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Howrey LLP
Two recent decisions by the California Court of Appeals provide examples of how a general contractor and an owner each successfully shifted responsibility for a personal injury claim to another party even though there was no showing of wrongdoing by that party. These decisions highlight the importance of understanding the scope and impact of indemnity clauses and additional insured requirements when negotiating construction contracts. As always, parties to a construction contract are well advised to scrutinize risk transfer provisions to maximize their benefits or to avoid obligations that were not intended at the making of the contract.
In Continental Heller Corp. v. Amtech Mechanical Services, Inc. 97 C.O.D.S. 1924 (March 17, 1997), the court upheld the trial court's determination that a subcontractor was required to indemnify the general contractor for claims arising from an explosion even though the trial court specifically determined that the subcontractor was not negligent nor the proximate cause of the explosion.
The indemnity clause at issue in Continental Heller required the subcontractor to indemnify the general for a loss which "arises out of or is in any way connected with the performance of the work under this Subcontract." The applicable provision also required indemnity for "any acts or omissions" of the subcontractor. Based on the plain meaning of the indemnity language, the court found that fault by the subcontractor was not required to trigger the subcontractor's indemnity obligation. As a result, the trial court found that the general was entitled to indemnity since the defective valve explosion was installed as part of the subcontractor's work.
The court dismissed the subcontractor's argument that its interpretation of the contract was "unfair" and not consistent with the parties' "reasonable expectations." As courts upholding indemnity provisions often do, the court stated that contracting parties are free to allocate risk with certain (and apparently very limited) public policy restrictions. The court did not find the parties' risk allocation "unconscionable," noting that the subcontractor was "not a small-time subcontractor being saddled with ruinous liability for the mere privilege of installing a valve in a meat packing plant." The court was also persuaded by the fact that both parties were "large, sophisticated construction enterprises" and the subcontract amount was $1.2 million.
The opinion in Shell Oil Co. v. National Union Fire Ins. Co. (1996) 44 Cal.App.4th 1633 provides an instructive example of risk transfer through additional insured clauses. Here the owner, Shell Oil Company, received additional insured benefits even though there was no finding of fault by the engineering company that contracted with Shell. Making matters even more interesting was the trial court's finding that Shell was the sole cause of the underlying liability.
This case involved a claim by an injured employee of the engineering company against Shell. The engineering company performed work on an oil refinery pursuant to a contract with Shell. The contract required the company to indemnify Shell and to name Shell as an additional insured under its general liability policy.
After being named a party in the employee's personal injury action, Shell tendered the claim to the engineering company's insurer, National Union, as an additional insured. National Union denied coverage and a coverage action ensued.
The primary issue before the court was whether Shell could receive additional insured benefits even though it was found to be the sole cause of the employee's injuries. The court drew an important distinction between Civil Code Section 2782 (which prohibits a party from being indemnified for its sole negligence) and Shell's additional insured benefits which were triggered by liability arising out of the engineering company's work. Noting that the applicable contract and policy language simply named Shell as an additional insured without exceptions for Shell's sole negligence, the court found coverage under National Union's policy for the employee claim. The court clarified that limitations pertaining to Shell's sole negligence only applied to the engineering company's separate indemnity obligations and that it had no bearing on the insurance coverage provisions.
The findings in the Continental Heller and Shell decisions are good reminders that risk transfer provisions in construction contracts must be closely examined at the inception of a project to assure that they conform with the parties' mutual intention.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©1997 Howrey LLP
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