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Court Distinguishes Duty to Defend from Duty to Indemnify, Requires Non-Negligent Supplier to Pay for Defense
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October 19, 2009
By Peter K. Zweighaft
Howrey LLP
Homeowners in a large residential project sued the developer/general contractor and its subcontractors and suppliers alleging construction defects. The developer/general contractor cross-complained for indemnity and defense costs against the subcontractors and suppliers named in the homeowners’ complaint, including the window supplier, Weather Shield Manufacturing, Inc.
The developer’s contract with the supplier required the supplier to 1) indemnify the developer against all claims for damages “growing out of the execution of [the supplier’s] work”; and 2) defend, at the supplier’s expense, any suit brought against the developer “founded upon the claim of such damage….”
The developer and all of the subcontractors and suppliers settled before trial except Crawford and the framing sub. The court bifurcated trial into two phases. First, a jury heard the homeowners’ claims for negligence and breach of warranty and returned a verdict in favor of the window supplier. Second, the trial court heard the developer’s claim against the supplier for indemnity for the developer’s settlement costs and for its defense costs. The trial court denied the developer’s indemnity claim against the supplier because the jury found that the supplier was not negligent. However, the trial court found that the supplier was responsible, under the subcontract, for the developer’s defense costs, regardless of whether the supplier was negligent.
The supplier appealed the judgment against it for the developer’s defense costs. The Court of Appeal affirmed the trial court’s ruling, holding that the supplier’s contractual duty to defend the developer arose at the time the lawsuit against the developer was filed and did not depend on the outcome of the litigation.
The supplier appealed to the California Supreme Court. It agreed to decide whether a subcontractor that agreed to defend any suit against a developer founded on any claim growing out of execution of the subcontractor’s work required the subcontractor to provide a defense even if the subcontractor was not negligent. Crawford v. Weather Shield Mfg., Inc., 44 Cal.4th 541, 79 Cal.Rptr.3d 721 (2008).
The court began its analysis by reviewing California Civil Code §2778, which it wrote sets out the general rules for interpreting indemnity agreements and is included in all California indemnity agreements unless they provide to the contrary. The court also pointed out that that while indemnity agreements resemble insurance contracts, the rules for interpreting them are significantly different. It recognized that in the construction industry, indemnitees (beneficiaries of the agreements) often have superior bargaining power in negotiating indemnity agreements.
In its analysis, the court focused on the plain language of the parties’ contract. The duty to defend, the court recognized, is different from the obligation to indemnify. An obligation to indemnify arises when a claim for damages has been resolved against an indemnitee, such as the developer. In contrast, a duty to defend arises when the indemnitee tenders its defense against claims encompassed by the indemnity provision.
Thus, the court concluded that the supplier had an immediate duty to defend the developer against claims founded on the supplier’s allegedly negligent performance regardless of the supplier’s ultimate liability for negligence. That was one of two distinct obligations imposed by the contract. And, the duty was not conditioned on a finding of liability.
In so ruling, the court wrote that parties to a contract may define their duties toward one another in the event of a third party claim against one or both of them arising out of the contract, including who will bear the cost of defense. The responsibility is subject only to public policy, including statutes, and rules of contract interpretation. The court recognized that statutes enacted after formation of this contract put limits on indemnity agreements for residential construction contracts.
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For more information about the issues covered in this report, please contact Peter K. Zweighaft in our Los Angeles office at 213-892-1996 or at zweighaftp@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2009 Howrey LLP
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