnitee's own negligence. Therefore, the requirement of having insurance listing the indemnitee as an insured, combined with a general indemnity agreement, will likely compel an indemnitor to indemnify an indemnitee, even if it is for negligence that the indemnitor had nothing to do with, and even if there is Workers Compensation exclusivity. Employers need to take particular care when signing agreements with contractors, especially if the agreement has an indemnity clause providing blanket indemnity, or a clause offering additional insurance, or they risk their employees coming after them – with Workers Compensation exclusivity serving as nothing more than a paper-thin security blanket.

[1] Young v. Anaconda American Brass Co., 43 Wis. 2d 36, 55, 168 N.W.2d 112 (1969).

[2] Id.

[3] AFMIC v. Cintas Corp. No. 2, 2017 Wisc. App. LEXIS 251.

[4] Mikula v. Miller Brewing Co., 2005 WI App 92, ¶ 35, 281 Wis. 2d 712, 701 N.W.2d 613.

[5] Id.

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