Defense and indemnity provisions in construction agreements often misunderstood to the detriment of subcontractors.

Most construction agreements between general contractors and subcontractors contain indemnity provisions that obligate the subcontractor to defend and hold harmless the general contractor from any claim growing out of the subcontractor’s work.  (See e.g., Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541, 547-48.)  Under these types of provisions, when any party makes a claim against the general contractor, the general contractor may tender its defense to the subcontractor in an effort to force the subcontractors to pick up the general contractor’s attorneys’ fees or pay a quick settlement to avoid the cost of litigation.  Simply refusing to pay may create a perverse incentive for the general contractor’s attorney to churn the file because the attorney represents the general contractor, but the attorney will ultimately seek those fees against the subcontractor who failed to pick up the defense obligations.   Many subcontractors incorrectly assume that their defense and indemnify obligations arise only after a finding of fault or at least, some finding of a connection between the subcontractor’s work and the claim against the general contractor.  In reality, the specific language of the indemnity provision controls.  The misconceptions may be attributable to the misunderstanding of Crawford.

In that case, the indemnity provision obligated the window installation subcontractor to indemnify the developer from all claims “growing out of the execution of [its] work” and to defend and indemnify the general from all actions “founded upon the claim of such damage.”  (44 Cal.4th at 547-48.)  Several homeowners filed suit against the developer alleging that the windows had been improperly designed, manufactured, and installed.  (Id. at 548.)  The developer filed a suit for indemnity against the subcontractor, which contended that the duty to defend and indemnify only arose after a court determined that the subcontractor performed negligently.  (Id. at 548-49.)  The Supreme Court held that the subcontractor’s duty to defend “arose when such claim was made” based on the interpretation of the specific indemnity provision at issue, which referenced any “claim” and contained a singular clause for defense and indemnity.  (Id. at 558.)

Although Crawford seems straightforward, the case is often cited for the proposition that the subcontractor’s obligations always arise when a claim is made, presumably because the Supreme Court held that the subcontractor had to defend the developer.  For example, the Court of Appeal characterized Crawford as “holding that a contractual indemnitor incurs a duty to defend the indemnitee as soon as the indemnitee tenders its defense to the indemnitor.”  (UDC-Universal Development v. CH2M Hill (2010) 181 Cal.App.4th 10, 15.) However, the Court of Appeal’s interpretation went too far as the Supreme Court emphasized that its interpretation was based upon the particular provision at issue.  (Crawford, supra, 44 Cal.4th at 567.) Not every defense and indemnity provision is the same.  Consequently, subcontractors looking to avoid paying out defense costs prior to a finding of liability or based on any “claim” should evaluate the language used in their indemnity provisions and consider adding language distinguishing it from the provision in Crawford.