Limitations On The Defense Duty Under An Indemnity Agreement04.17.2009
On July 22, 2008, the California Supreme Court in Crawford v. Weather Shield, 44 Cal.App.4th 541 (2008), held that a material supplier was responsible for the builder’s defense in a construction defect suit based on the language in the hold harmless or indemnity agreement between the parties and Civil Code §2778. This duty to defend was imposed in the non-insurance context and required that a defense be provided immediately upon notice, regardless of fault.
Subdivision 4 of Civil Code §2778 states that “[t]he person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if he chooses to do so.” This is read into every indemnity agreement unless a contrary intention appears. The indemnity language in Crawford mirrored Civil Code § 2778, subdivision 4, so the Court found the material supplier owed a defense even though the material supplier was not found negligent.
Not addressed by the Court in Crawford is the question of what if the builder’s insurer had fully defended the builder? According to Bramalea California, Inc. v. Reliable Interiors, Inc., 119 Cal.App.4th 468 (2004), the builder would have no claim against the material supplier. The appellate court in Bramalea determined that the indemnitee in that case, the developer, could not recover its defense costs from the subcontractor under an indemnity agreement based on the “contractual damages” rule, stating that “because the developer had not actually paid the attorney fees, it had no standing to recover them.” Any recovery by the developer against the subcontractor would be a prohibited double recovery. See also, Patent Scaffolding Co. v. William Simpson Constr. 256 Cal.App.2d 506, 511 (1967) [a breach of contract is not actionable without damage].
Further, the Bramalea Court held that the insurer that had paid the defense costs could not recover those costs from a co-indemnitor on an equitable subrogation theory. The most common subrogation is brought on behalf of an insured against a wrongdoer whose wrong caused the damage. The Court found that “[t]he attorney fees were not caused by the subcontractors’ breach of their obligations to indemnify Bramalea; they were caused by the lawsuit brought by the homeowners for construction defects, which was one of the risks [the insurer] accepted premiums to cover.”
However, the insurer has a right to seek costs from a co-indemnitor on an equitable contribution theory. “Where multiple insurers or indemnitors share equal contractual liability for the primary indemnification of a loss or the discharge of an obligation, the selection of which indemnitor is to bear the loss should not be left to the often arbitrary choice of the loss claimant, and no indemnitor should have any incentive to avoid paying a just claim in the hope the claimant will obtain full payment from another co-indemnitor.” Fireman’s Fund Ins. Co. v. Maryland Cas. Co. (1998) 65 Cal.App.4th 1279, 1295. The insurer must bring the contribution suit in its own name.
The insurer could lose the contribution right against an indemnitor (such as a subcontractor who has an agreement to indemnify the insured). An indemnity agreement creates a single contractual right. The duty to defend and the duty to indemnify are merely subsets of a single “primary” right for purposes of rights of action. Therefore, separate suits cannot be maintained by the insurer and the indemnitee to assert these rights, as this would be an unlawful “splitting” of a cause of action. See, McCaffrey v. Wiley, 103 Cal.App.2d 621, 623 (1951) [“It is well settled in this state that a party may not split a single cause of action, using the same obligation as the basis for separate suits, and that where this is done, the judgment in the first action may be pleaded as a bar to a subsequent suit based on the same fundamental claim which could have been presented in the first action.”] Thus, the defending insurer must intervene in the suit with the indemnitee to assert this contribution right against the indemnitor to recover an equitable share of the defense paid or the right will be lost when the indemnitee settles the indemnity claim with a full release or judgment is reached in the first suit on the indemnity claim.