Indemnities: Should There Be An Exception For Lessor (Simple) Negligence?
Indemnity language is often the source of irritation for lessees, particularly those who are new to equipment finance. The basic rules are fairly simple: the lessee, as the party who selected and is using the equipment, is responsible for any damage done by the equipment to persons or property. The lessor, who is basically in the position of being a lender, should have no responsibilities in that regard AND should be protected by the lessee (and its insurance).
Except for leases in which the lessor provides some additional services or is itself the manufacturer (leases that are not "finance leases" under UCC Article 2A), the only obligation that the lessor should undertake is to observe the lessee's right to quiet enjoyment.
Nevertheless, it is common for lessees to demand an exception to their indemnification obligation for the lessors "gross negligence or wilful misconduct." It is difficult to imagine an example of such behavior by the lessor. The hypothetical we have used in the past is a lessor who, during the course of an inspection, throws a lighted cigarette into a pool of flammable liquid or a lessor employee who loses his temper and throws a punch at one of the lessee's employees or customers.
We said hypothetical.
Trouble comes when the lessee raises what on its face would appear a reasonable question. "Does that we are indemnifying you against your own (simple) negligence." If the exception is only for a lessor's gross negligence, the lessee would still be required to indemnify the lessor against its own simple negligence.
One definition of gross negligence is "a conscious and voluntary disregard of the need to use reasonable care causing a foreseeable injury to persons or property". Simple negligence, on the other hand, is simply the failure to use reasonable care, causing a foreseeable injury to persons or property.
Why should a lessor refuse to drop the standard to simple negligence?
In the first place, simple negligence includes imputed negligence, a form of vicarious liability. In many states, the ownership of an inherently dangerous piece of equipment (which can include motor vehicles, air craft and certain other machinery) requires the owner to be responsible for the machinery and for any negligent acts its lessee or another person with permission to use the equipment might cause. In other words, if a simple negligence standard is used, it is possible for the lessor to be sued for the lessee's negligence but not have the benefit of a lessee indemnification. Note that the Graves Amendment discussed on our website significantly reduces, if not eliminates, the potential for vicarious liability for the operation of motor vehicles.
There are other legal theories that can result in loss of indemnification without the lessor actually doing anything wrong. These include negligent entrustment under which the lessor's failure to guarantee that the lessee will safely use the equipment can result in liability.
Simple negligence might also be extended (we are not saying this is a correct interpretation) to an alleged failure to inspect the equipment or to enforce strictly the terms of the lease requiring proper maintenance and use. An aggressive lawyer might try a theory that the lessor was involved with the selection of the equipment or that its willingness to provide financing itself caused "dangerous" equipment to be placed in commerce. Again, these theories are somewhat foolish but hungry plaintiff's lawyers can be expected to look for any avenue to reach the lessor.
Another troubling issue exists: the lessee's indemnification obligation includes the obligation to provide legal counsel and defend the lessor. The lessee will almost undoubtedly be involved in the lawsuit anyway and it should not be unreasonable to expect the lessee counsel to defend the lessor. If a simple negligence standard is used, however, the lessor may find itself facing an argument by the lessee that the lessee should pay for legal counsel because the lessor will ultimately be found to be negligent.
Finally, and perhaps most ominously, bear in mind that most insurance certificates limit the liability coverage to coverage that is required by contract. In other words, if the insurance company providing lessor coverage as additional insured can show that the lessee has the right to avoid indemnification, it is possible that the insurance company will argue that liability coverage does not apply, either.
The negligence exception is not the only way we find indemnities to be deficient. Some poorly-drafted indemnities state that the lessee's only responsible for damage caused by its use of the equipment, failing to recognize that the ownership of the equipment, patent issues and other claims may result from the lease itself.
Indemnification is one of the few purely legal provisions in a well drafted equipment lease that should not be substantially altered. While compromise is possible (with a lengthy addition to the language) the general rule should be that the indemnification provision is non-negotiable at least in so far as any exception for gross negligence and wilful misconduct is concerned.
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