Indecent Exposure: New Decision Confirms Subcontractors Liability To CD Damages Is Expansive

Michael Ludwig | Jones, Skelton & Hochuli, PLC | March 24, 2017

How broad is a “broad-form” indemnity provision in a construction contract?  A recent decision by the Arizona Court of Appeals has held such a provision allows a developer great latitude in recovering monies paid for settlement and also its attorneys’ fees and costs.

Amberwood Development v. Swann’s Grading, 1-CA-CV15-0786, arose from a lawsuit by homeowners against Amberwood alleging, among other things, construction defects from soil movement.  Amberwood arbitrated the dispute with some of the homeowners resulting in a $1.75 million award against it and it settled the claims of the remaining homeowners for another $723,000. Swann’s Grading had provided a defense to Amberwood for the arbitration but did not indemnify Amberwood.  This suit was Amberwood’s effort to recover indemnity from Swanns for the arbitration award and settlement.

Like many construction contracts, Amberwood’s subcontract contained a “broad form” indemnity provision which required Swanns to defend and indemnify Amberwood “from any and all claims, damages or Attorney’s fees…arising out of the acts or omissions of [Swanns]…with regard to the performance or omission of any of [Swanns] duties and obligations under the contract.”  At the bench trial, Amberwood presented expert testimony that because Swanns performed the rough and fine grading, the majority of the damages awarded “arose out of” its work. This evidence was unrebutted by Swanns  expert who only argued that Swanns work did not cause any of the claimed damages.  The trial judge agreed with Amberwood and found that 70.6 % of the litigation settlement and 72.7 % of the arbitration award were for issues that “arose out of” Swanns  work. The trial judge entered an award against Swanns to reimburse Amberwood those amounts. This award was upheld on appeal.

This case made clear several important lessons for construction defect litigants and insurers.  A broad form indemnity provision is highly advantageous for developers and disadvantageous for subcontractors.  To prevail, a developer is not required to prove that a subcontractor was negligent, it need only prove that the claims and damages sought by Plaintiffs “arose out of” the work performed by the subcontractor, even if other trades were perhaps partially responsible. Put another way, “fault” of the subcontractor is of little consequence.  Once the developer prevails, it is entitled to recover that portion of indemnity and defense fees that are attributed to the subcontractor. The former is usually determined by the jury, the latter by the judge post trial. And as made abundantly clear in Amberwood, this liability can even include being held responsible for the fu ll amount of damages even where another trade is perhaps partially responsible.   In CD cases, the attorneys’ fees and expert costs (of the developer and Plaintiff) can be as sizable as the construction defect damages at issue.

In conclusion, broad form indemnity provisions can now result in greater potential exposure to subcontractors than previously thought.  Early analysis of a subcontractors scope of work compared to claims alleged by Plaintiff should be done to assist in identifying early potential exposure.

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