A recent California Court of Appeals decision reaffirms that the duty to defend under a contractual indemnity clause is immediate. See Centex Homes v. R-Help Construction Company, 32 Cal. App. 5th 1230 (Cal. App. 2nd Dist. March 11, 2019).

Many contracts signed by San Diego businesses contain indemnification clauses, often called “hold harmless” clauses. In general, such provisions require one party to the contract to “defend and indemnify” the other party for any loss or damage or cost arising from or relating to the work being performed or the goods provided. Indemnification clauses are complex and can be costly, so it is important to seek the advice and counsel of an experienced San Diego corporate attorney to review your business contracts before signing.

In general, indemnity and hold harmless clauses impose two separate sets of obligations:

• The duty to defend any litigation that is filed and
• The duty to pay any judgment or costs or other damages

These duties relate to each other since both generally involve litigation, but the duties are distinct in that they are triggered at different times. The duty to defend arises at the beginning of the litigation whereas the duty to pay any judgment is a duty that arises at the end. The Centex Homes case affirms these general rules. In particular, the court in Centex Homes strongly affirmed the rule that the duty to defend is an immediate duty. The court also established two additional legal rules:

• The duty to defend cannot be suspended or delayed while the parties dispute whether the duty to defend exists and
• It is for the judge to decide, not the jury, whether the duty to defend exists

In this respect, Centex Homes provides some clarity to those legal issues.

The Centex Homes case involved construction work. A builder — Centex Homes, Inc. — contracted with an electrical company — R-Help Construction Company, Inc. (“R-Help”) — to trench, install, and inspect all utility boxes and conduits for what was called the “Novella.” The Novella was/is a residential project in the city of Thousand Oaks, California. Centex Homes and R-Help signed a contract for the work that contained an indemnification and hold harmless provision in which R-Help agreed to defend and indemnify Centex Homes for all claims “to the extent such Claim(s) in whole or in part arise out of or relate to” R-Help’s work. An accident occurred when someone fell into one of the utility boxes.

When the personal injury case was filed against Centex Homes (and others), R-Help argued that the accident did not “arise out of or relate to” its work. As such, R-Help did not pay for the defense of Centex Homes in the case and demanded a jury trial on whether it had a duty to defend. The trial court agreed and sent the duty-to-defend issue to the jury. The jury agreed with R-Help that the injury did not arise from or relate to the R-Help’s installation of the utility boxes.

On appeal, the Court of Appeals reversed and strongly re-asserted and re-affirmed the rule that the duty to defend is independent of whether or not the party is liable for the underlying claim. The duty to defend is about paying for the attorneys’ fees and court costs and litigation expenses. All of those costs and expenses are incurred before a jury makes a decision. Waiting until the jury makes a decision defeats the entire purpose of the duty to defend. The trial court was overruled.

Call San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Contact Mr. Leonard by calling (858) 483-9200 or via email. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Like us on Facebook.

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