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ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 11, No. 2, February 09
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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.)
***
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.
Copyright 2009, ConstructionRisk, LLC
Publisher & Editor:
J. Kent Holland,
Jr., Esq.
1950
Old Gallows Rd
Suite 750.
Vienna
,
VA
22182
703-623-1932
Kent@ConstructionRisk.com
_____________________________________________
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