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State Supreme Court: Subcontractors With Good Work May Still Have to Indemnify Contractors for Defense Costs

By: David Graeler
09/29/08

A recent state supreme court decision leaves residential construction subcontractors on the hook for certain construction defect litigation costs, even if the subcontractor is found not to have been negligent in its work. As the housing market continues to plummet, the court's ruling may encourage potentially costly construction defect litigation – already pervasive in California – against parties that have agreed to indemnity clauses. Subcontractors should take careful note of indemnity clauses in their new and existing contracts in light of a ten year statue of limitations for certain types of construction defect claims.

The California Supreme Court ruled in Crawford et al. v. Weather Shield Mfg. Inc., (2008) 44 Cal.4th 541, that the duty to defend imposed by an indemnity provision in a construction subcontract agreement is triggered by the tender of defense. It further ruled that a subcontractor's duty to defend exists as long as allegations of damages encompassed within the scope of an indemnity agreement exist. The duty to defend is irrespective of whether the subcontractor is ultimately found to be negligent in its work or not. The Court's analysis focused on the precise subcontract language that created the duty to defend.

Regarding a pre-2006 residential subcontract, the Court phrased the issue in Crawford as follows: "Did a contract under which a subcontractor agreed 'to defend any suit or action against a developer 'founded upon' any claim 'growing out of the execution of the work' require the subcontractor to provide a defense to a suit against the developer even if the subcontractor was not negligent."

Ruling: In a unanimous decision, the Court affirmed that a developer-builder (the indemnitee), was indeed entitled to an immediate defense by the subcontractor (the indemnitor) under a contractual indemnity clause, even though a jury ultimately found the subcontractor's work was not negligent. In other words, in a construction defect case that unsuccessfully challenged a subcontractor's work, the subcontractor was still obligated to pay the developer-builder's attorneys' fees and expenses.

Background: In Crawford, the developer/builder J.M. Peters Co.(JMP) entered into a subcontract with Weather Shield for the framed windows of a residential project. The agreement stated that the subcontractor would: (1) "indemnify and save JMP harmless against all claims for damages... loss,... and/or theft...growing out of the execution of Weather Shield's work,"; and (2) "at [its] own expense to defend any suit or action brought against [the developer] founded upon the claim of such damage[,]... loss or theft."

The plaintiff-homeowners sued JMP, Weather Shield, and other subcontractors for defects, including the improper design, manufacture, and installation of the windows provided by Weather Shield. JMP subsequently, filed suit against various subcontractors including Weather Shield, seeking to recover legal fees and expenses, including settlements paid to the plaintiff-homeowners, as part of the defect litigation.

Findings and Analysis: The Court made two findings. First, Weather Shield owed no duty to reimburse JMP for settlement payments because Weather Shield's work was determined not to be negligent. However, and notwithstanding the fact that Weather Shield was not negligent, the subcontract agreement imposed upon Weather Shield a contractual duty to defend JMP against the homeowners' claims against Weather Shield's work.

The California Supreme Court based its analysis on well-established statutes governing indemnity agreements. Under California Civil Code section 2772, an indemnity agreement is defined as a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person. Subsection (4) of Section 2778 provides that the indemnity obligation is triggered upon the request of the party seeking to be indemnified. In other words, once a lawsuit or other proceeding is filed, the party that agreed to indemnify the other must, upon request, pay the other party's defense fees and costs incurred in all claims that fall within the scope of the indemnity agreement.

Further, the California Supreme Court found that the general (and broad) provisions of the contractual indemnity agreement were not conditioned on the outcome of the underlying construction defect litigation. Instead, the duty to defend was triggered at the outset of the litigation even before a final determination was made as to whether the subcontractor's work was negligent.

The California Supreme Court did provide some protection to subcontractors under Civil Code 2782(e). The Court affirmed that the duty to defend or indemnify in residential construction contracts (entered into after January 1, 2008) are unenforceable if the claims arise out of the negligence of the general contractor or its agents, servants, or contractors who are directly responsible to the general contractor or to a contractor that is not affiliated with the builder. The Supreme Court also acknowledged the same protections for construction contracts (entered into after January 1, 2006) relating to claims arising out of the negligence of builders. However, it appears that contractual indemnity provisions in nonresidential construction contracts, and certain residential construction contracts predating 2006 and 2008, may impose upon a subcontractor/indemnitor a duty to defend even when the subcontractor was not negligent. This is significant, as California's 10-year statute of limitations for latent construction defects (Code of Civil Procedure section 337.15) may still expose numerous subcontractors who signed earlier agreements to broader defense demands by developers.

Precautions: The Crawford ruling is the current law of California relating to the duty to defend, separate and distinct from the duty to indemnify. It should be noted that Assembly Bill 2738 -- which purports to restrict various subcontractor obligations under Crawford -- is currently pending with the California Legislature and Office of the Governor. All parties should take careful note of indemnity provisions governed by California law, especially for residential construction projects. Potential parties to such agreements should consult experienced counsel for guidance through the myriad substantive and procedural requirements established under California's ever-changing law.

Thomas D. Long is a Partner in Nossaman's Litigation Department with over 24 years of experience. Tom represents policyholders in insurance coverage litigation involving environmental, construction defect and other claims. He can be reached at tlong@nossaman.com.

David Graeler is a Partner in the Los Angeles office working in the areas of eminent domain and construction. His construction practice includes the representation of contractors in a wide array of matters throughout Southern California. He can be reached at dgraeler@nossaman.com.

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