An Indemnity is Not a Release: A Cautionary Tale

Warning: An Indemnity is Not a Release

Anyone who buys or sells contaminated property, or even settles future liability involving contamination, needs to read this posting. Lawyers sometimes confuse an indemnity with a release of future liability. Doing so is a trap for the unwary.

An indemnity in favor of one party protects that party from liability for all environmental claims during the period of the indemnity. For example, if a seller indemnifies a buyer, during the indemnity period, the seller must defend and indemnify the buyer from third-party claims brought by subsequent owners of the property, adjacent landowners, or a government agency. Because the seller steps into the shoes of the buyer and has to defend and indemnify it, the seller cannot assert against the buyer a claim during the indemnity period if it is covered to by the indemnity.

An indemnity is not a release of liability, however, so once the indemnity has expired, the buyer (indemnitee) can sue the seller (indemnitor) for claims that were covered under the indemnity.

A classic example of this trap, discussed in a recent Washington Court of Appeals decision, involved a seller of contaminated property. I am very familiar with this matter because I was recently retained to represent the seller in this Model Toxics Control Act cleanup and multi-party cost recovery litigation. In the original purchase and sale transaction, the seller agreed to clean up the property and indemnify the buyer for any claims arising from the contamination for three years, but the buyer did not provide a release of liability. The Washington State Department of Ecology approved the cleanup, thus the parties reasonably believed that the transaction was complete.

It may have been complete, but the parties’ relationship was not over. As the buyer began developing the property 15 years later, it discovered new contamination. The buyer sent a letter notifying the seller that it was liable for the cleanup under the MTCA, Chapter 105D RCW, because the buyer had not released its claims of environmental liability against the seller. The seller was shocked, thinking that the parties had allocated their environmental liability by virtue of the Ecology-approved cleanup and the indemnity, but the real estate transaction documents did not release any environmental liability between the parties. The seller sued for a declaratory judgment that the cleanup and indemnity were an allocation of liability that effectively released all claims against the seller and thus barred any MTCA claim. The trial court granted summary judgment in favor of the buyer and the court of appeals upheld the decision. Thus, the buyer was able to proceed with the claim even though the seller had believed that the indemnity provision resolved all claims between buyer and seller.

This decision is now binding legal precedent in Washington State of which attorneys and parties to transactions need to be mindful in allocating environmental liability. So, if you are involved in a real estate transaction involving contaminated property, your lawyer must carefully consider both indemnification and release provisions.Posted March 10, 2013 by Peter Hapke