#2 – Subcontractor must Pay for General Contractor Defense, Including its Litigation Mistakes, after Ignoring General Contractor’s Tender Under Express Indemnity Provision

Graham C. Mills | Newmeyer & Dillion, LLP

A recent decision by the Court of Appeal, Valley Crest Landscape Development, Inc. v. Mission Pools of Escondido (2015) 238 Cal.App.4th 468, reinforces the right of a general contractor to defense and indemnity by a subcontractor when the parties have contractually allocated risk to the subcontractor. To ensure compliance with that right, the Valley Crest court imposed a strong penalty against a subcontractor that defaulted on its obligation.

The Valley Crest decision arose from a personal injury lawsuit filed against Valley Crest and Mission Pools, among others, for injuries suffered when an intoxicated hotel guest dove into a swimming pool at the St. Regis Resort in Dana Point and suffered severe injuries, rendering him a quadriplegic. Valley Crest was the general contractor for the construction of the pool and Mission Pools was the subcontractor that built the pool.

Upon being sued, Valley Crest tendered its defense to Mission Pools pursuant to an express indemnification provision in their contract which required Mission Pools to (1) indemnify Valley Crest for “all liabilities, penalties, costs, losses, damages, expenses, causes of action, judgments or other claims resulting from injury to or death sustained by any person” which arose out of Mission Pool’s work under the subcontract; and (2) maintain in force a policy of commercial general liability insurance with Valley Crest as an additional insured. Although Mission Pools initially obtained the required generally liability policy, it allowed the policy to expire several years before the hotel guest’s injury. Moreover, after receiving Valley Crest’s tender, Mission Pools never responded.

Valley Crest also tendered its defense to National Union Fire Insurance Company (“National Union”), which insured Valley Crest pursuant to a policy of commercial general liability insurance during the relevant time period. National Union accepted the tender and paid for Valley Crest’s defense.

In the underlying personal injury litigation, only some of the allegations about the swimming pool implicated work performed by Mission Pools and, after initial discovery, Mission Pools successfully moved for summary judgment. Valley Crest similarly moved for summary judgment, but its motion was denied because Valley Crest’s attorneys failed to properly object to certain evidence offered in opposition to the motion. Ultimately, the personal injury claims against the hotel defendants settled for over $4.5 million, and the claims against Valley Crest and Mission pools settled for $250,000.

After the personal injury lawsuit settled, Valley Crest and National Union pursued a cross-complaint against Mission Pools to recover the amounts paid in defense and settlement of the underlying in claim. Valley Crest sued Mission Pools for breach of the 2 express indemnity obligation in the subcontract, and National Union sued Mission Pools for equitable subrogation under the terms of the subcontract. Following a non-jury trial, the trial court awarded National Union the full amount of its claim ($421,161.54) and awarded Valley Crest recovery of its self-insured retention under the National Union policy ($250,000). Mission Pools appealed.

On appeal, the judgment in favor of Valley Crest was overturned on the grounds that Valley Crest’s claim for express indemnity was legal, not equitable, and the trial court erred in denying Mission Pools’ request for a jury trial. However, the Court of Appeal affirmed the trial court’s judgment in favor of National Union on its claim for equitable subrogation. In so holding, the court’s main focus was on whether “balancing the equities” favored imposing the loss on National Union, Valley Crest’s general liability insurer, or Mission Pools, which had entered into an express agreement to defend and indemnify claims such of those alleged in the underlying personal injury lawsuit. Relying Interstate Fire & Casualty Ins. Co. v. Cleveland Wrecking Co. (2010) 182 Cal.App.4th 32, the Court of Appeal concluded that Mission Pools should bear the loss because its equitable position was inferior to that of National Union. Specifically, (1) National Union did not cause the loss and Mission Pools was alleged to have contributed to it; (2) Mission Pools expressly agreed to indemnify Valley Crest against the type of loss incurred, while National Union provided only general liability insurance; (3) National Union received insurance premiums as compensation for undertaking the risk, but Mission Pools also accepted consideration in return for its obligations under the subcontract; and (4) while National Union complied with its obligations to Valley Crest under the insurance policy, Mission Pools did not comply with its obligations and “did not even respond to Valley Crest’s tender of defense.” The Court of Appeal also faulted Mission Pools for breaching its agreement to maintain general liability insurance coverage with Valley Crest named as an additional insured. Ultimately, factor number 4, Mission Pools default on its contractual obligations and failure to even respond to Valley Crest’s tender, “tip[ped] the balance against Mission Pools” and led the Court of Appeal “to conclude the trial court did not abuse its discretion” in entering judgment in favor of National Union.

The Court of Appeal also addressed Mission Pools’ argument that it should not be held liable to damages arising from the failure of Valley Crest’s attorneys to properly object to certain pieces of evidence in the personal injury lawsuit when Valley Crest sought to have those claims dismissed in a summary judgment motion. While agreeing that Mission Pools raised a “valid point,” the Court of Appeal was not persuaded “because the problem with objections would not have arisen if Mission Pools had fulfilled its contractual obligation and accepted Valley Crest’s tender of defense in the first place.” The Court of Appeal’s repeated comments…

To finish reading this article

Leave a Reply

%d bloggers like this: