Landmark California Case on Indemnity Contracts

In Crawford v. Weather Shield Mfg, Inc.. (2008) 44 Cal.4th 541, the California Supreme Court described at length the general principles concerning indemnity in the noninsurance context: "Parties to a contract, including a construction contract, may define therein their duties toward one another in the event of a third party claim against one or both arising out of their relationship. Terms of this kind may require one party to indemnify the other, under specified circumstances, for moneys paid or expenses incurred by the latter as a result of such claims. (See Civ. Code, 2772 'Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person.'.) They may also assign one party, pursuant to the contract's language, responsibility for the other's legal defense when a third party claim is made against the latter. "As befits the contractual nature of such arrangements, but subject to public policy and established rules of contract interpretation, the parties have great freedom to allocate such responsibilities as they see fit. 'When the parties knowingly bargain for the protection at issue, the protection should be afforded.' Hence, they may agree that the promisor's indemnity and/or defense obligations will apply only if the promisor was negligent, or, conversely, even if the promisor was not negligent. "In general, such an agreement is construed under the same rules as govern the interpretation of other contracts. Effect is to be given to the parties' mutual intent (Civil Code 1636), as ascertained from the contract's language if it is clear and explicit (Civil Code 1638). Unless the parties have indicated a special meaning, the contract's words are to be understood in their ordinary and popular sense. (Civil Code 1644; .) "Though indemnity agreements resemble liability insurance policies, rules for interpreting the two classes of contracts do differ significantly. Ambiguities in a policy of insurance are construed against the insurer, who generally drafted the policy, and who has received premiums to provide the agreed protection. . In noninsurance contexts, however, it is the indemnitee who may often have the superior bargaining power, and who may use this power unfairly to shift to another a disproportionate share of the financial consequences of its own legal fault. "This public policy concern influences to some degree the manner in which noninsurance indemnity agreements are construed. For example, it has been said that if one seeks, in a noninsurance agreement, to be indemnified for his or her own active negligence, or regardless of the indemnitor's fault--protections beyond those afforded by the doctrines of implied or equitable indemnity--language on the point must be particularly clear and explicit, and will be construed strictly against the indemnitee. "For similar public policy reasons, statutory law imposes some absolute limits on the enforceability of noninsurance indemnity agreements in the construction industry. At the time DeSilva Gates contracted with MBI, a party to a construction contract could not validly agree to indemnify the promisee for the latter's sole negligence or willful misconduct. (Civil Code 2782, subd. (a); see also 1668.) "Finally, section 2778, unchanged since 1872, sets forth general rules for the interpretation of indemnity contracts, 'unless a contrary intention appears.' If not forbidden by other, more specific statutes, the obligations set forth in section 2778 thus are deemed included in every indemnity agreement unless the parties indicate otherwise. . . ." (Crawford, supra, 44 Cal.4th at pp. 551-553.) Section 2778 provides: "In the interpretation of a contract of indemnity, the following rules are to be applied, unless a contrary intention appears: "1. Upon an indemnity against liability, expressly, or in other equivalent terms, the person indemnified is entitled to recover upon becoming liable; "2. Upon an indemnity against claims or demands, or damages, or costs, expressly, or in other equivalent terms, the person indemnified is not entitled to recover without payment thereof; "3. An indemnity against claims, or demands, or liability, expressly, or in other equivalent terms, embraces the costs of defense against such claims, demands, or liability incurred in good faith, and in the exercise of a reasonable discretion; "4. The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if he chooses to do so; "5. If, after request, the person indemnifying neglects to defend the person indemnified, a recovery against the latter suffered by him in good faith, is conclusive in his favor against the former; "6. If the person indemnifying, whether he is a principal or a surety in the agreement, has not reasonable notice of the action or proceeding against the person indemnified, or is not allowed to control its defense, judgment against the latter is only presumptive evidence against the former; "7. A stipulation that a judgment against the person indemnified shall be conclusive upon the person indemnifying, is inapplicable if he had a good defense upon the merits, which by want of ordinary care he failed to establish in the action." Crawford addressed duty to defend issues in a noninsurance context. The court held that where the underlying suits alleged a claim that would be covered by the subcontract (in that case, allegations of construction defects arising from the subcontractor's negligence), the indemnitor's duty to defend arose when the underlying action was brought, even though (1) a jury ultimately found the subcontractor was not negligent, and (2) the parties accepted an interpretation of the subcontractor that gave the builder no right of indemnity unless the subcontractor was negligent. (Crawford, supra, 44 Cal.4th at p. 547.)