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Spec’s lawsuit illustrates chains of indemnity claims

Indemnity obligations in contracts can get complicated. Here’s a real-world illustration, from news accounts (mainly for my students).

The story: Cascading indemnity obligations

  • Spec’s, the locally-famous Houston liquor-store chain, had its customer credit-card data hacked by criminals on at least two occasions.
  • Spec’s apparently uses a credit-card processor, FirstData, to handle transactions. That means that when Spec’s customers use credit cards, the customers’ money makes its way to Spec’s via FirstData.
  • In response to the hacking incident, Visa and MasterCard dinged FirstData for some $9.5 million to recoup Visa’s and MasterCard’s resulting expenses. [Note for students: In the previous sentence, the dollar figure is written with “million” spelled out instead of expressed with zeros; that’s the conventional way to do it when the exact amount of dollars and cents isn’t important. ]
  • FirstData in turn claimed that Spec’s was obligated to indemnify FirstData, that is, reimburse FirstData for what FirstData had to pay Visa and MasterCard. (The news reports I read don’t indicate where this alleged indemnity obligation came from.)
  • Spec’s apparently wasn’t forthcoming with the reimbursement that FirstData wanted.
  • Remember that the money from Spec’s customers’ credit-card purchases makes its way to Spec’s by first stopping along the way at FirstData.
  • Allegedly taking matters into its own hands, FirstData supposedly started unilaterally withholding money from its credit-card payments to Spec’s, to the tune of some $4.2 million.
  • Spec’s, unhappy about this turn of affairs, sued FirstData for breach of contract.
  • Complicating matters even further: Spec’s turned to its insurance carrier, Hanover, to fund Spec’s legal expenses in its lawsuit against FirstData. Apparently the insurance carrier has refused to pay.  Spec’s has now sued the insurance carrier.

See Mike D. Smith, Spec’s sues insurer over legal fee payments (Chron.com Feb. 22, 2014); Stephen Trader, Texas Retailer Says Insurer Bailed On Data Hack Coverage (Law360.com Feb. 19, 2016).

Takeaways

  1. Whenever people lose (or must pay) serious money, you can bet that they will look for ways to shift the loss to someone else.
  2. Indemnity (reimbursement) obligations in contracts are a classic way of shifting various risks of loss.
  3. Insurance policies, in essence, are contracts devoted almost exclusively to specific indemnity obligations, with various if-then prerequisites and “escape clause” exclusions and other exceptions.
  4. Insurance policies often are written in ways that give the insurance carriers some flexibility in denying coverage and refusing to indemnify the insured.
  5. Transactional lawyers can render a valuable service by getting their clients to think about insurance for the various risks that abound in business.
  6. In some contract negotiations, it might make sense to bring in one or both of the following to advise about insurance possibilities: (i) an insurance agent or -broker, and/or (ii) special counsel who know the ins and outs of insurance laws and, importantly, the coverages and exclusions in various types of insurance policy.

Comments on this entry are closed.

  • Chadwick Busk 2016-02-24, 2:10 pm

    Hi D.C. – I’m willing to bet that Spec’s duty to indemnify First Data is spelled out in the credit card processing agreement between the parties. This is typical of these relationships.

  • SURY Patrick 2016-03-04, 4:49 pm

    Understanding insurance clauses applicability conditions is quite important indeed… Sometimes pitffals are due to our ignorance or to our “belief systems” (Cf. NLP- neuro-linguistic programming).
    For example, suppose you have to sign a contract containing a lot of foreign laws to be respected. If a part of those laws seem well-known and acceptable (privacy, IP rights, etc.) you will be tempted to sign the whole without deepening the specific obligations of the other laws, just to save time, but also because one could think (“your belief systems”) that if you infringe one of them “accidentally”, your insurer will cover that accident/damage …but he probably will not.
    So, as insurers exist to cover “normal” accidents, it’s important to first understand the contract obligations (from your own Customer or Supplier contract) and to consider the related possible “accidents” and then check which kind of “accident” will be covered or not by your insurer.
    Beliefs are so comfortable and often OK …but some contain “pitfalls”. Checking our beliefs may cause us to grow.
    P.

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