Many states recognize that a liability insurer is not obligated to pay for the defense of a claim until it is notified of the suit. See, e.g., Home Ins. Co. v. National Union Fire Ins. of Pittsburgh, 658 N.W.2d 522, 533 -534 (Minn. 2003). Once notice of the claim is given to the insurer, the insurer is obligated to pay post-notice fees if the claim is covered by the policy. Does this same principle apply in the context of a general contractor’s indemnity claim against a subcontractor? Is a subcontractor’s liability for attorney’s fees likewise limited to the period after it has received notice of the general contractor’s indemnity claim? Not according to the Michigan Court of Appeals in Ajax Paving Industries, LLC v. Vanopdenbosch Const. Co., WL 2629802 (Mich. Ct. App. 2010) an unpublished decision released in July 2010.
In Ajax, a general contractor and subcontractor executed a subcontract agreement containing an indemnity clause obligating the subcontractor to indemnify the general contractor and hold it harmless against any claims arising out of the subcontractor’s work whether arising before or after completion of the subcontractor’s work. The subcontract, like most of the agreements used in the construction industry, did not obligate the subcontractor to “defend” the general contractor against such claims, but obligated the subcontractor to indemnify the general contractor against “all suits, actions, legal and administrative proceedings, claims, demands, damages, judgments, liabilities, interest, attorney’s fees, costs and expenses.” The general contractor in Ajax was named as a defendant in a lawsuit, and the claim was ultimately arbitrated. The injured party was awarded $40,000 in damages. The general contractor defended the claim and did not notify the subcontractor or its insurer of the lawsuit until just prior to the arbitration, some 18 months after the lawsuit was commenced. The general contractor satisfied the award and commenced an indemnity action against the subcontractor seeking to recover the amount awarded in arbitration together with all of the legal fees incurred in the defense of the lawsuit. Among other defenses to the claim, the subcontractor contended that it could not be held responsible for the legal fees the general contractor incurred prior to being notified of the underlying lawsuit, claiming that a tender of the defense was a prerequisite to reimbursement. The trial court agreed with the subcontractor on this point, but the Michigan Court of Appeals reversed, drew a distinction between a duty to defend (found in insurance policies, but not found in the indemnity clause at issue) and duty to reimburse (found in the indemnity agreement between the parties) and stated in relevant part:
It is undisputed that the underlying action was initiated on October 12, 2005. It is also undisputed that neither defendant nor its insurer was advised of the lawsuit until April 4, 2007. Notably, however, there is no contractual provision in this matter requiring that defendant be put on notice of an underlying lawsuit or that a tender of defense is necessary for the indemnification provision to apply. * * * Because the contract itself contains no notice or tender of defense requirement and expressly provides for the recovery of all fees and costs associated with defending the underlying litigation, without limitation, plaintiff is entitled to recover the entirety of those fees and costs. * * * [The subcontractor] asserts that the duties to defend and to indemnify in the subcontract are coincident. However, the parties’ contract contains no “duty to defend” provision. In addition, the two concepts are not interdependent; they are distinctly different. “Defend” means to “deny, contest, or oppose an allegation or claim.” Black’s Law Dictionary (7th ed). “Indemnity,” however, is defined as, “a duty to make good any loss, damage, or liability incurred by another. (Black’s Law Dictionary (7th ed). As one cannot oppose an allegation or claim unless he or she is aware of the same, it could be reasonably argued that one who desires to trigger a contractual duty to defend must necessarily tender notice of the litigation to the defender. The same does not hold true for indemnification, however, as indemnity contemplates reimbursement for injuries/losses that have already been incurred. * * * [The subcontractor’s] reliance on certain authority suggesting that fees and costs subject to reimbursement are limited to those incurred only after a tender of a defense, is misplaced, as the cited cases address contracts that expressly required both a duty to indemnify and a duty to defend. * * * The lack of notification in this matter did not preclude a finding that defendant was liable under the indemnification provision for the monies paid by plaintiff to those involved in the underlying lawsuits, and it does not preclude a finding that defendant is liable for the attorney fees and costs associated with defending the underlying action.
The Ajax analysis has significance to CGL insurer affording coverage to subcontractors. As noted in Part V of my construction defect insurance series (Getting a Handle on Large Construction Defect Claims), the “insured contract” provisions of the standard ISO CGL policy provide that “for the purposes of liability assumed in an ‘insured contract,’ reasonable attorneys’ fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of ‘bodily injury’ or ‘property damage,’ provided: “[l]iability to such party for, or for the cost of, that party’s defense has also been assumed in the same ‘insured contract’, and such attorneys’ fees and litigation expenses are for defense of that party . . . in which damages to which this insurance applies are alleged.” This contractual language was written into the ISO CGL form in 2001 and essentially incorporated the conclusion reached by several courts such as the Minnesota Court of Appeals in Soo Line Railroad Co. v. Brown’s Crew Car of Wyoming, 694 N.W.2d 109 (Minn. Ct. App. 2005). Thus, the subcontractor’s CGL insurer may be required to reimburse its insured for the general contractor’s defense fees in the Ajax situation.
Minnesota courts do not appear to have specifically addressed the issue raised in Ajax, but have recognized that in contractual indemnification situations, “tender of defense is a condition precedent to the creation of an obligation to indemnify.” Seifert v. Regents of Univ. of Minn., 505 N.W.2d 83, 87 (Minn. Ct. App.1993), pet. for rev. denied (Minn. Oct. 28, 1993) (citing Jack Frost, Inc. v. Engineered Bldg. Components Co., 304 N.W.2d 346, 353 (Minn.1981); Logefeil v. Logefeil, 367 N.W.2d 114, 116 n. 1 (Minn.App.1985)). “To require [the indemnitor] to indemnify the [indemnitee] before a formal tender of defense would encourage indemnitees to defend claims on their own and then, after fees have been incurred, notify the indemnitor and hold it liable for earlier costs.” Id.
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This is an excellent article. In my career I have seen many indemnity agreements and their companion insurance requirements. Many appear to be boilerplate copies of agreements prepared by others in the past. The central issues appear to be the duty to defend and timing of notice. While the decision seems to deliver the intended results of the contracting parties are there any lessons here for future contracting parties regarding either indemnity agreements or insurance requirements or both? It would be terrific if you provided a follow up list of the handful of essential elements indemnity agreements should have for maximum effectiveness.