by Eric J. Miersma
In a prior article, I wrote about contractual indemnity agreements and the changes to California law that eliminated Type I indemnity agreements. The change came about through a modification of California Civil Code section 2782. For all residential construction contracts entered into after January 1, 2006, the subcontractor cannot be contractually forced to indemnify and defend the builder for claims that arise out of the negligence of the builder or its agents. This change was recently extended, for all residential construction contracts entered into after January 1, 2008, to include a builder and agents that are not affiliated with the general contractor. As I discussed before, this simply means that a subcontractor cannot be contractually forced to pay for, or defend against claims of, someone else’s negligence.
However, for residential construction contracts entered into before January 1, 2006, agreements that required a subcontractor to defend and indemnify a builder for its own or its agents negligence up to ninety-nine percent are still valid. Thus, if you, a subcontractor, were ultimately found to be only one percent at fault, you could still end up paying the other ninety-nine percent of the builder’s fault. Fortunately, California case law held that the duty to defend and the duty to indemnify were linked together, and you did not need to actually pay for the defense of the builder except to the extent you were found liable for indemnity. (Regan Roofing Co. v. Superior Court (1994) 24 Cal.App.4th 425.)
Depending upon the specific wording of the contract, the Regan Roofing case allowed subcontractor defense attorneys to argue that they did not need to pay for a defense unless and until they were found negligent and their indemnity provision was triggered. Subcontractors who believed they were not at fault had little incentive to settle the lawsuit and could simply maintain a low profile in an otherwise lengthy and expensive lawsuit while the builder (and its insurance carrier) bore the brunt of the defense costs. From an insurance prospective, some of those subcontractors might have had their own insurance carriers issue an additional insured endorsement that promised to fund the builder’s defense. Over time, insurance companies greatly restricted the scope of these additional insured endorsements, which had the effect of once again placing the bulk of the burden of defense on a strictly liable builder. As you can imagine, an insurance carrier has a powerful incentive to settle a lawsuit where it is not only paying for the defense of its own insured, but also for the defense of the builder. But, for those subcontractors who did not have insurance or whose insurance carrier did not issue an additional insured endorsement, they did not feel the pressure of being obligated to defend the builder.
In California, this rule has recently dramatically changed. The Regan Roofing case has been overturned by the California Supreme Court. (Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541.) Now, for all residential construction contracts entered into before January 1, 2006, a properly worded contract can compel a subcontractor to immediately defend a builder regardless of whether the subcontractor is ultimately required to indemnify the builder or even found to be at fault. Putting aside insurance provisions, this has the effect of imposing potentially ruinous liability on a subcontractor. Imagine that you, a concrete subcontractor, install slabs and foundations at one hundred single family homes and your pre-2006 contract requires you to defend and indemnify the builder against any and all claims arising out of your work. Assume that your work is flawless, but the builder is sued anyway by homeowners alleging defective concrete slabs and seeking millions of dollars in damages for total slab replacement. Further assume that the builder will need to mount a vigorous defense including hundreds of thousands of dollars in attorney fees and expert costs to prove that your work is, in fact, flawless. Under the Crawford case, you are potentially immediately, upon tender of defense, at the outset of the litigation, liable for the defense of the builder and its hundreds of thousands of dollars in fees and costs even though no one has, can, nor ever will find you at fault for anything.
Now that I really have your attention, you might consider speaking to your attorney and insurance broker to find out whether your state has similar case law and, if you are in California, whether your liability insurance will provide you with coverage for claims to defense fees under Crawford. Given the ten year statute of repose in California, claims involving projects from late 2005 will not be barred until approximately 2016. Thus, for subcontractors and their insurance companies who may have thought they successfully modified their indemnity provisions to require proof of fault and who eliminated the all encompassing additional insured endorsement, they are once again exposed to significant liability, even when not at fault.
