Public and private construction contracts almost always contain indemnification provisions. These provisions transfer the financial risk of claims arising on a construction project by making the contractor/indemnitor responsible for all or part of the liability of another(s), the indemnitee(s). Liability can potentially extend to not only the other party to the contract, but also to third parties and non-parties. Responsibility may include tort damages as well as contract damages.

One of the benefits of such a provision is that it may keep all of the parties on the same side and avoid parties pointing fingers and seeking to blame each other in the event of a claim.

In general, indemnity provisions assign the overall risk of payment to the party that is best able to control the risk exposure. The contractor/indemnitor typically purchases insurance or takes other action or care to address the risk posed by an indemnification clause.

Wisconsin courts have repeatedly held that indemnity clauses are valid, not against public policy, and are not prohibited by Wisconsin common or statutory law. Barrons v. J. H. Findorff & Sons, 89 Wis. 2d 444, 452 (1972); Dykstra v. McKee & Co., 100 Wis. 2d 120, 126 (1981); Gerdmann v. United States Fire Ins. Co., 119 Wis. 2d 367, 373-74 (1984). See also Estate of Kriefall v. Sizzler USA, 2012 WI 70, 342 Wis. 2d 29, ¶¶ 34 and 59.

When damages occur, and a lawsuit is filed against the indemnified party, the indemnitee, it is likely the indemnitee will tender the defense of the action to the indemnitor. In such an instance, do not ignore the tender, reject it out of hand, or fail to notify your insurance provider.

The recent pithy and instructive Aug. 9, 2016 Court of Appeals decision in Karen Colleran v. Erik C. Wildes, 2016 WI App 75 (2015AP537) (Petition for Review pending) is a sharp warning on this point; it illustrates the pitfalls if you fail to respond correctly. It may well be a hard lesson to you as to the breadth of your insurance coverage or a costly lesson to your balking insurance provider, or both.

In Colleran, M.D. Transportation, Inc. (M.D. Transportation) contracted with Soo Line Railroad (Soo Line) to provide transportation services to Soo Line employees. On Jan. 26, 2012, Karen Colleran, a Soo Line employee, filed a lawsuit against Soo Line, M.D. Transportation, and Matthew Henshaw for injuries she allegedly sustained while a passenger in a vehicle operated by Henshaw. On March 13, 2012, Soo Line tendered its defense to M.D. Transportation, pursuant to an indemnification clause in the parties’ contract. M.D. Transportation rejected the tender out of hand.

From the parties’ briefs, it appears that Soo Line had also tendered the defense of the action to M.D. Transportation’s insurance carrier, American Service Insurance Company (“American”), but that American had failed to respond to the tender.

Soo Line then defended the case and filed a cross-claim against M.D. Transportation. After an investigation by Soo Line, Colleran stipulated to dismiss all of her claims against all parties, leaving only the Soo-Line’s cross-claim against M.D. Transportation.

On Dec. 7, 2012, Soo Line moved for summary judgment on its cross-claim for defense costs and attorneys’ fees against M. D. Transportation. The motion was granted and damages of approximately $88,000 were awarded to Soo Line.

M.D. Transportation objected to the amount and was allowed discovery by the court. Nearly three years later, during the trial court’s hearing on Soo Line’s attorneys’ fees, the amount Soo Line claimed had increased by $54,000 to cover the additional costs Soo Line incurred in litigating the reasonableness of its attorneys’ fees claim. The trial court rejected Soo Line’s claim for an additional $54,000 on the basis that Wis. Stat. 814.045 did not permit such additional fees to be recovered. M.D. Transportation appealed the trial court’s award to Soo Line, and Soo Line cross-appealed for the full amount of its attorneys’ fees.

The Court of Appeals decided that the indemnification clause was conspicuous under Wis. Stat. 401.20(2)(f) and Deminsky v. Arlington Plastics Machinery, 2003 WI 14, 259 Wis.3d 587, and that the clause allowed Soo Line to collect all of its reasonable attorneys’ fees. This included not only the reasonable fees to defend the underlying action, but also the amount to litigate the reasonableness of its attorneys’ fees at the trial court level and the amount of Soo Line’s reasonable attorneys’ fees and costs incurred on appeal.

Colleran serves as a warning to contractors and insurers; do not reject a tender for defense and indemnification without first fully analyzing your contractual obligations or getting a ruling on your obligations. If you reject the tender imprudently, you may find that you have just multiplied your exposure to damages.