California Court of Appeals Weighs in on the Duty to Defend and Suggests “Fetch” New Motion

Garret Murai | California Construction Law Blog | June 5, 2019

It’s not uncommon for construction contracts to include indemnity provisions requiring the indemnitor (typically, the lower-tiered party) to “defend, indemnify and hold harmless” the indemnitee (typically, the higher-tiered party) from third-party claims. But when an indemnitor refuses to defend an indemnitee, who gets decide that issue, the jury or the court?

In Centex Homes v. R-Help Construction Company, Case No. B276708 (March 11, 2019), the 2nd District Court of Appeal answered that question. They also framed the issue better than I could, so I’ll let the court speak for itself:

A subcontractor is hired by a developer to install utility boxes in a subdivision. The subcontract contains a clause requiring the subcontractor to indemnify the developer for all claims arising out of the subcontractor’s work.

A plaintiff in an underlying tort action brings an action against the subcontractor and the developer for injuries allegedly arising from the subcontractor’s work. The subcontractor does not defend the developer.

The trial court submits the question of the subcontractor’s duty to defend to a jury. The jury finds the plaintiff’s injuries were not caused by the subcontractor’s work. Does this end the matter? No.

The end of the trial is not the end of the case. The parties are back to the beginning on the issue of duty to defend. Why? Where plaintiff in an underlying tort action alleges that his injuries arose out of the subcontractor’s work, the developer is entitled as a matter of law to a defense under the indemnity clause. It is error to submit the question of the subcontractor’s duty to defend to a jury. We reverse and remand.

Background

Centex Homes (Centex) contracted with R-Help Construction Company, Inc. (R-Help) to trench, install and inspect utility boxes and conduits at a residential construction project in the City of Thousand Oaks, California. The subcontract required R-Help to defend and indemnify Centex from all claims “to the extent such Claim(s) in whole or in part arise out of or relate to [R-Help’s work].”

Following R-Help’s completion of its work, a lawsuit is filed by Matthias Wagener who was injured when he fell into a utility box. What Mr. Wagener was doing standing on top of a utility box, I don’t know, but he sued both Centex and R-Help alleging that the “defendants” negligently managed, maintained and inspected the utility box cover such that it created an unstable platform.”

During the discovery phase of the litigation, Mr. Wagener was asked about the basis of his claims, to which he responded:

It appears as though R-Help installed and thereafter abandoned the subject junction box or hand holder and adjoining conduit, having installed the lid without the prescribed bolts specifically designed to keep the SCE lid bolted to the junction box. Acting as Centex'[s] agent, R-Help and Centex are both jointly and severally liable to plaintiff for the injuries he suffered and the damages he sustained.

I’m guessing he had help with that response. At any rate, after receiving Mr. Wagener’s response, Centex tendered Mr. Wagener’s claim to R-Help demanding that R. Help defend and indemnify Centex pursuant to the subcontract. After R-Help failed to respond, Centex filed a cross-complaint against R-Help for breach of contract, indemnity and declaratory relief.

Centex later settled with Mr. Wagener, leaving Centex’s cross-complaint against R-Help to be decided.

At the subsequent trial between Centex and R-Help, contradictory evidence was presented by  the parties. Centex’s witnesses testified that the utility box was installed by R-Help, while R-Help’s witnesses testified that it wasn’t. After the case was presented to the jury, the jury found that R-Help did not install the utility box and had no duty to defend Centex.

Centex appealed.

The Court of Appeal Decision

For those of us who practice regularly in the area of construction law the issue on appeal was pretty straightforward: A contractual duty to defend implies an immediate duty to defend. After all, what’s the point of including a defense obligation in a contract if a party can just punt the duty down the road, by which time, even if a trier-of-fact was to determine that there was a duty to defend it would be too late anyway?

Well, that’s exactly what Centex argued on appeal. Citing Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541, Centex argued that the California Supreme Court had held “that the duty to defend . . . arises immediately upon the proper tender of defense . . . and before . . . litigation has determined whether indemnity is actually owed.”

The Court of Appeal agreed:

Here Wagener claimed his injuries arose out of or related to R-Help’s work for Centex. Under Crawford, the duty to defend arose immediately upon the proper tender of defense of a claim embraced by the indemnity agreement. The duty to defend was not a question of fact for the jury; the trial court was compelled to determine as a matter of law that Wagener’s claim was embraced by the indemnity agreement.

The Court of Appeal did caution, however, that an escape hatch does exist. Quoting the Supreme Court in Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 289, 298, an insurance case, the Court of Appeal noted:

It would be pointless . . . to require an insurer to defend an action where the undisputed facts developed early in the investigation conclusively show, despite a contrary allegation in the complaint, that the underlying acts occurred on a date when the policy was not in effect or at a location concededly not covered by the policy.

The Crawford decision has even spawned a specific indemnity-related motion, the Crawford-motion, filed by an indemnitee (i.e., the party being indemnified) against an indemnitor (i.e., the party providing the indemnity) to force an indemnitor to defend an indemnitee pursuant to an indemnity agreement. Note: even if an indemnity agreement does not expressly include a defense obligation, a defense obligation will be implied, unless expressly waived. See Civil Code section 2778.

Interestingly, the Centex decision also seems to suggest that an indemnitor could  file a motion, let’s call it a Centex-motion, to get out of the obligation to defend an indemnitee, and perhaps even, as a means of avoiding liability altogether since most defense and indemnity obligations are premised on some fault or presumed fault of the indemnitor. Since, like one of the mean girls in the movie Mean Girls, I don’t have the gravitas to make up the name of a new motion (recall Gretchen’s attempt to get the term “fetch” to catch on), let’s just call it what it is: a motion for summary judgment.

Conclusion

The Centex decision confirms that the duty to defend is immediate and, as can be surmised from the Crawforddecision although it’s not expressly stated in that decision, is not a factual issue to be determined by a jury. The Centexdecision also suggests that an indemnitor subject to a defense obligation could potentially file a motion (a Centex-motion) to avoid defense obligations if it can conclusively show by undisputed facts that no defense is owed under the indemnity agreement.  That is so “Fetch!”

Construction Law Practice Tip: Indemnity Provision Details Matter

Pierre Grosdidier | Haynes and Boone LLP | February 5, 2019

In the usual construction contractual chain, the owner has a contract with a general contractor (“GC”), and likewise the GC with a subcontractor. Indemnity provisions typically ensure that the GC indemnifies the owner, and the subcontractor indemnifies the GC if, for example, an injured subcontractor employee sues the owner in a third-party over action (Figure). At least, that is the way it should have worked—but did not—when a Port Authority, Schneider Electric, and Oliver Communications entered into contracts to install security cameras on a bridge.

Burness, an Oliver employee, sued the Port Authority for an injury sustained on the job site. The Port Authority sought indemnification from Schneider, which eventually agreed to pay a settlement to Burness. Schneider then moved for summary judgment against Oliver for indemnification. The trial court granted the motion and awarded Schneider over $1.2 million against Oliver, but the Amarillo Court of Appeals reversed and denied judgment for Schneider, for two reasons. As a threshold matter, the court reiterated that, under Texas law, “indemnity agreements are strictly construed in favor of the indemnitor.”

The subcontract obligated Oliver to “indemnify, save, and hold harmless” Schneider, its agents and employees, “and all parties indemnified by Contractor in Contractor’s Contract.” In this case, the “Contractor’s Contract” was the contract between the Port Authority and Schneider. Thus, Oliver was allegedly contractually obligated to indemnify Schneider and anyone Schneider was obligated to indemnify. But, after scrutinizing the owner-GC contract, the court determined that Schneider had no obligation to indemnify the Port Authority. 

The Contract between the Port Authority and Schneider boiled down to a purchase order that contained no indemnity provision, and that did not incorporate the only document that included an owner-GC indemnity provision (a request for proposal).4 The court held that Schneider, in its motion for summary judgment, failed to prove that it had a duty to indemnify the Port Authority, which meant that Oliver had no duty to indemnify Schneider for Burness’s claim against the Port Authority.5 Schneider, therefore was, not entitled to summary judgment.

The court then turned to the scope of Oliver’s indemnification duty. The subcontractor agreed to indemnify against claims “arising by reason of the death or bodily injury … to the extent caused in whole or in part by any negligent act or omission of Subcontractor [Oliver], [Oliver’s] employees, agents, suppliers, subcontractors or anyone for whose acts subcontractor may be liable and [Oliver] expressly so agrees, whether or not said liability … arises in part from the negligence of Contractor [Schneider] or any party indemnified by [Schneider] in Contractor’s Contract.

Citing to prior Texas appellate cases that have addressed this issue, the court held that this provision required some act of negligence by Oliver or those under it to trigger Oliver’s indemnification obligation. Oliver had no duty to indemnify Schneider and its indemnitees if the latter were “the sole cause of the injury.” But, the court added, the factual record contained insufficient evidence to raise a question of fact regarding the negligence of Burness, Oliver, and those under Oliver. For this additional reason, Schneider was not entitled to summary judgment. There being no basis to Schneider’s summary judgment motion, and inadequate evidence adduced to counter Oliver’s no-evidence motion for summary judgment, the court reversed the trial court and rendered judgment for Oliver.

Counsel’s takeaway from this case is straightforward: check that all indemnity provisions are in place in the construction contractual chain and, when seeking indemnity under a provision such as Schneider and Oliver’s, look for a fact that implicates the indemnitor’s responsibility in the incident and might bar the indemnitor’s noevidence motion for summary judgment.

New Indemnity Law for Design Professionals

William Coggshall | Archer Norris | August 10, 2017

On April 28, 2017, Governor Brown signed into law Senate Bill 496 (Cannella). The Bill, which is now codified in California Civil Code §2782.8, amended the statute to provide greater protection for design professionals. Under the prior law, design professionals1 that entered into contracts with public agencies where there was an indemnity provision would only be required to indemnify the public agency for claims arising out of the negligence, recklessness, or willful misconduct of the design professional. For private works projects, the state of the law was as interpreted by the court in the onerous case UDC v. CH2M Hill decision.2  In that case, a jury determined that CH2M Hill was not negligent in performance of its services. Notwithstanding the successful verdict, the courts determined that CH2M Hill was required to pay for the defense of UDC in the underlying complaint that gave rise to the dispute.

As amended, Section §2782.8 shall apply to all contracts entered into on or after January 1, 2018, wherein a contract that purports to indemnify the indemnitee is unenforceable, except to the extent that the claims arise out of the “negligence, recklessness, or willful misconduct of the design professional.”

In addition to providing this new protection for design professionals in private works projects, the new law also provides additional protection for those design professionals performing services for public agencies. That new pertinent language is as follows:

“In no event shall the cost to defend charged to the design professional exceed to the design professional’s proportionate percentage of fault.”

The law provides that the duty to defend as well as the duty to indemnify are limited as provided in this section and it may not be waived or modified by the parties.

Please click here to read the law in its entirety.


1Design Professionals include licensed architects, landscape architects, professional engineers, and professional land surveyors.

2181 Cal. App. 4th 10 (2010).

Even When You Win, You Lose: Subcontractor’s Indemnity Obligation Enforced Despite Being Absolved of Liability at Trial

Scott Murphy | Barnes & Thornburg | July 25, 2017

In Provenzino v Macomb County2017 WL 104544 (Mich. App. 2017), the Michigan Court of Appeals reversed the trial court’s decision to dismiss a general contractor’s claim for indemnity where the plaintiff’s allegations arose “in any way” from the subcontractor’s work. The appeals court reasoned that the broad indemnity language of the parties’ agreement encompasses indemnification for the subcontractor’s conduct regardless of whether the subcontractor is foundactually negligent.

The case arose from a severe motorcycle accident in Macomb County, Michigan, during a construction project on Harper Avenue that included asphalt resurfacing and concrete reconstruction. Florence Cement Company (Florence) was the general contractor and Lois Kay Contracting Company (Lois Kay) was the asphalt subcontractor. The plaintiff was severely injured while heading southbound on Harper Avenue traveling at about 20 miles an hour; he saw friends in a local bar and attempted to turn into the parking lot. When the plaintiff turned, he encountered a 4-inch rise from the new asphalt resurfacing and lost control of his motorcycle. Plaintiff brought claims against both Florence and Lois Kay for negligence. Pursuant to its subcontract agreement with Lois Kay, Florence asserted cross-claims against Lois Kay for contractual indemnity.

The indemnity provision contained in the subcontract was broad and shifted a great deal of responsibility to the subcontractor. In pertinent part, it stated:

INDEMNIFICATION: Subcontractor agrees, and shall bind all sub-subcontractors to agree to indemnify Contractor, Owner and all other parties the Contractor is obligated to indemnity pursuant to the Prime Contract (hereinafter “Indemnities”), and to defend and hold Indemnities forever harmless from and against all suits, actions, legal and administrative proceedings, claims, demands, damages, interest, attorneys’ fees, costs and expenses of whatsoever kind or nature whether arising before or after completion of Subcontractor’s work and in any manner directly or indirectly caused or claimed to be caused by any action or negligence of Subcontractor of Sub-subcontractor, and regardless of whether directly or indirectly caused or claimed to be caused in part by a party indemnified hereunder or by anyone acting under their direction, control or on their behalf, until such time as a judgment is entered against Contractor by a court of law.

At the trial court level, Lois Kay filed a motion for summary disposition, arguing that Florence was solely negligent because plaintiff’s allegations revolved around signage, barricades, ramps, clean-up and warnings in general, and not because of Lois Kay’s milling the road surface. Relying upon Michigan’s anti-indemnity statute, Lois Kay argued that MCL § 691.991 applied and prohibited Florence from seeking indemnity for its sole negligence. The trial court agreed and dismissed the general contractor’s indemnity claim.

Cause of the injury

The Court of Appeals focused on whether the plaintiff’s injury arose from Lois Kay’s conduct. In order to make this determination, the court focused on the allegations that the plaintiff “was confronted by unclearly marked signage/cones/barrels, etc.,” as well as a differential in height of approximately inches in the asphalt. According to the plaintiff, these unreasonably dangerous conditions caused him to lose control of his motorcycle.

In construing the indemnity provision against these allegations, the appeals court examined the language of the contract according to its plain and ordinary meaning to determine whether plaintiff’s alleged injuries arose out of the subcontractor’s conduct. In reaching its decision, the court explained:

The case was not just about signage, barriers and warnings, which fell within Florence’s scope of work. Rather, plaintiff’s broad allegation that the combined defendants created an unreasonably dangerous condition included the height differential, which was the result of Lois Kay’s work. The issue is not whether Lois Kay was actually negligent; the issue is whether plaintiff’s allegations arose “in any way” from Lois Kay’s work, thereby triggering the indemnification provision.

This case illustrates the importance of paying close attention to the indemnity provisions of your contract. The failure to negotiate a fair and reasonable indemnity provision could leave you in the same position as Lois Kay – paying for the legal defense of the general contractor even when you have been absolved of liability at trial.

Indemnitor Owes Indemnity Even Where Indemnitee is Actively Negligent, California Court Holds

Garret Murai | California Construction Law Blog | June 5, 2017

Indemnity provisions are one of the most fought over provisions in design and construction contracts. But while parties generally understand the intent behind indemnity provisions — that one party (the “indemnitor”) agrees to indemnify (and often defend as well) another party (the “indemnitee”) from and against claims that may arise on a project — few understand how they are actually applied.

In a recent Court of Appeals decision, Oltmans Construction Company v. Bayside Interiors, Inc. (March 30, 2017), Case No. A147313, the California Court of Appeals for the First District examined an indemnity provision and its “except to the extent of” provision whereby a subcontractor agreed to indemnify (and defend) a general contractor from claims arising on a project “except to the extent of” the general contractor’s active negligence or willful misconduct and whether such language either: (1) bars a general contractor from seeking indemnity where the general contractor was actively negligent; or (2) simply bars a general contractor from seeking indemnity where the general contractor was actively and solely negligent, thereby, requiring a subcontractor to indemnify the general contractor where the negligence of another party may have also contributed to the injury or damage.

Oltmans Construction Company v. Bayside Interiors, Inc.

Gerardo Escobar, an employee of O’Donnell Plastering, Inc., was injured when he fell through a skylight at a construction project in Menlo Park, California.  O’Donnell was a second-tier subcontractor to Bayside Interiors, Inc., which was in turn  a subcontractor to Oltmans Construction Company, the general contractor on the project.

On April 13, 2013, Dennis Raia, an Oltman employee, was cutting a skylight on the roof of the building when Oltmans’ project superintendent instructed him to stop work and secure the opening because debris was falling on the workers below. Raia placed a wooden frame with wire mesh over the opening but did not secure it to the roof. Later, on April 17, 2013,  before Raia had returned to complete the job, Escobar came to the jobsite to erect scaffolding. While erecting the scaffolding, Escobar climbed onto the roof and while walking there fell through the opening. Escobar was not wearing fall protection gear.

Escobar filed suit against the project owner and Oltmans alleging that Oltmans negligently left an unsecured skylight opening in the roof. Oltmans in turn filed a cross-complaint against Bayside and O’Donnell alleging that it was entitled to contractual indemnity from each of them and that Bayside had breached its contractual obligation to provide certificates of insurance certifying that Oltmans was an additional insured under liability policies required from subcontractors.

The subcontract between Oltmans and Bayside contained the following indemnity provision:

[Bayside] shall, to the fullest extent permitted by law, indemnify, defend, protect and hold harmless [Oltmans] . . . from and against each and all of the following: (a) Any claims . . . arising out of (i) the scope of work of [Bayside], or (ii) the breach of obligations of [Bayside] arising from the scope of work under this subcontract . . ., or (iv) any other act or omission arising out of the work of [Bayside or its] sub-subcontractors . . . resulting in or alleged to have resulted in . . . bodily injury . . . . The indemnification and defense required by this Paragraph 11(a) shall apply in all described matters herein except to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of the contractor parties . . . , or to the extent such obligation is inconsistent with the provisions of California Civil Code 2782.05.

The subcontract between Oltmans and Bayside further provided:

[Bayside] shall not allow any consultant or sub-subcontractor to commence any work until [Bayside] obtains from such consultant or sub-subcontractor . . . an indemnification in form and substance identical to the indemnity set forth in paragraph 11 of the subcontract, with the modification that such indemnity shall be from the consultant or sub-subcontractor for the benefit of [Oltmans]

Prior to trial, Bayside moved for summary judgment arguing that the undisputed facts established that Oltmans’ employee was actively negligent in failing to secure the skylight and that due to the active negligence of Oltmans’ employee that Bayside owed no duty defend or indemnify Oltmans. In response, Oltmans argued that there was a material disputed fact whether Oltmans’ employee was actively negligent, and even if found to be actively negligent, Oltmans was nevertheless entitled to be indemnified to the extent of the negligence of others, specifically, Escobar or O’Donnell.

The trial court agreed with Bayside finding that “Oltmans’ conduct in leaving a partially cut skylight on the roof of a building for several days, without securing a cover, and failing to advise O’Donnell’s employees of the hazard clearly constitutes active negligence on Oltmans’ part.” As to Oltmans’ argument that even if it were actively negligent it was entitled to indemnity to the extent of the negligence of others, the trial court found that the words “to the extent” applied to the extent of Oltmans’ own negligence only (i.e., if Oltmans was actively negligent or guilty of willful misconduct, no indemnity is owed), and not “to the extent of” the negligence of others (i.e., even if Oltmans was actively negligent or guilty of willful misconduct, Oltmans would still be entitled to indemnity to the extent of the negligence of others).

Oltmans appealed and the Court of Appeals reversed the trial court.

The Appeal

On appeal, the Court of Appeals explained that “where, as here, the parties have expressly contracted with respect to the duty to indemnify, the extent of that duty must be determined by the contract and not by reliance on the independent doctrine of equitable indemnity.”

Thus, explained the court:

[T]he question whether an indemnity agreement covers a given case turns primarily on contractual interpretation, and it is the intent of the parties as expressed in the agreement that should control. When the parties knowingly bargain for the protection at issue, the protection should be afforded. This requires an inquiry into the circumstances of the damage or injury and the language of the contract; of necessity, each case will turn on its own facts. Thus . . . an indemnity provision that does not refer to the issue of the indemnity’s negligence will be considered to be a general indemnity clause under which the indemnity is not entitled to indemnity for its active negligence, unless the circumstances of the case and language of the contact evince a different intent by the parties.

And, here, the indemnity provision in the Oltmans-Bayside subcontract was not a general indemnity clause because it didaddress the negligence of Oltmans and provided that Bayside would indemnify Oltmans “except to the extent . . . [of] the active negligence or willful misconduct of [Oltmans].” Thus, held the Court:

The indemnity provision in the present case makes unmistakably clear that the parties intended to limit the indemnity Oltmans’ right to indemnification for liability arising out of the scope of the indemnity Bayside’s work only “to the extent” the claims arose out of Oltmans’ active negligence or willful misconduct. Had the parties intended to prohibit Oltmans from obtaining any indemnification if it was actively negligent, that prohibition could have been stated simply and straightforwardly. Rather, the provision limits the right to indemnification only “to the extent” of Oltmans’ active negligence, and no more.

Moreover, explained the Court, the Oltmans-Bayside indemnity provision specifically referenced Civil Code section 2782.05, which provides (as applicable to the case) that “provisions affecting any construction contract and amendments thereto entered into on or after January 1, 2013 that purport to insure or indemnify . . . a general contractor . . . by a subcontractor against liability for claims of death or bodily injury to persons . . . are void and unenforceable to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of that general contractor.”

“The purpose” of Section 2782.05 according to its legislative history, further explained the Court, “was to apportion liability on an equitable basis in proportion to the fault of the various parties.” Thus, held the Court, “[t]o the extent he negligence of Bayside’s sub-subcontractor contributed to the injury of is employee, as Oltmans has alleged, denying Oltmans indemnification for the portion of any liability it may occur attributable to that fault would be inconsistent not only with the language of the contractual indemnity provision but with the purpose behind section 2782.05.

Conclusion

Oltmans is a clear win for general contractors and other indemnitees who have broad indemnity (and defense) provisions in their design and construction contracts limited only by statutory anti-indemnity language.

While the Court of Appeals stated that if the parties hadintended to prohibit Oltmans from obtaining indemnity if it was actively negligent, that such a prohibition “could have been stated simply and straightforwardly,” it gave no example of such language. Ostensibly, it could be done by clarifying that an indemnitee is entitled to indemnity “except to the extent a claim arises out of an indemnitees’ active negligence or willful misconduct, whether solely or otherwise.” Whether such language or similar language would be sufficient, however, will likely have to wait for another decision.