The California Supreme Court's holding in Crawford v. Weathershield, 44 Cal.4th 541 (2008) raised just as many questions as it supposedly addressed regarding indemnity obligations between the indemnitee and the indemnitor pursuant to an express indemnity provision set forth in the contract between the parties.  Generally, the California Supreme Court renders its ruling, which then becomes the "rule of law" or guiding principle on a given legal issue.  Rarely is that ruling narrow, but it is often broad and encompassing.  It is at the Court of Appeal level where the appellate jurists hammer out their decisions that reduce the Supreme Court's ruling to a more pragmatic application for both the trial courts and practitioners to follow.  For the most part, there has been little light shed on this issue of indemnity obligations following the California Supreme Court's ruling in Crawford other than a number of articles, each trying to address what they believed was the Supreme Court's original intent. 
 
The recent 6th District Appellate Court decision entitled UDC-Universal Development, L.P. v. CH2M Hill, 2010 DJDAR 79 (January 15, 2010) represents the first Court of Appeal decision to define and squarely address the issue of Crawford as to the interpretation of  indemnity obligations. In the first portion of its opinion, the Appellate Court stated that an indemnitor is obligated to defend the indemnitee, in the absence of a showing of negligence. In this respect, this decision represents an expansion of the original Crawford ruling based the 6th District Appellate Court's interpretation of the actual contractual indemnity provision between the parties.  In the second portion of the opinion, the appellate court seems to circumvent the prior holding of Ranchwood as to recovery of contractual damages by an unlicensed contractor.
 
In its appeal, the design professional, CH2M Hill ("CH2M"), sought review of a judgment on a cross-complaint brought by the developer, UDC-Universal Development, Inc. ("UDC"), pursuant to a contractual indemnity agreement between them.  The underlying trial court judgment required CH2M, which had originally denied UDC's tender of defense, to reimburse UDC for the costs of its defense in a lawsuit.  CH2M contended that the contractual provision required no defense because CH2M's negligence was neither alleged in the third party complaint nor established in UDC's action.
 
The basis for CH2M's argument was that the indemnity agreement between itself and UDC created a defense obligation only if a claim against UDC arose out of CH2M's negligence.  Pursuant to the specific language set forth in the indemnity provision of the contract between the parties, there must be an allegation by the plaintiff that its damages arose at least partially from the negligence on the part of CH2M, at a minimum in order for a duty of defense to arise.  CH2M further sought to distinguish Crawford on the grounds that, in Crawford, the Plaintiff homeowners expressly alleged negligence by Weather Shield, whereas in this instant matter, the plaintiff's complaint contained no such allegations. In fact, the underlying jury verdict did not find any negligence on the part of CH2M.
 
In reaching its decision, the 6th District Appellate Court of Appeal reviewed the specific language of the contractual indemnity provision between the parties.  It found that the indemnity language was neither specific enough nor limiting enough to put the indemnity agreement outside the ruling of Crawford.  The appellate court further found the language did not specifically state that there had to be a claim of negligence specifically against CH2M in order to trigger CH2M's defense obligation to UDC. 
 
In fact, the subject indemnity provision called for indemnification when claims against UDC "arise out of or in any way connected with" a negligent act or omission by CH2M.  The duty to defend applied to any "suit, action or demand brought against [UCD] on any claim or demand covered herein."   To rule contrary, the Court reasoned, would usurp California Civil Code § 2778 and render meaningless CH2M's defense obligation.  The appellate court noted that under Crawford that "the duty to defend arises out of an indemnity obligation as soon as the litigation commences and regardless whether the indemnitor is ultimately found negligent."
 
The appellate court was unconvinced that the underlying plaintiff must alleged negligence by CH2M in order for CH2M's defense obligation to arise under Crawford.  The Court held that "[a]n indemnitee should not have to rely on the plaintiff to name a particular subcontractor or consultant in order to obtain a promised defense by one the indemnitee believes is responsible for plaintiff's damages."  Here, it was sufficent that plaintiff merely allege that CH2M was among those architects, engineers and consultants "who provided design services to UDC in connection with the project."  Although the "negligent act or omission" language limiting CH2M's indemnity liability to the scenario in which CH2M was proven negligent, the duty to defend arose when the cross-complaintant, UDC, attributed responsibility for plaintiff's damages to CH2M's negligent performance of its role in the project.  The 6th District Appellate Court believed that this was sufficient to trigger CH2M's duty to defend UDC.
 
CH2M also made arguments on appeal that UDC's cross-complaint was barred because UDC did not file a Certificate of Merit pursuant to Code of Civil Procedure § 411.35, and that the contract with UDC was "illegal" pursuant to Business and Professions Code § 7031(a) [3] since UDC lacked a "Class A" contractors license when it entered into the contract with CH2M.  Furthermore, CH2M argued that Crawford should not be applied retroactively.    
 
As to the need for a contractor to hold a valid contractors license for recovery of contractual damages, the appellate court held that, even if the general contractor was unlicensed, this fact would not preclude it from recovering breach of contract damages against the subcontractor for failing to defend the general contractor in a construction defect lawsuit.  The appellate court reasoned that the punitive provisions precluding actions for compensation by an unlicensed contractor do not apply to actions for recovery of defense costs incurred in defending a lawsuit.  One has to wonder if this ruling related to the requirement for a general contractor to hold a valid contractor's license in order to recover damages is contrary to the holding in Ranchwood and its progeny.  After all, the indemnity obligation arises out of the contract between the parties.
 
What is most remarkable about the appellate decision is its broad interpretation of the Crawford holding.  It would appear from the 6th District Appellate Court's recent opinion, the indemnitee does not even have to have a specific allegation of negligence against the indemnitor by a third party in order to trigger the indemnity obligation.  Although this decision was primarily based on the specific language contained in the indemnity provision set forth in the contract between CH2M and UDC, this ruling appears to go a step further than Crawford which set forth that in order for the indemnity obligation to arise there need only to be an issue related to the subcontractor's scope of work and/or materials made by a third party. 
 
However, the appellate court also seems to invite the proposition that if you can fashion a contractual indemnity provision which specifically sets forth that the indemnitor will provide indemnity (and furthermore, a defense obligation) to the indemnitee only for the negligence of the indemnitee and not include "any and all related actions," then perhaps the trial courts may construe the duty to defend more narrowly than that set forth in Crawford and in this appellate court ruling.
 
Until our State Legislature enacts a much needed revision to Civil Code § 2782, et. seq. which would minimize the effect of Crawford on the subcontractors, all contracts should be reviewed and analyzed by legal counsel familiar with indemnity issues to determine the potential risks and liability for the contractor's defense fees and costs associated with indemnity obligations.  As we have seen all too often, it is not the actual liability for alleged defect damages that is most significant to the subcontractor, but it is the demand for reimbursement of the developer's defense fees and costs which can be prohibitive and costly. 
 
Mr. Ramirez is a partner with Kring & Chung, LLP's San Diego office.  He can be reached at (858) 436-0268 or dramirez@kringandchung.com.