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Recovering Attorney's Fees Under Indemnity Agreements
Construction Practices Newsletter
Nearly all construction contracts contain some kind of indemnity provision and nearly all bonding companies require their contractors to execute general agreements of indemnity in connection with issuing payment and performance bonds on their behalf. Included in the obligation to indemnify is the duty of the indemnifying party (the indemnitor) to "defend" the party being indemnified (the indemnitee) against third-party claims. For example, California Civil Code section 2778(3) provides that "[a]n indemnity against claims, or demands, or liability, expressly, or in other equivalent terms, embraces the costs of defense against such claims...." This duty of defense creates a potential dispute between indemnitors and indemnitees in terms of whether and under what circumstances an indemnitee is entitled to conduct its own defense and recover those defense costs. This article examines how California answers the question.
In California, an indemnitee has the right under statute to conduct its own defense. (Cal. Civ. Code ยง 2778(4).) Put differently, an indemnitee is not required to tender its defense to its indemnitor. Security Building & Loan Ass'n of Los Angeles v. Maryland Casualty Co. (1935) 6 Cal.App.2d 77, 79. However, does an indemnitee's failure to tender its defense to its indemnitor affect its ability to recover its defense costs? The answer to this question is generally no. And, if an indemnitor offers to provide a defense, does an indemnitee's rejection of that offer affect its ability to recover its defense costs? The answer to this question depends on the indemnity language and the facts of the case.
There is no requirement that an indemnitee tender its defense to the indemnitor in order to recover its defense costs. See City of Watsonville v. Corrigan (2007) 149 Cal.App.4th 1542, 1548-1549 [distinguishing between indemnity agreements and insurance policies where a tender of defense is typically a requirement]. However, if an indemnitor offers to defend and the indemnitee rejects that offer and conducts its own separate defense, the indemnitee will be unable to recover its defense costs unless (1) it had a contractual right to conduct its own separate defense or (2) it had a "sufficient justification or need" to conduct its own defense. Buchalter v. Levin (1967) 252 Cal.App.2d 367, 371 [lack of trust is insufficient justification].
Whether an indemnitor is responsible for an indemnitee's separate defense costs turns on the intent expressed in the indemnity agreement, supplemented, as necessary, by the interpretive rules set forth in Civil Code section 2778. City of Watsonville, 149 Cal.App.4th at 1549. Thus, for example, in City of Chino v. Jackson (2002) 97 Cal.App.4th 377, 385, the court of appeal held that the indemnitee was entitled to its defense costs without a tender of defense or demand for indemnity where the indemnity agreement unambiguously provided for the indemnitee's recovery of attorney's fees upon a default, with default defined to include a lawsuit against the indemnitee. Admittedly, the decision does not explore whether the indemnitor would have provided a defense to the indemnitee if it had notice of the lawsuit.
As to the second point, what constitutes "sufficient justification or need" for an indemnitee to conduct its own defense and recover its defense costs despite an indemnitor's offer to defend is a fact-dependent question, examined on a case-by-case basis. Not surprisingly, where the indemnitee's separate defense is wholly voluntary, gratuitous and duplicative of the defense that the indemnitor is providing, the indemnitee is not entitled to recover its defense costs. See Tulare County Power Co. v. Pacific Surety Co. (1919) 43 Cal.App. 315, 330. On the other hand, if there are material conflicts between the interests of the indemnitor and indemnitee, then the indemnitee is justified in, and entitled to reimbursement for, conducting its own defense. Safeway Stores, Incorporated v. Massachusetts Bonding & Ins. Co. (1962) 202 Cal.App.2d 99, 115 [Indemnitor determined that if indemnitee was negligent, indemnitor would no longer have an indemnity obligation, which determination created a conflict of interest and led to indemnitor's defense becoming "qualified and technical rather than fully promotive of [indemnitee's] interests." Based thereon, it was appropriate for indemnitee to withdraw tender and conduct own defense.]
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