Past CA. Commercial Digest

February 29, 2012

Harris v. Superior Court: Insurance adjusters and other similarly situated professionals may be exempt employees not entitled to overtime under the administrative exception to California’s overtime rules.

In a long-awaited decision, a unanimous California Supreme Court in Harris v. Superior Court (2011) 53 Cal. 4th 170, 135 Cal. Rptr. 3d 247, reversed a Court of Appeal decision. The plaintiffs, Liberty Mutual claims adjusters, filed a class action lawsuit seeking unpaid overtime wages based on their allegation that Liberty Mutual misclassified them as exempt administrative employees. The Court of Appeal had determined that the adjusters were entitled to overtime as a matter of law because they were not exempt employees under the “administrative exemption” to the general requirement that employees are entitled to overtime compensation. The Supreme Court in Harris did not resolve the issue of whether the exemption would apply to the Liberty Mutual adjusters, remanding the case back to Superior Court for further proceedings because of its view that the Court of Appeal applied an incorrect test to determine if the exemption applied. However, it cited with approval a 2007, 9th Circuit decision, which held, under the federal Fair Labor Standards Act, that adjusters who interview witnesses and make recommendations regarding coverage, the value of claims, determine fault and negotiate settlements would be exempt.

While the Harris decision was narrowly decided, and the Court did not provide any clear rule on how the “administrative exemption” is to be determined going forward (in many ways the decision is more notable for what it did not decide than what it actually did determine), the Court did provide guidance regarding how California courts should approach this issue in future cases. In summary, the Supreme Court rejected the more simplistic “administrative/production worker” dichotomy test that had been used in two leading Court of Appeals cases involving Farmers adjusters (the Bell cases) for the past ten years, in favor of a more complex and fact-specific analysis using the now-applicable Wage Order 4-2001 issued by the Industrial Welfare Commission (“IWC”), the incorporated federal regulations, and Labor Code section 515.

In the Bell cases, the Court of Appeal had determined that under the provisions of the then applicable Wage Order, which provided that “persons employed in administrative, executive, or professional capacities” were exempt from the overtime compensation requirements, that “claims adjusters were nonexempt ‘production workers,’” and thus entitled to be paid overtime. The scope of the administrative exemption was not specifically articulated at that time in the Wage Order or in the Labor Code, and the Bell cases articulated the “administrative/production worker” test that essentially distinguished between employees primarily engaged in “administering the business affairs of the enterprise,” [exempt] and production-level employees [non-exempt] whose “primary duty is producing the commodity of the enterprise” (whether goods or services).

After the Legislature amended various Labor Code sections the IWC adopted the now applicable Wage Order 4-2001 which has a more expansive definition of the administrative exemption. The Supreme Court in Harris decided only the question of whether the work of the adjusters was administrative, and summarized the statutory test to meet the administrative exemption as follows: “to qualify as ‘administrative,’ employees must (1) be paid at a certain level, (2) their work must be administrative, (3) their primary duties must involve that administrative work, and (4) they must discharge those primary duties by regularly exercising independent judgment and discretion.”

The term “primary duties” is defined in the applicable Wage Order as “more than half of the employee’s work time,” so at least half of the employee’s time must be spent doing work that fits the test of the exemption. The Court, using the Wage Order and the incorporated federal regulations, stated that a worker is employed in an administrative capacity if his/her duties and responsibilities are “directly related to management policies or general business operations” of the employer. The Court then said that the “directly related” component has two prongs: (1) qualitatively administrative and (2) quantitatively of substantial importance. The Court did not provide any further guidance to how this two-prong test of “directly related” is to be applied.

The “qualitative” nature of the work would appear to be met where employees’ work involves substantial discretion and independent judgment such as providing advice to management, engaging in planning, negotiating, or representing the company in some capacity. The “quantitative” nature of the work regarding its “substantial importance” to management policy or general business operations is vague, and suggests that there is an “importance” level that must be met before the work qualifies as administrative. The Court did not indicate what is required to meet the “quantitative” component.

What is clear then is that the Supreme Court rejected the “administrative/production worker” test of the Bell cases, due to changes in the law and more definitive guidelines in the Labor Code and Wage Order regarding the exemption. What is less clear is where the courts will go with the somewhat cumbersome guidelines the Court provided. The Court’s final words on this, no doubt not intended to be intentionally humorous, were that the “essence” of their holding is that “in resolving whether work qualifies as administrative, courts must consider the particular facts before them and apply the language of the statutes and wage orders at issue.” Many issues remain to be determined, and until the courts provide some bright line rules in this area it will often be a question of fact as to whether a particular type of work is exempt or not.


November 17, 2011

The Dust is Still Settling; Unanswered Questions Following the California Supreme Court’s Ruling in Howell v. Hamilton Meats & Provisions, Inc.

The Howell Decision

For years, California litigants have argued over what an injured plaintiff may recover as economic damages in lawsuits where a portion of the plaintiff’s medical bills were paid for by insurance and another portion was adjusted or written-off pursuant to an agreement between the plaintiff’s health care provider and the plaintiff’s health insurer. Injured plaintiffs argued that the unpaid portion was a collateral source benefit which should be recoverable. Defendants argued that allowing injured plaintiffs to recover for unpaid medical bills created an unacceptable windfall. A split in California authorities did not help the situation.

On August 18, 2011, the California Supreme Court published its much anticipated opinion in Howell v. Hamilton Meats & Provisions, Inc. (August 18, 2011) 52 Cal. 4th 541, which addressed the issue described above. In Howell, the California Supreme Court held that “an injured plaintiff whose medical expenses are paid through private insurance may recover as economic damages no more than the amounts paid by the plaintiff or his or her insurer for the medical services received or still owing at the time of trial.” It was hoped that the Howell decision would finally put to rest the longstanding debate over what economic damages are recoverable in personal injury lawsuits where portions of the medical bills are unpaid. Unfortunately, important questions remain unanswered in the wake of the decision, including: (1) Will an injured plaintiff be able to present evidence of the total amount of medical charges at trial for some other purpose?; and (2) Will an injured plaintiff be able to recover the full amount of anticipated future medical charges?

Unanswered Questions

The Howell Court observed that issues remained to be decided concerning whether evidence of the full amount of medical charges, including unpaid charges, would be admissible at trial. “[W]hen a medical care provider has … accepted as full payment for the plaintiff’s care an amount less than the provider’s full bill, evidence of that amount is relevant to prove the plaintiff’s damages for past medical expenses …. Evidence that such payments were made in whole or in part by an insurer remains, however, generally inadmissible under the evidentiary aspect of the collateral source rule… Where the provider has, by prior agreement, accepted less than a billed amount as full payment, evidence of the full billed amount is not itself relevant on the issue of past medical expenses. We express no opinion as to its relevance or admissibility on other issues, such as noneconomic damages or future medical expenses…. Where a trial jury has heard evidence of the amount accepted as full payment by the medical provider but has awarded a greater sum as damages for past medical expenses, the defendant may move for a new trial on grounds of excessive damages.”

It is Clear that the Plaintiff Cannot Recover for the Unpaid Amounts, but is the Total Amount of the Charges, which Includes Unpaid Amounts, Admissible at Trial?

Because the Howell Court stated that it was not addressing the issue of whether the full amount of medical charges would be admissible at trial, the issue is open for debate, and is guaranteed to be a hot topic during settlement discussions, as the issue, depending on which way it is decided, may significantly alter the value of any given case.

An injured plaintiff is presented with a dilemma when it comes to the issue of whether evidence of the full amount of medical charges should be presented at trial. On the one hand, an injured plaintiff would not normally wish to introduce evidence that an insurance company paid a portion of his/her medical charges to the jury, but would rather use the collateral source rule to prevent the jury from learning of the existence of insurance benefits. On the other hand, an injured plaintiff would want to introduce evidence of the entire amount of past medical charges in order to impress the jury with the seriousness of the injury, and thus increase his/her damages. However, it does not appear that an injured plaintiff can introduce evidence of the total amount of the medical charges to a jury without abrogating the collateral source rule. This is because the jury would have to be informed, in order to avoid an award that could lead to a new trial for excessive damages, that some of the bills were paid while others were written off pursuant to an agreement between the health care provider and the insurer. Therefore, it can be argued that allowing introduction of the total amount of medical charges will result in a violation of the collateral source rule. If the plaintiff wishes to introduce the total amount of medical charges to the jury, the jury must also be informed that the plaintiff had insurance which paid for the medical charges.

Moreover, since the unpaid amount of the medical charges is not recoverable, it can be argued that the total amount of medical charges is irrelevant under California Evidence Code Sections 210 and 350. Although many lawyers and insurance professionals are accustomed to evaluating non-economic damage awards by simply multiplying the total of the medical charges, the total amount of charges, which includes unpaid charges, is not relevant to prove or disprove the nature and extent of the injured plaintiff’s pain and suffering, which is what comprises the non-economic damage award. It appears that plaintiffs are taking the position that the past medical bills are relevant to demonstrate the nature and extent of the injury. Until an appellate court rules on this issue, it appears that the best arguments against introduction of the total amount of medical charge, which include unpaid charges, are that such evidence is irrelevant, that introduction would be a violation of the collateral source rule, and that introduction may lead to an excessive award which might require a new trial.

Can an Injured Plaintiff Recover for the Full Amount of Future Medical Charges Even Though His/Her Past Medical Charges Were Reduced?

Another issue that was not addressed by the Howell Court was whether a plaintiff may recover for the full amount of claimed future medical charges. By way of example, this issue may arise in cases where the plaintiff has had one surgery for which the insurer paid for 50% of the charges, but received a reduction for the other 50% of the charges pursuant to a negotiated discount. The injured plaintiff may require a second surgery sometime in the future. In that situation, does the defendant get the benefit of the insurer’s 50% negotiated reduction in charges?

Again, this issue is sure to arise during settlement discussions as it will affect the overall value of the case. Although the Howell Court did not rule on this issue, it appears somewhat more likely that plaintiffs will be able to recover the full value of future medical bills in this situation. Defendants will argue that the plaintiff “opens the door” to the issue, by introducing the full amount of the medical charges to the jury. In that situation, since the door was opened by the plaintiff, the defendant might be able to argue that, like the past medical specials, the plaintiff would only be required to pay for a portion of the future medical specials. The defendant can argue for the jury to award less than the full amount of future medicals that are claimed, in proportion to the reduction in the past medical specials. On the other hand, plaintiffs will argue that it would require speculation by the jury to determine what amount would likely be paid out of the full amount billed in the future, what insurance the plaintiff will have at some later point in time, and that it would violate the collateral source rule to allow evidence of how much various insurers are likely to pay for the future procedures or treatment. In other words, plaintiffs will argue that there is no other number that they can use other than the full amount of the future bills without speculating as to what the coverage for the plaintiff will be and the amount that insurance will pay in the future. Until an appellate court provides guidance on this issue, litigants will continue to argue over whether the evidence is admissible, over what their experts can testify to regarding future medical bills, and trial courts will undoubtedly make inconsistent rulings on this issue.


IN THE POST-CRAWFORD WORLD, THE CONTRACTUAL DUTY TO DEFEND IS TRIGGERED WITH OR WITHOUT FAULT

UDC-Universal Development Company LP v. CH2M Hill 2010 WL 144353 (Cal. App. 6 Dist.) 10 Cal. Daily OP. Serv. 646

OVERVIEW

This case, which went to trial shortly after the watershed California Supreme Court indemnity decision in Crawford v. Weathershield Mfg., Inc. (2008) 44 Cal. 4th 541, confirms that (1) no specific allegations against a cross-defendant by a plaintiff are needed to trigger a contractual indemnity provision; (2) a lack of fault on the part of the cross-defendant, determined by a jury, does not operate to negate a contractual duty to defend under Crawford; and (3) the Crawford holding controls despite the fact that it was decided only a week before the matter was submitted to the jury, and counsel had relied on earlier case law.

FACTUAL BACKGROUND

UDC-Universal Development LP (UDC) entered into two contracts with CH2M Hill to provide engineering and environmental planning services for a residential development project. Among the provisions of one agreement was a paragraph obligating CH2M Hill to indemnify UDC (the developer) and to defend UDC against any suit, action, or demand brought against UDC arising from any claim covered by the agreement. The homeowners associ¬a¬tion for the development filed an action for property damage resulting from defective conditions due in part to negligent planning and design. UDC cross-complained for indemnity against several subcontractors including CH2M Hill, and tendered its defense under the express contractual indemnity provision, which CH2M Hill rejected.

UDC paid for its own defense for a year, then settled with plaintiffs; the cross-complaint against CH2M Hill proceeded to trial. On a special verdict form, the jury found CH2M Hill had not been negligent and had not breached the contract, but the trial court decided that the question of duty to defend was a separate matter not contemplated by the jury. The trial court ultimately found that the contract required that a defense be provided immediately upon an allegation of negligence in the manner of work. A finding of actual negligence was then necessary to trigger the duty to indemnify.

APPELLATE COURT DECISION

On appeal, CH2M Hill asserted that the contract only called for a defense when the under¬lying claim arose out of actual negligence, and that there was no finding of negligence by the jury or even any allegation of such negligence in the underlying complaint. CH2M Hill pointed out that in the Crawford case, the homeowners had expressly alleged negligence by the individual cross-defendant. The court rejected this argument, stating that the contractual indemnity provision did not state there must be an underlying claim of negligence against a cross-defendant specifically in order to trigger its obligation to defend. General allegations by the plaintiff are enough; the appellate court reasoned that an indemnitee should not have to rely on a plaintiff to name particular subcontractors in order to obtain the promised defense.

As to CH2M Hill’s argument that the jury finding of no negligence rendered the indemnity clause inapplicable, the appellate court pointed out that indemnity and defense are separate obligations and that the duty to defend arises as soon as litigation commences, regardless of whether the indemnitor is ultimately found negligent.

Finally, CH2M Hill argued that Crawford should not be applied retroactively, pointing to an exception to the retroactivity rule for situations in which the parties reasonably relied on previously existing law. The appellate court disagreed that Crawford so dramatically changed established law that its retroactive application would prejudice any party. The court pointed out that the contract called for a defense when any claim against UDC implicated the cross-defendant’s performance, even if it was not explicitly stated.

This case reinforces the rule post Crawford that no specific allegations implicating the party are needed in the underlying complaint for the duty to defend to arise. This case also serves as a reminder of the rule that case law can and will be applied retroactively, thus changing the state of the law even while a lawsuit is in progress.


August 2009

ENFORCEMENT OF LIMITATIONS ON EXPERT WITNESS TESTIMONY IN MOLD CASE

Dee v. PCS Property Management, Inc., et al.

FACTUAL BACKGROUND

Plaintiff was an apartment dweller who lived in her unit for approximately four and one-half months in 2001. Toward the end of her stay, her unit was tested for mold. The tests revealed Stachybotrys, a mold capable of producing mycotoxins, but there were no specific tests for mycotoxins during her occupancy. Shortly after the plaintiff’s departure, a third test for mold found Stachybotrys, Aspergillus, Penicillum, and Caudisporum. This was followed by a final test two weeks after the plaintiff vacated the premises. mycotoxins were detected, but that test was excluded from the analysis because it was an extremely minor amount.

LITIGATION AND TRIAL

The plaintiff sued the property manager and owners, among others, for a variety of causes of action based on exposure to mold and related conditions in the building. Defendants moved to exclude plaintiff’s proposed expert testimony, noting that Evidence Code section 801 and case law requires that scientific evidence be based on (1) a proven technique generally accepted as reliable in the scientific community; (2) proof that the witness testifying is properly qualified; and (3) proof that the person performing the test used appropriate scientific procedures. The court excluded portions of the testimony of three of plaintiff’s proposed experts regarding causation, and after a jury trial, the plaintiff appealed those decisions.

APPELLATE COURT REVIEW

One of the plaintiff’s experts was a physician specializing in toxicology. At a pre-trial hearing, he testified that he “understood” that low levels of mycotoxins had been found and intended to testify about an increased risk for developing different cancers as well as memory loss, migraines, fibromyalgia, chronic fatigue, and other symptoms. He acknowledged, though, that no mycotoxins were found in the unit when the plaintiff was actually living there. The trial court had excluded his testimony regarding a connection to cancer and concluded that his testimony generally lacked foundation because there was no proof that mycotoxins caused plaintiff any injury.

Another physician specializing in toxicology gave a preliminary opinion that there was a link to the symptoms; he also knew nothing about the quantity or amount of exposure the plaintiff had to any toxin. Finally, a clinical neuropsychologist was allowed to testify only about plaintiff’s behavior and emotions, but was not allowed to attribute them to any organic cause.

At trial, the jury found none of the respondents negligent, and plaintiff contended on appeal that the trial court erred in excluding the proposed testimony by the three experts. The appellate court held that because of the lack of scientific basis and in particular the lack of any connection to the presence of mycotoxins in the apartment when the plaintiff lived there, nothing in the records supported a causal connection between the minute amount of mycotoxins detected after she left and any illness. The appellate court also held that the testimony proposed by the three experts relied on an incorrect premise: that plaintiff’s exposure to mycotoxins caused her symptoms even though there was no actual evidence that she was ever exposed to mycotoxins. Accordingly, the appellate court reasoned that those expert opinions lacked evidentiary value and that the trial court did not err in excluding them. Finally, the court noted that in addition to this fundamental problem, the plaintiff’s experts had sought to rely on techniques that had not gained acceptance in the relevant scientific community.

COMMENT

This case emphasizes that expert witnesses may be precluded from testifying about assumptions unsupported by factual foundation. Additionally, there must be a specific showing of a link between the established facts, the type of testimony offered, and the standards of acceptance in the scientific community.


March 13, 2009

EXCEPTIONS TO TEN-YEAR STATUTE OF LIMITATIONS IN CLAIMS FOR CONSTRUCTION DEFECTS, INCLUDING MISCONDUCT ALSO APPLIES TO CROSS-COMPLAINTS IN ACTION

Pine Terrace Apartments, L.P. v. Windscape, LLC
2009 WL 68877 (Cal. App. 5 Dist.)

OVERVIEW

Code of Civil Procedure section 337.15 places an outer limit on the statute of limitations for latent construction defect claims at ten years, but with certain exceptions, including willful misconduct. In a recent decision, the court held that the exceptions also apply to cross-complaints for indemnity, and that cross-complaints may allege an exception simply by incorporating allegations found in the direct complaint.

FACTS

Between 1989 and 1991, a 256-unit apartment complex was built in Fresno. The project was eventually sold to Pine Terrace Apartments; escrow closed in May of 2003. Subsequently, the buyer became aware of defects, including water intrusion and mold damage caused by the absence of flashing and alleged that the seller had known about the absence of the flashing, but did not disclose it to the buyer. In May of 2004, over ten years after construction was completed, Pine Terrace filed a complaint against the seller. Causes of action included negligence, strict liability, breach of contract, breach of implied and express warranty, bond liability, express contractual indemnity, and concealment. Plaintiff alleged that the work was done with reckless disregard and constituted willful misconduct.

One of the subcontractors, Western Building Products Company, admitted it had installed windows without flashing paper. The developer-seller filed a cross-complaint, naming numerous subcontractors. Although the cross-complaint did not use the term “willful misconduct,” it did incorporate by reference allegations in the buyer’s complaint that had already been filed.

TRIAL COURT RULING

Three of the subcontractors moved for summary judgment on the indemnity claims against them. The trial court granted their motions on the basis that the 10 year statute of limitations had run on the cross-complaint.

APPELLATE COURT RULING

On appeal, the court considered the applicability of Code of Civil Procedure section 337.15, which provides in part that actions to recover damages from developers or constructors of real property cannot be brought more than ten years after substantial completion of the project, but that the statute contains exceptions. These include that a cross-complaint may be filed later, when the main action was brought within the time period set forth in the code section. The court noted that the statute also contained exceptions for actions based on willful misconduct and/or fraudulent concealment.

The court observed that the ten-year-limitation period is not absolute and that earlier Supreme Court cases had made it clear that claims for indemnity pursued through cross-complaints should be considered actions in and of themselves. Nothing in the statute indicated that the Legislature intended to limit the exceptions to the ten-year statute to direct actions only. Thus, longer limitation periods for actions based on willful misconduct or fraudulent concealment may apply to actions for indemnity in a cross-complaint. Here, cross-complainants effectively alleged willful misconduct against the subcontractor when they incorporated allegations into their pleadings by reference. The trial court was directed to vacate its earlier order granting cross-defendants’ motions for summary judgment.

CONCLUSION

This case clarifies that allegations of willful misconduct or fraudulent concealment will exempt both direct and derivative cross-complaints from the ten-year statute of limitations based on latent construction defects when allegations constituting an exception to the ten-year statute are alleged, whether directly or through incorporation by reference. The case removes an argument cross-defendants might have made earlier that indemnity claims were barred when exceptions to the ten year statute of limitations had not been specifically pled in their cross-complaints.


August 2008

David Madden v. Summit View, Inc.
2008 West Law 3274100 (Cal.App. 1 Dist.) August 11, 2008

INJURED SUBCONTRACTOR EMPLOYEE MUST PRESENT EVIDENCE
OF AFFIRMATIVE NEGLIGENCE BY GENERAL CONTRACTOR

OVERVIEW

This case represents a further development favorable to defendants in the line of cases following Privette v. Superior Court (1993) 5 Cal. 4th 689 and Toland v. Sunland Housing Group, Inc. (1998) 18 Cal. 4th 253. The court confirmed that Cal-OSHA regulations do not operate to enlarge the general contractor’s common law duty of care toward its subcontractor’s employees, and that even if they did, the evidence would have to show that the regulation cited was applicable in the situation.

FACTS

The plaintiff, David Madden, was the employee of an electrical subcontractor working at a home construction site. The general contractor was Summit View. While pulling and untangling electrical wire, the plaintiff walked backwards and stepped off a raised patio area. The patio was between two and eight feet high over sloping ground; the plaintiff did not know how far his fall was, and there were no witnesses. Because of the changing elevation, it could not be established whether a Cal-OSHA regulation requiring a railing in areas more than 7.5 feet high was applicable.

TRIAL COURT ACTION

Madden sued Summit View, Inc., on the theory that it failed to place a protective railing around the patio. The general contractor then moved for summary judgment under the theory that it owed no duty to the employee of a subcontractor under California law. Summit View cited the Privette-Toland doctrine, which holds that a contractor’s employee is covered by the workers’ compensation scheme, and that the peculiar risk doctrine provides no tort remedy against the person hiring the employee’s employer. Similarly, the Hooker case determined that the hirer of an independent contractor is not liable to a subcontractor’s employee merely because the hirer retained control over safety conditions–its exercise of control must have affirmatively contributed to the employee’s injuries–such as providing unsafe equipment used by the injured worker.

The trial court determined that these doctrines were applicable and even though there was a triable issue whether Summit View had retained control over safety conditions at the work site, there was no evidence that the general contractor affirmatively contributed to the injuries. Even though Summit View did not put up a railing, it did nothing to prevent the erection of a railing.

APPEAL

The appellate court noted that the general contractor exercised no control over the means and methods of the subcontractor’s work, nor did Summit View retain control over the general safety conditions. The absence of a guardrail was open and obvious; the general contractor was in no better position to know this than the plaintiff’s employer. Madden directed his own work, and the general contractor did not instruct him to do his work in an especially dangerous manner. The court observed that the plaintiff could not simply assume his own employer lacked the authority to take reasonable precautions or was prevented from doing so.

The court affirmed prior holdings that Cal-OSHA regulations cannot be used to expand a general contractor’s duty of care to an injured employee of a subcontractor. It stated that violations of safety regulations are only applicable in actions by employees of subcontractors where evidence establishes that the general contractor affirmatively contributed to the employee’s injuries. Here, there was no evidence of any affirmative contribution to the accident by the general contractor. The court noted that even if it rejected this rule and accepted that Cal-OSHA regulations applied, the plaintiff still had no evidence that a railing was required at the location where he fell.

COMMENT AND CONCLUSION

The case strengthens the existing doctrine of Privette, Toland and others, holding that an employee of a subcontractor has no tort remedy against a general contractor in the absence of affirmative negligence by the general contractor. It emphasizes that this is the necessary result particularly when there is no evidence that an alleged failure to act had any direct bearing on the cause of the accident.


April 2008

Joe Henry v. Superior Court 160 Cal. App. 4th 440
Second District Court of Appeal February 25, 2008

After plaintiff was injured on defendant’s property and his condition was subsequently made worse by negligent medical treatment, defendant property owners were allowed to introduce evidence of medical malpractice for the purpose of apportioning non-economic damages (Prop 51), even though plaintiff’s health care providers were not parties to the lawsuit.

FACTUAL AND PROCEDURAL BACKGROUND

The plaintiff, Larry Reinink, was hired by defendant Henry to clean and repair their swimming pool and related equipment. As he was leaving the property he fell, attributing it to an unmarked, unlit concrete step. He was transported to Kaiser Hospital where he received treatment for his injured shoulder. Plaintiff eventually had several separate surgeries. The plaintiff filed a complaint against the Henrys for negligence and premises liability. Neither the plaintiff nor the defendant property owners sought to bring the medical care providers into the action, even though exacerbation of the plaintiff’s original injuries was claimed. Shortly before the matter was scheduled to begin trial, the court refused to allow evidence related to the alleged subsequent medical malpractice because it would have expanded the scope of the trial and, as the trial court stated, would, “take up so much time that it is not worthwhile doing it”.

The defendant property owners, after securing a continuance of the trail date, petitioned the appellate court for a writ of mandate compelling the trial court to vacate its order and allow evidence of medical negligence. They contended that they were entitled to introduce the evidence to limit their own potential liability for non-economic damages according to their actual percentage of fault. They argued that in effect, whether or not the Plaintiff had sought to sue additional defendants for a subsequent but related injury, they were entitled to have any non-economic damages assigned to them only in proportion to the extent that they, and not others, were actually responsible.

HOLDING

The appellate court agreed with the defendant property owners. They observed that the core principle of Proposition 51, eliminating joint liability for non-economic damages when liability is based on comparative fault, should be recognized in this situation.

COMMENT

This case modifies the previous rule that all damage (even malpractice by medical care providers) could be recoverable as against the original tortfeasor. This decision provides an avenue for apportioning awards of non-economic damages among parties and non-parties alike in accord with the principles of Proposition 51.


December 10, 2007
CAL-OSHA REGULATIONS ADMISSIBLE
SUBJECT TO PRIVETTE LIMITATIONS
Millard v. Biosources, Inc.
Court of Appeal, Fourth District, Division 1, 2007 WL 3379799

Facts

Plaintiff was an employee of Apex Mechanical Systems, Inc., who was hired as a subcontractor to install upgrades to the HVAC system as part of a tenant remodel project. Biosources was the general contractor and electrical contractor on the project. The incident occurred when plaintiff was “troubleshooting” the HVAC system in an attic space and fell. At the time of the fall, there were no Biosources personnel present. Plaintiff sued Biosources for personal injuries. Biosources brought a motion for summary judgment arguing the following: 1) Plaintiff’s action was barred by the Privette doctrine (common law rule that a person who hired an independent contractor was not liable to third parties for injuries caused by the contractor’s negligent performance of the work); and 2) the retained control exception (which specifies that a hirer of an independent contractor could be found liable to an employee of an independent contractor insofar as its negligent exercise of retained control affirmatively contributed to the employee’s injuries) did not apply because Biosources did not affirmatively contribute to plaintiff’s injuries. Plaintiff opposed the motion, arguing: 1) Biosources violated applicable OSHA regulations; 2) Privette did not apply because Biosources’ duty was created by the Labor Code under Elsner v. Uvegas (2005) 34 Cal. 4th 915; and 3)Biosources affirmatively contributed to his injuries by failing to conduct a safety meeting or post a safety tag near the electrical panel and light switch to the attic light.

Discussion

The court granted Biosources’ motion for summary judgment. The court held that Biosources did not affirmatively contributed to plaintiff’s injuries as required to impose liability under the retained control exception to the Privette doctrine. The court reasoned that plaintiff’s efforts to implicate Biosources’ employees to the incident were unfounded. Additionally, even if plaintiff could show that Biosources retained control over safety conditions at the project, there was no triable issue of fact that Biosources affirmatively contributed to plaintiff’s injuries. Plaintiff’s also contended that the Elsner opinion allowed Cal-OSHA provisions to establish a standard or duty of care. The court, however, reasoned that Elsner was not intended to limit Privette. Elsner was distinguishable because the plaintiff was not attempting to impose liability on the general contractor for the negligence of others, but for the general contractor’s affirmative contribution to his injuries. Moreover, under Labor Code section 6304.5, safety regulations may be admissible in actions by employees of subcontractors that retain control of safety conditions, but only where the general contractor affirmatively contributed to the employee’s injuries. “Affirmative contribution” occurs where a general contractor is actively involved in, or asserts control over, the manner of performance of the contracted work. The court again distinguished Elsner because of the general contractor’s affirmative contribution to the injury. Further, Elsner emphasized that 6304.5 was not intended to expand a general contractor’s duty of care to an injured employee of a subcontractor and incorporated the limitations on such a duty imposed by Privette and its progeny.

Comment

Elsner has not expressly or impliedly overruled the limitations imposed by the Privette line of cases. The doctrine of retained control is applicable only to the extent that the third party affirmatively contributed to the employee’s injuries. Further, under amended section 6304.5, safety regulations may be admissible in actions by employees of subcontractors brought against general contractors that retain control of safety conditions, but only where the general contractor affirmatively contributed to the employee’s injuries. In order for safety regulations to be admissible, there must first be a duty of care established by retained control and affirmative contribution to the accident. Once a duty is established, the safety regulations can be used to determine the standard of care.


Updated June 7, 2007
IN THE MATTER OF HARRIS CONSTRUCTION COMPANY, INC.
Occupational Safety and Health Appeals Board
Docket No. 03-R2D5-3914

The State of California Occupational Safety and Health Appeals Board issued a decision on March 20, 2007 with implications for civil cases involving multi-employer work sites. While this case is not binding in civil cases, it is instructive authority which can be used when arguing interpretation of the multi-employer work site responsibilities.

Factual and Procedural Background

The injured worker was an employee of Champion, a subcontractor doing work for the general contractor Harris. Champion was performing pipefitting work on a community college project. The employee was injured when a pressurized pipe he was working on broke off. A Cal OSHA representative issued a citation to the general contractor under Title 8, section 3329(d) of the California Code of Regulations which requires that internal pressure on pipes be relieved before dismantling or opening pipes. The administrative law judge upheld the citation issued to the employer as the “controlling employer” under Labor Code 6400(b).

Holding

The Appeals Board considered the matter within in the context of a multi-employer situation as well as the Board’s traditional interpretation that employers may not be found liable in a multi-employer situation if they are unable to abate the violation. The Board stated in part “We believe responsibility for safety requirements should be placed on those who have the greatest practical opportunity and ability to insure compliance with the applicable safety standards.” They noted that this may include the general contractor, but not always. The totality of the circumstances controls. The citation was based on contract language (providing for ultimate control over safety), and the proximity of the general contractor’s work site trailer to the accident. However, the Board stated in part “…We find that general contractors are not charged with staying abreast of their subcontractors’ every activity. We do not believe general contractors are required to consult with their subcontractors about every step they plan to undertake in their work as well as the manner in which they plan to undertake it. A general contractor is not charged with that level of oversight.” In this case there were no facts to support the argument that the general contractor knew or should have known this employee was going to perform this dangerous work. The Board acknowledged that some factual circumstances may place a duty on the general contractor as the “controlling employer”, but no such facts existed here.

Comment

The decision in the Harris Construction is not binding on courts, but can be used persuasively in situations where, in multi-party employer situations, a particular defendant was not in a position to guard against an injury. The case helps to clarify the ambiguity in Labor Code 6400(b) as to how “controlling employer” should be interpreted to impose (or not impose) liability on the construction job sites.


Indemnitee Entitled to Reimbursement for Defense Costs Despite Providing Own Defense
City of Watsonville v. Patrick Corrigan, et al., Cal. App. 6 Dist. 2007

Factual and Procedural Background

Developers entered into a contract with the City of Watsonville to redevelop residential property. After its completion, the developers and the City were sued because of problems with unstable soil on the property.

The City’s contract with the developers provided that the City was owed contractual indemnity including defense costs and any potential judgment for damages arising out of the projects. The City elected to provide its own defense rather demanding that the developers hire attorneys to defend it. Eventually, the cases settled except for the issue of express indemnity. At trial, the Superior Court found that the City had a duty to request a defense from the developer and that its decision to use its own counsel precluded it from passing its defense costs off to the indemnitors.

Holding

The appellate court considered the question of whether the City was actually required to tender its defense before the developers could be held accountable for the costs of that defense. The court looked at the contractual language between the parties and at Civil Code section 2778, which sets out rules guiding the interpretation of indemnity agreements. The agreements included language requiring the developers to hold the City harmless from claims and to defend it from lawsuits based on such claims. The Civil Code section provides that an indemnity agreement embraces the costs of the defense against claims when the costs are incurred in good faith and in the exercise of reasonable discretion. It specifically states that the indemnitee has the right to conduct its defense.

Although the court discussed case law cited by both sides, not surprisingly, the clear language of the Civil Code was found to be controlling. The appellate court noted that the code did not include any requirement that the City tender its defense as a prerequisite to later collecting its defense costs. The court stated “Indemnity agreements are not construed like liability insurance policies.” The code section makes clear that the indemnitee has the right to provide its own defense if it chooses to do so, and the only issue remaining was whether the statutory requirement that the defense costs be incurred in good faith and in the exercise of reasonable discretion had been met. The matter was remanded to the Superior Court for a decision on those questions.

Comment

The issue in the trial court and necessity of the appeal would probably have been avoided by clearer drafting of the indemnity agreement. The City could have spelled out its right to defend itself and recover the costs of its defense regardless of whether defense was tendered. Although the Watsonville case now makes such indemnity language appear unnecessary, it should have been unnecessary before this case was decided. Explicit contractual terms make it clear there is a meeting of the minds and eliminate much litigation. Here, there would have been no harm in including indemnity language that explicitly set out the indemnitee’s right to defend itself without first tendering the defense or allowing the indemnitor to select the defense counsel.


RECENT EQUITABLE CONTRIBUTION AND EQUITABLE SUBROGATION CASES
Safeco Insurance Co. of America v. Superior Court 2006 CDOS 5462 (June 27, 2006)
Employers Ins Co. of Wausau v. The Travelers Indemnity Co. 2006 CDOS 6410 (July18, 2006)
RLI Insurance Co. v. CNA Casualty of California 2006 CDOS 6125 (July 11, 2006)

California Courts of Appeal recently issued three opinions explaining the duties of insurers to each other under the doctrines of equitable contribution and equitable subrogation. Equitable contribution (discussed in the Safeco and Employers cases) permits insurers at the same level (i.e., two primary insurers or two excess insurers) to apportion the risk on an equitable basis among them regardless of the rights or obligations of the insured or the language of the policies. Equitable subrogation (as discussed in the RLI case), permits an excess insurer to “stand in the shoes of the insured”, and to sue a primary insurer based on the rights the insured has against the primary insurer under the primary policy language.

Equitable Contribution

Equitable contribution between insurers is not dependent on the terms of the insurance policies. Rather, it is an equitable doctrine intended to permit an insurer that defended and/or indemnified its insured to recover its fair share from other insurers with obligations to defend and/or indemnify their mutual insured but did not do so. In Wausau, the court concluded primary insurers that previously settled with the insured by paying a lump sum in exchange for a release by the insured regarding all asbestos cases could still be sued by other primary co-insurers for equitable contribution toward defense costs in future cases. The court followed Fireman’s Fund Ins. Co v. Maryland Casualty Co., 65 Cal.App.4th 1279 (1988), and held that a policyholder release does not insulate a primary insurer from equitable contribution by primary co-insurers.

The Wausau court also upheld the method of allocation stated by the trial court as “in direct ratio to the proportion each insurer’s coverage bears to the total coverage provided by all of the primary insurance policies.” Since equitable contribution is an equitable doctrine, appellate courts have not specified a single method of allocation. Instead they determine what is “equitable” on a case by case basis. Allocation of defense costs based on time on the risk, policy limits, and modified time on the risk (in which the time on the risk is adjusted to account for the policy limit of each policy) have all been approved by appellate courts in other cases.

Although the settlement agreements stated that the policy limits were exhausted, the insurers in Wausau did not argue the policy limits had been exhausted, and the court specifically noted this fact in its opinion. The court appeared to make a distinction between ceding policy limits to the insured and actual exhaustion by payments to resolve claims. Had the policy limits been exhausted, the court probably not have permitted equitable contribution. It is also interesting to note that the agreement in Wausau between the insured and the non-participating insurers required the insured to defend and indemnify the non-participating insurers against equitable contribution actions. Thus, although the non-participating insurers could be sued for equitable contribution, the insured was required to indemnify them.

In Safeco, the court addressed the burden of proof in a case in which one primary insurer defended and settled a case on behalf of the insured, and then sued non-participating primary for equitable contribution. The court entered uncharted waters holding that (1) the non-participating insurers cannot challenge the reasonableness of the participating insurer’s settlement, and (2) the burden of proof shifts to the non-participating insurer to prove that there is no coverage for the settlement. The court reasoned, since many settlements involve a consideration of future defense costs, it is more equitable to the insurer that meets its obligations to defend and settle to shift the burden of proof regarding coverage to the non-participating insurers. This is a departure from prior cases, such as Peter Culley & Associates v. Superior Court, 10 Cal.App.4th 1084 (1992) (involving indemnity agreements) in which the courts held that (1) there is only a rebuttable presumption of reasonableness of a settlement, and (2) the indemnitee, not the indemnitor, has the burden of proof as to whether the settlement was within the scope of the indemnity agreement. Safeco thus makes it much easier for a participating insurer to recover from non-participating insurers.

Equitable Subrogation

Equitable subrogation, unlike equitable contribution, permits one insurer that pays a judgment to sue a non-participating insurer that should have paid the judgment. Equitable subrogation is often used by an excess insurer to sue a primary insurer whose failure to settle a case caused an excess judgment against the insured for which the excess insurer became responsible. In that situation, the excess insurer can sue the primary insurer for equitable subrogation. Equitable subrogation derives from the rights of the insured under the respective insurance policies, and the excess insurer “stands in the shoes” of the insured against the primary insurer.

In RLI, the court addressed a situation where the excess insurer settled the case against the insured rather than letting it go to judgment and then sued the primary insurer in equitable subrogation. The primary insurer rejected an offer to settle the case against the insured within the primary policy limit. The excess insurer then settled the case and sued the primary insurer in equitable subrogation. The court held that equitable subrogation against a primary insurer requires an actual judgment against the insured, citing Hamilton v. Maryland Casualty Co., 27 Cal.4th 718 (2002). The excess insurer settled the case, so there was no judgment against the insured, and the insured thus had no cause of action against the primary insurer. Since the excess insurer stands in the shoes of the insured, the excess insurer has no cause of action against the primary insurer either. The court distinguished and rejected the reasoning of Fortman v. Safeco Ins. Co., 221 Cal.App.3d 1394 (1990), which permitted equitable subrogation without a judgment, because Fortman improperly relied on concepts of equitable contribution rather than equitable subrogation.

Comment

Wausau and RLI appear to be well reasoned and set forth the distinctions between equitable contribution and equitable subrogation. Safeco, on the other hand, appears inconsistent with existing law. The Safeco court appears to punish non-participating insurers, rather than trying to compensate participating insurers. It will be interesting to see whether the California Supreme Court grants review of Safeco or depublishes the case rather than let the case stand as precedent.


Assumption of Risk Doctrine Weakened By Reckless Behavior
Mammoth Mountain Ski Area v. Graham (2006) 135 Cal.App.4th 1367
and Lackner v. North (2006) 135 Cal.App.4th 1188
In the Court of Appeal of the State of California, Third Appellate District

The California Court of Appeal, Third Appellate District, recently decided two cases which purport to clarify the doctrine of primary assumption of risk. In analyzing whether primary assumption of risk could be used as a complete defense against negligent behavior, the court considered whether the defendant’s conduct was so reckless as to be totally outside the range of ordinary activity involved in the sport. In these decisions, the court recognized two situations wherein the defendant did not owe a duty of care to the plaintiff, and where “primary Assumption of the Risk” would typically be a bar to a claim of injury – skiing; however, the court carved out an exception to the general rule. Namely, the court held that the doctrine does not apply to a participant in an active sport who “intentionally injures another player or engages in conduct that is so reckless as to be totally outside the range of ordinary activity involved in the sport.” The context of these recent cases both involve careless, and arguably (and allegedly) reckless, snowboarding accidents.

Facts

In Graham, a ski school instructor was employed by Mammoth Mountain Ski Area (“Mammoth”) to teach novice skiers how to ski. He was in the course of leading a class down the slope when he pulled over to the side of the run to observe his students. A snowboarder engaged in a snowball fight collided with him. In Lackner, the defendant snowboarder was racing his teammates down a run when he collided with the stationary plaintiff causing severe injuries.

Discussion

In each case, the appellate court examined whether the defendant’s behavior was so reckless as to be totally outside the range of ordinary activity involved in the sport. The court considered whether imposing liability for Defendant’s conduct would deter vigorous participation in the sport. In Graham, the court held that a snowball fight was arguably outside the range of activity involved in the sport. In Lackner, the court disagreed with the defendant’s contention that this was a “garden variety” collision, noting that North was an accomplished snowboarder who was taught to give downhill skiers the right of way. Consequently, the court found there were a triable issues of fact on the question of recklessness in both cases.

Comment

These cases are significant in that they substantially weaken the defense of primary assumption of risk as a means of seeking an early disposition of the case by summary judgment. Summary judgment requires there be no triable issue of fact. Moreover, whether or not a defendant was “reckless”, or was engaged in a conscious choice of a course of action, with knowledge of the serious danger to others involved is likely to be a matter of factual dispute. If future plaintiffs are able to circumvent the doctrine of primary assumption of the risk merely by alleging reckless behavior, the effectiveness of motions for summary judgment in these case will be reduced.


CALIFORNIA SUPREME COURT LIMITS LIABILITY OF OWNER OR CONTRACTOR FOR INJURIES TO AN INDEPENDENT CONTRACTOR’S EMPLOYEE CAUSED BY A HAZARDOUS CONDITION OF THE PROPERTY
Kinsman v. Unocal Corporation
Supreme Court of California
December 19, 2005

The California Supreme Court recently limited the liability of an owner or possessor of land (including contractors) to employees of independent contractors for a latent dangerous condition on the property. If the owner or possessor did not create a dangerous condition on the property, liability exists only if: (1) the landowner or possessor knew or should have known of dangerous condition (2) the independent contractor did not know and could not have reasonably discovered the hazardous condition; and (3) the landowner or possessor failed to warn the independent contractor about the hazardous condition.

Facts

Kinsman worked at Unocal’s refinery during the 1950’s and was exposed to asbestos dust. Kinsman ultimately developed mesothelioma. Kinsman argued that the industry knew asbestos was a hazard as early as 1937, and that Unocal should have either warned Kinsman of the dangers of asbestos or adopted safety measures. Kinsman sued Unocal on two theories: (1) premises liability, and (2) negligent exercise of control over the work performed by Kinsman. The jury awarded over $3 million to Kinsman on the premises liability cause of action. The Court of Appeal reversed. The Supreme Court granted review.

Holding

The California Supreme Court held that an owner of land where a dangerous condition existed is not liable for injuries to the employee of an independent contractor unless: (1) the landowner or possessor of land knew, or should have known, of a latent or concealed hazardous condition of the property; (2) the independent contractor itself did not know and could not have reasonably discovered the hazardous condition; and (3) the landowner or possessor of land failed to warn the independent contractor about the hazardous condition. The Court stated “when there is a known safety hazard on a hirer’s premises that can be addressed through reasonable safety precautions on the part of the independent contractor, … the hirer … is not liable to the contractor’s employee if the contractor fails to do so.

Comment

This case is extremely helpful to landowners and contractors who hire independent contractors in situations like construction sites, where obvious dangerous conditions often exist. The Court reiterated that the hirers of independent contractors are not responsible to insure the safety of the subcontractor’s employees from open and obvious dangers – that duty falls on the subcontractor.


INSURER MAY SEEK REIMBURSEMENT FOR DEFENSE COSTS FROM INSURED WHEN NO DUTY TO DEFEND EXISTED AND RESERVATION WAS MADE
Scottsdale Ins. Co. v. MV Transportation, et al.
Supreme Court of California
July 26, 2005

The California Supreme Court recently held that a commercial general liability insurer, who properly reserved its rights to do so, may obtain reimbursement of the expenses of defending its insured against a third party lawsuit when it is ultimately determined that the insurance policy never afforded any potential of coverage, and that therefore a duty to defend never arose.

Facts

The insured, MV Transportation and various of its employees were sued by Laidlaw which alleged causes of action for breach of fiduciary duty, tortious inducement to breach duty of loyalty and fiduciary duty, intentional interference with contractual relations and with prospective business advantage, misappropriation of trade secrets, and unlawful, unfair, and fraudulent business practices. Scottsdale, as the insurer for MV Transportation, agreed to defend the case, but asserted a reservation of its rights to reimbursement of defense costs if it turned out there was no duty to defend. The underlying case ultimately settled and Scottsdale sued the insured for declaratory relief and reimbursement. The superior court found a potential for coverage, but the court of appeal held that there was no potential for coverage as a matter of law. The court of appeal, however, held that the lack of potential for coverage was determined as of the date of court of appeal decision, so no reimbursement was owed before that time.

Holding

The Supreme Court overruled the court of appeal and held that in light of the proper reservation of rights, Scottsdale could properly obtain reimbursement from the insured for the costs of defense incurred because there was never a potential of coverage, and thus no duty to defend in the first instance.

Comment

This case will be helpful to insurers who wish to “play it safe” by defending an action which may not have a potential for coverage. By reserving rights to reimbursement, and then seeking declaratory relief, the insurer can better avoid the potential for a later bad faith case resulting from a wrongful refusal to defend.


A GENERAL CONTRACTOR MAY BE FOUND LIABLE FOR INJURIES
TO A SUBCONTRACTOR EMPLOYEE WHERE IT VOLUNTARILY
ACTED TO PREVENT INJURY

Browne v. Turner Construction Company
2005 WL 705221 (Cal. App. Dist.)

Sixth District Court of Appeal
March 29, 2005

When a general contractor acted to provide a safety system and equipment for the benefit of subcontractor employees and then withdrew them, a triable issue of fact existed as to whether the contractor had affirmatively contributed to the employee’s injury, precluding summary judgment.

Facts

Turner Construction was hired as a general contractor; Superior Automatic Sprinkler Company was hired by a Turner as a subcontractor. Paul Browne fell off a ladder while working for Superior and sued the general contractor, as well as the owner. The plaintiff claimed that Turner acted negligently by removing two safety features from the work area consisting of a tie-off system and aerial lift equipment, either of which could have been used to keep him from falling off a ladder. The trial court granted summary judgment for the defendants on the basis that the general contractor and owner made no affirmative contribution to the injuries; the appellate court held that this was error, since the furnishing and then withdrawing safety equipment could be found to be negligent performance, even if the undertaking to provide the safety equipment was voluntary.

Holding

The appellate court found that the defendants’ motion for summary judgment was based on the claimed inability to prove the defendants’ conduct was an affirmative contribution to the cause of plaintiff’s injuries, and saw the pivotal question as whether the defendants had presented sufficient evidence, precluding a finding that they affirmatively contributed to the plaintiff’s injuries or alternatively showing that the plaintiff lacked enough evidence to prove they affirmatively contributed to the injuries.

After reviewing cases regarding the liability of owners and general contractors in similar situations, including Privette v. Superior Court (1993) 5 Cal. 4th 689, Toland v. Sunland Housing Group (1998) 18 Cal. 4th 253, Camargo v. Tjaarda Dairy (2001) 25 Cal. 4th 1235, and Kinney v. CSB Construction, Inc. (2001) 87 Cal. App. 4th 28, the appellate court concluded that these and other cases stood for the principle that the liability of the hirer of an independent contractor for injuries to an employee of that contractor cannot be predicated on the contractor’s negligence, although the hirer can be liable if–and only if–it injures the worker through its own negligence.

The Browne v. Turner case illuminates one boundary of the protection afforded by the Toland and Privette line of cases. In moving for summary judgment, the defendants had not attempted to demonstrate that the plaintiff’s own employer (the independent contractor) was negligent, or that such negligence was the sole or primary cause of the plaintiff’s injuries. They failed to establish that they themselves had not affirmatively contributed in some manner to the plaintiff’s injuries. Instead, the undisputed evidence showed that the general contractor had undertaken to arrange and supply some of the means and methods of the work, including the safety systems and equipment they withdrew before the work was completed. There was no evidence that withdrawal of this equipment was done with the expectation that the independent contractor would make substitute arrangements. As it stood, the evidence in front of the court left open the possibility that the defendants actively contributed to the plaintiff’s injuries and may have even created a situation that made it more likely an injury would occur. The court found that even if the plaintiff’s decision to perform the work was negligent under these circumstances, summary judgment was still not available under the circumstances.

Comment

This case serves to underline the principle that the protections afforded to a general contractor and owner in similar situations are not absolute. At minimum, a general contractor who exercises control over a job site, particularly including safety features and whether required to do so or not, may find itself precluded from prevailing on a motion for summary judgment.

The public policy implications of this decision go in two directions. First, they make a general contractor potentially more responsible when it exercises control over a job site in a manner that may adversely affect the employees of independent contractors at the site. This clearly requires owners and general contractors to carefully consider all implications of their control over a job site, regardless of whether it is voluntary control or pursuant to a contractual agreement. On the other hand, the eventual effect of this case may be to discourage general contractors from engaging in any voluntary safety measures for the benefit of the employees of independent contractors, since any withdrawal of those safety measures, and certainly any failure of them, will preclude summary judgment if not lead to a finding of liability.


UNILATERAL ATTORNEY FEE CLAUSE INCLUDED IN AN INDEMNITY AGREEMENT BETWEEN A GENERAL CONTRACTOR AND A SUBCONTRACTOR IS SUBJECT TO RECIPROCITY PRINCIPLES OF CIVIL CODE SECTION 1717(a)
Baldwin Builders v. Coast Plastering Corporation, et al.
05 CDOS 624 (2005)
California Court of Appeal, Fourth Appellate District, Division One
January 21, 2005

The California Court of Appeal has held that Civil Code section 1717(a) applies and authorizes a prevailing indemnitor/subcontractor to recover attorney fees incurred in defending against a claim under the indemnity agreement. The Court further held that where the indemnitor/subcontractor is required to prove its lack of fault in defending against a claim under the indemnity clause, it is entitled to recover the fees incurred in doing so as well.

Facts

Baldwin Builders was a developer of a 239-unit community in San Marcos. Coast Plastering Corporation and T&M Framing, Inc. entered into subcontracts with Baldwin to do certain work on the construction. Though a general indemnity provision was already included, Coast and T&M each agreed to a stand-alone indemnity agreement with Baldwin. Thereafter, the homeowners filed an action against Baldwin for construction defects in their homes. Baldwin requested Coast and T&M to defend and indemnify it against the claims of the homeowners. Coat and T&M refused. Baldwin then cross-complained against Coast and T&M for express, contractual, implied, and equitable indemnity, contribution, breach of contract, breach of implied and express warranty, negligence, and declaratory relief. The Court bifurcated the trial so that the homeowners’ claims and Baldwin’s cross-complaints against its subcontractors were heard separately from the issue of attorney fees and costs between Baldwin and its subcontractors. At trial, the jury returned special verdicts, finding Baldwin was negligent. However, they found Coast and T&M were not negligent. Following the trial, Coast and T&M filed motions seeking to recover attorney fees and non-statutory costs based on the indemnity agreement, arguing that the reciprocity principles of section 1717(a) entitled them to recover these costs. Baldwin opposed these arguments contending that attorney fee provisions in indemnity agreements were not subject to reciprocity.

Holding

The Appellate Court discussed the rule of reciprocity as it related to attorney fees and costs in indemnity agreements in two parts. First, the Court discussed whether the costs were recoverable, and second, if so, to what extent they were recoverable.

In its holding, the Court noted that generally, even a prevailing party to a lawsuit must pay its own attorney fees. The exception to this general rule is where a contract, statute, or other law specifically authorizes the prevailing party to recover the attorney fees. In such instances, the agreement will generally be subject to section 1717(a) which provides in part that “in any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorneys fees in addition to other costs.” The Court also discussed the exception to the rule of reciprocity. Where the recovery of attorney fees is authorized as an item of loss or expense in an indemnity agreement, reciprocity principles would not apply. The exception makes sense in that an indemnity agreement is intended to unilaterally benefit the indemnitees. Applying reciprocity principles in such instances would defeat the very purpose of the agreement.

Here, the issue involved attorney fee provisions set forth in an indemnity agreement. The issue was whether the attorney fees were reciprocal under contract or whether they were an element of loss in an indemnity agreement, making 1717(a) inapplicable.

The Court held that in this case, the parties did not simply have a general provision requiring the subcontractors to indemnify the general contractor in the event of third party claims. Rather, the attorney fee clause here unambiguously contemplated an action between the parties to enforce the indemnity agreement itself. The Court found that the express language of the attorney fee clauses authorized recovery of attorney fees. Such an action was a “contract” and would fall within the meaning of 1717(a). Therefore, attorney fees in such a case were subject to reciprocity. The Court held that the fact that attorney fee clauses were in an indemnity agreement did not alter that conclusion.

Having found that reciprocity applied, the Court went on to discuss to what extent the fees were recoverable. All parties in this case agreed that the contractual language authorized recovery on only those fees and costs incurred in enforcing the indemnity agreement. The parties disagreed, however, as to what was meant by costs in “enforcing the indemnity agreement.” Coast and T&M took the position that they had to prove their lack of fault to prevail under the indemnity agreement and therefore were entitled to the costs of proving this element at trial. The Court agreed and held that because Coast and T&M were required to establish that they were not negligent in doing their work in order to defeat Baldwin’s cross-claim for indemnity, fees and costs incurred in making that showing could be included as fees and costs incurred to enforce the indemnity agreement.

Comment

Under this case, section 1717(a) and the concept of reciprocity would apply even to attorney fee clauses included in indemnity agreements. This ruling goes against the traditional notion that an indemnity agreement is intended by the parties to unilaterally benefit the indemnitee. However, the Court was careful in that while it expanded the application of reciprocity to indemnity agreements, it did so in instances where attorney fee clauses are specifically included and where an action between parties to enforce the indemnity agreement was contemplated. It is also significant in that indemnity agreements can be used now as a sword rather than simply as the traditional shield against liability. Where there is an action between the parties to enforce an indemnity agreement, the costs of defending against a claim under the indemnity can also be recovered.


VIOLATIONS OF CAL-OSHA SAFETY REGULATIONS RULED ADMISSIBLE
TO SHOW NEGLIGENCE IN THIRD-PARTY ACTIONS
Elsner v. Uvegas
04 C.D.O.S. 11146
Supreme Court of California
December 20, 2004

The California Supreme Court has settled a significant question in dispute since the adoption of AB 1127 by the California Legislature in 1999. The Court ruled that violations of Cal-OSHA safety regulations were made admissible by the 1999 amendments to Labor Code 6304.5 to show negligence per se under Evidence Code sections 452 and 669.

Facts

This was a construction site injury case where the plaintiff injured his knee when a scaffold collapsed beneath him. The general contractor for the project was sued for having negligently set up the scaffold in violation of various Cal-OSHA regulations. The trial court allowed plaintiff’s expert to opine on violations of Cal-OSHA regulations as a basis for the opinion that the general contractor was negligent for violating the standard of care under the safety regulations. The jury rendered a verdict for the plaintiff. The Court of Appeal held that the interpretation of the 1999 amendments to Labor Code 6304.5 did not make the safety regulations admissible in third part actions, overturning the case. The case was then appealed to the California Supreme Court.

Holding

The Supreme Court held that the 1999 amendments to the Labor Code were clearly intended to make the regulations admissible in third party actions, and that such violations may be used to support a negligence per se theory of liability under Evidence Code §669.

Comment

This case is significant in that any violation of the myriad and complex safety rules promulgated under Cal-OSHA will now be available as proof of a violation of the standard of care, and in support of negligence per se claims. Many construction site accidents involve such alleged violations. This case will increase the liability exposure of general contractors for injuries to the employees of subcontractors. The remaining significant question in these cases will be whether the safety rules allegedly violated were applicable to the general contractor (safety railings, etc), or whether compliance with the rule was imposed solely upon the plaintiff’s immediate employer (proper clothing items, etc). In addition, the Supreme Court did not address whether having complied with the Cal-OSHA safety rules will be admissible as a defense to show the lack of negligence. Allowing the rules to be used both as a sword and a shield would appear to make sense from a fairness standpoint, however.


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