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Inside This Issue:

  • Indemnification Clause in Subcontract Creates Automatic Duty to Defend Prime Even if No Duty is Specifically Stated.
  • CGL Insurance Carriers Had no Duty to Defend Design Professional on
  • Claims Arising out of Professional Services.
  • Site Safety: General Contractor not Liable to Injured Subcontractor Employee.

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Article 1
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Indemnification Clause in Subcontract Creates Automatic Duty to Defend Prime Even if No Duty is Specifically Stated

A subcontractor that agreed to indemnify the prime contractor for damages caused by its negligent performance had a broader duty to defend the prime in court against all claims arising out of the subcontractor’s performance.  This duty begins when the claim is filed.  It is not conditional on whether or not the subcontractor is ultimately found to have performed its services negligently or properly.  The duty to defend is essentially a duty to pay on behalf of the prime contractor regardless of whether damages are never awarded or the subcontractor is otherwise not obligated to indemnify the prime contractor for damages.

In the case Crawford v. Weather Shield Mfg., Inc., 187 P.3d 424, 44 Cal.4th 541 (2008), the Supreme Court of California addressed the question of whether the subcontract indemnification provision obliged the subcontractor, Weather Shield Manufacturing Co., to defend the developer/general contractor , J. M. Peters Co., (JMP) against law suits brought by third party homeowners whose complaints alleged construction defects arising from the subcontractor’s work.

Complicating the court’s decision were the facts that (1) a jury ultimately found no negligence on the part of the subcontractor and (2) the indemnification provision, as interpreted by the parties and accepted by the court, only required the subcontractor to indemnify the prime contractor in the event that the subcontractor was negligent.  Consequently, the case was not a dispute over whether the subcontractor must indemnify the prime contractor, JMP, for any ultimate damages awarded.  Instead, the sole issue was whether the subcontractor was required to defend or pay the defense costs of JMP as they were incurred during the litigation.

The pertinent language of the indemnification clause required the subcontractor “to indemnify and save [prime contractor] harmless against all claims for damages … loss … and/or theft …  growing out of the execution of [subcontractor’s] work.” A second part of the clause further required the subcontractor “at [its] own expense to defend any suit or action brought against [prime contractor] founded upon the claim of such damage … loss or theft.”

After the residential project was completed, 220 owners filed suit against the developer/prime contractor as well as Weather Shield and other participants in the project’s construction.  JMP filed a cross-complaint seeking declaratory relief against Weather Shield and all the other subcontractors, asserting that they owed a duty to defend JMP against the complaints, as well as indemnify JMP for any damages awarded.

In the trial, the dispute over window leaks and framing issues which were the crux of the underlying case was tried separately from the cross complaint for indemnity.  The jury found in favor of Weather Shield but awarded damages of approximately $1 million against another of the subcontractors.

Subsequently, the cross-complaint against Weather Shield was tried on the question of whether Weather Shield was required to indemnify JMP for amounts JMP paid to the homeowners in a settlement, and (2) whether, pursuant to the defense obligations of the subcontract, Weather Shield owed JMP for the attorneys fees and expenses incurred in defending itself against the homeowners’ suit.

The trial court determined that since the jury found Weather Shield was not negligent, the indemnification obligation was not triggered.  On the other hand, the court found that the duty to defend was triggered by the initiation of the law suit insofar as claims concerned the windows supplied by Weather Shield regardless of whether a jury ultimately found Weather Shield was not negligent.   This decision was affirmed on appeal to the California Supreme Court.  The court stated:

We focus on the particular language of the subcontract. Its relevant terms imposed two distinct obligations on Weather Shield. First, Weather Shield agreed “to indemnify and save [JMP] harmless against all claims for damages to persons or to property and claims for loss, damage and/or theft … growing out of the execution of [Weather Shield’s] work.”  Second, Weather Shield made a separate and specific promise “at [its] own expense to defend any suit or action brought against [JMP] founded upon the claim of such damage … loss, … or theft.”  (Italics added.)

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We agree with the Court of Appeal majority that, even if strictly construed in Weather Shield’s favor, these provisions expressly, and unambiguously, obligated Weather Shield to defend, from the outset, any suit against JMP insofar as that suit was “founded upon” claims alleging damage or loss arising from Weather Shield’s negligent role in the Huntington Beach residential project. Weather Shield thus had a contractual obligation to defend such a suit even if it was later determined, as a result of this very litigation, that Weather Shield was not negligent.

The court further stated:

A contractual promise to “defend” another against specified claims clearly connotes an obligation of active responsibility, from the outset, for the  promisee’s defense against such claims. The duty promised is to render, or fund, the service of providing a defense on the promisee’s behalf -a duty that necessarily arises as soon as such claims are made against the promisee, and may continue until they have been resolved. This is the common understanding of the word “defend” as it is used in legal parlance. [citations omitted] A duty to defend another, stated in that way, is thus different from a duty expressed simply as an obligation to pay another, after the fact, for defense costs the other has incurred in defending itself.

The court did not stop here in its analysis but instead went on to interpret and apply sections of the California Civil Code that it found applicable to the indemnity provisions of the contract.  In particular, the court addressed sections 2772 and 2778 of the Civil Code which set forth general rules in California for the interpretation of indemnity contracts “unless a contrary intention appears.”   The court states:

In this regard, the statute first provides that a promise of indemnity against claims, demands, or liability “embraces the costs of defense against such claims, demands, or liability” insofar as such costs are incurred reasonably and in good faith. (§ 2778, subd. 3, italics added.) Second, the section specifies that the indemnitor “is bound, on request of the [indemnitee], to defend actions or proceedings brought against the [indemnitee] in respect to the matters embraced by the indemnity,” though the indemnitee may choose to conduct the defense. ( Id. , subd. 4, italics added.) Third, the statute declares that if the indemnitor declines the indemnitee’s tender of defense, “a recovery against the [indemnitee] suffered by him in good faith, is conclusive in his favor against the [indemnitor].”  (Id., subd. 5.)

The court thus concludes that the defense obligations contained in section 2778 “are deemed included in every indemnity agreement unless the parties indicate otherwise.” (emphasis added).  The court states that case law in California confirms that “unless the parties’ agreement expressly provides otherwise, a contractual indemnitor has the obligation, upon proper tender by the indemnitee, to accept and assume the indemnitee’s active defense against claims encompassed by the indemnity provision.”  And this duty, says the court, arises immediately upon a proper tender of defense by the indemnitee, and thus before the litigation to be defended has determined whether indemnity is actually owed.”

For these reasons, the court held that Weather Shield owed JMP a duty to defend immediately upon the tender of the defense by JMP to Weather Shield, and that due to its failure to defend, Weather Shield now was obligated to reimburse JMP the costs it incurred in defending itself.

Risk Management Comment: BEWARE that striking defense obligation language out of indemnification clauses is apparently not sufficient to eliminate the duty of the indemnitor to defend the indemnitee.   The decision of the court might come as quite a surprise to anyone negotiating indemnification provisions in California that has previously assumed that so long as no affirmative duty to defend is included in the indemnification clause, there will be no such duty.

The court interprets the California statute as turning that idea completely on its head.  If the contract contains an indemnification agreement whereby an indemnitor agrees to indemnify an indemnitee for damages arising out of the indemnitor’s services, the courts in California will automatically read into that agreement an additional obligation for the indemnitor to defend the indemnittee immediately upon the tendering of the defense.  The only way around this, says the court, is for the parties to affirmatively state that there is NO duty to defend any claim that is subject to the indemnification provisions.

Note that in the case note discussion in this Construction Risk.com Report of the Wimberly v. Travelers coverage dispute case, I noted that professional liability carriers will not provide coverage for obligations to defend a client that its insured assumes by contract language.  The typical suggestion has been to strike out the defense obligation language in the clause but keep the indemnification language provided that it is based upon negligent performance of the insured firm.  But this advice does not go far enough to eliminate the defense obligation that is automatically imposed by California law.

By striking the defense language all we have done is made the indemnification provision “silent” with regard to defense.  The court states that this silence must be interpreted as creating a duty to defend.  The only way around this is apparently to affirmatively write into the text of the indemnification provision that the indemnitor shall NOT have a duty to defend the indemnittee in any action relating to a claim for which indemnification obligations may apply.

Typically, an insurance company would advise its insureds (particularly design professionals) to limit indemnification to apply only to damages to extent caused by the insured’s negligence, and that this type of indemnification should generally not create losses for the insured that would be subject to the contractual liability exclusion of the policy.  The insurance company would also advise the architect to strike any defense obligation indemnification language contained in an indemnification clause since such an obligation would create a contractual liability for the insured to immediately defend (pay on behalf of its client) legal costs, and that is not covered by the policy since that obligation is not based on common law but rather arises solely because of the contract language.

Note, however, that in California, merely by agreeing to what may look like an otherwise insurable, negligence-based, indemnification provision, the indemnitor is understood to automatically be committing to defend the indemnitee – and this is so regardless of whether the indemnitor is ever found to be negligent and owes any indemnification duty.  By signing what many risk managers have long thought to be innocuous indemnification provisions, the indemnitor/architect is committing to a defense obligation that is excluded from coverage pursuant to the contractual liability exclusion.

If any readers would like to comment on the case or my comments, please send me an e-mail.  I would particularly appreciate hearing from anyone concerning whether the court’s holding that  indemnification automatically incorporates a duty to defend unless affirmatively stated to the contrary has been adopted in other states.

(Note:  This case decision addressed a pre-2006 residential contract.  California statutes that became effective January 1, 2006 and January 1, 2008 apply to residential construction contracts entered after their effective dates and void indemnity provisions of a residential construction contract that would require a subcontractor to indemnify (or defend) another entity to the extent that the claims arise out of or related to the negligence of those other entities.)

About the author: All articles in this issue of the ConstructionRisk.Com Report are written by J. Kent Holland, a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 11 No. 2 (February 2009).

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Article 2

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CGL Insurance Carriers Had no Duty to Defend Design Professional on Claims Arising out of Professional Services

An architect under contract to provide professional services related to the renovation and expansion of the Tropicana Casino in Atlantic City , New Jersey was sued by a number of parties claiming damages from wrongful death and physical injuries resulting from the collapse of a parking garage that was under construction.  The architect demanded that its commercial general liability (CGL) carrier and excess CGL carrier defend it against the plaintiff’s complaints.  The carriers refused to do so based on the professional services exclusion of their policies. The architect filed suit seeking declaratory judgment that the carriers had a duty to defend it.  The court granted the carriers summary judgment motion – denying coverage and a duty to defend.

The architect’s Tropicana contract called for it to provide architecture, structural and mechanical engineering, and construction administration.  It entered into a subcontract with a consulting engineering firm that it retained to provide structural engineering services.  While the parking garage was being constructed, six levels collapsed, killing four people and injuring others.  Numerous plaintiffs filed suit against the architect and others in the local superior court for Atlantic County , New Jersey , and most of these were consolidated into a general Master Complaint, that included several counts against the architect.

The counts in the complaint against the architect alleged that the architect “deviated from the standard of care that should have been utilized as professionals in the fields of architecture relative to the design and supervision of the construction of [the] Garage” and that that the architect was “otherwise careless and negligent.”

Two unconsolidated complaints were filed against the architect.  One alleged that the architect failed “to perform as a reasonable architect would under the same or similar circumstances.”  The other asserted negligence, private nuisance and public nuisance against the architect.

A third-party claim was also filed by a construction subcontractor against the architect seeking contribution and indemnification.  It alleged that the architect deviated from the standard of care of professionals in the field of architecture, including the supervision of design and “architectural administration of construction” at the Tropicana Construction Project.

In reviewing whether the CGL policies were required to provide a defense to the underlying complaints in the county court action, the Federal District Court in the case of Wimberly Allison Tong & Goo, Inc. v. Travelers Property Casualty Company and Gulf Underwriters Insurance Group, 559 F.Supp.2d 504 (D.C. NJ, 2008), compared the allegations of the complaints to the specific wording of the exclusions contained in the policies.

The Travelers policy excluded damages arising out of professional services with the following exclusion:

“This insurance does not apply to “bodily injury,” “property damage,” “personal injury” or “advertising injury” arising out of the rendering of or failure to render any professional services by you or any engineer, architect or surveyor who is either employed by you or performing work on your behalf in such capacity.”

Professional services was defined in the Travelers policy to include:

“1.  The preparing, approving, or failing to prepare or approve maps, shop drawings, opinions, reports, surveys, field orders, or drawings and specifications; and 2.  Supervisory, inspection, architectural or engineering activities.”

Gulf Insurance company’s CGL policy contained similar language stating that damages from professional services were excluded from coverage.

There was also a professional liability policy from a different carrier that provided $1 million per claim.  The court stated there was a $250,000 deductible. (Editor’s note:  It is more likely that this was actually a self insured retention (SIR) rather than deductible, but the court refers to it as a “deductible”.)  The architect also had an excess professional liability policy from the same carrier that covered up to $2 million per claim and $5 million in the aggregate – in excess of the $1 million primary professional liability policy.   For reasons not explained by the court, the professional liability carrier did not pay anything toward the eventual $500,000 settlement of the case or toward the $2,323,000 that the architect says it incurred in defense costs and legal fees. (See comment at conclusion of this case note).

Architect’s theory for why the CGL policies should provide coverage was that the allegations of the complaints were not purely allegations of defective professional services, but rather contained other allegations such as “nuisance” and therefore created the “possibility of coverage” under the CGL policies which required the two carriers to “defend” against the complaints.  More specifically, the architect argued that the carriers were required to defend it “until it was unambiguously clear that the professional services exception was applicable to all asserted claims.”  Although the complaints in the state court action, on their face, appeared to clearly articulate that the basis for the allegations was negligent performance of professional services, the Architect argued that it was not clear that this was the basis of the complaints since the plaintiffs did not mark or state “professional malpractice” when they filled in the blanks on the Civil Case Information Statement form that is attached to the top of the complaint.

The U.S. District Court rejected the architect’s argument, saying that the architect conspicuously failed to point to any specific allegation in the underlying action that would support its allegation that the claims were based on anything other than the provision of professional services.  Supervisory and inspection-related services, for example, were included within the definition of “professional services” and the court states that is consistent with New Jersey law, “that when a professional party, such as an architectural or engineering practice, supervises the implementation of its work, such supervision is performed in its professional capacity.”

In trying to get out from under the professional services exclusion of the policy, the architect also argued that the claims of “nuisance” and “general negligence” were something other than “professional services.”  The court rejected that argument, concluding that the facts alleged by plaintiffs in the state court action in support of their nuisance and general negligence claims show that those claims were directed at the architect’s provision of professional services, “not its general business activities (or other non-professional conduct).”  For these reasons, the court found in favor of the CGL carriers that they had no duty to defend the architect in the underlying case, and granted them summary judgment accordingly.

Comment: This final point by the court concerning the difference in general business activities and professional services is one of the keys to its rejection the architect’s arguments.  Despite what appeared to be some minor extraneous allegations by the underlying plaintiffs in the state court action, all the genuine allegations (based on the facts contained in the complaint) demonstrated that the true essence of each count of the complaint was that the architect provided its professional services in a manner that the plaintiffs asserted was unacceptable and caused their damages.  Since all counts were ultimately founded upon professional services, the CGL carriers had no duty to defend.

It is curious that the court did not explain anything about what role, if any, the professional liability carrier had in the underlying action.  The court says that this carrier advised the architect it would defend it, yet the architect asserts it never received defense or indemnity from any carrier.

There are several possible reasons a professional liability carrier might not pay any defense costs for an architect in a matter such as this one.  First, with a $250,000 SIR, an architect would be required to pay the first $250,000 in attorneys fees itself before the insurance carrier has any duty to start paying.  Second, with a final settlement of $500,000, it is not at all clear what constitutes the claimed $2.3 million in “defense costs” and “legal fees.”

If an architect agrees to defend its client against claims by third parties such as the plaintiffs in the underlying action, those defense costs are not covered by insurance.  In this regard, legal fees to defend an architect against multiple plaintiffs would have to be coordinated and typically approved in advance by the insurance company that is expected to cover the defense costs.

The contractual liability exclusion of the professional liability policy will bar coverage for such defense costs that are incurred as a result of the contractual indemnification provision.  This is an important matter to be understood by design professionals.  Whenever you as a design professional see language include in an indemnification provision that would require you to “defend” your client, this means that you must pay on behalf of your client legal fees and defense costs as they are incurred, instead of awaiting a final decision by a finder of fact whether you were negligent in the performance of your services. Since that is not a liability the architect would have at common law in the absence of the contractual language, the insurance company can assert that costs associated with that liability are excluded pursuant to the contractual liability exclusion.

Please note that I have no personal knowledge of whether any of this commentary applies to the instant case.  I am merely using this as learning opportunity to point out the theory of how these principles work.

About the author: All articles in this issue of the ConstructionRisk.Com Report are written by J. Kent Holland, a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 11 No. 2 (February 2009).

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Article 3

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Site Safety: General Contractor not Liable to Injured Subcontractor Employee

On a college dormitory remodeling project, an employee of a subcontractor filed suit against the college and general contractor to recover for his injuries after receiving what he could from workers compensation.  The individual was injured while demolishing a non-pressurized cast-iron water pipe that fell onto, and broke, a pressurized PVC water pipe that then erupted and knocked him off his ladder.   His legal theories for recovery included negligence and premises liability.  A motion for summary judgment by the general contractor was granted by the trail court, and sustained on appeal. The courts found that because the general contractor did not retain control over the details of the activities that caused the injuries, and did not otherwise engage in any affirmative acts that contributed to the injuries.

At the time of the accident, pressurized water was still being maintained in the PVC pipe since it was needed for water during the remodeling process.  The laborer was using the tools and equipment of his own employer.  He was directed in his work at all times by his own supervisor who had advised him that pressurized water remained in the pipe in question.  He was not supervised or directed in his work by the general contractor.  He failed to follow the demolition procedures established by his employer and failed to follow the express advice of his supervisor to avoid damaging the PVC pipe.  The court found that the general contractor had fully delegated the task of providing a safe work environment to the subcontractor and did not thereafter exercise any retained control in a manner that affirmatively contributed to the injuries.

The court also addressed an argument by the plaintiff that certain state OSHA regulations applied to the situation and created non-delegable duties for the general contractor.  The court rejected the argument and concluded that the regulations cited by the plaintiff did not impose a non-delegable duty on the general contractor. In this regard, the court stated that while some safety regulations impose non-delegable duties, others impose duties that can be delegated.  The court stated that “it is the nature of the regulation itself that determines whether the duties it creates are non-delegable…. As a result, to determine whether [a] Regulation [  ] imposes a non-delegable duty, we must look at the language of the regulation itself.”

In this case, the court looked at the language of the regulation in question that requires utility companies to be notified and all utilities to be shut off before commencing demolition activities unless needed during demolition.  As observed by the court, the regulation does not indicate who must perform these acts and does not expressly place the obligation on the landowner or other specific party.  But even if the general contractor were found to have violated the regulation, the court concluded that this would not constitute negligence per se entitling the plaintiff to recovery since the plaintiff was required to show that the general contractor’s conduct affirmatively contributed to his injuries – and he failed to show that.  For these reasons, the Court of Appeal affirmed the summary judgment in favor of the general contractor.  Padilla v. Pomona College et al., 166 Cal. App.4th 661, 82 Cal.Rptr.3d 869, (2008).

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., J.D. The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law.  Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.

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