Contracts to Indemnify: The Duty to Defend May Arise Independent from the Duty to Indemnify

Contracts between parties frequently contain indemnification provisions. Potential indemnitors should carefully review indemnification provisions to understand when and for what they may be held liable for. UDC-Universal Development, L.P. v. CH2M Hill (2010) 181 Cal.App.4th 10 provides an example of how misunderstanding the effect of an indemnity agreement could lead to a serious miscalculation of a party's potential liability.

In UDC v CH2M Hill an engineering consultant contracted with a developer to provide professional services for a condominium developement. The HOA to thenew development sued the developer. The developer filed a cross-complaint against the consultant and others involved in the project.

The consultant agreed to indemnify the developer for losses connected with any negligent act or omission by the consultant. The provision went on to specify that the consultant agrees to defend any action (pay for the litigation and attorney fees) brought against the developer at the developer's written request.

The consultant refused to pay the developer's defense fees and successfully established at trial that it was not negligent. Based on that finding it argued that it should not be responsible for paying the developer's costs of defense. The court disagreed and found that the duty to defend arose when the developer cross-complained against the consultant. Again, this is despite the jury's finding that the consultant was not negligent.

Even though the consultant was ultimately not responsible for general indemnification of the damages paid for by the developer, as you may already know, the costs of litigation can frequently exceed the alleged actual damages in a case.

The message of this case is that contracting parties must avoid broad indemnity language whenever possible. The potential indemnitor should search for such broad language and at the very least address the danger of it by attempting to limit the scope of indmenification by cleary linking the duty to defend to an adjudication of liability or other finding acceptable to the potential indemnitor.

If you are presented with a contractual provision whose scope of affect is uncertain that you want reviewed, please feel free to contact Bustarde Law to speak to an attorney experienced in contract review, drafting, negotiation and litigation.