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INSURANCE NOTES

Court Extends Crawford and Allows Defense for Unlicensed Contractor Under an Indemnity Provision

02.19.2010

In January 2010, the California Court of Appeal in UDC-Universal Development, LP v. CH2M Hill, 181 Cal.App.4th 10 (2010) ruled that an unlicensed contractor had a right under contract to a defense to a claim that implicated a contractor’s work.

In so doing, the Court appeared to extend the Supreme Court’s decision in Crawford v. Weather Shield Mfg. Inc., 44 Cal.4th 541 (2008). Crawford held that a contractual indemnitor has an immediate duty to defend an indemnitee upon the indemnitee’s tender of a claim implicating the indemnitor’s work unless the contract clearly states a contrary intention. That defense duty existed “even if it was later determined, as a result of this very litigation, that [the indemnitor, the window supplier] was not negligent.” In other words, Crawford held that the duty to defend under a contractual indemnity provision may be broader than the duty to indemnify – just as it is under liability insurance policies.

In UDC-Universal, the Court of Appeal took the Crawford ruling further and applied it to a situation in which an owner sued a developer for construction defects but made no allegations against the contractor-indemnitor. The developer sought defense and indemnity from the contractor under a consulting contract that required the contractor to defend and indemnify the developer for claims “connected with any negligent act or omission” by the contractor.

The contractor argued it had no duty to defend the developer because there were no allegations of any negligent act by the contractor. Moreover, the contractor argued that the developer was an unlicensed contractor who was barred from any recovery by California Business & Professions Code §7031.

The trial court and the Court of Appeal rejected the contractor’s arguments. The Court ruled that, “the indemnity provision does not state that there must be an underlying claim of negligence specifically against [the contractor] in order to trigger [its] defense obligation.” Thus, even though the indemnity obligation was for claims connected to the contractor’s “negligent acts” and the owner made no explicit allegations of contractor’s negligence, the Court found a duty to defend.

The Court’s rationale was that: “In a construction project involving multiple consultants and subcontractors, any of them might have been negligent. An indemnitee should not have to rely on the plaintiff to name a particular subcontractor or consultant in order to obtain a promised defense by the one the indemnitee believes is responsible for the plaintiff’s damages.” [Emphasis added.]

In essence, the Court ruled that because the developer asserted that the contractor was negligent, the developer was entitled to a defense from the contractor. The Court also noted that the owner’s general description of the defects in the project implicated the contractor’s work and this was sufficient to trigger the contractor’s duty to defend.

The Court also rejected the contractor’s argument that the consulting contract was “illegal” under Business & Professions Code §7031(a). The Court of Appeal noted that the statute bars recovery by an unlicensed contractor of “compensation for the performance of any act or contract where a [contractor’s] license is required,” and ruled that, in seeking to recover its defense costs, the developer was not seeking to recover “compensation” for work performed by an unlicensed contractor. The Court reasoned that “compensation” refers to compensation for one’s services and that did not apply to the developer’s indemnity claim.

Both of the Court’s rulings bolster support for a request for an immediate defense upon tender of an action under indemnity provisions. Although this commonly occurs in construction cases, the rulings are not limited to construction contracts. The same rationale could apply to indemnity clauses in all manner of contracts, such as leases, purchase orders and bills of sale.

The decisions treat the breadth of the duty to defend under indemnity provisions similar to the standard for insurers under liability policies. Arguably, there is no material difference between the traditional “potential for liability” standard for an insurer’s duty to defend and the “general description of the defects in the project” that triggered the contractor’s duty to defend the developer. Just as courts have noted that the claimant’s counsel is not the “arbiter” of an insurer’s duty to defend, claimant’s counsel’s drafting of the complaint now may not determine whether an indemnitor owes a defense. Whereas courts had previously “strictly” construed an indemnity provision so as not to convert an “unsuspecting” party into an insurer, the future trend may well be to treat indemnitors as though they are de facto insurers.

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