Franchise & Insurance Alert: The Obligation to Obtain Liability Insurance Is NOT a Substitute for the Duty to Indemnify and Defend Hotels (and others)

Risk transfer provisions in agreements, in franchise relationships specifically and in commercial relationships generally, usually deal with requirements for indemnification and requirements to obtain insurance. The goal of these provisions is to shift liability exposure to the responsible party in situations where the responsible party’s conduct may have resulted in the contracting party being named in a lawsuit. Both such provisions are important tools in transferring risk in commercial agreements. However, each should be considered and enforced separately, as they carry separate legal obligations.   

In the case of Buhrman v. Courtyard by Marriott, Inc., et al., a Motion for Summary Judgment argued by Reger Rizzo & Darnall’s Wilmington, Delaware based Paul Sunshine, the Court considered the duty of a security company, pursuant to its contract with Marriott related entities, to indemnify and defend Marriott based upon the Plaintiff’s Complaint alleging negligence against Marriott. Securitas Security Services was contracted to provide security guard services to a Marriott hotel located in Delaware, and it was alleged by the Plaintiff that both Securitas and Marriott were negligent in their operations by allowing the Plaintiff to be mugged in an area adjacent to the front entrance of the hotel. Marriott tendered the matter to Securitas for defense and indemnification pursuant to provisions in the underlying contract, but Securitas declined the tender, arguing that it had no contractual duty to indemnify Marriott for its own negligence. While the agreement also required Securitas to obtain insurance covering Marriott for such claims, the policy obtained by Securitas included a large “deductible” which exceeded the value of the underlying claim. Thus, the insurance coverage, although in place, provided no indemnity to Marriott. The indemnity would have to come from Securitas.

The Court applied Maryland law, as required by the contract, and ruled that the duties of Securitas to defend and indemnify were, indeed, triggered by the allegations of negligence contained in the Complaint. The security company argued that there was no duty for it to defend Marriott for Marriott’s own negligence, and that the only requirement was for Securitas to defend Marriott for Securitas’ acts under the security agreement; and not to defend or indemnify Marriott for its own negligence. The Court found that the Complaint alleged virtually identical negligence claims against Marriott and Securitas, and that it did not bring specific allegations of negligence solely against Marriott. The Court went on to conclude that the contractual terms of the agreement between Marriott and Securitas required  Securitas to indemnify, defend and hold Marriott harmless from claims and lawsuits arising out of any negligent act or omission or willful misconduct on the part of Securitas and the performance of its obligations under the security agreement. The contractual indemnification obligations extended to allegations regarding Marriott’s hiring, retention or supervision of Securitas, its employees or its services provided under the Agreement, except for that caused by the willful misconduct of Marriott. The security company’s declination to defend and indemnify Marriott was found to be improper by the Court.

The Court found that the duty to defend and indemnify Marriott was simply triggered by the allegations in the Complaint, even if ultimately there was to be no liability or negligence on behalf of Marriott or Securitas.  The Court found that the security agreement clearly expressed the duty of Securitas to defend and indemnify Marriott in connection with any allegations of negligence against Marriott, even if, ultimately, there would be no liability or negligence on behalf of Marriott; as the Court found the security agreement to be clear in its duty to defend Marriott based on allegations of negligence. The indemnity and insurance procurement requirements were separate.  Thus, the indemnity provision as enforced filled the gap left by the insurance coverage “deductible”.

The case points out the importance for all hotels (and other commercial entities) to carefully review the agreements with third party vendors, including those providing security services, as to whether there is a contractual duty for the third party to defend, indemnify and hold harmless the hotel owner (management company and/or others) in addition to the obligation/duty of the third party to obtain liability insurance covering the hotel.  The nature and limits of insurance coverage required to be obtained should also be specified in the agreement and confirmed upon/after the agreement is signed.