The California Supreme Court’s eagerly awaited opinion in Crawford v. Weather Shield Mfg., Inc., involves a cross-complaint seeking express indemnity and the imposition of a duty to defend by a developer/general contractor against the entity that supplied the windows for a large single family residential development. The court unanimously upheld the finding of both the superior court and appellate court that, though Weather Shield was not found negligent after a jury trial and, thus, did not owe a duty to indemnify the developer, J.M. Peters Co. (“JMP”), the subcontract at issue otherwise imposed a duty to defend the developer upon Weather Shield.
The contract at issue was a pre-2006 contract in which Weather Shield agreed “to indemnify and save [JMP] harmless against all claims for damages…loss, … and/or theft … growing out of the execution of [Weather Shield’s] work,” and also agreed “at [it’s] own expense to defend any suit or action brought against [JMP] founded upon the claim of such damage [,] …, loss or theft.” JMP, Weather Shield and other contractors were sued in the homeowners’ underlying lawsuit. JMP’s cross-complaint against all subcontractors included claims based upon a contractual duty to indemnify and to defend JMP. The case was settled against all parties except the window manufacturer and the framing contractor. Though Weather Shield prevailed at trial, the framing contractor, who installed the windows, did not and thereafter settled out of the case. The pertinent portion of the appeal reviewed by the Supreme Court dealt with an award of over $130,000 against Weather Shield for attorneys’ fees incurred in JMP’s defense of the underlying case as to the window issues.
The Supreme Court ruled that a subcontractor who, in its contract with the developer, agrees to defend any suit or action against the developer “founded upon” any claim “growing out of the execution of the [subcontractor’s] work” is obligated to defend the developer regardless of the subcontractor’s obligation to indemnify the developer. Though this result may seem unfair to some, the court specifically did not consider whether the provision at issue was unconscionable.
The Crawford decision is based on fundamental principles of contract interpretation: While the duty to indemnify was expressly limited to claims for damages arising from Weather Shield’s negligent work, Weather Shield otherwise agreed to defend any suit against the developer “founded upon the claim of such damage.” In other words, the duty to defend arose when somebody merely made a claim that their damage arose out of Weather Shield’s work. The opinion also noted that a duty to defend based upon subdivision 4 of Civil Code section 2778 is similarly broader than the statutory duty to reimburse defense costs set forth in subdivision 3 of Civil Code section 2778 because the creation of a duty to defend against a suit raising claims covered by the indemnitee is broader than an obligation to pay the costs of defense that is otherwise part of an indemnification obligation.
For lawyers who specialize in dealing with construction contracts, the decision was detailed and scholarly. As a practical matter, however, it simply clarifies an area of legal ambiguity which, for the most part applies, thanks to the 2006/2008 amendments to Civil Code section 2782, only to pre-January 1, 2006 construction contracts. Consequently, while pre-2006 agreements can contain the language at issue in the Crawford case, post-2006 defense provisions must be consistent with indemnity obligations. The Supreme Court noted, however, that notwithstanding concurrent indemnity and defense obligations, Civil Code section 2782 still allows parties to contractually agree to the timing and reimbursement of defense costs, so long as those provisions do not waive the defense/indemnity limitations set forth in that section.
Footnote 12 of the Crawford decision explains that it is appropriate to defer, upon agreement of the parties, resolution of a party’s contractual defense obligation until the underlying litigation has been completed. If the parties cannot agree, they are allowed to file motions for summary judgment/summary adjudication to resolve those issues even though the construction defect lawsuit has not yet resolved. If there then is a finding of an ongoing duty to defend, but the parties cannot agree how the defense should be handled, the trial court may allow the underlying lawsuit to be defended by counsel of the indemnitee’s choosing, subject to later apportionment of that obligation among all other subcontractors who may share that obligation for their particular scope of work.
As such, the Crawford decision confirms that a duty to defend may be broader than a duty to indemnify, depending upon the language of the construction contract at issue. While the 2006/2008 amendments to Civil Code section 2782 should eliminate this distinction, those amendments do not eliminate the fact that the parties may contract about the timing and funding of a defense obligation subject to any right of reimbursement. The Crawford decision indicates timing and funding language of even post January 1, 2006 contracts will be enforced pursuant to basic rules of contractual interpretation, subject to Civil Code section 2782, and possibly subject to unconscionability defenses.
The Crawford decision is a clear message from the California Supreme Court that subcontractors or any other indemnitor identified in a construction contract must take their defense obligations seriously and plan on how to deal with a request by an indemnitee to satisfy those obligations while litigation is pending. The decision also confirms that one party to a contract may shift the obligation to defend it against any claim involving the other party’s work prior to any finding that the other party was at fault and that the defense obligation begins when the claim is made.
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