California Appellate Court Limits Subcontractors Duty To Pay General Contractors Defense Fees

On July 23, 2020, the California Appellate Court affirmed a judgment against Travelers in a case titled Carter, et al. v. Pulte Home Corp., after finding that Travelers could not recover the defense costs that it had spent in defending the developer in the main action from several subcontractors who had worked on the project but had failed to provide the developer with a defense.

This case arises from a 38-home construction defect lawsuit against Pulte Homes. Travelers agreed under an additional insured endorsement that it would defend the entire lawsuit on behalf of its four subcontractors who had been involved with the project.

Travelers then planned on pursuing the other subcontractors to recover the defense costs it had spent on behalf of Pulte Homes. Most of the other subcontractors’ insurers had issued Additional Insured endorsements with only “ongoing operations” coverage, whereas Travelers had issued blanket Additional Insured endorsements that included “completed operations” coverage.

Travelers did receive contributions totaling almost half of their expenses. Travelers then sued 7 subcontractors directly!!

Traveler’s trial court strategy was to claim the 7 subcontractors were “jointly and severally” responsible, which would allow Travelers to recover all the amounts it had paid out but had not to be reimbursed. However, instead of seeking proportionate amounts from each subcontractor of the total amount of defense costs, Travelers took an “all or nothing” approach.

The court rejected Travelers’ assumption, which was that the subcontractors who were contractually obliged to provide a defense for claims within the scope of their work also had the same obligation to provide a complete defense to the entire action. It wrote that “policy considerations applicable to an insurer’s contract with its insured do not necessarily apply in the same manner to the contractual obligations of a subcontractor indemnitor to a general contractor indemnitee.” Id.

The court emphasized that a subcontractor’s liability for defense fees is limited to a proportionate share based on its scope of work. The court cited Civil Code §2782(d), which expressly makes unenforceable provisions in a construction contract (entered into after January 1, 2009) purporting to impose upon subcontractors the obligation to indemnify or defend a developer or general contractor for claims of construction defects “to the extent the claims arise out of, pertain to, or relate to the negligence of the builder or contractor other builder’s or contractor’s other…independent contractors…or to the extent the claims do not arise out of, pertain to, or relate to the scope of work in the written agreement between the parties.” Id.

In contrast, for the insurer, it is the established rule in California that in a “mixed “action in which some of the claims are at least potentially covered, while others are not, an insurer has a duty to defend the action in its entirety. Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal. 4th 1076, 1081. So long as the insurer properly reserves its rights, it has a right to seek reimbursement from the insured of those sums that were expended to defend any non-covered claims, as long as those sums can be allocated solely to the claims that are not even potentially covered. Buss v. Superior Court (1997) 16 Cal.4th 35.