A recent ruling from the Georgia Court of Appeals has drawn a sharp line on how indemnity agreements interact with insurance payouts in commercial contract disputes.
The decision, issued on June 24, in Gila, LLC v. Kapsch Trafficcom USA, Inc., stemmed from a tolling system failure that triggered a class action and raised thorny questions about who ultimately pays for the defense.
Kapsch Trafficcom USA, Inc., the primary contractor behind the RiverLink electronic tolling system used on bridges over the Ohio River, subcontracted Gila, LLC to manage the back-office invoicing. When drivers began receiving late notices without ever getting an initial toll invoice, confusion turned into litigation. The system’s failures led to a consolidated class action suit filed by motorists who claimed they had been unfairly penalized.
To settle the lawsuit, Kapsch paid a $100,000 deductible, while its insurer covered the rest of the initial defense and settlement costs. Later, when the insurer stopped paying, Kapsch took on the remaining legal expenses. Kapsch then sued Gila for breach of contract, claiming Gila had failed in its duty to perform, to defend, and to indemnify the company for all losses stemming from the class action.
At trial, the court sided mostly with Kapsch, ruling that Gila was liable under its subcontract for indemnification and owed a duty to cover costs related to the class action. The court also dismissed Gila’s counterclaims for unpaid invoices and for a detailed financial reconciliation, citing the subcontract’s mandatory dispute resolution clause.
But the appellate court partially reversed that decision. Applying New York law, which governed the subcontract, the court ruled that Kapsch could not recover costs already paid by its insurer. The court cited Inchaustegui v. 666 5th Avenue Ltd. Partnership, a precedent that distinguishes contract law from tort law when it comes to damages. The rule: in contract disputes, damages must reflect actual losses borne by the plaintiff. If an insurer paid the legal fees, then Kapsch itself did not incur that economic loss.
The court also trimmed the scope of declaratory relief issued by the lower court. While Gila may still be on the hook for future defense costs tied to the class action, the court ruled that a declaratory judgment could not be used retroactively to require reimbursement for past expenditures. That, it said, falls into the realm of damages—not declarations about future obligations.
What remains is Kapsch’s breach of contract claim, which the court left intact, noting that unresolved factual issues make it unsuitable for summary judgment. Gila’s counterclaims remain dismissed due to its failure to engage in the subcontract’s prescribed alternative dispute resolution process prior to filing.
Although the case doesn’t pivot on insurance policy wording, it delivers a pointed reminder to insurers, brokers, and legal teams drafting commercial contracts. Indemnity provisions, while broad, won’t override the basic principle that damages in contract law must reflect real financial loss. When insurance has already covered the cost, the insured party may not be entitled to recover those amounts again through indemnity.
