Contract Interpretation: Whether The Contract Is A Non-Insurance Indemnity Agreement Or An Insurance Policy Makes A Big Difference In California

by Selman Breitman LLP

In Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal. 4th 541, 187 P.3d 424, 79 Cal.Rptr.3d 721, the California Supreme Court addressed an indemnitor’s duty to defend the indemnitee under a non-insurance indemnity agreement (in Crawford, an indemnity provision in a construction subcontract).  The Crawford court stated (44 Cal. 4th at 552): 

Though indemnity agreements resemble liability insurance policies, rules for interpreting the two classes of contracts do differ significantly. Ambiguities in a policy of insurance are construed against the insurer, who generally drafted the policy, and who has received premiums to provide the agreed protection. . . . In noninsurance contexts, however, it is the indemnitee who may often have the superior bargaining power, and who may use this power unfairly to shift to another a disproportionate share of the financial consequences of its own legal fault.

On August 8, 2016, in Morlin Asset Management LP v. Murachanian, --- Cal.Rptr.3d ----, 2016 WL 4183782, the California Court of Appeal applied the principle that the “rules for interpreting the two classes of contracts do differ significantly” in considering the scope and application of an indemnity provision stated in a commercial lease agreement.  Pursuant to the provision, the tenant agreed to indemnify the landlords for claims "arising out of . . . the use and/or occupancy of the Premises" by the tenant.  The tenant rented an office suite in a building owned and managed by the landlords and hired a carpet cleaning company to clean the carpets in his suite.  One of the cleaning company’s employees was carrying a bucket of soapy water up a flight of stairs in the common area of the building when he spilled some of the water and slipped and fell forward so as to sustain severe facial injuries. He sued the landlords for negligence and premises liability, and defendants cross-complained against the tenant for express contractual indemnity pursuant to the terms of the indemnity provision in the lease. The trial court granted the tenant’s motion for summary judgment, concluding that the tenant owed no contractual indemnity obligation to the landlords, and the Court of Appeal affirmed.

The Morlin court rejected the argument that the phrase “arising out of” must be construed liberally in the indemnitee landlords’ favor and refused to apply the broad definition of “arising out of” which the California courts have consistently held applies where “arising out of” is used in insurance policy provisions, such as exclusions and additional insured endorsements.  The words “arising out of” in an insurance policy context (1) “broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship,” and (2) mean “originating from,” “growing out of,” or “flowing from.” See, e.g., Vitton Const. Co. v. Pac. Ins. Co. (2003) 110 Cal. App. 4th 762, 766, 2 Cal. Rptr. 3d 1

The Court of Appeal stressed that it was not addressing “an insurance case” and that “if one seeks, in a noninsurance agreement, to be indemnified . . . regardless of the indemnitor’s fault . . . language on the point must be particularly clear and explicit, and will be construed strictly against the indemnitee.”  The court concluded:

We hold that under the indemnity clause in this case, the injury to a third party that occurred outside the dental suite, in a common area over which the landlords have exclusive control, did not arise out of the tenant’s use of the dental suite. It does not matter that the accident would not have happened but for the tenant hiring the third party to clean the carpets in the dental suite, and that the third party may have been at fault. The connection between the tenant’s use of his suite and the accident in the stairwell over which the tenant had no control is too remote to have been within the contemplation of the parties when they entered into the lease. This construction of the indemnity clause is fully consistent with the law governing the interpretation of indemnification provisions (Crawford, supra, 44 Cal.4th at p. 552) . . .

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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