Kent Holland, J.D.
Where a subcontractor failed to honor its contractual indemnification obligations to defend and indemnify a swimming pool installation general contractor against claims arising out of the subcontractor’s work, the general contractor entered into a settlement with plaintiff who had been injured when diving into the swimming pool several years after construction of the pool was completed. The GC and its insurance carrier sued the subcontractor to recover their settlement costs. In defending against the suit, the subcontractor moved for summary judgment, arguing that the statute of limitations for enforcing the indemnity agreement had lapsed. This was rejected by the court, which held that the statute, which was actually a statute of repose applicable to patent defects in design and construction (4 years for patent defects and 10 years for latent defects), was not applicable to bar an action for indemnity.
As found by the court, “A cause of action for breach of an express indemnity agreement (contractual indemnity) accrues when the indemnitor sustains the loss by paying the money sought to be indemnified from the Indemnitee.” The indemnity does not accrue for statute of limitations when the original accident occurs, but instead accrues when the tort defendant pays a judgment or settlement as to which he is entitled to indemnity. Valley Crest Landscape Development v. Mission Pools of Escondido, Inc., 189 Cal. Rptr. 3d 259, 238 Cal. App.4th 468 (2015).
The indemnification clause in question in the subcontract provided the following:
“Subcontractor [(Mission Pools)] indemnifies and holds Contractor [(Valley Crest)] harmless from and against any and all claims, demands or actions made by any person or entity, whether valid or not, arising out of the performance by Subcontractor, including, without limitation, its employees, agents, and sub-subcontractors of this subcontract. Subcontractor agrees to reimburse Contractor upon demand for any expenses, including attorney’s fees, incurred by Contractor in defending against or dealing with any such claims, demands, or actions. [¶] Subcontractor specifically obligates itself to Contractor in the following respects … [¶] … [¶] … Subcontractor shall protect, hold free and harmless, defend and indemnify Contractor and Owner … from all liability, penalties, costs, losses, damages, expenses, causes of action, judgments or other claims resulting from injury to or death sustained by any person …, which injury [or] death … arises out of Subcontractor’s performance of work under this Subcontract. Subcontractor’s aforesaid indemnity and hold harmless obligation shall apply to any act or omission, willful misconduct or negligent conduct, whether active or passive, on the part of Subcontractor or its agents, sub-contractors or employees.”
The subcontract was for work on a new swimming pool for a St. Regis Resort. Construction of the pool was completed in 2001. In September, an individual dived into the shallow end of the pool while under the influence of alcohol and seriously injured his spine and was rendered a quadriplegic. He filed suit against St. Regis in 2008, and later amended the complaint to add the general contractor and subcontractor as defendants. The general contractor tendered its defense to the subcontractor pursuant to the indemnity provision of the subcontract. The subcontractor never responded to the tender.
After the underlying case by the plaintiff was settled, the general contractor and its general liability insurance carrier sued the subcontractor to recover under the indemnification clause. Its general liability insurance carrier likewise sought, through subrogation under the express indemnity provision of the contract, to be reimbursed the amounts it had paid to resolve the matter.
In considering the merits of the indemnification claims (and in particular the CGL carrier claims), the court noted that although the factual basis for finding any contribution by the subcontractor in causing the injuries was slim, the equities tip against the subcontractor with regard to the subrogation claim because the subcontractor failed to comply with its obligations under the subcontract. In contrast to the subcontractor who did not even respond to the defense tender, the CGL carrier did everything it was supposed to do to fulfill its obligations under the insurance policy.
The subcontractor was found to have an obligation to accept the tender of defense when it was made and to provide a defense. The subcontractor also failed to maintain its own CGL policy that would name the general contractor as an additional insured as required by the contract. It had maintained such a policy for three years after completion of the pool but had ceased to maintain it prior to the accident. The court concluded that the “failure to fulfill its obligation to maintain insurance supports a finding that National Union was in a superior equitable position.”
Comment: This decision demonstrates an important point about indemnification clauses that I think some risk managers may be overlooking when they agree to contractual indemnification. Whereas a claim might otherwise be barred by a statute of limitations or statute of repose because it is based on a tort claim arising out of a construction project, an indemnity clause may create a wholly different cause of action that is not subject to the ordinary statutes of limitations and repose. As in this case, an indemnitte might settle a claim and bring a breach of contract action against the indemnitor for refusing to tender a defense and provide indemnification as required by the contractual indemnification clause.
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. 17, No. 8 (November 2015).
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