Manufacturer Indemnity Agreements: Should You Sign One?

Several consumables manufacturers have been offering indemnity agreements to shield their distributors from liability arising from welding fume litigation. These indemnity agreements, where available, should always be considered by distributors to manage welding fume liability risk. However, indemnity agreements are not a “one-size-fits-all” solution to the welding fume problem.

Understand What Protection Is Being Offered – The terms of indemnification vary from manufacturer to manufacturer, and the terms offered to one distributor may be different from those offered to others. Have a lawyer carefully review the terms. A written indemnification agreement provides only the degree of protection the manufacturer has agreed to provide.

Indemnification vs. Agreement to Defend – The fact that these agreements are referred to as “indemnification agreements” is misleading. Most of the agreements being offered to distributors provide for the costs of defending fume litigation, but few actually promise to indemnify distributors in the event a judgment is rendered. In fact, most either specifically exclude any duty to indemnify, or provide that the duty to indemnify is solely at the option of the manufacturer.

Terminable at Will – Most of the indemnity agreements being offered by manufacturers can be cancelled at any time by the manufacturer for any reason. Circumstances such as a rash of plaintiff victories or a change in the business climate could cause a manufacturer to terminate these agreements at any point in the future.

Manganese Only – Manufacturer indemnity agreements typically cover claims specifically arising from alleged exposure to manganese in welding fumes. This narrow definition could preclude application of these agreements to future lawsuits, which may generally claim injury due to exposure to welding fumes without specifically identifying manganese.

Concurrent Negligence – Some indemnification agreements exclude liability for the distributors’ own negligence. Since plaintiffs often allege that each defendant was independently negligent in causing injury, the inclusion of such a clause could eliminate any obligation by the manufacturer. Distributors should seek language clarifying that the terms of indemnification apply regardless of any alleged negligence of the distributor, unless the distributor altered or changed the product or accompanying labels, inserts or marketing materials.

Marketing Tool – Whether an indemnity agreement is offered or continued by a manufacturer often depends upon marketing considerations such as meeting certain sales thresholds, or an agreement by the distributor to exclusively sell the manufacturer’s products. Because indemnification agreements are generally terminable at will, manufacturers are in a position to wield them to push sales.

Selection of Counsel – Most indemnity agreements allow the manufacturer to select counsel and direct the defense of the distributor. This term may be problematic for distributors who also have insurance coverage because the insurance carrier will likely also demand to select counsel and control the defense. In fact, an insurance carrier may very well deny coverage if deprived of the ability to select counsel and direct the defense.

For a distributor who does not have any insurance coverage for a particular claim, a manufacturer indemnity agreement is a fantastic option. An agreement to pick up the costs of defense alone will save the distributor tens of thousands. On the other hand, a distributor who is being fully defended by an insurance company, even under a reservation of rights, probably has little need for a manufacturer indemnity agreement, especially if signing the agreement could jeopardize insurance coverage. A distributor who has partial coverage, but is still paying a portion of the costs of defense out of his own pocket, will need to closely evaluate the terms being offered pursuant to an indemnification agreement, alongside the terms of his insurance coverage, and will most likely have to negotiate a compromise between the manufacturer and insurance carrier regarding selection of counsel.

Lastly, distributors should consider pooling their collective bargaining power to gain more leverage in negotiating with the manufacturers. A common front would make it more difficult for manufacturers to dictate terms.

Gases and Welding Distributors Association
Meet the Author
GAWDA Joint Defense Fund Coordinating Counsel Mike Degan is a partner with Blackwell Sanders Peper Martin LLP, in Omaha, Nebraska. Members can reach him at (402) 964-5000 and at mdegan@blackwellsanders.com.