A couple of lawyers have answered my call from the post below as to whether the city could actually be on the hook if somebody sues Kroll for defamation.
The end result may depend on the exact language in the agreement between Kroll and the City. Usually, a party will agree or be responsible to defend and indemnify another but only for regular negligence, not for gross negligence or willful misconduct. Defamation would normally be included in gross negligence or willful misconduct, not regular negligence.
Another, disagrees, but says the defamation claim isn’t too worrisome as long as Kroll and the city can prove that what they say about the people being fraudsters is proven to be true:
First of all, as part of the engagement contract between Kroll and the City, the City has agreed to indemnify Kroll for any actions arising from the engagement. So, as in the scenario you mention, the City would have to reimburse Kroll for its legal expenses. However, defamation is only defamation if it’s false. Which is to say, you can write all sorts of horrible things about someone but if they’re true there’s nothing they can do about it.
In case you’re wondering, here’s the actual wording of Kroll’s agreement with the city:
The Council and City agree that the City or any other party or affiliate acting on their behalf will not hold Kroll, its affiliates, its representatives or its employees legally responsible for any loss or liability to the City or any of its representatives or personnel for any claims, liabilities, or expenses relating to this engagement. Additionally, the City agrees to indemnify and hold harmless, Kroll, its affiliates, its representatives and its employees from any and all claims, liabilities and expenses arise as a result of Kroll performing services pursuant to this Agreement. This provision and other provisions in this Agreement will survive the completion or termination of this engagement.