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The Takeaway

Defense and indemnification agreements are at the core of the insurance industry, but the duties and obligations vary from one contract to the next, especially where sophisticated intermediaries are involved. Applying Indiana law, the U.S. Court of Appeals for the Seventh Circuit recently clarified whether a contract required a tender of defense before settling claims against it or merely notice of the claim. AXIS Insurance Company v. American Specialty Insurance & Risk Services, 111 F.4th 825 (7th Cir. 2024).

Reversing the district court, which had found the contract required either approval of the settlement or assumption of the defense, the appellate court held that the contract requires notice, but settlement decisions remain with the indemnitee.

It further held that under Indiana law, tender of defense is not implied in an indemnification agreement. Therefore, the appellate court found no reason to read into the contract another restriction not agreed upon by the parties.

Case Background

Plaintiff-Appellant AXIS Insurance Company specializes in insurance policies for the entertainment industry, including professional sports teams. In 2008, AXIS contracted with Defendant-Appellee American Specialty to “accept proposals for insurance, negotiate, underwrite and accept insurance coverages on [AXIS’s] behalf….” Id. at 828. The contract further provided that if American Specialty acted negligently as to any of those functions, it would indemnify AXIS for any resulting losses.

In May 2013, an agent for the Tampa Bay Buccaneers contacted American Specialty for a quote on a variety of coverages, including employer’s liability coverage. American Specialty sent back a proposal and binder on behalf of AXIS. While the documents mentioned employer’s liability coverage, all parties interpreted the same differently. In 2015, team kicker Lawrence Tynes asserted a personal injury claim against the team due to contracting a Methicillin-resistant Staphylococcus aureus (MRSA) infection at the team’s facility while rehabilitating from a medical procedure performed on his kicking foot. Tynes had previously won two Super Bowls and kicked game-winning field goals in two separate conference championship games. He sought $15 million in compensatory damages for his career-ending injury.

The parties disagreed as to whether the policy provided employer’s liability coverage. The Buccaneers maintained that the policy included it because the team had requested it. AXIS asserted that the policy as issued did not include that coverage. American Specialty admitted the actual policy did not include employer’s liability coverage. However, it maintained this was due to error and asserted that AXIS should reform the policy to include this coverage.

American Specialty notified AXIS, but Axis ultimately denied the claim and refused to indemnify the team against the claim. Despite American Specialty’s repeated requests that AXIS reform the policy due to the “mistake,” AXIS stood on the policy as issued and informed American Specialty that it would seek indemnification from American Specialty for losses arising from its negligence in preparing the policy.

AXIS then informed American Specialty that AXIS would handle the claim. AXIS directed American Specialty to maintain an administrative file and pay bills relating to the claim, but it told American Specialty that American Specialty had not authority in the matter and should not be involved in the claim handling in any way.

After Tynes filed suit, the parties submitted the matter to mediation. Despite AXIS’ communications to American Specialty informing it of the mediation and AXIS’ interest in a “market solution,” American Specialty did not respond and didn’t attend mediation. However, the attending parties were able to reach a confidential settlement, ending the underlying suit.

In April 2017, AXIS demanded indemnity for the settlement payment. American Specialty refused. Following a failed attempt at arbitration, AXIS filed suit against American Specialty seeking indemnification for the settlement contribution as well as attorneys’ fees and costs arising out of the litigation.

Following cross-motions for summary judgment, the district court agreed with American Specialty that it was not liable to AXIS since AXIS made its settlement payment without giving American Specialty the opportunity to approve of the payment or to assume the defense, thereby rendering the payment voluntary. The district court, noting that Indiana law does not require reimbursement of “voluntary” settlement payments, concluded that a settlement payment is not voluntary if an indemnitee gives notice and an opportunity to defend its indemnitor and if the indemnitee shows that it was “actually liable” on the underlying claim. Finding that while AXIS invited American Specialty to participate in mediation, it did not offer the opportunity to approve the settlement or to assume the defense of the potential coverage claim by the Buccaneers. Since AXIS did not tender its defense to American Specialty, the court found that AXIS had to show actual liability on the potential claim by the team. Since it could not do so, the district court granted summary judgment to American Specialty.

The Seventh Circuit’s Appellate Ruling

The sole issue on appeal was whether the indemnification agreement required AXIS to give American Specialty the opportunity to choose between approving the settlement agreement or assuming the defense in the underlying case. Both sides agreed that Indiana law governed.

Indemnity in the Contract

Since indemnity agreements are contracts, they are governed accordingly. Parties can “define their mutual rights and obligations” through the contract and decide the prerequisites for an indemnitee to qualify for indemnification. Bethlehem Steel Cor. v. Sercon Corp., 654 N.E.2d 1163, 1168 (Ind. Ct. App. 1995).

In this case, the contract between the parties did not state that AXIS was obligated to tender the defense to American Specialty. The appellate court found that:

… there is no textual basis for concluding that the parties intended to require AXIS, if it wanted indemnification, to give American Specialty the opportunity to assume the defense. To the contrary, the fact that other preconditions to settlement were included but tender of defense was not signals that the parties did not intend for tender of defense to be a precondition to settlement. Axis Ins., 111 F.4th at 831.

American Specialty argued that as a matter of common law, its promise to indemnify AXIS was subject to an implied condition precedent: that in the absence of proof of AXIS’ actual liability to the Buccaneers, AXIS had a duty to tender the defense to it. The court rejected this argument in its entirety:

No appellate precedent in Indiana holds that such a duty exists, and we do not predict that the Indiana Supreme Court would do so now. Sophisticated insurance companies like American Specialty know that indemnification agreements are governed by principles of contract law. If an indemnitor wants the right to choose between approving a settlement or assuming the defense, it can bargain for that right. But if it does not, an indemnitor cannot cry foul when it knows its indemnitee is facing pressure to settle, especially when the indemnitor refuses even to respond to the indemnitee’s communications. Id. (internal citations omitted).

Turning to the verbiage of the contract, American Specialty agreed “to defend, indemnify, and hold AXIS harmless from and against all claims … which result from any negligent or willful acts” by American Specialty. However, the text contained no provision giving American Specialty a right to defend claims against AXIS that were subject to this duty.

Rejecting American Specialty’s argument that the provision linked its obligation to defend and indemnify to AXIS provided it with an opportunity to defend, the appellate court described the provision as a “one-way street—it listed only obligations that American Specialty owed to AXIS. It did not specify obligations that AXIS owed American Specialty, such as a duty to tender the defense.” Axis Ins., 111 F.4th at 831. The court also held that “Holding AXIS’s contractual rights against it would rewrite the plain terms of the contract, and Indiana courts teach us not to pick up the pen ourselves when parties have stated their intentions clearly.” Id. (citing Bethlehem Steel, 654 N.E.2d at 1168).

The court found the contract required only written notice from AXIS as a basis for seeking indemnification and reserved to AXIS nearly complete control in settling claims within the scope of the agreement, Therefore, the court found AXIS’ only obligation was the duty to provide notice if AXIS sought to override American Specialty’s decision in a settlement proceeding which was not triggered in this case because American Specialty didn’t participate. However, nothing in the contract required AXIS to give American Specialty an opportunity to approve the settlement or to assume the defense in order to secure indemnification.

Indemnity under Indiana Law

The appellate court further rejected American Specialty’s argument that Indiana’s common law required AXIS to tender the defense to American Specialty with respect to the potential liability to the team. To the contrary, it held, “No Indiana precedent holds that indemnification agreements include an implied contractual term requiring indemnitees to tender the defense before settling a claim.” Axis Ins., 111 F.4th at 833. In addressing whether the settlement payment was voluntary, two Indiana Courts of Appeal cases and one Southern District of Indiana case each found that a settlement payment was not voluntary when the indemnitee notified the indemnitor of the proposed settlement and gave it the opportunity to either approve or assume the defense. Id. (citing Sequa Coatings Corp. v. Northern Indiana Commuter Transp. Dist., 796 N.E.2d 1216, 1230 (Ind. Ct. App. 2003); Sink & Edwards, Inc. v. Huber, Hunt, & Nichols, Inc., 458 N.E.2d 291, 293 (Ind. Ct. App. 1984); Price v. Amoco Oil Co., 524 F. Supp. 364, 367 (S.D. Ind. 1981). However, while the indemnitees in those cases tendered the defense, none of those opinions identified whether the contracts required a tender, none found tender to be an implied contractual requirement, and none found the tender to be a prerequisite to settling claims.

Indemnity in This Case

With respect to the instant case, the court noted, “The most extraordinary feature of this case is American Specialty’s silence in response to AXIS’s communications, including the invitation to plan for and participate in the mediation of the Tynes claim against the Buccaneers.” Axis Ins., 111 F.4th at 834. For over a year and a half, both parties were aware that Tynes was asserting claims against the team, and they disputed whether AXIS was obligated to cover the team. During that time, AXIS repeatedly informed American Specialty that it expected indemnification for any losses resulting from the mistake concerning coverage.

The district court found that the Tynes claims were within the scope of the indemnification agreement, and neither side challenged that finding on appeal. Accordingly, the only issue was whether AXIS was required to provide American Specialty an explicit tender of defense. Since this requirement was not included in the contract and not found in Indiana’s common law, the appellate court concluded that tendering its defense was not a condition precedent to indemnification of AXIS for settlements of potential liability.

The court further noted that American Specialty should have known to communicate its concerns, if any, regarding settling when AXIS invited it to mediate the Tynes claims. Instead, American Specialty remained silent, and Indiana courts don’t reward refusals to communicate. Axis Ins., 111 F.4th at 835 (citing Sequa Coatings Cor., 796 N.E.2d at 1230). However, with respect to the settlement amount itself, Indiana courts distinguish this as a separate issue from whether the procedural requirements for indemnification were followed. Since neither side raised the issue in their competing motions for summary judgment, the appellate court took no position on that matter.