By: William E. Kelley, Jr., LEED AP
The Indiana Court of Appeals recently addressed a subcontractor’s duty to defend and indemnify a general contractor for a lawsuit arising from a highway construction project. The decision was set forth in Roadsafe Holdings, Inc. v. Walsh Construction Company (Ind. Ct. App., January 28, 2021), where the Court of Appeals affirmed a judgment entered by the trial court in favor of the general contractor.
During a highway construction project in Lake County, Indiana, a driver was injured while operating his vehicle through the work zone’s traffic pattern. The driver sued the general contractor for negligence, alleging that the contractor created an unsafe traffic pattern. In turn, the general contractor sued its subcontractor via third-party complaint for defense and indemnity, citing the relevant subcontract provisions.
In addition to contractual defense and indemnity obligations, the subcontract required the subcontractor to name the general contractor as an additional insured on the subcontractor’s insurance policy. The subcontractor procured a commercial general liability (CGL) insurance policy, and the policy included a blanket endorsement providing additional insurance for any “person and organization where required by written contract”. However, the subcontractor also obtained a $500,000-per-occurrence self-insurance retention (SIR) endorsement. In short, the SIR endorsement meant that the subcontractor was financially responsible for paying the costs of any defense or indemnity up to the $500,000 amount, before the insurance company was required to pay for any defense or indemnity costs under the insurance policy.
In a separate lawsuit, the insurance company successfully argued that it had no obligation under the CGL policy to defend or indemnify the general contractor until the subcontractor satisfied the $500,000 SIR amount. Both the trial court and court of appeals confirmed that the insurer had no coverage obligation until or unless the $500,000 SIR amount was satisfied. Thus, the focus turned to the subcontractor’s obligation to defend and indemnify the general contractor within the $500,000 SIR limits. In the meantime, the general contractor reached a settlement with the driver for $60,000. The general contractor then sought to recover the $60,000 settlement amount and its attorney fees against the subcontractor.
The Indiana Court of Appeals held that the subcontractor breached its duty to defend the general contractor. The court noted that if the subcontractor disputed its defense obligation, it could have either (1) filed a declaratory judgment action to determine its obligations under the SIR endorsement to the CGL policy; or (2) defended the general contractor under a reservation of rights. However, the subcontractor did neither. As a result, the court held that the subcontractor was barred (pursuant to the doctrine of collateral estoppel) from arguing that it had no duty to defend and indemnify the general contractor.
Further, the court noted that the general contractor was left to litigate the driver’s lawsuit itself, and the general contractor had the right to settle the underlying case without any further consultation with the subcontractor. The subcontractor was therefore liable to the general contractor for the settlement paid to the driver in the underlying lawsuit, along with the general contractor’s attorney fees related thereto.
In addition, the court upheld an award of attorney fees incurred by the general contractor (1) in defending the driver’s lawsuit; (2) in litigating with the subcontractor’s insurance company in the separate lawsuit; and (3) in litigating with the subcontractor in the third-party complaint over the scope of the subcontractor’s defense and indemnity obligation. The court found that these costs were all recoverable as “costs of prosecuting the indemnity clause” between the parties. Finally, the court upheld an award of pre-judgment interest added to the general contractor’s attorney fee and damage amounts.
This case serves as a reminder for both general contractors and subcontractors to carefully review the terms of written contract language related to insurance, defense, and indemnity obligations. These provisions can be complicated and can potentially expose both parties to substantial financial risk, especially where there is disagreement about the scope or interpretation of these provisions. In addition, this case is a good reminder to carefully review the insurance policies, programs, and endorsements that may be intended to protect the parties for these types of defense and indemnity obligations. This is especially true for contractors that utilize SIR endorsements, so that there is clear understanding of the contractor’s financial obligations versus the insurance company’s coverage obligations.
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