Duty To Defend Carries Many Costs
Imagine a situation where your business did everything right, and yet it was sued. Then imagine the situation where the Judge and jury agreed with your position and found that you were not negligent, and yet still held you liable for another party’s attorney fees.
While that predicament may sound hard to believe, it is an accurate reflection of the law as it pertains to the duty to defend. The duty to defend is the duty to hire legal counsel and possibly expert witnesses and provide a legal defense to a party being sued by another. The duty to defend is different from the duty to pay for someone else’s defense. It is also different from the duty to indemnify – an obligation to hold another party harmless from claims brought by others.
The duty to defend and the duty to indemnify are often found in written construction contracts. These clauses started appearing in construction contracts because general contractors wished to insulate themselves from liability from claims related to work performed by subcontractors. In the 60’s and 70’s general contractors began to act more in the capacity of construction managers who did not self-perform work, but rather coordinated the work of other trade contractors.
The reasoning behind a general contractor’s request for indemnity is fairly simple: the general contractor did not actively do anything negligent; rather it was likely the subcontractor who installed the work that was actively negligent.
To account for this situation, general contractors began writing indemnity clauses in their subcontracts, demanding that subcontractors indemnify general contractors for many claims brought by third-parties, regardless of whether the subcontractor was negligent or not.
This indemnity obligation (that is, the obligation to pay for or otherwise discharge claims brought by third-parties) was viewed as bad public policy by the Idaho State Legislature if the party demanding indemnification could ask that it be indemnified from its own sole negligence. In 1971, the Legislature responded by passing a law indicating that a contract clause in a construction contract attempting to require one party to indemnify another party from that party’s sole negligence is void and unenforceable. For example, a general contractor would not be able to require its subcontractor to indemnify the general contractor from the general contractor’s sole negligence.
However, the obligation to indemnify (or insulate another from liability) is different from the obligation to provide a legal defense. Thus, a non-negligent party can be called upon to defend another party, who actually may be negligent. Moreover, the non-negligent party can be held liable for the fees and costs incurred by the negligent wrongdoer if the non-negligent party does not provide the legal defense. In other words, a wrongdoer may recover its legal defense costs from an innocent party, if the contract between the parties provides that one party will provide a defense.
The decision to demand that another party defend claims brought by a third-party may not be as simple as it might appear. The party that has the duty to defend has the right to select the defense and the lawyers.
Even though the court may uphold a wrongdoer’s right to be defended by an innocent party, it may not be wise under the circumstances. For example, it may be unwise to demand that a minimally negligent subcontractor provide a defense to a minimally negligent general contractor. In such a circumstance the jury verdict in the case defended by the subcontractor may quite possibly result in a finding of no negligence on the part of the subcontractor and a finding of negligence (and liability) on the part of the general contractor!
Additionally, a contractor’s demand that another contractor provide it with a legal defense to a claim which is not insurable (such as a claim for lost profits due to alleged construction defects) may also be a mistake. To compel a party with potentially limited resources to provide a defense to an uninsured claim may actually result in a worse situation than had the claim been managed by the first contractor from the outset.
These issues can be addressed by drafting contract language which imposes a duty to pay for the defense, instead of a duty to defend. The irony remains however, that under a “duty to defend” clause, the non-negligent party must provide a legal defense to one who may very well be negligent.