LIMITING THE UNINTENDED DUTY TO DEFEND: An Analysis Of State Law P. Douglas Folk and Christopher M. Brubaker Clark Hill PLC Schinnerer s 56 th Annual Meeting of Invited Attorneys Chicago, Illinois May 25 26, 2017
Issue: Unintended Duties To Defend Crawford/CH2MHill impose liability for defense costs Contractual indemnities in both cases required a defense, and the indemnitee s tender was refused Jury found indemnitors not at fault but court required payment of indemnitee s defense costs Duty to defend upon receipt of tender and reimburse costs required by Cal.Civ.Code 2778.3 to.5 Indemnity embraces costs of defense Indemnitor bound, on request to defend If tender declined, recovery against [indemnitee] suffered by him in good faith, is conclusive against indemnitor 1
States That Follow California Rule Statutes interpreting contractual indemnities Five jurisdictions have statutes like Cal.Civ.Code 2778: North Dakota, South Dakota, Guam, Montana, Oklahoma Reported decisions in ND, SD, and OK No decision: Guam, MT Specialized Contractors v. St. Paul (ND) Held: No duty to defend because not expressly required and contract states indemnitor shall not be responsible for an amount disproportionate to culpability Court referred to statute but held no duty to defend Court found that tying liability to indemnitor s degree of culpability was sufficient statement of contrary intention to avoid duty to defend 2
States That Follow California s Rule Statutes interpreting contractual indemnities US ex rel. Ash Equip. v. Morris, Inc. (SD) SD also has statute that voids indemnification for sole negligence of indemnitee Case involved subcontractor s indemnity of general contractor for all claims and mechanic s liens on account [of subcontractor s work] No express duty to defend distinguishable from Crawford GC sought immediate payment of defense costs before liability of sub on claim was determined SD court held there was sufficient contrary intent that parties did not intend for defense of other claims asserted against general contractor 3
States That Follow California s Rule Statutes interpreting contractual indemnities Callaway v. WilTel Communs, LLC (OK) US Dist. Court for OK acknowledged statutory rules for interpreting indemnities but did not rely on them in decision Held: contractual indemnity for any and all claims controls over more specific text imposing liability based on acts or omissions of the contractor OK Dist. Ct. imposed duty to indemnify without first requiring a finding of negligence by indemnitor Relied on general principles of contract interpretation Case not explicitly based on statutory rule of construction 4
States Without Statutory Rules of Interpretation General principles of contract law apply St. Paul UM Church v. Gulf States Conf. (AL) AL had no statutory rule applicable to duty to defend Lessee indemnifies for claims and liability of any kind (including any attorney fees and costs) arising out of injury or death to any person occurring during [lessee s] use Invitee injured by sole negligence of lessor s employee Lessor demanded a defense from lessee Held: Contract terms will be given their clear and plain meaning under basic contract rules of construction No duty to defend because none included in the indemnity; will not be inferred from its terms 5
States Without Statutory Rules of Interpretation Indemnity limited by to extent caused by condition M.T. Builders, LLC v Fisher Roofing, Inc. (AZ) Subcontractor indemnified homebuilder for all claims, damages, losses and expenses [etc.] to the extent caused in whole or in part by any negligent act or omission of the Subcontractor Builder settled construction defect claims after tender refused; sought to charge subcontractor with cost of settlement and its defense costs Held: Sub s liability was not determined before builder settled with homeowners; not bound by settlements or obligated to pay builder s defense costs Remand on all issues No duty to defend in contract; will not be implied Similar: Amtrak v. Rountree Transp. & Rigging (FL) 6
States Without Statutory Rules of Interpretation Indemnity construed narrowly Ruzzi v. Butler Petroleum Co. (PA) Rule: Indemnity agreements are to be narrowly interpreted in light of the parties intentions as evidenced by the entire contract. Indemnity did not include duty to defend; did not expressly require indemnification for sole or partial fault of indemnitee Held: No duty to defend or indemnify will be implied in contract when terms used were insufficient to convey intent to indemnify party for its own negligence Similar results: Metso Automation USA, Inc. v. ITT (RI) Kaydon Acquisition Corp. v. Custum Mfg (IA) 7
States Without Statutory Rules of Interpretation Statutory limits on right to indemnity Barton Malow Co. v Grunau Co. (FL) GC sought indemnity from subs for settlements and cost of defense incurred in sick building case Indemnity: protect, defend, indemnify and save harmless [GC] from and against all losses, claims, demands, payments, damages, suits, actions, attorney s fees, recoveries and judgments of every nature and description Held: Void under Fla.Stat. 725.06 as indemnification sought for GC s own negligence and other violations of statute; GC also unable to recover defense costs because express duty to defend was inseparable from balance of void indemnity 8
States Without Statutory Rules of Interpretation Indemnities construed narrowly TNT Logistics v. Bailly Ridge TNT (IL) [Bailly] shall indemnify and hold [TNT] harmless from and against, and shall reimburse Tenant for, all liabilities Held: Term reimburse did not require immediate payment of defense costs; no duty to defend in contract 933 Van Buren Condo. Assn v. Van Buren (IL) Held: Unlike insurance policies, contractual indemnities do not require defense of claims that are outside indemnity scope; no duty to defend indemnitee against fraud claims Contrast with: Rodrigues v. N&S Bldg. Contrs., Inc. (NY) in which indemnity sufficient and enforceable despite strict construction of contractual rules of interpretation 9
States That Prohibit Duty To Defend Reimbursement of defense costs to extent of fault Texas: Tex. Local Gov t Code 271.904(a) and (b) A/E s indemnify gov t to the extent that the damage is caused by or results from the A/E s act of negligence, intentional tort, [etc.] May not require indemnity for the gov t fault Reasonable defense costs may be reimbursed in proportion to engineer s or architect s liability Indemnity requiring a defense is void Florida: Fla.Stat. 725.08(1) and (2) Prohibits duty to defend or indemnity for gov t fault Reimbursement for reasonable defense costs only to extent caused by A/E s fault 10
States That Prohibit Duty To Defend Reimbursement of defense costs to extent of fault Arizona: A.R.S. 34-226, 41-2586 Scope of indemnity of public agency limited to negligence, recklessness or intentional wrongful conduct of A/E or contractor Requirement of defense or indemnity for public agency s fault is void Preempts local ordinances Applicable to all state, county and municipal contracts Colorado: C.R.S. 13-50.2-102(8) is similar Scope of indemnify limited to extent of A/E s fault Duty to defend is void and unenforceable Defense cost reimbursement decided after fault determined 11
California Fixes Duty To Defend Problem SB496 amends Cal.Civ.Code 2782.8 Applies to private sector contracts signed on or after 1/1/2018 Duty to defend is unenforceable except to the extent that the claims against the indemnitee arise out of, pertain to, or relate to the negligence, recklessness, or willful misconduct of the design professional Defense costs reimbursed in amount proportional to share of fault if no fault, then no duty to reimburse defense costs If one or more defendants cannot pay their allocated share of defense costs, the other defendants are directed to meet and confer with other parties regarding unpaid defense costs Not applicable to projects with project-specific general liability policy insuring all project participants that covers all design professionals for their legal liability arising out of their professional services on a primary basis Does not apply to design professionals in a written design-build joint venture agreement 12