Federal Ins. Co. v. Walker, 53 N.Y.2d 24 (1981)

An indemnity agreement does not automatically bar a third-party negligence action by the indemnitor against the indemnitee, and an indemnitor is not obligated to reimburse an indemnitee for losses resulting from the indemnitee’s failure to reasonably mitigate damages.

Summary

This case concerns interlocking indemnity agreements and the duty to mitigate damages. Ms. Walker received dividends for Union Camp stock she no longer owned due to a failure to record a transfer. She obtained duplicate certificates, agreeing to indemnify Union Camp and its agent, Morgan Guaranty. Federal Insurance issued a bond indemnifying Union Camp and Morgan, with Ms. Walker and her son, Alexander, indemnifying Federal. After the error was discovered, Union Camp waited nearly a year to purchase replacement shares, increasing the cost. Federal paid the claim and sued the Walkers, who impleaded Union Camp and Morgan for negligence. The court addressed whether the indemnity agreements barred the negligence claim and whether Federal was entitled to full reimbursement despite the delay in mitigating damages. The Court of Appeals held that the indemnity agreement did not bar the negligence claim and that the Walkers were not responsible for losses attributable to Union Camp’s unreasonable delay.

Facts

In 1970, Helen Walker acquired Union Camp shares but the transfer was not recorded. She continued receiving dividends. Her son, Alexander Walker, Jr., suggested she obtain duplicate certificates. Union Camp’s agent, Morgan Guaranty, required her to sign an agreement indemnifying them against losses arising from issuing the duplicates. Federal Insurance issued a blanket bond indemnifying Union Camp and Morgan, with the Walkers indemnifying Federal. Ms. Walker sold the duplicate shares for $52,800. In 1975, the unrecorded transfer was discovered, creating an “overissuance” problem. Union Camp and Morgan waited until August 1976 to purchase replacement shares, by which time the cost had risen to $108,515.25 due to a stock split.

Procedural History

Federal paid Union Camp and Morgan’s claim and sued Alexander Walker, Jr., and Ms. Walker’s estate for reimbursement. Walker impleaded Union Camp and Morgan for negligence. Special Term dismissed the third-party complaint but only partially granted summary judgment to Federal. The Appellate Division reinstated the third-party complaint and granted Federal full summary judgment. Walker appealed to the Court of Appeals, and Union Camp and Morgan also appealed by permission.

Issue(s)

1. Whether the indemnity agreement executed by Ms. Walker bars a third-party negligence action against Union Camp and Morgan.

2. Whether Alexander Walker, Jr., is obligated to reimburse Federal for the full amount of the replacement shares, including the increase in cost due to Union Camp and Morgan’s delay in purchasing them.

Holding

1. No, because the indemnity agreement did not indicate an intention to waive rights or exonerate the third-party defendants from direct liability for their negligence.

2. No, because the Walkers are not responsible for losses attributable to Union Camp and Morgan’s unreasonable delay in mitigating damages.

Court’s Reasoning

The Court reasoned that Ms. Walker’s indemnity agreement allocated the risk of liability to third parties but did not waive her right to sue for Union Camp’s and Morgan’s own negligence. The agreement only protected them from claims by “some stranger to the transaction.” The court distinguished this case from those involving explicit waivers of negligence claims. Alexander Walker, Jr.’s, indemnity agreement with Federal only bound him to Federal, not Union Camp or Morgan. Regarding mitigation of damages, the Court stated that Federal was not obligated to “remunerate the third-party defendants for losses occasioned strictly by their own failure to take remedial measures within a reasonable period of time.” The Court emphasized that “the surety agreed to reimburse the third-party defendants for any loss they might reasonably sustain.” Requiring the Walkers to pay for the increased cost resulting from the delay would be inequitable, especially since Federal acquiesced in the delay. The Court remanded for a trial to determine the reasonableness of the delay and the resulting damages. The court noted the “daisy chain” effect of the interlocking indemnity agreements but stated that the parties created this situation through their agreements.