Construction Law Update

March 7 , 2006 ; Issue 10

Highlight Article

Kirk Crawford V. Weather Shield Manufacturing, Inc.

By Kyle D. Kring

On January 31, 2006, the California Court of Appeal issued an opinion holding that even where a subcontractor is shown not to have been negligent, the fact that claims in a suit grew out of subcontractor’s work will require the subcontractor to fulfill its agreement to pay the defense costs of developer. The opinion offers some guidance concerning the limited extent to which California Civil Code Section 2782, which went into effect January 1, 2006, will protect subcontractors from enforcement of indemnification agreements, particularly where a subcontractor is not found negligent.

The Type I Indemnity Bill (Civil Code Section 2782), signed by Governor Arnold Schwarzenegger last year, was drafted in response to the challenge faced by subcontractors who were required to contribute to the defense of contractors based on Type I indemnity agreements where as little as 1% of the subcontractor’s work was involved in the project. The need for a solution became apparent when insurance companies, realizing that there was no way to assess risk on projects where every subcontract was held liable for the project, simply quit writing Type I coverage for residential work, according to Lyle Sandlin, president of Hallmark Insurance Associated and member of the Southern California Contractors Association Legislative Committee.  Civil Code Section 2782 makes subcontractors legally responsible for only their work on new residential construction projects.

However, Crawford shows us that a subcontractor will be required to pay for the defense costs of a general contractor related to claims arising out of the subcontractor’s work, even though the subcontractor is ultimately found not to be negligent. In Crawford, 200 homeowners in the Huntington Place housing development brought a construction defect action against the developer of the project and the project’s window manufacturer and window framer, alleging strict products liability, negligence and breach of warranty.  Plaintiffs asserted that the window manufacturer’s wooden windows were defectively designed and manufactured, causing them to leak and fog. The developer filed a cross-complaint against the window manufacturer and the window framer, seeking attorney fees incurred in defending against the homeowners’ suit and indemnification. The homeowners and the developer ultimately settled their claims. On March 14, 2003, the trial court entered judgment, finding no liability on the part of the window manufacturer to the homeowners or the developer. However, the trial court, by way of declaratory relief, found developer was entitled to be indemnified by the window manufacturer in the amount of $131,274.

In arriving at its conclusion that the window manufacturer was liable for indemnity notwithstanding the court’s finding that it was not negligent, the court relied in large part on the language of the indemnity agreement in the case. It noted that the agreement plainly and unambiguously called for the window manufacturer to provide a defense of the homeowner’s suit at least to the degree that the suit was “founded upon” claims of window problems, independent of whether the window manufacturer was itself ever held to be responsible for those window problems. That being said, the court also emphasized that as a general rule, the precise scope of what a subcontractor must defend must be interpreted as narrowly as the language of the contract will allow. Thus, it did not say that a subcontractor is necessarily responsible for providing a “complete defense” to an action founded upon a claim growing out of a subcontractor’s work absent specific contractual language to that effect. The court similarly emphasized that the duty to defend imposed in the case arose as a result of the language of the particular contract at issue, and that its holding did not extend beyond the language of the contract.

The court also addressed whether extensive California case law rendered a determination of subcontractor’s negligence a condition precedent to its duty to defend. Providing a detailed review of five different cases, it concluded that the cases merely assumed that a defense obligation was part of (or subsumed within) a classic indemnity obligation, and therefore assumed that some express reference to the indemnitor’s own “negligence” was required for the defense obligation to survive. However, it concluded, none of the cases ever shut the door on the recognition of a defense obligation where there is explicit language obligating a party “to defend” a suit, and that obligation is independent of the obligation to make good a loss (classic imdemnity).

The court next addressed whether Civil Code Sections 2782 and 2778 precluded enforcing subcontractor agreements to defend in this type of situation. The court stated that Section 2782 does not apply under these circumstances because it only precludes enforcement of an indemnification agreement where indemnitee is solely negligent. Because the claims in this case arose out of problems with the windows and third party claimants alleged negligence and strict liability against the indemnitor, the case did not arise out of the general contractor’s “sole” negligence. The court also referred to Section 2778, which states that indemnity includes the cost of defense against claims and that the duty to defend arises during the underlying litigation, i.e. at a time before the indemnitor’s negligence has been established. Thus, the court concluded there is no public policy against the enforcement of subcontractor’s duty to defend notwithstanding a finding of no negligence on the part of the subcontractor.

Though the court does not speak to it, this does not seem to defeat the legislative intent behind Section 2782, which was intended to rectify the situation wherein subcontractor’s work had little to nothing to do with the defects which were the subject of the litigation, as the windows were at the center of the case. While the legislature made it clear through its enactment of Section 2782 that non-insurance construction contracts by which the indemnitor promises to indemnify the indemnitee for expenses arising from the indemnitee’s sole negligence are against public policy and thus unenforceable, this case demonstrates that the law does not preclude enforcement of an agreement to defend where subcontractor is not found negligent, as long as the claims at issue arise out of the subcontractor’s work.

It is unknown at this point whether the legislature will step in to alter the effect of this case. In the meantime, subcontractors should ensure that from now on their contracts state that their negligence is a condition precedent to their duty to defend.

Kyle D. Kring, Esq. is the managing partner of Kring & Chung, LLP. Mr. Kring specializes in serving the legal needs of the construction industry. For more information or with questions regarding this article, please contact Mr. Kring at (949) 261-7700 or via email at kkring@kringandchung.com

** The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change with time. Applicability of these same legal principles may differ substantially in individual situations. Please consult an attorney before making a decision in a particular area using only the information provided in this article.

Kring & Chung, LLP is one of California’s fastest growing full-service law firms. With over forty attorneys, the firm practices business, corporate and securities, construction, real estate, labor & employment, insurance, estate planning and family law. The construction department of the firm serves the construction industry in relation to construction and design defect litigation, mechanic’s liens, stop notices, construction bonds, public works construction disputes, change orders, bid protests and delay claims.
 

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