Viability of Contractor’s Express Indemnity Claims are Not Dependent on Allegations In Underlying Third Party Actions

Sep 30 2016

By: Chelsea L. Zwart
September 30, 2016

On August 16, 2016, the First District California Court of Appeal held in Aluma Systems Concrete Construction of California v. Nibbi Bros. Inc. (2016) 2 Cal.App. 5th 620 that a general contractor’s demurrer to a subcontractor’s indemnity claim was erroneously sustained because (1) the allegations of underlying third-party lawsuits were not determinative of liability and (2) the subcontractor’s underlying claim for a worker’s compensation offset did not obviate the subcontractor’s indemnity claim.

In Aluma, a deck shoring subcontractor (the “Subcontractor”) entered into a contract with a general contractor (the “General Contractor”) to design and supply the materials for wall formwork and deck shoring at the General Contractor’s construction project (the “Subcontract”). The Subcontract included an indemnity provision stating: “To the extent permitted by law, [General Contractor] shall defend, indemnify and hold harmless [Subcontractor] 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 [Subcontractor]’s equipment and services, except to the extent such claims, actions, expenses, damages, losses and liabilities are caused by the acts or omissions of [Subcontractor] or anyone directly or indirectly employed by [Subcontractor] or anyone for whose acts [Subcontractor] may be liable.”

The Subcontractor was later sued by a number of the General Contractor’s employees for injuries sustained when a shoring system, allegedly negligently designed by the Subcontractor, collapsed (the “Employee Suits”). The Subcontractor asserted, as an affirmative defense, that the employees’ injuries were proximately caused by the negligence of the General Contractor and others. On that basis, the Subcontractor tendered the defense and indemnity of the Employee Suits to the General Contractor based upon the Subcontract’s indemnity provision. When the General Contractor did not respond, the Subcontractor sued the General Contractor directly for indemnification in the instant action.

The General Contractor demurred to the Subcontractor’s complaint on the basis that the contractual indemnification provision did not apply because the Employee Suits alleged that the Subcontractor alone, not the General Contractor, was negligent. The trial court sustained the demurrer without leave to amend, finding that “the exception included in the Contract’s indemnity provision plainly states that the [General Contractor’s] duty to defend, indemnify, or hold harmless does not arise from acts caused by or omissions of the [Subcontractor]… The underlying complaints in this action allege negligence as to the [Subcontractor] only because the employees are required to pursue worker’s compensation claims against the [General Contractor]. The acts and/or omissions for which [Subcontractor] seeks indemnity against arose from [Subcontractor’s] alleged negligence and is barred by the plain language of the Contract.”

The Court of Appeal reversed the trial court’s decision, holding that the allegations in the Employee Suits were not determinative of the Subcontractor’s claim for indemnity. In so holding, the Court of Appeal reasoned that the Subcontractor reasonably interpreted the indemnification provision as providing proportionate liability such that the General Contractor must indemnify the Subcontractor for any portion of the economic damages attributable to the negligence of the General Contractor and/or others, but is not obligated to indemnify the Subcontractor for any portion of the damages attributable to the Subcontractor’s negligence.

The Court of Appeal also held that while the employees could not sue the General Contractor for damages and instead had to pursue benefits through worker’s compensation, the Subcontractor may be entitled to offset part or all of the worker’s compensation benefits received by the employees if the General Contractor was also at fault for the injuries. However, even with this offset, the Subcontractor could still be liable for a portion of the General Contractor’s share of the employees’ economic damages, which the Subcontractor could only recover pursuant to the indemnification provision.

Finally, the Court of Appeal rejected the General Contractor’s primary argument that the Employee Suits alleged only the Subcontractor’s negligence, thereby barring the Subcontractor’s indemnity claim. Rather, the Court of Appeal held that while the allegations in the Employee Suits may be relevant to the General Contractor’s duty to defend, they do not govern its duty to indemnify which, unlike the duty to defend, is not dependent on the framing of the third-party complaints. Rather, the duty to indemnify is tied to the damages for which the Subcontractor is ultimately found liable, regardless of the employees’ underlying allegations.

The Court of Appeal’s decision in Aluma joins the growing wealth of authority interpreting contractual indemnity provisions. Not only does this opinion clarify the interplay between personal injury claims, worker’s compensation recovery, and indemnification, it also stresses the importance of bringing indemnification claims even when the underlying complaint may not allege negligence on the part of the alleged indemnitor.