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Narrowing the Scope of Subcontractor Indemnity

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Owners, developers, and general contractors, beware: the protection afforded by a subcontractor's responsibility to pay for lawsuits arising from its work (what is known as "indemnity") might not be as broad as originally thought. A recent Oregon Court of Appeals decision significantly narrows the scope of a subcontractor's indemnity obligations in construction-defect cases. Under most subcontracts, the subcontractor has a "duty to indemnify" the general contractor (i.e., pay any judgment or settlement amount awarded against the contractor) against claims that involve the subcontractor's scope of work. Indemnity also means that the subcontractor has a "duty to defend" the lawsuit (i.e., pay for the contractor's lawyer fees, expert fees, and other costs).

This duty to defend is much broader than the duty to indemnify under insurance policies. In fact, recent appellate court decisions require insurance companies to pay for the defense of a contractor even when there is undisputed extrinsic evidence that the allegedly defective work did not occur during the insurance-policy period. Navigators Ins. Co. v. K & O Contracting, LLC. More importantly, the duty to defend under an insurance policy contains a "defend-one-defend-all" rule, which means that if any of the allegations against the contractor could be covered, the insurer has a duty to pay for the defense against all the allegations.

In Sunset Presbyterian Church v. Andersen Constr. Co., the court took a narrower approach when looking at indemnity obligations of a subcontractor. In Sunset Presbyterian, the general contractor sued its subcontractor for the cost to defend a construction-defect lawsuit with the owner. The court held that the subcontractor was liable under the indemnity provision of the subcontract, but awarded no damages because the owner (which had been assigned the claim by the general contractor) failed to distinguish between defense costs related to claims having to do with that subcontractor's scope of work and other types of claims. It appears that this case would have been resolved differently had the owner's attorneys sought to recover only a portion of the defense costs, instead of the entire amount (which included costs to defend claims for defective work completely unrelated to the subcontractor's scope). Nonetheless, the court took the opportunity to clarify the scope of a subcontractor's indemnity obligations in light of ORS 30.140.

ORS 30.140, which applies solely to construction contracts (not insurance policies), voids any contract provision that requires a subcontractor to indemnify a contractor for the contractor's own negligence. Applying that statute, the court held that the subcontractor is required to pay the defense costs related only to the subcontractor's scope of work. The court's decision means that there is no "defend-one-defend-all" rule for indemnity under construction contracts, as there is under insurance policies. Ultimately, this opinion suggests that general contractors defending defect claims, and even owners and developers bringing defect claims, will now need to take special care to identify at the beginning of a claim the issues involved and the apportionment of the potential liability between subcontractors whose work is implicated.