Indemnity provisions are a central component in any construction contract. An issue that often arises under such provisions is when one party, the indemnitor, is obligated to assume the defense of the other, the indemnitee, or, more specifically, whether the duty to defend arises at the outset of a lawsuit before any determination of the indemnitor’s fault.
Until the California Supreme Court’s recent landmark decision in Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541, California courts held that a party’s duty to defend and indemnify was triggered by a finding of liability — which effectively negated any attempt to obtain an immediate defense under an express contractual indemnity at the outset of a case before determinations of fault are rendered. See e.g., Baldwin Builders v. Coast Plastering Corp. (2005) 125 Cal.App.4th 1339; Heppler v. J.M. Peters Co. (1999) 73 Cal.App.4th 1265; Regan Roofing v. Superior Court 24 Cal.App.4th 425 (1994).
Before Crawford, California case law had not previously been reconciled with the language of Civil Code § 2778, which governs the interpretation of indemnity clauses and provides in relevant part: “In the interpretation of a contract of indemnity, the following rules are to be applied, unless a contrary intention appears: . . . 4. The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity.”
Relying on specific contract language, courts in other jurisdictions have found that there does exist a separate duty to defend against claims before determinations of liability are rendered. See e.g., Stephans & Sons, Inc. v. Municipality of Anchorage (Alaska 1981) 629 P.2d 71, 75-76; Hauskins v. McGillicuddy (Az. App. 1992) 852 P.2d 1226, 1234; Westinghouse Elec. Corp. v. Metropolitan Dade County (Fl. 3rd Dist. 1992) 592 So.2d 1134, 1135; Pancakes of Hawaii, Inc. v. Pomare Properties Corp. (Hawaii 1997) 944 P.2d 83, 88-89; Urban Investment and Development Co. v. Turner Construction Co. (Mass. App. 1993) 616 N.E.2d 829, 834; Knipschield v. C-J Recreation, Inc. (Wash. App. 1994).
With Crawford, the California Supreme Court has now aligned California with those other jurisdictions. In Crawford, several hundred homeowners sued the developer and its subcontractors, including Weather Shield (the window manufacturer) and Darrow (the framer and window installer), for alleged construction defects. The developer cross-complained against the subcontractors for express contractual indemnity, and a declaration that the subcontractors had a “present” duty to defend the developer against the homeowners’ lawsuit.
The indemnity clause in each subcontract required the subcontractor “to indemnify and save [developer] harmless against all claims for damages . . . loss, . . . and/or theft . . . growing out of the execution of [subcontractor’s] work,” and “at [its] own expense to defend any suit or action brought against [developer] founded upon the claim of such damage[,] … loss, … or theft.” Crawford 44 Cal.4th 541 at 547.
Before trial, the developer and all subcontractors except Weather Shield and Darrow reached a settlement with the homeowners. The homeowners’ claims against Weather Shield and Darrow were tried first to a jury, which found that Darrow was negligent but that Weather Shield was not. Darrow then settled all claims against it.
The developer’s claim for indemnity against Weather Shield for its settlement payment and attorneys’ fees and costs was tried next. Even though the jury found Weather Shield was not negligent, the trial court ruled Weather Shield had a duty to defend the developer from the outset of the homeowners’ lawsuit. The court, therefore, awarded the developer a portion of its attorneys’ fees and costs (approximately $134,000). The trial court ruled Weather Shield had no duty to reimburse the developer for its settlement with the homeowners. The Court of Appeal and Supreme Court affirmed the trial court’s rulings.
Crucially, the Supreme Court held that, even though indemnity clauses are strictly interpreted in favor of the indemnitor (in contrast to insurance policies, which are strictly interpreted in favor of the insured), the subcontract provisions “expressly, and unambiguously, obligated Weather Shield to defend, from the outset, any suit against [the developer] insofar as that suit was ‘founded upon’ claims alleging damage or loss arising from Weather Shield’s negligent role in the [project].” Crawford, 44 Cal.4th at 553. Weather Shield thus had a contractual obligation to immediately defend the developer without consideration of Weather Shield’s liability. In other words, the Supreme Court interpreted the indemnity clause in Weather Shield’s subcontract more like an insurance policy than an indemnity agreement.
In reaching its decision, the Crawford Court distinguished the case from the previous cases requiring a liability determination before a duty to defend is triggered; see Baldwin Builders, supra, and Heppler, supra, and specifically overruled Regan Roofing, supra. In so doing, the Supreme Court held the language in Civil Code § 2778 (quoted above), as well as the language in Weather Shield’s subcontract, makes clear that “indemnity” involves two separate and distinct duties: the duty to defend — triggered upon tender of the claim — and the duty to indemnify in the event of liability.
While Crawford is a major development in the law of indemnity, its effect on California residential construction contracts entered into after 2006 is uncertain. California’s legislature amended Civil Code § 2782 in 2005 and 2007 to modify the permissible scope of indemnity clauses in residential construction contracts entered into after January 1, 2006, and January 1, 2008. Further, Assembly Bill 2738 is now pending before California’s legislature and, if passed, will again radically revise the landscape of indemnity law in the context of residential construction contracts, and specifically in connection with the duty to defend. For non-residential construction and other contracts in California, Crawford will have continuing and profound relevance, and should be carefully factored into a party’s business and litigation strategies.
Given that courts will interpret specific contract language when determining when the duty to defend is triggered, all contractors, including those operating outside California, should consider Crawford when drafting or consenting to an indemnity clause. Without careful consideration, a contractor may be unaware of exactly what risks it is assuming. The contractor may be unpleasantly surprised when forced to immediately defend another party at the outset of a lawsuit before any finding the contractor is at fault.
This article was originally published in URS’ Claims and Dispute Resolution Group’s newsletter