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Where  a firm (Parsons Infrastructure) entered into a contract to design and construct a soda ash processing plant for Kerr-McGee Chemical Corp (KM) and agreed to provide KM with a defense and indemnity against losses arising out of negligent performance of its work,  and KM later assigned its property and contract to a new firm (Searles Valley Mineral Operations), Searles, as assignee of KM, paid defense costs on behalf of KM that were incurred in defending against a wrongful death action by the heirs of a deceased laborer who was killed while working at the plant.  A California court held that Parsons was obligated to reimburse the defense costs even though they were not incurred directly by KM but were instead paid by Searles on behalf of KM.  Searles Valley Minerals Operations, Inc. v. Ralph Parson Service Company, 191 Cal.App. 4th 1394 (Cal. 2011).

The court concluded that an assignee of contract indemnification rights stands in the shoes of the indemnitee.  Consequently, where the indemnitor refuses to pay an indemnitee’s defense costs, the indemnitee, and in turn the assignee of the indemnitee, can pay the costs and then seek reimbursement from the indemnitor.

The indemnification clause in question provided the following:

Contractor [Parsons], agrees that it will, at its sole cost and expense, defend, indemnify and save Owner [KM], its subsidiaries, and their officers and employees, harmless from and against any and all claims, demands, causes of action and liabilities for loss of use or damage to property … or for bodily injury, personal injury or death arising out of Contractor’s (or its subcontractor’s) negligence (including, as respect bodily injury, personal injury or death, the contributory negligence of Owner [KM] ) in connection with any work which Contractor (or its subcontractors) shall perform pursuant to this Agreement or any operations or activities of Contractor (or its subcontractors), in connection therewith.

In determining the obligations under this indemnification clause, the court cited Crawford v. Weather Shield Mfg., Inc, 44 Cal. 4th 541 (Cal. 2008), and the California Civil Code, section 2778 that specifies indemnification obligations.  The code provides the following:

 In the interpretation of a contract of indemnity, the

following rules are to be applied, unless a contrary intention

appears:

    1. Upon an indemnity against liability, expressly, or in other

equivalent terms, the person indemnified is entitled to recover upon

becoming liable;

   2. Upon an indemnity against claims, or demands, or damages, or

costs, expressly, or in other equivalent terms, the person

indemnified is not entitled to recover without payment thereof;

   3. An indemnity against claims, or demands, or liability,

expressly, or in other equivalent terms, embraces the costs of

defense against such claims, demands, or liability incurred in good

faith, and in the exercise of a reasonable discretion;

   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, but the

person indemnified has the right to conduct such defenses, if he

chooses to do so;

   5. If, after request, the person indemnifying neglects to defend

the person indemnified, a recovery against the latter suffered by him

in good faith, is conclusive in his favor against the former;

   6. If the person indemnifying, whether he is a principal or a

surety in the agreement, has not reasonable notice of the action or

proceeding against the person indemnified, or is not allowed to

control its defense, judgment against the latter is only presumptive

evidence against the former;

   7. A stipulation that a judgment against the person indemnified

shall be conclusive upon the person indemnifying, is inapplicable if

he had a good defense upon the merits, which by want of ordinary care

he failed to establish in the action.

 Applying this code section to the current case, the court stated the following:

As explained in Crawford, section 2778 “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].’

In the current case, the court states that KM tendered its defense to Parsons, Parsons rejected KM’s tender of defense, Searles paid for KM’s defense, and the wrongful death action against KM and other defendants resulted in Parson’s subcontractor being found 25 percent at fault, but no fault was found directly against Parsons itself.  The court states “Under section 2778, subdivisions (3) and (4), KM was entitled under the indemnity agreement to a defense from Parsons and, since Parsons did not provide a defense, KM was entitled to recover its defense costs….”  The jury in the wrongful death action awarded the heirs $6.75 million in damages.  No fault was assigned to either KM or Parsons.  Searles was found to be 75 percent at fault and a Parson’s subcontractor was found to be 25 percent at fault.   Searles incurred over $800,000 in attorneys fees, costs, and expenses from providing KM with a defense in the suit, and is entitled pursuant to the indemnification obligations of the contract to recover those costs from Parsons.

Comment:  This court’s reiteration of the affect of California Civil Code, section 2778, and the import of the holding in Crawford v. Weather Shield should serve as a reminder of how important it is to carefully craft indemnification clauses to specify exactly what types of claims and damages are covered by the indemnification, and whether or not there is a duty to defend the indemnitee or to otherwise reimburse the indemnitee for defense costs after-the-fact, as part of the indemnification obligation.  In this particular case, the indemnification clause contained an express defense obligation.  But even if it had not contained a duty to defend, the court’s decision once again makes plain that pursuant to the California Code, that duty to defend would be automatically read into the indemnification clause unless the parties expressly, affirmatively stated a contrary intent.  It is not sufficient merely to strike out the words “defense” or “defend” when they appear in a sentence such as “Contractor shall indemnify, defend and hold harmless the Owner….” Even if those words were struck from the contract, the California courts would read them right back into the contract pursuant to the Civil Code.  In California, therefore, if parties want to eliminate a duty to defend in the indemnification provisions of the contract, they must affirmatively insert a parenthetical or sentence clearly stating that there is no duty to defend.

About the author: Article written by J. Kent Holland, Jr.,  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 founder and president of a consulting firm, ConstructionRisk, LLC, 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. 14, No.1 (Jan 2012).

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