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January 2010

Consultant's Duty to Defend Under a Contract with Developer Arises At the Time of Tender Despite the Lack of a Finding of Negligence Against the Consultant.

UDC-Universal Development, L.P. v. CH2MM Hill, 2010 DJDAR 794

The California Court of Appeals issued an important opinion regarding UDC v CH2MMHill this week affecting construction professionals. The decision is the first of its kind to interpret a design professional's duty to defend under an indemnity agreement in light of the California Supreme Court's decision in Crawford v. Weathershield.

In short, the court concluded that CH2MHill (CH2M) was obligated to defend the project developer despite the fact a jury did not find any negligence on the design professional's part. The court's conclusion was based on the fact that the professional services agreement between the parties provided that CH2MMHill would "defend any suit, action or demand brought against Developer or Owner on any claim or demand covered herein" to the extent it arose out of or was in any way connected with any negligent act or omission by CH2M.

Under the court's interpretation, the duty to defend arose at such time as the homeowners' association made claims implicating CH2M’s work. The court further found that the indemnity provision in question did not require an underlying claim of negligence directed specifically against CH2M in order to trigger a defense obligation, and that the obligation was not excused by virtue of the jury's exoneration of CH2M on the negligence claim. The court also determined that it was appropriate to apply Crawford retroactively. Due to the finding of no negligence, however, CH2M would not have any duty to indemnify the developer.

Developer UDC and CH2MHill entered into two contracts in which CH2M was to provide consulting services in the development of a residential project. The homeowner’s association (HOA) sued UDC for property damages resulting from defective conditions at the project, due in part to negligent planning and design. Subsequently, UDC cross-complained against several subcontractors, including CH2M, and tendered its defense to all cross-defendant’s based on their contracts with UDC. CH2M rejected UDC’s tender, and thereafter UDC sought reimbursement for costs associated with its defense. CH2M claimed that its contracts with UDC did not require a defense because 1)negligence on behalf of CH2M was not asserted in the HOA’s complaint, 2)nor was it established in UDC’s action. Further, CH2M argued UDC’s cross-complaint was barred due to the illegality of the contract based on UDC’s lack of a “Class A” contractor’s license. CH2M also sought review of the Court’s refusal to award attorneys fees to CH2M based on the developer’s failure to comply with California’s Certificate of Merit statute, CCP§411.35.1

The Appellate Court first addressed CH2M’s argument that it only had a duty to defend UDC against the HOA’s lawsuit if a claim against UDC was based on CH2M’s negligence. CH2M’s contract with UDC stated in part that:

Consultant shall indemnify…Developer…from and against any and all claims…to the extent they arise out of or are in any way connected with any negligent act or omission by Consultant…Consultant agrees, at his own expense, and upon written request by Developer or Owner of the Subject Property, to defend any suit, action or demand brought against Developer or Owner on any claim or demand covered herein. (Emphasis added).

CH2M argued that under the contract, it had a duty to indemnify UDC only if it was found negligent in performing its work and a duty to defend only when the HOA alleged a claim that directly implicated CH2M.

The Court agreed that the “negligent act or omission” language shielded CH2M from a duty to indemnify, as that duty was dependant upon a finding of negligence. However, following Crawford v. Weather Shield Mfg. Inc., the Court construed the duty to defend provision as requiring CH2M to defend "any suit, action or demand" against UDC insofar as it was “in any way connected with any negligent act or omission" of CH2M’s work on the project. The duty to indemnify and the duty to defend are separate and distinct obligations. Thus, CH2M’s duty to defend was triggered when “any claim against UDC implicated CH2M’s performance of its role in the project…when the HOA alleged harm resulting from deficient work that was within the scope of services for which UDC had retained CH2M.” It was irrelevant that the HOA had not alleged negligence on the part of CH2M. The Court reasoned that 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.”

The court’s opinion necessarily is based on the contract language, leaving open how changing the wording might alter the design professional's defense obligation so that it is only triggered by a finding of negligence on the part of the design professional. The court placed some emphasis on the fact that the "indemnity" language(which is triggered if CH2M is found negligent) was separate from the "defense" language, which is more ambiguous and applies to "any claim or demand covered herein." For example, would a provision that reads that the design professional must "defend and indemnify" the developer for "any claims to the extent caused by any negligent act or omission" by the design professional trigger an immediate defense obligation on the part of the design professional? In this example, the "defense" obligation is specifically linked to a finding of negligence, so counsel for the design professional would be able to argue that the "defense" obligation would only arise at the end of the case, after a jury determined that the design professional is negligent.

On the other hand, the court included language in its opinion that may suggest that the design professional's obligation to provide a defense to the developer would be immediate even if specifically linked to a negligence finding. Here, the court stated,

If "any claim or demand covered herein" refers back to claims and demands identified in the indemnity clause, it obviously cannot be premised on a proven "negligent act or omission" by CH2MHill unless there is first a finding of such negligence. As the trial court pointed out, requiring such a determination would render meaningless the defense obligation and contravene Civil Code section 2778 and the Supreme Court's admonition that a duty to defend arises out of an indemnity obligation as soon as the litigation commences and regardless of whether the indemnitor is ultimately found negligent.

The practical effect of the decisions in Crawford and now UDC is to further impact the availability of insurance since in these cases the costs of defense frequently exceed the cost of repairs. In the case of design professionals, many of the professional liability insurers argue that their policies do not provide any coverage for the costs of defending a client under a contractual indemnity provision in the absence of evidence of professional negligence. If the obligation to provide a defense is triggered at the time of the tender, the design firm may be forced to bear this cost on its own without help from its insurer.

The retroactive application of the broad duty to defend standard of Crawford in the UDC opinion renders it applicable to contracts entered into over the past 10 years, at a time when most construction professionals, and their attorneys and insurance brokers, had a different understanding of the law. This is likely to drive the cost of “claims made” professional liability insurance higher and result in many insurers taking hard line positions against paying defense cost claims.

This decision will negatively impact design professionals. This decision will only encourage developers when sued to name “everyone who walked by the project” with whom they have a contract arguing that they owe a defense because the developer “believes [they are] responsible for the plaintiff’s damages.” Designers with significant assets and the financial strength to be selective may further withdraw from the residential market except where they can negotiate around such duty to defend clauses.

Although the court's opinion is not yet final and may be modified, depublished, or reviewed by the Supreme Court, UDC v CH2MHill is nonetheless significant in its extension of Crawford directly to design professionals and its broad interpretation of defense obligation under the standard language typically found in owner/design professional contracts. It remains to be seen whether these decisions lead to legislative action or revisions to professional liability policies. In the interim the Crawford and UDC decisions may led to an expansion of Owner Controlled Insurance Programs (OCIP’s) which include the design team or the use of Joint Defense Agreements.

Click here to view the opinion.



1 CH2M argued that it was entitled to attorney’s fees because UDC failed to file a certificate of merit. California CCP § 411.35 requires counsel for a claimant alleging professional negligence against an A/E to file and serve a certificate declaring that the attorney has received an opinion from at least one A/E stating that there is reasonable and meritorious cause for the suit. UDC had failed to comply with the statute. However the Court of Appeals upheld the trial court’s exercise of discretion in refusing to order an award of attorneys fees because CH2M failed to show that the failure to file the certificate caused CH2M any “further expense of any kind.”

 

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