A homeowner's association ("HOA") filed suit against the developer, UDC-Universal Development, L.P. ("UDC"), for property damage resulting from defective conditions at the property. UDC cross-complained against numerous subcontractors, including CH2M Hill ("Hill"), for indemnity, and tendered its defense against HOA's action to all cross-defendants based on their subcontracts. Hill rejected UDC's tender.
All causes of action in the litigation were settled, except the cross-complaint against Hill. At trial, the jury found that Hill was not negligent and did not breach its contract with UDC. The trial court applied the then recent Supreme Court holding in Crawford v. Weather Shield Mfg. Inc. (2008) 44 Cal.4th 541 ("Crawford"), that a contractual indemnitor incurs a duty to defend the indemnitee as soon as the indemnitee tenders its defense to the indemnitor, and found that the contract called for a defense.
Hill brought a post-judgment motion to verify that UDC filed a certificate of merit before cross-complaining against Hill, as required by Code of Civil Procedure section 411.35. The trial court granted the motion for verification, but denied Hill's request for attorney fees and costs, on the basis that UDC had "fully complied" with the pre-filing requirements.
Hill appealed the judgment and post-judgment orders. The main issue on appeal was whether the contract called for a defense even where the jury found no negligence on the part of Hill and there was no allegation of negligence against Hill in the underlying HOA complaint. Hill also argued on Appeal that Crawford should not be applied retroactively, and the contract was illegal because UDC lacked the required contractor's license.
The Court of Appeal considered the language in the contract, which required Hill to indemnify UDC for all claims to the extent they arose out of Hill's negligence. As to the defense duty, the contract required Hill, upon UDC's request, to "to defend any suit, action or demand brought against Developer? on any claim or demand covered herein." Hill maintained that in order for a duty to defend to arise, there had to be an allegation that the damage arose from Hill's negligence.
In Crawford, where the contract language was similar to the language in the contract between Hill and UDC, the Supreme Court construed the parties' agreement to require the subcontractor to defend, from the outset, any suit against the developer insofar as that suit was "founded upon" claims alleging damage or loss arising from the subcontractor's negligent role in the project. The holding recognized the significance of Civil Code section 2778, which obligates a contractual indemnitor to provide a requested defense "in respect to matters embraced by the indemnity?." The defense obligation arose as soon as defense was tendered and did not depend on the outcome of the litigation.
Hill tried to distinguish Crawford on the ground that there the homeowners expressly alleged negligence by the subcontractor, whereas here the HOA did not. The Court of Appeal, however, found that the provision does not state that there must be an underlying claim of negligence specifically against Hill in order to trigger Hill's defense obligation. The Court of Appeal also found that the indemnity clause was broadly worded and similar to the language in the Crawford contract. The Court of Appeal explained that an indemnitee in a construction project involving multiple subcontractors, any one of which may have been negligent, should not have to rely on the plaintiff to name a particular subcontractor in order to obtain a defense from an indmnitee it believes is responsible.
The Court of Appeal also rejected Hill's argument that the jury's finding of "no negligence" rendered the entire indemnity clause, including the defense provision, inapplicable. The Court of Appeal explained that requiring a finding of negligence before a duty to defend would render meaningless the defense obligation and contravene Civil Code section 2778 and the Supreme Court's holding in Crawford.
The Court of Appeal also rejected Hill's argument that Crawford should not apply retroactively because Hill reasonably relied on the state of the law existing at the time it rejected UDC's tender. Specifically, Hill argued that it relied on the case Regan Roofing v. Superior Court (1994) 24 Cal.App.4th 425. The Court of Appeal found that Hill's interpretation of the previous state of the law was not reasonable. Civil Code section 2778, unchanged since 1872, contemplated a defense by the indemnitor before resolution of the substantive issue of liability. Thus, any assumption by Hill that Regan Roofing represented established law when it rejected the tender was not reasonable. Additionally, contrary appellate authority had held that a finding of negligence was not required before the indemnitor's defense obligation was triggered.
The Court of Appeal rejected Hill's argument that the contract was illegal because UDC lacked the required contractor's license when it entered into the contract. The Business and Professions Code section 7031 bars all actions for "compensation" for illegal unlicensed contract work. Here, UDC, was not seeking compensation for its services, but rather indemnity for the damages it had to pay the HOA due to alleged defects in work for which it believed Hill was responsible.
Lastly, Hill appealed the trial court's post-judgment order denying it attorney's fees and costs due to UDC's failure to file a certificate of merit before it filed its cross-complaint against Hill. The Court of Appeal affirmed, finding that the sanctions for failure to file a certificate of merit were discretionary, and that Hill simply did not establish that it incurred expenses that were attributable to Hill's failure to file a statutory certificate.
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