United States: The State Of Crawford In 2017

More than eight years ago, the California Supreme Court handed down Crawford v. Weather Shield (2008) 44 Cal.4th 541, holding that a contractual indemnitor must immediately assume an indemnitee's defense, irrespective of whether it is determined that indemnity is actually owed. The Crawford Court determined that, per California Civil Code section 2778, a promise of indemnity against claims, demands, or liability "embraces" the costs of defense against such claims, demands, or liability and that this obligation includes an obligation of "active responsibility" on the part of the indemnitor. Id. at 553-554. The Court further clarified that under section 2778, the duty to defend is distinct and separate from the contractual obligation to pay an indemnitee's defense costs after the fact, as part of any indemnity owed under the agreement. Id. Perhaps most striking about Justice Marvin Baxter's decision at the time was his affirmation that, even if it is ultimately determined that the indemnitor was not negligent for the claims giving rise to the duty to indemnify, an indemnitor nonetheless has an immediate duty to defend the indemnitee upon a proper tender of defense.

What is the status of Crawford in 2017? While the passage of California Senate Bill 474 in 2011 and its resulting revisions to California Civil Code 2782.05 in 2012 was anticipated to limit the application of Crawford, at least in the context of construction defect actions, the core principles set forth in Crawford remain undisturbed. Notably, neither the California Courts of Appeal nor the California Supreme Court have addressed any limitations on Crawford by section 2782.05. To the contrary, Crawford is regularly referenced by courts and practitioners in California as the dominant authority when a contractual indemnitee seeks defense and indemnification from another entity who has expressly agreed to hold harmless the indemnitee. See Searles Valley Minerals Operations Inc. v. Ralph M. Parsons Serv. Co. (2011) 191 Cal.App.4th 1394, 1401 (under Crawford, indemnitee was entitled under the agreement to a defense from the indemnitor and, since the indemnitor did not provide a defense, indemnitee was entitled to recover its defense costs); Valley Crest Landscape Dev., Inc. v. Mission Pools of Escondido, Inc. (2015) 238 Cal.App.4th 468, 489 (finding that under Crawford, a subcontractor's contractual duty to defend and indemnify under the subcontract was triggered by the allegations that the subcontractor's negligence contributed to the damage); UDC-Universal Dev., L.P. v. CH2M Hill (2010) 181 Cal. App. 4th 10, 24 (Crawford applies retroactively and commands 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.) Crawford is also invoked in numerous unpublished decisions. See, e.g., Jqd Inc. v. Ir. Beach Clusterhomes Ass'n, 2015 Cal. App. Unpub. LEXIS 1621; Morales v. County of L.A., 2015 Cal. App. Unpub. LEXIS 2944).

The term "Crawford" has become part of California's judicial vernacular such that many judges, practicing attorneys, mediators and claims professionals regularly refer to "Crawford motions" and "obligations under Crawford." Crawford is now synonymous with an immediate duty to defend. California Appellate Courts published two recent decisions further affirming Crawford's tenets.

The Duty to Defend Remains Distinct From the Duty to Indemnify

In Aluma Systems Concrete Construction of California v. Nibbi Bros. Inc., (2016) 2 Cal. App. 5th 620, 623, a contractor, Aluma agreed to design and supply shoring for Nibbi's construction project. Nibbi agreed to defend and indemnify Aluma from and "against any and all claims, actions, expenses, damages, losses and liabilities, including attorneys' fees and expenses, for personal injuries (including death) and/or property damage arising from or in connection with this contract and/or [Aluma]'s equipment and services, except to the extent such claims, actions, expenses, damages, losses and liabilities are caused by the acts or omissions of [Aluma] or anyone directly or indirectly employed by [Aluma] or anyone for whose acts [Aluma] may be liable." Id. Employees of Nibbi sued Aluma, alleging that they were injured after the shoring system designed by the Aluma collapsed. Aluma then sued Nibbi for indemnification. Id.

The trial court granted Nibbi's demurrer to Aluma's complaint on the grounds that the allegations the employees' lawsuit set forth claims only against Aluma and not Nibbi. Id. The Court of Appeal reversed the trial court, citing Crawford's proposition that "the duty to indemnify is distinct from the duty to defend: the former "require[s] one party to indemnify the other, under specified circumstances, for moneys paid or expenses incurred ... as a result of" a third party claim, while the latter "assign[s] one party ... responsibility for the other's legal defense when a third party claim is made." Id. at 627. The Court noted that both Aluma and Nibbi did not make any distinction between Nibbi's duty to defend and its duty to indemnify. Therefore, the Court stated that it did not have to consider Nibbi's duty to defend because Aluma's complaint sufficiently stated a claim with respect to Nibbi's duty to indemnify. The Court found that, while the allegations in employees' complaint may be relevant to the duty to defend, the allegations did not govern Nibbi's duty to indemnify. Id. at 628.

Indemnitees asserting Crawford claims should consider whether to plead two separate causes of action for breach of the duty to indemnify and breach of the duty to defend, based on the circumstances of the third party claim and the third party's allegations. In Aluma, Aluma's cause of action for express indemnification included an allegation that Nibbi also owed a duty to defend. It may be prudent in certain situations to plead these obligations separately so that if one cause of action is dismissed, the possibility of risk transfer remains.

Interpretation of "Embraced By"

How do courts determine whether a third party claim is "embraced by" an indemnification provision? While California courts have, for the most part, taken an expansive approach to the defining what is "embraced by" an indemnification obligation, the term is not limitless. Courts may want to prevent parties claiming they are owed indemnity from overreaching. A Court of Appeal recently considered the following hold harmless provision: "Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees expenses and/or liabilities arising out of, involving or in connection with, the use and/or occupancy of the Premises by Lessee." Morlin Asset Management LP v. Murachanian (2016) 2 Cal.App.5th 184, 188.

Morlin involved a carpet cleaner who filed suit against a building tenant (the "Lessee") and the tenant's landlords (the "Lessors") alleging that he was injured when he slipped and fell on the stairs in the common area of the commercial building. Id. at 187. The carpet cleaner was an employee of a cleaning service hired by the Lessee to clean his dental suite and the Lessors cross-claimed the Lessee for express indemnity under the terms of the lease. Id. at 187-188. The Court of Appeal concluded as a matter of law that the indemnification clause in the lease did not extend to claims or liabilities arising out of an accident in the common area over which the tenant had no control and affirmed the Lessee's motion for summary judgment. Id. at 189. The Court stated that it did not matter that the accident would not have happened but for the tenant hiring the plaintiff to clean the carpets because the connection between the tenant's use of his suite and the accident in the stairwell over which the tenant had no control was too remote to have been within the contemplation of the parties when they entered into the lease. The Court concluded that such an interpretation of the lease was "fully consistent" with the law governing indemnification provisions, as set forth in Crawford. Id. at 193.

Continuing Enforcement of Defense Obligations

Consistent with the general principals of contractual interpretation, Crawford requires "clear and explicit" language in the indemnifying agreement in order for the indemnitee to enforce its rights to be held harmless. More often than not, the language of the provision will indicate an intent to "hold harmless" the indemnitee, as Crawford is typically invoked in disputes involving entities in the construction industry where form contracts are prepared by contractors who are mindful of the language which triggers the indemnification obligation. Courts have ruled accordingly. In one recent trial court decision, counsel for an indemnitor argued that the phrase "it will accept and assume responsibility for and immediately undertake defense of any claim" in a lengthy hold harmless clause should be interpreted to mean that the provision only requires that it defend itself, and not the indemnitee. The court held that such an interpretation was unreasonable and illogical.

In attempts to potentially maximize recovery for their clients, some plaintiffs' attorneys include broad, encompassing allegations in a complaint to implicate as many parties as possible and secure additional contribution to a claim. Under Crawford, the indemnitor's defense obligation is triggered immediately upon proper tender. Defendants who have the benefit of a written indemnity agreement running in their favor must ensure that written tenders are transmitted to all potentially implicated parties as soon as these parties are identified. Sometimes these tenders are transmitted prior to the filing of a claimant's lawsuit. This dynamic would seem to provide an incentive for the indemnitee to resolve the claim as soon as possible, prior to incurring additional defense fees and costs. From a practical viewpoint, providing an immediate defense may, depending on the circumstances, allow the indemnitor to control, or at the very least, monitor the progress of the litigation and assess the exposure. In actual practice, this does not occur as often as it should, often resulting in continued litigation, cross claims for defense fees and costs, subrogation actions and multiple lawsuits between co-indemnitors. 

What does Crawford mean for entities who are subject to hold harmless provisions? These entities will have to continue to pay particular attention to the indemnification language with an awareness that they may be requested to defend third party claims even prior to a determination of whether they owe indemnity. Inequities in bargaining power between and indemnitor and indemnitee may force indemnitors to continue to enter into these types of agreements, which may raise the cost of doing business for the entities who frequently face requests to defend against third party claims.

In sum, Crawford remains the prevailing authority for an indemnitee to enforce contractual defense and indemnity obligations and will continue to do so unless the California Supreme Court issues a decision to the contrary. Alternatively, a legislative amendment to California Civil Code section 2778 may limit Crawford's reach. However, section 2778 has not been amended since its enactment in 1872, and there are no pending legislative bills pertaining to this section.

With regard to construction defect actions, and as discussed in more detail in a sister articles in this newsletter, California Civil Code section 2782.05 applies to non-residential construction contracts entered into after January 1, 2013, so courts may not have had the opportunity to analyze a dispute involving the interplay of the two authorities. We can anticipate that the courts will address the effect of section 2782.05, if any, on Crawford in the near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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