Indemnity Agreements & California s Crawford Decision: Its Implications and Strategies for Defense Prepared for the Construction Law Section Meeting at the 2011 Annual Meeting of the Federation of Defense & Corporate Counsel Williamsburg, VA July 2011 Jean M. Lawler Daniel G. Pezold Murchison & Cumming, LLP 801 S. Grand Avenue 9 th Floor Los Angeles, CA. 90017
Indemnity Agreements & California s Crawford Decision: Its Implications and Strategies for Defense Crawford V. Weather Shield Mftg., Inc. (2008) 44 Cal. 4th 541, 79 Cal.Rptr.3 rd 721 It has been almost three years now since California s Supreme Court changed the way that indemnity obligations are addressed in California, creating a new language with phrases such as Crawford fees and Crawford claims and a host of new and changed litigation. In typical fashion, these changes and the new vocabulary that accompanies them have spread to other jurisdictions and probably will extend further. So what is Crawford and what does it mean to a business entity who has agreed to indemnify another? To its insurer? What does it mean in litigation and what new defenses and strategies appear to be working to defend against and/or minimize Crawford claims? General Background on the Crawford Decision Simply put, in Crawford the California Supreme Court determined that the indemnity provisions of a contract obligated the indemnitor to begin paying the defense costs of the indemnitee at the outset of a lawsuit, prior to the time that it could be determined whether or not there would be liability imposed on the indemnitee because of the negligence of the indemnitor. This has resulted in early tenders of defense, the filing of cross-complaints and summary judgment motions seeking to recover Crawford fees, insurers needing to defend indemnitees of their insureds along with additional insured carriers, exaggerated settlement demands meant to include Crawford claims, which may or may not be tied to realistic evaluations of damage exposures related to the work of the indemnitor. For sake of discussion, assume that X and Y enter into a contract, for the lease of a building, for the sale of a product, to provide a service or for some other business purpose. As part of that contract, X agrees to indemnify Y if Y is liable to a third party for damages, caused to some degree by the work, product or other negligence of X. A lawsuit is filed against Y, seeking damages because of injury. Y thinks that the cause of the injury is attributable to the negligence of X and that X should defend/indemnify Y for any damages that Y incurs in connection with the lawsuit. Y tenders its defense of the lawsuit to X. X may or may not have insurance applicable to the loss. X may not also be sued in the lawsuit. Neither of these latter two facts is pertinent to the analysis. Recognizing the proviso that each contract is unique and its terms need to be evaluated and considered based on the particular factual situation involved, but speaking in generalities, if the Crawford decision applies to the X/Y contract, then at this point, X will arguably need to pay to defend Y in the lawsuit. If X is self-insured, then that expense will come out of X s corporate coffers. 2 Page
If X has insurance applicable to the loss, then X will turn to its insurer and ask that the insurer pay Y s legal fees. X s insurer will need to look at the insurance contract entered into between X and the insurer, to determine what the policy says about coverage for liability that X has assumed under an insured contract (the X/Y contract may or may not be an insured contract as defined by the policy). If the X/Y contract is an insured contract within the meaning of the insurer s policy and there are no other dispositive coverage issues, then X s insurer will be obligated to indemnify X for the attorney fees/costs that X must pay to Y under the indemnity provision of the X/Y contract. Because these payments are paid under the policy s coverage provisions, they are indemnity payments made on behalf of X and they apply to reduce the policy s available liability limits. (i.e. If X has a $1 million policy limit and $200,000 in attorney fees/costs are paid out for Y s defense expense, then X now has only $800,000 in available liability limits remaining available to it.) Responding to Crawford Demands What should X do when it gets the demand from Y? At the very least, X should: 1. Review the X/Y contract to see if there is an applicable indemnity provision (the services of an attorney may be needed); 2. Review its CGL policy (or other applicable policy) to see if it might have coverage under the policy for Y s claims; 3. Regardless of what X might think to be the answer to #2, tender the matter to all of X s insurance carrier(s) and cooperate with the insurer s investigation; 4. If X has no applicable insurance coverage, it will need to investigate the loss and secure pertinent information regarding the loss or lawsuit, eg. demands, pleadings, loss information, etc., 5. Ultimately, respond to the tender. Whether X agrees to defend or not, in its response to Y, X needs to reserve its rights under the terms and conditions of the X/Y contract as to whether or not the contract is applicable to the loss and whether X has any obligations to Y under the contract; and 6. Undertake to defend, or not, with or without your insurer. Defense strategies are discussed in further detail below. What should X s insurer do when it gets the tender from X? At the very least, the insurer should: 1. Open a claim file and undertake to investigate the matter and evaluate it for coverage; 2. Evaluate the matter under both the insured contract exception to exclusion b of the CG0001 form (or its counterpart) and the supplementary payment provisions of the policy; 3 Page
3. If the X/Y contract is an insured contract and the policy is otherwise applicable to the loss, agree to indemnify X for what X owes to Y under the X/Y contract, with or without reservation of rights (again, depending on the coverage analysis), working out an appropriate payment arrangement. Payment of Y s expense fees/costs and any settlement funding will be paid as indemnity payments inside policy limits. 4. If the X/Y contract is not an insured contract, then there is likely no coverage for X for what X might owe to Y as indemnity and no obligation to indemnify X for Y s attorney fee payments. Again, however, each policy is unique and must be evaluated on its own merits and per its own terms and conditions. 5. Whether or not the X/Y contract is an insured contract, if the loss otherwise falls within the scope of coverage available to X if it is directly sued in the matter, take a look at the policy s supplementary payment provisions to determine if those requirements for defending Y have been or could be satisfied, so that the attorney defending X could also defend Y. Payments under the supplementary payment provisions are generally outside of limits, but that depends on the policy language. 6. Make a decision, properly advise the insured and proceed to handle the matter accordingly. 7. If the claim is not denied, then consider what other insurers may need to participate with you in the defense of Y, including Y s direct insurer, its additional insured insurers, and any other business entities that may have their own indemnity obligations for the claims at issue (eg. in a construction defect context). 8. Defend X against the indemnity claim of Y. Defense strategies are discussed below. Basic Implications of Crawford for Indemnitees, Indemnitors and their Insurers If X has no insurance, it needs to re-evaluate how it plans to handle these matters in the future and if it needs to secure insurance protection for these exposures. If X has insurance, its insurer may step into the indemnity issues (at least for defense) at the outset rather than at the end of the matter; For X s primary insurers, you will be in essentially the same position as Y s AI carriers, but your limits will generally be depleted by your payments (whereas an AI carrier s payments would not deplete limits if defense is outside of limits). You will need to work out allocations with other responsible parties and you may find your policies exhausting earlier (so may need to give earlier notice to excess carriers and/or reinsurers). For X s excess insurers, you may find that the primary policy is exhausted earlier than it would have been had the primary insurer not had to indemnify X for what X s obligation to pay Y s defense fees/costs. You need to keep a closer eye on monitoring losses and factor in the effect of payments of Y s defense fees/costs. 4 Page
For reinsurers the payments for Y s attorney fees/costs will be indemnity on behalf of X and covered damages, with the impact of that turning on the terms of the applicable reinsurance treaties. If you are Y, you want contracts with strong indemnity provisions without exceptions that might mean that X doesn t have to pay until after determination of negligence. You also want to have Additional Insured status under X s policy, so that defense fees/costs don t reduce limits available under X s policy to pay whatever judgment or settlement must be paid. If not an AI, then the net effect of X s policy for your purposes is that it is a burning limits policy, eaten up by payment of your attorney fees. This asset needs to be managed carefully during litigation and defense expense should not be allowed to eat up otherwise available policy limits that could be used to pay the claimant. Defenses for X to Assert to Defeat or Minimize Crawford Claims and Crawford Damages Just because there is an indemnity provision referencing defense and because a defense has been demanded does not mean that one is legally obligated to be provided. There are threshold questions, issues and defenses that can and should be asserted so that one need not pay for a defense for which one is not legally obligated to pay and/or so that one may be able to avoid or minimize any obligation to pay Crawford fees. At the very least, when a demand is made or crosscomplaint filed, appropriate letters and/or discovery should be served. An example of an initial letter to Y s attorney follows below. This is sent even if summary judgment has been filed, to set the stage for a meet and confer and grounds to oppose the summary judgment. In our experience, many attorneys will not be willing to give up their attorney bills, even though they must do so to recover payment. The same types of documents being requested should also be requested in formal discovery. Dear : This letter is regarding Y's Motion for Summary Adjudication of Y's Cause of Action for Declaratory Relief Re: Duty to Defend. We respectfully suggest that with defending insurers, this entire law and motion exercise appears to be creating a needless and costly expense. While Y's defending insurers may at some point have a contribution claim to bring against non-defending A.I. carriers, or even a subrogation claim against the non-defending subcontractors for fees and costs directly arising from the defense of claims arising from a subcontractor's scope of work, it does not appear that Y presently has a claim, particularly one that can be brought by your firm. Further, the subcontract at issue states, "Subcontractor shall not provide indemnity against claims, liability, loss, or expense, when shown by the final judgment of a court of competent jurisdiction to have been caused by the sole negligence or sole misconduct of Contractor or Owner." How do you propose that Y would make a cross-defendant whole if ultimately Y is found to be solely negligent for some or all of the alleged damages attributed by Y? 5 Page
With respect to the alleged duty to defend, the subcontract at issue clearly states that the duty to defend, if any, is strictly limited to claims arising from a subcontractor s work. Without addressing the numerous ambiguities in that subcontract, or even the enforceability of the terms and conditions, it is undisputed by Mr. s declaration that Y is being defended. It is also clear that a subcontractor is not required to contribute to the payment of any attorneys fees and costs associated with the defense of claims arising from the work of any other trade at the subject properties, the prosecution of Cross-Complaints against any other Cross-Defendant in this action, toward Y's responses to discovery with respect to any other trade, toward expert fees and costs not related to that subcontractor's scope of work, or toward any defense activity unrelated to the plaintiff s claims against Y specifically arising from that subcontractor's scope of work at the subject property. As such, in addition to the issues raised above, no determination can be made as to the defense obligation in favor of Y, if any, without our prior evaluation of the following: (a) The hourly rates for each attorney and paralegal for which Y seeks any defense participation by X ; (b) All attorneys fees and costs invoices, un-redacted, consistent with ABA Uniform Billing Standards, for which Y seeks X s participation; (c) The identity of each insurance carrier who is contributing or who has agreed to contribute the defense of Y; (d) The total amount contributed by each insurance carrier toward Y s defense to date; (e) A copy of all Joint Defense Agreements executed by or on behalf of Y, its insurer(s) and other Cross-Defendants insurers, including all A.I. carriers; (f) The total amount contributed by any party to the above captioned litigation toward Y s defense; and (g) All invoices, un-redacted, for expert fees and costs for which Y seeks any reimbursement from X We wish to schedule a meet and confer session with you, in person, to discuss the issues raised above, including but not limited to the fact that Y is currently being defended and, how Y intends to address it's apparent inability to make a cross-defendant whole if ultimately Y is found to be solely negligent for some or all of the alleged damages attributed by Y. Your cooperation and professional courtesy in this matter is anticipated and appreciated. We look forward to the production of the requested documents and to scheduling a meeting with you. Thank you. 6 Page
Depositions re the various aspect of the fees that are demanded to be paid, including the fees themselves and the fee arrangement, the reasonableness of the work, actual payments by Y, and other related issues are all appropriate areas for inquiry. In California, it is typical that a summary judgment motion will be filed seeking an adjudication of an immediate duty to defend under the indemnity agreement. Those should be opposed on both legal and factual grounds. My firm recently succeeded in both outright defeating a motion for summary judgment in one matter and having a summary judgment motion taken off calendar in another. Again, aggressive defense to these types of demands and motions are generally effective to defeat or substantially minimize the claim. On a cost issue alone, if X disputes the tender, Y may well not pursue the claim at the defense level, either abandoning the claim or seeking to incorporate extra money into X s funding of the settlement pot. Attached to this article are samples of responsive pleadings, discovery requests and an opposition to a Summary Judgment motion, which have been successfully used to set the stage to defeat a Crawford claim seeking defense fees. More often than not, claims for Crawford fees will be made as part of an overall settlement to which the same responses should be asserted. If a defense has been assumed, there are approaches that can be taken to ensure that any attorney fees paid are reasonable, that they are related to the work of the insured and other such things. The same kind of audits, motions and arguments that are often taken by insurers with respect to independent counsel (eg. CA Civil Code section 2860) and Buss rights (i.e. reimbursement of fees paid for non-covered damages) can and should be applied to what are now being called Crawford fees. That said, keep in mind that if X is insured under a typical CGL policy (eg. using form CG 0001), then the payment of Y s attorney fees (i.e. Crawford fees) are paid as an indemnity payment, such fees being an exception to the Breach of Contract exclusion, exclusion b. As such, they reduce the liability limits available to X and/or Y for settlement of the claim. Such fees are not paid outside of limits where the policy uses the form CG0001, unless all of the requirements for payment as supplementary payments have been satisfied a very rare thing, especially in the construction context. Concluding Comments Crawford defense concepts can easily be applied in any situation seeking indemnification of defense fees/costs. The difference, however, between the traditional indemnity setting and the Crawford setting is that under Crawford, defense fees are payable immediately, at the outset of the litigation and both X and his insurer have been placed in the position of sharing defense with those actually insuring Y, as if they themselves were insurers. Crawford demands should be scrutinized very closely and are worthy of strong defense. Each contract and situation is of course unique, but if contested, there is a very strong chance that the claimed obligation to pay Crawford fees can be defeated. And, if not outright defeated, the obligation can generally be minimized. 7 Page