As we reported in the July 2008 edition of The Morrison Law Journal, the
California Supreme Court issued its decision on July 21, 2008 in the matter of
Crawford v. Weather Shield Manufacturing, Inc. (2008) 44 Ca1.4th 541
("Crawford Decision") whereby it held that the duty to defend under a broad
based indemnity agreement was immediate and did not depend on a
determination as to whether the indemnitor (the party charged with the
indemnity obligation) was ultimately found to be negligent in the first place.
In footnote 6 of the Crawford Decision, the California Supreme Court
noted that if a contractual indemnitor declined the indemnitee's tender of
dE;fenseof a third party claim against the latter, the third party's later judgment
against the indemnitee may be conclusive evidence, as against the indemnitor, of
the indemnitee's liability to the third party (including the amount thereof), while
the indemnitee's good faith settlement of the third party claim may be
presumptive evidence against the indemnitor on that issue, citing Isaacson v.
California Insurance Guarantee Association (1988)44 Ca1.3d775 ("Isaacson") and
Peter Culley & Associates v. Superior Court (1992) 10 Ca1.4 th 281 ("Peter
Culley")1.
1 In so holding, the California Supreme Court cited California Civil Code section 2778(5)which
deals with the repercussions resulting from the failure by the indemnitee to accept a demand for
a defense. That statute provides, in pertinent part:
"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".
1
The footnote was somewhat curious in that the Isaacson and Peter Culley
cases present different outcomes, if not different holdings. In Isaacson, a case
involving an alleged failure to provide a defense to physician insureds from the
California Insurance Guarantee Association (the physicians later settled for
$500,000 after being denied a defense), the Court ruled that if an insurer
wrongfully failed to provide coverage or a defense and the insured then settles
the claim, the insured is to be given the benefit of an evidentiary presumption as
to that settlement. The Court went on to hold that in a later action against the
insurer for reimbursement based on a breach of its contractual duty to defend the
action, a reasonable settlement made by the insured to terminate the underlying
claim against him may be used as presumptive evidence of the insured's liability
on the underlying claim, and the amount of such liability citing Kershaw v.
Maryland Casualty Company (1959)172Cal.App.2d 248,256-257.
By contrast, the Peter Culley dealt with a developer of a condominium
project which entered into a settlement with an architect and obtained an
.assignment of the architect's express indemnity rights against the structural
engineer. Suit was filed by the developer against the structural engineer and the
Courtfound the settlement amount (apportioned to the structural engineer) to be
in good faith and also determined that the amount of the settlement was
conclusive as against the structural engineer. On appeal, The Court of Appeal
reversed and ruled that the settlement, even though found to be in good faith,
was only presumptively valid and the indemnitor could still challenge the
reasonablen,ess of the settlement amount even though the duty to defend had
been breached.
In October of this year, in the matter of Aerospace Dynamics
International, Inc. v. Frize Corporation, Inc., ("Aerospace Dynamics
International") the Court of Appeal, Second District was presented with the
question (among other issues) as to whether, in the context of a noninsurance
contract, an indemnitee could still challenge a settlement between the indemnitee
and the third party claimant when:
(i) an immediate duty to defend was owed;
(ii) the indemnitor breached the immediate duty to defend;
(iii)the indemnitee entered into a settlement agreement whereby
an arbitrator issued an award which was only partially binding on
the indemnitee (i.e.the indemnitee was only obligated to pay the
award up to a certain amount); and
(iv) the Court entered a judgment based on the arbitration award.
2
Aerospace Dynamics International dealt with a personal injury accident where a
17 year jouneyman painter severely burned his hand aHer placing it on a buss
bar in the crane stall of an aerospace facility. The project owner, Aerospace
Dynamics International, Inc., tendered its defense to the general contractor, Frize
Corporation, which had been working at the facility and which had hired the
employer of the injured worker. The general contractor declined to provide a
defense and the worker and the project owner went to an arbitration with an
agreement that the project owner would only be responsible for the first"$300,000
of the arb~trator's award, The arbitrator awarded $2,700,000and the Court
entered judgment in that amount. The project owner then assigned its rights to
the injured worker"who sued the general contractor to recoup the amount of the
award.
At trial, the Court found that the general contractor had breached its
obligation to defend the project owner but ruled that the $2,700,000amount was
only presumptive as against the general contractor and the jury later found the
amount was not reasonable. The injured worker then appealed arguing that the
arbitration award should have been conclusive as against the general contractor.
Prior to oral argument, the Crawford Decision was issued. Both parties argued
that the Crawford Decision was on point, and favored their respective positions.
In an unpublished deciSIon issued December 4, 2008 in Aerospace
Dynamics International, Inc. v. Frize Corporation, Inc. (2008)Westlaw 5096982,
the Court of Appeal held, in footnote 2 of the decision, that the Crawford
Decision only applied to defense obligations and that the Crawford Decision did
not impact the indemnity obligation which might arise from the settlement
between the third party claimant and the indemnitee. Quoting the Court of
Appeal:
"The Supreme Court issued Crawford v. Weather Shield
Manufacturing Inc. (2008)44 CaL4th 541 after briefing in this case
was complete and so we asked the parties to provide supplemental
briefing on the .effect of that opinion on this case. Having
considered Crawford and the parties' letter briefs, we conclude that
other than the statements of general indemnity law, Crawford is
not on point. The issue here is whether Frize was required to
indemnify ADI under the parties' agreement, the extent of the
indemnity obligation, and whether and how any indemnity
responsibility was affected by ADI's settlement with Mendoza, Jr.
and the referee's award. By contrast, the Supreme Court in
Crawford was presented with "no issue ... of the effect of [the
indemnitee's] settlement with the [third party] on [the
indemnitor's] indemnity liability....." The issue in Crawford was
