Contractual Indemnification

Aluma Systems Concrete Construction of California v. Nibbi Bros. Inc., et al.

Court of Appeal, First Appellate District (August 16, 2016)

This case considered the applicability of a contract’s indemnification clause where there was no alleged negligence by the indemnifying party in an underlying action.

Aluma Systems Concrete Construction of California, Inc. (“Aluma”) was sued by employees of respondents Nibbi Bros. Inc., and Nibbi Bros. Associates, Inc. dba Nibbi Concrete (“Nibbi”), for injuries sustained on the job. In March, 2011, Aluma entered into an agreement with Nibbi to design and supply the materials for wall formwork and deck shoring at Nibbi’s construction project (“Contract”). The terms of the contract included an indemnification provision. Part of it required Nibbi to indemnify and hold harmless Aluma against any and all claims arising from or in connection with the contract, except to the extent such claims are caused by the acts or omissions of Aluma, or anyone directly or indirectly employed by Aluma, or anyone for whose acts Aluma may be liable.

Subsequently, two lawsuits were filed by Nibbi’s employees (“Employee Lawsuits”) against Aluma alleging that in August, 2011, the employees were injured after a shoring system designed by Aluma collapsed. They alleged the collapse was due to Aluma’s negligence. Aluma’s answers alleged as affirmative defenses that the employees’ injuries were proximately caused by the negligence of Nibbi and unnamed others. Aluma tendered the Employee Lawsuits to Nibbi for defense and indemnification, but received no response.

Aluma then filed the instant action against Nibbi for breach of contract, express indemnification, and declaratory relief. Nibbi demurred to the complaint. The demurrer argued the contractual indemnification provision did not apply because the Employee Lawsuits alleged Aluma alone, not Nibbi, was negligent. The trial court sustained the demurrer without leave to amend. Aluma appealed.

The Court of Appeal reversed the trial court’s ruling. Nibbi’s primary argument was that the Employee Lawsuits alleged only Aluma’s negligence, which was expressly excluded from the indemnification provision. Nibbi contended the application of the indemnity provision turned on whether the Employee Lawsuits alleged the negligence of any party other than Aluma, rather than on what a factfinder ultimately determined about the parties’ respective negligence.

The Court disagreed and first looked at the language of the contract. Nibbi noted the indemnification provision applied to “claims” and argued that this indicated the allegations of the Employee Lawsuits controlled the provision’s application. Assuming this is an appropriate construction of the word “claims,” the provision also requires indemnification for Aluma’s “damages” and “losses.” The Court saw no basis to restrict the damages and losses so indemnified to the allegations of the Employee Lawsuits, rather than to the damages Aluma was ultimately found liable for. Even if Nibbi’s construction of the Contract were possible, the Court noted it must accept Aluma’s reasonable interpretation for purposes of the demurrer. Marzec v. Public Employees’ Retirement System (2015) 236 Cal.App.4th 889, 909.

Nibbi pointed to cases in which the application of indemnification provisions turned on the allegations of the third party’s complaint. However, the Court found that those cases all involved the duty to defend. The duty to indemnify is distinct from the duty to defend: the former “require[s] one party to indemnify the other, under specified circumstances, for moneys paid or expenses incurred . . . as a result of” a third party claim, while the latter “assign[s] one party . . . responsibility for the other’s legal defense when a third party claim is made.” (Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541, 551 (Crawford).) Depending on the contractual language, a duty to defend may exist even if no duty to indemnify is ultimately found. The duty to defend “necessarily arises as soon as [the specified] claims are made against the promisee.” (Crawford, supra, 44 Cal.4th at p. 554.) Therefore, the duty to defend may depend on the framing of the third party’s complaint. Unlike the duty to defend, however, the duty to indemnify does not arise until liability is proven.

Aluma’s complaint alleged Nibbi owed a duty to both defend and indemnify. Nibbi’s demurrer argued the entire indemnification provision did not apply to the Employee Lawsuits, and the parties made no distinction between Nibbi’s duty to defend and its duty to indemnify. Therefore, the Court found that it need not decide whether the complaint sufficiently stated a claim with respect to the duty to defend. If it stated a claim with respect to the duty to indemnify, Nibbi’s demurrer failed.

The Court noted also, as Aluma argued, that the employees had no reason to allege Nibbi was liable, as they could not recover damages from Nibbi due to workers compensation. (DaFonte v. Up-Right, Inc. (1992) 2 Cal.4th 593, 598.) Indeed, the employees had reason not to make such allegations, because their damages from Aluma may be reduced by workers’ compensation benefits attributable to Nibbi’s fault. Consequently, the Court saw no basis in the contract language to limit the indemnification provision (at the demurrer stage) to the allegations of the employees’ complaints.

The judgment was reversed.

COMMENT

The importance of this case is that an employer sued by a party with whom it has an indemnity agreement is probably not going to get out of a case on demurrer, even if the plaintiff-employees make no allegation of employer negligence. The employer will only be able to successfully defend the cross-complaint by ultimately showing a lack of negligence on its part.

For a copy of the complete decision, see: Aluma Systems Concrete Construction of California v. Nibbi Bros. Inc., et al.