The Third Appellate District Court of Appeal has issued a decision in which it found that an indemnitee defense clause contained within a general liability insurance policy affords the indemnitee mere status as an incidental third party beneficiary, and that such an indemnitee lacks standing to sue the carrier to provide a defense. LaBarbera et al. v. Security National Insurance Company, C093414 (Super. Ct. No. 34-2019-oo248873-CU-IC--GDS).
The lesson to be learned is that contracting parties who expect to be indemnified against third party claims should ensure that they are named as additional insureds in the insurance policies purchased by their contractual indemnitors, as they cannot rely upon the indemnity defense provision of the indemnitor’s insurance policies.
Chris LaBarbera retained Richard Knight dba Knight Construction to complete a remodeling project on a house. The contract between the parties provided that Knight was required to pay any damages related to the bodily injury of a third party, and that Knight would defend and indemnify LaBarbera for any such claims.
Knight purchased a general liability insurance policy from Security National Insurance Company. The policy contained standard language covering Knight's liability for damages assumed in an insured contract. All parties agreed that the indemnity provision contained in agreement between LaBarbera and Knight was an insured contract.
The insurance policy also provided an indemnitee defense clause stating that “If we [Security National] defend an insured [Knight against a suit and an indemnitee of the insured is also named as a party to the suit, we will defend that indemnitee [LaBarbera]…” assuming certain conditions are satisfied.
While working on the remodeling project at LaBarbera's house, a subcontractor sustained catastrophic injuries. The sub sued both Knight and LaBarbera. LaBarbera was defended by its insurer, Lloyd's of London and Knight was defended by Security National. LaBarbera tendered his defense to Knight and Security National under the contract and the policy.
After LaBarbera settled with the subcontractor was settled for $465,000 LaBarbera and Lloyds filed a claim against Knight and Security National seeking to recoup the settlement as well as costs and fees of approximately $100,000. Security National filed a motion for summary judgment arguing that it did not have a duty to indemnify LaBarbera under its insurance contract with Knight. The trial court granted the motion. The Court of Appeal affirmed, holding that LaBarbera and Lloyds had no standing, and that Security National owed no duty to defend LaBarbera because LaBarbera was not an intended third party beneficiary, but in fact, only an incidental beneficiary to the insurance contract.
Third Party Beneficiary; Intended or Incidental?
Security National asserted that LaBarbera's claims could not stand because LaBarbera was not a party nor a third party beneficiary to the Knight insurance policy.
The portion of the insurance contract in question revolved around the following clause: "If we defend an insured against a suit and an indemnitee of the insured is also named as a party to the suit, we will defend that indemnitee if [a list of] conditions are met."
The Court noted that the general rule is that "a third party… may not bring a direct action against an insurance company on the contract because the insurer's duties flow to the insured." Harper v. Wausau Ins. Co., (1997) 56 Cal. App.4th 1079, 1086. The facts clearly showed that LaBarbera was not an insured or additional insured under the Knight policy. As such, according to the general rule, LaBarbera would not be allowed to entertain an action as he is not a party to the policy. The Court then examined whether an exception could apply.
Civil Code section 1559 states, "A contract made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it." Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal. App.4th 847, 875. This exception permits a direct action by a third party beneficiary in situations where the terms of the contract were meant to benefit the third party. "It is not necessary that the beneficiary be named and identified as an individual; a third party may enforce a contract if he can show he is a member of a class for whose benefit it was made." Prouty v. Gores Technology Group (2004) 121 Cal. App.4th 1225, 1232. In addition, it is not necessary that the contract only be made for the benefit of a third party. Id.
The court employs a test to determine whether a contract was formed with the intention to benefit a third party. The test considers the following:
- Did the terms of the contract "necessarily require: the promisor to confer a benefit on a third person?
- If so, then the contract and the parties attached to it, meant to form the contract for a third party. Id.
On the contrary, if a third party is "incidentally or remotely benefitted" by the contract, then they may not bring a direct claim to enforce the contract provisions. Harper v. Wausau Ins. Co., supra, 56 Cal.App.4th at p.1087. On this point, the California Supreme Court found, "A third party should not be permitted to enforce covenants made not for his benefit, but rather for others. He is not a contracting party; his right to performance is predicated on the contracting parties' intent to benefit him. As to any provision made not for his benefit, but for the benefit of the contracting parties or for third parties, he becomes an intermeddler and may not enforce the contract." Murphy v. Allstate Ins. Co., (1975) 17 Cal,3d at p. 944.
If any doubt exists as to the intent of the parties to the contract as it relates to the benefit to a third party, the court will construe the contract against that intent. "The California rule is that in order for one to have a direct cause of action against an insurer, an intent to make an obligation inure to the benefit of a third party must clearly appear, and if there is any doubt it should be construed against such intent." Rupley v. Huntsman (1958) 159 Cal.App.2d 307; 312.
In the case at hand, Security National and Knight argued that LaBarbera was not entitled to enforce the indemnity defense clause because the intent of the parties was not to benefit LaBarbera, but rather Knight. They asserted that LaBarbera is merely an incidental beneficiary.
Under the insured contract exception contained in the agreement, any defense costs that are incurred by someone other than the insured are considered damages. This coverage of damages would generally result in a reduction of the policy limits available to settle any underlying claim or pay an adverse judgment.
Pursuant to the indemnitee defense clause, if Security National provides a joint defense to the insured and the indemnitee, the cost of the indemnitee's defense will not reduce the policy limits available to the insured to cover judgments or settlements. Accordingly, Security National contended that the clause's express purpose is to preserve the insured's indemnity limit by treating the cost of the indemnitee's defense as part of the insurer's duty to defend the insured rather than as limits-reducing damages under the insured contract exception. It is then clearly the insured that is the express intended beneficiary and not any indemnitee.
LaBarbera contended that both he and Knight were intended to benefit from the clause. Although no California cases were cited by either party on this point, Security National did reference several out-of-state cases addressing this issue. For example, in Berg v. Gulf Underwriters Ins. Co., 2008, WI App 121 [2008 Wisc. App. Lexis 513], in which the court found that the "primary purpose of the indemnitee defense clause is to benefit both the insured and the insurer, and the indemnitee is only an incidental beneficiary." It went on to state, "This clause applies only where the insured would be obligated under the insured contract to pay the indemnitee's cost of defense, as well as liability; in that case, it is in the insured's interest to have the insurer pay for the indemnitee's defense without having that payment reduce payments for the insurer for the tort liability the insured has assumed; and it is in the insurer's interest to minimize its obligation with the efficiency of a combined defense where feasible and where agreeable to the insured." Id.
The court in LaBarbera used Berg in guiding its final determination. Like Berg, the indemnitee defense clause in the present case benefits the insurer, Security National and the insured, Knight. It is important to note that the issue before the court is not whether the parties would benefit from the indemnitee defense clause- all three clearly would- but rather the question is whether the indemnitee defense clause was intended to benefit LaBarbera. The court decided that the clause was not intended to benefit LaBarbera. Knight and Security National only intended to benefit one another. Knight was not obligated to agree to a joint defense, but had that option if he felt it would benefit him. If, however, he decided against it, Security National would not be obligated to provide LaBarbera a defense pursuant to the indemnitee defense clause. Therefore, the obligation is only triggered if and when Knight consents to such an action. Since Knight does not wish to confer any such benefit, LaBarbera was not entitled to any defense or reimbursement for damages, costs, or fees.