Did the Ore Sup Ct Abolish Common Law Indemnity for Defense Costs?

"Frequent-fliers" in the world of construction-defect litigation know that defense costs are often the biggest exposure, particularly for subcontractors.  That is why securing a paid-for defense from an insurance carrier is such a hot topic on this blog (and elsewhere).  And whether there is insurance to cover defense costs or not, defendants in complex disputes (including insurers) often threaten to sue other co-defendants to recover part of their defense costs, which can drive settlement discussions.  So any development in the law relating to defense cost recovery has an impact on policyholders - and that's why I'm writing about this new case, which on its face has nothing to do with insurance.

On March 19, 2015 the Oregon Supreme Court issued a somewhat surprising decision in Eclectic Investment v. Patterson & Jackson County et al., in which the court appears to have changed some fundamental assumptions about whether one defendant can recover defense costs from another defendant.  In Eclectic a landowner sued a contractor that had done excavating work for him and the county that inspected and permitted the excavation, after the excavated hillside eroded and damaged commercial buildings on owner's property.  A jury found that the landowner was more than 50% at fault, meaning that under Oregon's comparative fault law neither the county nor the contractor had to pay any damages (both the county and the contractor were found to be slightly at fault).  The county had asserted a common-law indemnity claim against the contractor, and after the trial pursued that claim to recover its defense costs.

Common-law indemnity is an equitable theory used when there is no contractual relationship between the parties or the contract does not contain an indemnity provision.  Under one formulation of the legal standard for the claim, Defendant A will owe Defendant B indemnity if Defendant A's negligence was "active" or "primary" while Defendant B's negligence was "passive" or "secondary."  Another way of phrasing the test is whether in fairness, Defendant A "should" pay for Defendant B's costs in the suit.

The issue before the Oregon Supreme Court in Eclectic Investment was how to determine if the county was entitled to indemnity, since neither the county nor the contractor were liable for damages, and each was found to have played a minor role in the incident.  The court recounted the rather vague legal tests that Oregon courts had developed over the years to determine whether in equity one party owes another indemnity (see above).  The court observed, however, that Oregon law changed after common-law indemnity was adopted, replacing the older "joint liability" regime with the current comparative-fault regime in which each defendant is assessed only its percentage share of any damages by the jury using a questionnaire.  Therefore, according to the court, the rationale for common-law indemnity has disappeared, because under the new scheme one party will never be made to pay damages that were in fact attributable to the "active" fault of another party.

The problem, of course, is that the defense costs incurred by the defendants are not part of the jury's consideration.  (In reality, those costs can only be determined once the litigation is done.)  But the court made it clear, in a final footnote, that where the comparative fault rules apply, common-law indemnity cannot be used as the theory on which to recover even defense costs.  The court stated that it would countenance recovery of defense costs on some other theory, citing cases from other states that allowed such claims under a quasi-contract theory - but that such claims could only lie where the indemnitee incurred defense costs only because of the indemnitor's negligence.  Applying that concept to the facts of the case, the court stated that because plaintiff had sued the county and the contractor, it was clear that the county's involvement in the litigation was not solely because of the contractor's negligence, so the county would have been out of luck in recovering defense costs under an alternative theory.

The court's decision will change some of the leverage points in multi-defendant litigation where not all players have contractual indemnity claims.  It also emphasizes the importance of having Oregon courts enforce insurance contracts providing a paid-for defense.   If defendants cannot rely on common-law indemnity to recover defense costs when they are dragged into lawsuits in which they play a minor part, it is critical that insurers understand and heed their contractual obligation to cover those defense costs.

Ore. Appeals Court Important Holding on Construction Indemnity Agreements

Just as the ball began to fall in New York to herald the New Year Oregon's Court of Appeals issued an important ruling on contractual indemnity agreements in construction contracts.  The decision isn't directly on insurance coverage, but is important because of the overlap between additional insured issues, contractual indemnity, and Oregon's "anti-indemnity" statute (ORS 30.140).  The progress of the case, Sunset Presbyterian Church v. Andersen Construction, has been closely watched because the trial court issued a written decision, one of the few on this subject.

Here is a bit of background: a  new addition to the church suffered from many problems, involving the work of several subcontractors (including one called "B&B"), as well as the general contractor, Andersen.  Andersen's form subcontract included a broad indemnity provision requiring all subcontractors to defend Andersen if suit was brought on the project.  Therefore, Andersen tendered the suit to its subcontractors.  B&B refused the tender.  Andersen settled with the owner, and assigned to the owner its claims against B&B for breach of the duty to defend.  The owner moved for summary judgment on the duty to defend, and prevailed.  However, the trial court awarded the church (as Andersen's assignee) no damages, because the church could not prove how much time Andersen's lawyers had spent dealing with the claims involving B&B's alleged negligence, as opposed to its own negligence or the negligence of other subcontractors.  The trial court relied on Oregon's anti-indemnity statute (ORS 30.140) -- which only applies to construction contracts -- as the basis for putting the burden on the church /Andersen to allocate the defense costs.  (I analyzed the trial court's ruling in more detail in an article for the June 2013 newsletter of the OSB Construction Law Section, available here,)

The church appealed, arguing that the statute did not require that kind of allocation for various reasons, including that the standard applied in the insurance "duty to defend" context should apply to the duty to defend in a contractual indemnity provision.  As a matter of insurance law, an insurer has a duty to defend all claims -- even claims that are not potentially covered -- if any one claim in a suit triggers the duty to defend.  The insurer may not allocate its defense costs based on covered versus uncovered claims.  The Court of Appeals rejected that argument as to ORS 30.140 (and all of the church's other arguments) based on the court's analysis of the legislative history.  However, the Court of Appeals did not reach many of the practical issues presented by the case, finding them moot because of the church's failure to even try to meet the burden of proof articulated by the trial court.  (See the Construction Law Section newsletter article mentioned above for an explanation of those issues).  The case was sent back to the trial court for additional proceedings including (potentially) an award to B&B of its attorney fees, since the Court of Appeals reversed the trial court as to who was the prevailing party.

The general take away is this: if a general contractor (or the GC's insurer) wants to recover its defense costs from a subcontractor that refuses to pick up the defense, it must require its law firm to write time descriptions in such a way that a court can later determine how much time was spent on the negligence of each subcontractor.  Of interest to readers of this blog, that requirement will likely lead to all kinds of issues between GC's and their insurers about management of the defense, and also may complicate additional insured claims on subcontractors, involving coverage counsel for the subcontractors.  Happy New Year!