Can a Maryland state agency agree to unconditionally indemnify another state for liability arising from a product's manufacture, like a vaccine, without legislative approval?

Plain-English summary

Maryland's Secretary of Agriculture wanted to buy a veterinary vaccine (used to prevent a usually-fatal botulism-related disease in young foals) from the Michigan Department of Public Health. Michigan required, as a condition of sale, that the purchase contract contain a clause under which Maryland's Department of Agriculture would unconditionally indemnify, defend, and hold harmless the State of Michigan and its employees for any and all claims and losses arising from the vaccine's use, administration, or manufacture, including Michigan's own negligence. The Secretary asked whether any state official had authority to agree to that clause.

The Attorney General concluded that no state official had that authority. The opinion explained that Maryland's Tort Claims Act only waives sovereign immunity for torts committed by Maryland's own "State personnel" acting within the scope of their duties and covered by state insurance, none of which applied to Michigan's conduct in manufacturing the vaccine. Because the indemnity obligation would instead arise as a contractual promise, the relevant question became whether an official agreeing to it would be acting within the scope of contracting authority. The opinion found that this particular clause exceeded that authority: it exposed the state to potentially unlimited, uninsured, unappropriated liability, in tension with the constitutional and statutory rule that state financial commitments must be tied to available appropriations. The opinion added that indemnity clauses are not inherently improper, ordinary indemnification tied to insurance or existing appropriations is a routine and permissible contracting practice, but this open-ended clause went too far, and only the General Assembly could authorize a state officer to accept that degree of risk.

Currency note

This opinion was issued in 1986. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Could a Maryland state agency agree to pay unlimited damages on behalf of another state as a condition of a purchase contract?
Under this 1986 opinion, no. The Attorney General concluded that a contracting officer's authority does not extend to accepting an indemnity clause that exposes the state to potentially unlimited, uninsured liability with no tie to available appropriations.

Are indemnity clauses in state contracts always improper?
No. The opinion specifically said indemnity clauses are not per se improper and that ordinary indemnification, covered by insurance or existing appropriations, can fall within a contracting officer's normal discretion.

Who could authorize a state agency to accept a broad indemnity obligation like the one Michigan required?
Only the General Assembly, according to the opinion. Absent express legislative authorization, the opinion concluded that a contracting officer lacked authority to agree to a clause of this scope.

Background and statutory framework

The Maryland Tort Claims Act waives the state's sovereign immunity for torts, but only within specific limits: the tortfeasor must be "State personnel" acting within the scope of official duties and free of malice or gross negligence, and the claim must fall within the state's insurance coverage. The proposed indemnity clause did not fit these limits because it would make Maryland responsible for the acts of Michigan's own employees, who are not Maryland "State personnel," for conduct potentially including gross negligence, and for a risk not covered by the state's purchased insurance or self-insurance program.

Because the clause would operate as a contractual promise rather than a direct tort waiver, the opinion analyzed it under Maryland's separate waiver of sovereign immunity for contract actions, which turns on whether the official agreeing to the clause acted "within the scope of the authority of the official." The opinion recognized that contracting officers generally have broad discretion to agree to terms reasonably related to a bargain, including indemnity clauses that reflect ordinary commercial practice. But it found that discretion is not unlimited: Maryland's Constitution and procurement statutes require that binding financial commitments be linked to legislative appropriations, and separately impose civil and criminal penalties on officials who commit the state to pay amounts beyond what has been appropriated. An open-ended indemnity clause with no cap and no funding source, the opinion reasoned, would improperly constrain the Governor's and General Assembly's future budgeting discretion if a large judgment were ever entered against the state under it, making the clause contrary to public policy even though no immediate outlay of funds would occur unless and until the legislature appropriated money to pay a judgment.

Citations

Statutes:

• SG §12-101(a) and §12-101 (Maryland Tort Claims Act's waiver of sovereign immunity for torts)
• SG §12-104(b)(4) and §12-104(a) (limits on the tort waiver: scope of duties, no malice or gross negligence, insurance coverage)
• SF §9-105 and §9-105(b)(2) (State Insurance Program and Treasurer's authority to purchase additional insurance)
• SG §12-201(a) (waiver of sovereign immunity in contract actions based on written contracts)
• SF §11-101(g) (definition of "contract modification")
• SF §11-202(b)(1) (Procurement Law's inapplicability to this intergovernmental contract)
• SF §13-406, §13-602, §13-705, and §18-501 through 18-515 (procurement law provisions reflecting mandatory clauses and procedures)
• COMAR 21.07.01 through 21.07.04 (procurement regulations)
• Article III, §32 of the Maryland Constitution (no withdrawal from Treasury except by appropriation)
• SF §13-705(b), (c), and (d) (multi-year contracts contingent on future appropriations)
• SF §7-237, §7-237(b), and §7-237(a) (civil and criminal penalties for contracting beyond appropriations)
• SG §12-204 (Governor's duty to include judgment amounts in the budget bill)
• SF §9-104(a) (Treasurer's responsibility for the State Insurance Program)

Cases:

• Austin v. City of Baltimore, 286 Md. 51, 56 n. 3 (1979)
• MTA v. Granite Constr. Co., 57 Md. App. 766, 780-81 (1984)
• Arizona v. California, 373 U.S. 546, 580 (1963)
• 68 Opinions of the Attorney General 242, 246 (1983)
• Board of Educ. v. Allender, 206 Md. 466, 475 (1955)
• Hanna v. Board of Educ., 200 Md. 49, 51 (1952)
• 57 Opinions of the Attorney General 88 (1972)
• Smith v. Ouzts, 103 S.E.2d 567, 569 (Ga. 1958)
• Modjeski & Masters v. Pack, 388 S.W.2d 144, 148 (Tenn. 1965)
• 68 Opinions of the Attorney General 382 (1983)
• 34 Comp. Gen. 824 (1975)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1986/Volume71_1986.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

PUBLIC CONTRACTS

Indemnity Clauses—Agreement Under Which Department Of Agriculture Would Unconditionally Indemnify Another State For Liability Arising From Manufacture Of A Vaccine Is Not Authorized Under Current Law.

December 1, 1986

The Honorable Wayne A. Cawley, Jr.
Secretary, Department of Agriculture

You have requested our opinion concerning your authority, or that of any other State official, to enter a contract under which the Department of Agriculture would unconditionally "indemnify, defend, and save harmless" another state and its employees in connection with the manufacture and use of a vaccine. The particular indemnity clause in question is contained in a proposed agreement under which the Department of Agriculture would purchase a certain veterinary vaccine from the Michigan Department of Public Health.

For the reasons given below, we conclude that no State official has authority to agree to this indemnity clause.

I
Background

The Michigan Department of Public Health sells a vaccine that is useful in preventing a serious disease in horses. The Department of Agriculture would like to purchase the vaccine for distribution to Maryland veterinarians.

As a condition of sale, the Michigan Department of Public Health requires that the sales contract contain the following indemnity clause:

"The Contractee assumes full liability for the use, administration and manufacture of the Toxoid and agrees to indemnify, defend, and save harmless the State of Michigan, Michigan Department of Public Health, and any other subdivision, officer, agent or employee of the State of Michigan from any and all claims and losses which may arise from the use, administration or manufacture of the Toxoid, including any action or omission by the Contractee, or other persons receiving this Toxoid from the Contractee."

II
Scope of Statutory Waiver of Immunity

A. Introduction

"The law is well established that the State or one of its agencies may not by affirmative action or by failure to plead the defense, waive the defense of governmental immunity in the absence of express statutory authorization, or by necessary implication from a statute." Austin v. City of Baltimore, 286 Md. 51, 56 n. 3 (1979). When the General Assembly has waived immunity, the scope of the waiver is no greater than that delineated in the statute. MTA v. Granite Constr. Co., 57 Md. App. 766, 780-81 (1984). In general, "the standard of liability is strictly construed even under statutes which expressly impose liability on the sovereign." 3 Sutherland Statutory Construction §62.01, at 65 (Sands ed. 1974).

B. Torts

The Maryland Tort Claims Act effects a limited waiver of sovereign immunity in tort actions. §12-101(a) of the State Government Article ("SG" Article). The principal limitations on this waiver are:

1. the tort must have been committed by a person within the scope of the term "State personnel," SG §12-101;

2. the tortious act or omission must be "within the scope of the public duties of the State personnel" and must be free of "malice or gross negligence," SG §12-104(b)(4); and

3. the tort must be within the State's "insurance coverage under Title 9 of the State Finance and Procurement Article," SG §12-104(a).

Under the proposed indemnity clause, the Department would assume the risk of exposure to potential damages originating in tortious conduct beyond that contemplated by the Tort Claims Act. First, the clause would require the Department to indemnify the State of Michigan and its employees, who obviously are not "State personnel" under the Tort Claims Act. Second, the indemnity clause, phrased in terms of "any and all claims and losses arising from the ... manufacture" of the vaccine, apparently extends even to grossly negligent acts or omissions in Michigan's manufacture of the product. Finally, the clause would impose on the Department a risk that is covered neither by purchased insurance nor by the State's self-insurance program. See §9-105 of the State Finance and Procurement Article ("SF" Article).

C. Contracts

Nevertheless, the Tort Claims Act is not directly applicable to the proposed indemnity clause. The Department's liability under the clause, though directly traceable to tortious acts by Michigan employees, would arise as a matter of contractual obligation. The victim of the tortious act or omission would sue Michigan in tort, but Michigan, in turn, would sue the Department in contract.

The State has generally waived sovereign immunity in contract actions:

"Except as otherwise expressly provided by a law of the State, the State, its officers, and its units may not raise the defense of sovereign immunity in a contract action, in a court of this State, based on a written contract that an official or employee executed for the State or 1 of its units while the official or employee was acting within the scope of the authority of the official or employee." SG §12-201(a).

Hence, the determinative question, we think, is whether an official or employee would be acting "within the scope of [his or her] authority" in agreeing to the indemnity clause in the vaccine sales agreement. If so, the waiver of immunity in contract would apply. If not, the clause would be unenforceable, because neither the contract nor tort waivers would apply.

III
Contracting Authority

An official authorized to enter a contract on behalf of the State or a State agency necessarily has broad authority to agree to terms that are reasonably related to the bargain. See Arizona v. California, 373 U.S. 546, 580 (1963). Although some contract terms are standard, others might be a product of bargaining over the specifics of a contract, and, as here, still others might be insisted upon by the seller. The State contracting officer negotiates a contractual arrangement "just as a private citizen or corporation might do" and must have "similar flexibility to prescribe", or, we think, accept, "contract specifications that fulfill [the agency's] own perceived needs." 68 Opinions of the Attorney General 242, 246 (1983). This essential discretion in the contracting process has been recognized by the courts. E.g., Board of Educ. v. Allender, 206 Md. 466, 475 (1955); Hanna v. Board of Educ., 200 Md. 49, 51 (1952).

An indemnity clause might well be reasonably incident to the contractual purpose. If the seller of a product is required to bear the risk of a given liability, that risk will be reflected in the price of the product. It might be to the State's advantage to negotiate a lower price by shifting risk to the State through the device of an indemnity clause.

Hence, we are not suggesting that indemnity clauses are per se improper. For example, agreeing to indemnify a vendor against losses associated with the State's use of a product might reflect routine commercial practice and fall within the discretion of a contracting officer.

Yet the discretion of a contracting officer, in this and other respects, is not unlimited. The Procurement Law, for example, specifies various mandatory procedures and clauses. Legal limitations on the officer's authority to contract, whether grounded in the Maryland Constitution, pertinent statutes, or public policy, are necessarily a component of any agreement with the State. "The rule is firmly established that one who makes a contract with a municipal corporation or administrative agency is bound to take notice of the limitations of its powers to contract." Hanna v. Board of Educ., 200 Md. at 57.

In our view, this State's public policy precludes the entering of a contract that purports to impose upon the State unlimited liability arising from the manufacture of a product. Both the Constitution and the statutes require a link between contractual commitments and appropriations. Thus, Article III, §32 of the Constitution, which prohibits the withdrawal of money from the Treasury "except in accordance with appropriation by Law," applies to any binding commitment for the payment of State funds and requires that multi-year contracts be made contingent upon future appropriations. See 57 Opinions of the Attorney General 88 (1972). Cf. SF §13-705(b), (c), and (d). Moreover, SF §7-237 provides for civil liability and criminal penalties if "any officer or agent of the State" responsible for certain categories of contracts:

"(1) Makes or participates in making for any purpose a contract that purports to bind the State to pay any amount unless money has been appropriated for that purpose and remains unspent;

(2) Creates a deficiency; or

(3) Incurs a liability or spends money in excess of the applicable appropriation." SF §7-237(b).

The indemnity clause in the proposed Michigan contract is flatly inconsistent with the public policy that these particular provisions express. The effect of the clause is to expose the Department to potentially unlimited liability under circumstances in which no funds are appropriated to fund that potential liability, the risk is uninsured, and the indemnity clause itself does not condition the Department's obligation on future appropriations having been made available.

To be sure, under the statute waiving sovereign immunity in contract, this indemnity clause would not result in any actual outlay of money from the Treasury unless a budget bill were enacted with appropriations sufficient to satisfy a final judgment arising out of the indemnity clause. SG §12-201(a). The General Assembly would retain its ultimate authority to decide whether to provide funds for this purpose. See 68 Opinions of the Attorney General 382 (1983).

But this possibility does not cure the legal difficulty created by contracting for such a potential liability. If a judgment were rendered under the indemnity clause, the Governor then would be obliged to include in the budget bill an amount sufficient to fund the judgment. SG §12-204. To this extent, the Governor's discretion over the formulation of the budget bill would be impaired, and, given that the potential liability under the indemnity clause might be huge, this impairment of the Governor's discretion over the allocation of State resources might well be significant. A contract having that restrictive effect on the Governor's discretion is contrary to public policy: "Obviously ... any contract which controls or restricts the discretion vested in a public officer or public body is contrary to public policy and void." Smith v. Ouzts, 103 S.E.2d 567, 569 (Ga. 1958). See also Modjeski & Masters v. Pack, 388 S.W.2d 144, 148 (Tenn. 1965). See generally 63 Am.Jur.2d Public Officers and Employees §336, at 913 (1984).

The exposure in the proposed indemnity clause is extraordinary. It far exceeds that arising from ordinary indemnity clauses, where the risk is met either by insurance or by the availability of appropriations.

In our view, if a State official is to be authorized to incur a risk of liability of this kind, the General Assembly should grant that authority expressly. Absent such legislative authorization, we do not believe that a contracting officer has authority to agree to this indemnity clause.

IV
Conclusion

In summary, it is our opinion that, in the absence of appropriate insurance, a contract provision purporting to require the State to indemnify without limit the State of Michigan and its employees for any damages arising from their acts or omissions in the manufacture of a vaccine cannot be given legal effect. Assent to such a provision would be outside the authority of any State officer or employee.

We recognize the difficulty presented when the sole source of an important product conditions its availability on agreement to an indemnity clause like this. Nevertheless, the authority to assent to such an indemnity provision must come from the General Assembly.

The Treasurer is responsible for the State Insurance Program. SF §9-104(a). Proposed indemnification agreements that would impose a casualty risk on the State should be discussed with the Treasurer so that the insurance consequences can be ascertained.

Absent insurance or already available appropriations to fund an indemnity agreement, the agreement itself should indicate expressly that any indemnity payment is conditioned upon available appropriations at the time of the loss. See 34 Comp. Gen. 824 (1975). Language of this kind would preserve the discretion of both the Governor and the General Assembly.

This conclusion applies as well to the Board of Public Works, notwithstanding its broad authority over contract matters. Letter from Assistant Attorney General Margaret Lee Quinn to Board of Public Works (April 29, 1986).

Stephen H. Sachs
Attorney General
Jack Schwartz
Chief Counsel
Opinions and Advice