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Negotiation News: Volume 1, Issue 4

Sean Judge

The "Crawford Tender" is one of those potentially significant impediments to settlement in multi-defendant mediations where there are issues of express and/or implied indemnity, and (most importantly), where a defense obligation exists.  I am proud to have coauthored this article with mediator Bob Tessier about overcoming this particular impediment to settlement.  

Why Can't I Get This Case Settled? Perhaps We Have a Crawford Problem

By Sean E. Judge and Robert Tessier

This newsletter is a first in a series discussing common impediments to settlement. Though not the sexiest issue, our first newsletter tackles multiple- party mediation and how express and implied indemnity claims between defendants cause an impediment to settlement, and how to solve the issue.

Scenario 1:

The plaintiff trips and falls in a recently constructed building and suffers a serious injury. Counsel for plaintiff sues the property owner. Simple enough. However, suddenly there is a cross complaint naming several contracting and subcontracting companies, and each of those new cross defendants cross complain against one another. Some allege express indemnity and defense obligations under a written contract (normally obligating subcontractors to defend and indemnity the general contractor and owner). Others allege implied indemnity, and also argue the injury was caused by the sole negligence or gross negligence of the owner or general contractor. A formerly simple case now has 4 or 5 defense counsel with cross complaints all around. Clear out a file drawer for the discovery responses alone…

Scenario 2:

In another case, an employee of a subcontractor is injured on the job due to the alleged active negligence of another contractor or the property owner (thus avoiding Privette). Suit is filed against both the alleged offending contractor and the property owner. Each defendant files cross complaints against one another, and also names a new entity (another subcontractor). The property owner alleges it is owed a defense and indemnity under a contract calling for express indemnity. The general and/or sub-contractor files a cross complaint alleging implied indemnity claiming the injury was caused by the sole negligence of the property owner.

In each case, the plaintiff's attorney believe he or she has a "slam dunk" liability case, yet no defendant approaches the plaintiff to try to settle the case. At the first mediation, the plaintiff's counsel is bored to tears and frustrated as the mediator spends all of his or her time with the defense attempting to work out indemnity issues. In fact, one or more of the defendants, rather than having money to try to settle with the plaintiff, actually make affirmative claims for money due to the mounting defense costs incurred in defending against the plaintiff's claims after a tender of defense. Defendants (even those being defended or indemnified by the same insurance carrier) fight more bitterly with one another than with the plaintiff. Defense costs mount. The plaintiff, who at first would like to work out a reasonable settlement, begins to gather that the defendants will not only fail to put forth a united defense, but also will spend the trial fighting against one another and point fingers at other defendants. Any smart plaintiff's lawyer knows this is a recipe for a very good plaintiff's verdict, and he or she will sit back and enjoy the pre-trial wrangling.

All sides can't help but ask these rhetorical questions: How did this happen? Why does this happen? What is the best way to deal with these issues?

Sound familiar? The problem arises out of the express contractual defense and indemnity claims arising out of a contract or subcontract, and the subcontractor's insistence that it was not negligent and therefore, should not be obligated to defend or shoulder the entire settlement burden as to the plaintiff. In multi-party litigation, the tender of a defense by one party (the "indemnitee") to another (the "indemnitor") based on potential liability for the claims of a third party has changed dramatically in recent years.

Way Out

Before Crawford v. Weather Shield Mfg Inc, a tender of a defense from an indemnitor to an indemnitee was based substantially upon the Court of Appeal holding in Regan Roofing v. Superior Court (1994) 24 Cal. App. 4th 425. In Regan, the court found that where a tender of defense was made early in the litigation before any determination of responsibility was found, such a tender was premature, and did not accrue until after a finding of liability upon the indemnitor. In other words, the obligation for defense costs (and fees, if so provided in the contract) did not accrue until the party from whom a defense was sought was found to be responsible to the indemnitee for liability damages.

For those lawyers and claims professionals who remember Regan, an early tender of defense could be safely ignored until enough discovery ensued to establish which defendant was culpable, or most culpable. The meter on codefense counsel's fees and costs did not start to run until it became clear who was responsible. The practical effect of Regan was that even defendants with a Type I indemnity agreement came to the table and all defendants found a way to more or less equitably contribute toward a settlement.

However, in Crawford, the California Supreme Court expressly rejected this approach. The Court found that the plain language of Civil Code section 2778 provided for a simple, but much broader, obligation of defense that accrued upon the tender, that was broader than, and independent from the ultimate finding of responsibility for the indemnitee's damages.  The upshot is that the defense obligation arises immediately based upon the allegations in the plaintiff's complaint, and any contractor or subcontractor who refuses an early tender of defense faces mounting and costly defense costs and fees incurred by the owner or general contractor who tendered.

In analyzing Civil Code section 2778, subds. 3 and 4, which provide for a defense obligation where the indemnity obligation "embraces the costs of defense" (subd. 3) or where the defense demand is made "in respect to matters embraced by the indemnity" (subd. 4). The Crawford court stated at p. 555:

"unless the parties' agreement expressly provides otherwise, a contractual indemnitor has the obligation, upon proper tender by the indemnitee, to accept and assume the indemnitee's active defense against claims encompassed by the indemnity provision. Where the indemnitor has breached this obligation, an indemnitee who was thereby forced, against its wishes, to defend itself is entitled to reimbursement of the costs of doing so." (Italics added)

The trier of fact in Crawford found that the indemnitor, a window supplier, ultimately prevailed on the issue of indemnity claims made by the developer in a multi-party residential homeowners' action. The Supreme Court, in affirming the trial court's finding, stated at 549:

"…the jury's verdict that {the indemnitor] was not negligent absolved [the indemnitor] of indemnity liability in this case. On the other hand, the [trial] court concluded, the subcontract did give [the indemnitor] responsibility for [the indemnitee's] legal defense against the homeowners' claims, insofar as those claims concerned the windows supplied by [the indemnitor] regardless of whether [the indemnitor] was ultimately found negligent." (italics added)

In Crawford, the contractual language that the court upheld as justifying a defense obligation from the outset provided for the indemnitor "at [its] own expense to defend any suit or action brought against [the indemnitee] founded upon the claim of such damage…loss… or theft." (Italics in original)

Invariably, this gives rise to a number of issues in mediation:

1.  Contractual Language – What specifically does the defense obligation call for? If as in Crawford, it calls for the defense of the indemnitee "founded upon" a claim of loss damage or theft, then the defense obligation from the outset will likely lie. More recently, in UDC- Universal Development, LP v. CH2M Hill, 181 Cal. App. 4th 10 (2010), the Court of Appeal affirmed the tender of defense at the outset based on language that provided for the defense of claims for "…any claim or demand covered herein." Thus, without an express disclaimer or specific contractual limitation on the

Crawford obligation. Nevertheless, the extent of that obligation if it exists, is an issue well suited for mediation.

2.  Insurance Issues – Can the indemnitor in turn tender its defense obligation to its insurer, or must it cover "Crawford fees" itself? Careful consideration must be given to the policy language in the indemnitor's insurance policy, whether the contract is an "insured contract" under the policy, whether there are any other policy exclusions, any other available coverage, and how and to what extent this affects the indemnitor's available liability coverage.

3.  Evidence of Crawford fees – The indemnitee seeking Crawford fees will need to support such a claim that is being sought against the indemnitor.

4.  Apportionment of the Crawford fees – The issue of to what extent the indemnitor would be responsible for the indemnitee's fee's must be considered if there are multiple potential indemnitors. It is essential to determine what portion of the indemnitee's fees and costs are or will be devoted to the defense of the work, product or services of the indemnitor. There is no law on this issue yet. Most defense counsel who have faced this issue realize that if there are two subcontractors with identical indemnity language, they should split the attorneys fees of the owner or general contractor 50/50. If there are three, than each bears 1/3, etc.

The Upshot: For Defense Counsel

Keep your eye on the defense obligation, as well as your opinion on your chances of success at trial! Without question, since Crawford, the defense obligation landscape has changed dramatically. While broad defense language has been upheld in court as triggering a defense obligation from the outset, it remains to be seen whether potential indemnitors will, in light of Crawford, negotiate different defense language going forward. Defense costs can overwhelm the case, and end up costing a carrier as much or more than the settlement of the claim, depending upon the injury and plaintiff's damages.

Many claims professionals and defense counsel continue to operate in "pre- Crawford" mode and ignore the early tender. Tactically, they hope for contribution to the settlement pot from the carrier for the general contractor or owner, and/or argue that the owner's liability is the lion's share of liability to settlement money should be contributed on a pro-rata basis according to the liability split.

The problem is that under Crawford, the subcontractor's carrier owes a defense obligation from the outset! Even a defense verdict for the little subcontractor can cost the subcontractor's carrier considerable defense costs of the general contractor or owner who is ultimately found responsible to the plaintiff! Those defense costs can mount quickly in multi-party cases, and often will exceed six figures after a full trial. On many occasions with multiple defendants, the defense costs can actually exceed the settlement value of the case.

Therefore, there are three strategies that seem to work best for defendants in this situation:

First, pick up the tender early! Once the Crawford holding is digested, it is hard to argue with this strategy if the subcontract calls for defense and indemnity for the subject claim.

Second, "pay and chase." If the general contractor or owner is sure of their cross- complaint's eventual success, and a subcontractor(s) is not "with the program" and willing to pick up the tender or offer any money to settle with the plaintiff, the carrier for the general contractor or owner can settle with plaintiff and reserve all rights against the subcontractor and try the cross complaint. While many carriers might not like this option at first blush, any trial lawyer who has seen how one of these cases tries with a good plaintiff, a good plaintiff's lawyer, and defendants fighting with one another knows it is a money saver in the long run.

Third, agree to a figure with the plaintiff, and guarantee the funding of that settlement within 90 days. Then, all defendants go to a binding arbitration, or try their cross complaint to the judge in a bench trial to determine which carrier is obligated to fund what percentage of the settlement. When all else fails, this>option saves significant defense costs over a full jury trial with the plaintiff when all parties view the case has having the same settlement value.

In one recent case, in which the defendants could not agree to any of the above three options, the jury's verdict was about $1 million MORE than the sum asked for by plaintiff's counsel. Certainly, the plaintiff's lawyer tried a remarkable case, and deserves tremendous credit. But it is also certain that because defense counsel spent the trial fighting with one another to exonerate their individual clients helped to anger the jury and elevate the verdict amount.

The Upshot: For  Plaintiff's  Counsel

Be patient! These types of cases can prove very frustrating during discovery and during mediation for the plaintiff's attorney. What starts as a relatively simple case becomes complex and contentious because defense counsel normally begin exhaustive discovery, including deposing everyone under the sun, and generally do not seem to want to settle the case. It has the feel of a billing bonanza. The reason has to do with the infighting over the contractual issues and implied indemnity arguments. Most importantly, defense counsel for the owner and/or general contractor are very certain that some other carrier (normally the subcontractor's carrier) will ultimately pay their bill. It only takes one carrier (normally for the subcontractor) to bury their head in the sand on the Crawford obligation to lock up any negotiation.

For the plaintiff's counsel, it is wise to have an understanding of Crawford, and being open to a two step mediation process in which session 1 (or the first half of the day) is between defendants only to sort out the indemnity issues, and then session 2 is a conversation with plaintiff's counsel to settle the claim.  This way counsel for plaintiff doesn't waste time sitting alone in mediation wondering why no one is talking to him for hours on end.

In this scenario it is critically important to have all claims people personally present! Though Crawford is now 4 years old, the dire consequences of doing business as usual (pre-Crawford denial of the tender) is not universally understood. Getting everyone in the same room, or at least the same building, gives the mediation process the best chance of success.

Finally, plaintiff's counsel must be willing to be flexible. Sometimes these cases are resolved at mediation by a settlement conditioned upon payment in 90 days, to allow the defendants to proceed with a trial of their cross complaint or a binding arbitration on the issue.

Conclusion

As mediators, the cases involving Crawford take on a distinctive feel. Defendants are fighting, and plaintiffs are frustrated. The negotiation takes a long time to get going, but once it gets going, can result in a fair settlement. A knowledgeable mediator can help the parties resolve all the issues and save all the parties, time, money, and headache.

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Sean E. Judge is a mediator with offices in Woodland Hills, CA. In his 21 years as a litigator, he has represented corporate and institutional clients, and individual litigants and small businesses, both as Plaintiffs and Defendants. He can be reached via telephone at (818) 610-8799, at www.judgemediation.com or via email at sean@judgemediation.com.

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[* California Rule of Professional Conduct 1-400 requires me to inform you that the results obtained on other cases do not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter.]

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