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Indemnitor may challenge liability and damages

A party which does not breach a duty to defend its indemnitee is not estopped from disputing the liability and amount of damages in a subsequent action for indemnity, the Court of Appeals held in Evanston Ins. Co. v. Penhall Co., No. 79657-7-I (Jul. 27, 2020).

In Penhall, a condominium owner retained a general contractor to address the leaks in the top floor of its parking garage, which permitted water to penetrate to levels beneath. Although the owner believed the top simply needed to be resurfaced, the general contractor advised installing an impermeable membrane first, as resurfacing with asphalt would not fully fix the leaks.

The general contractor sought a bid from a subcontractor, which proposed to install a certain type of waterproof membrane. Its bid excluded testing, crack sealing, and surface preparation. It also provided that the subcontractor would not be required to indemnify any other party for damages or expenses the subcontractor did not directly cause. This bid was incorporated into the general contractor’s proposal, which the owner accepted. The owner and general contractor did not arrange to repair the existing cracks on the surface before completing installation of the membrane and resurfacing.

After the completion of the work, it became evident that the leaks had not been repaired. Although both the general contractor and the subcontractor attempted repairs, they could not rectify the problem. The subcontractor believed that the cracks in the concrete and structural movement caused the continued leaks.

The owner retained another contractor to repair the leaks, which ultimately entailed repairing 1,500 linear feet of cracks before resurfacing, and cost nearly nine times the amount of the prior effort to repair. The owner also submitted its claim against the general contractor to arbitration, as provided in their agreement. The general contractor demanded indemnity from the subcontractor, which asserted that it was not the cause of the leaks and refused the demand.

The general contractor’s insurer paid the settlement, then filed a lawsuit against the subcontractor for indemnity. On cross-motions for summary judgment, the trial court ruled against the subcontractor on liability, and determined the amount of the settlement between the owner and the general contractor was the appropriate measure of the damages in the claim against the subcontractor. The subcontractor appealed.

The Court of Appeals reversed the trial court. It rejected the argument that the subcontractor was liable as a matter of law. The court had two bases for this decision. The first basis was that the request for relief in the motion did was not broad enough. The subcontractor had pleaded affirmative defenses to liability, and the motion for summary judgment had not specifically addressed these affirmative defenses. The nonmoving party does not have notice that it must respond to a request to dismiss affirmative defenses if the moving party does not state with particularity the relief sought.

The second basis for reversing summary judgment on liability was that the record raised questions of material fact on whether the subcontractor had breached its warranties or indemnity obligation. The subcontractor’s scope of work did not include diagnosing the leak problem or proposing possible solutions. It presented evidence that it was not solely responsible for the leaks that persisted after its work had been completed.

The court also reversed the trial court’s decision on the reasonable measure of damages. It rejected the argument that the subcontractor’s refusal to defend rendered it liable for the full indemnity. The subcontractor did not have a duty to defend. Any authority holding a party is estopped from disputing indemnity when it breached a duty to defend did not apply. Further, the subcontractor’s duty to indemnify the general contractor extended only to those damages it had directly caused. The owner and general contractor had settled the matter for all damages. The damages the subcontractor had caused, if any, had yet to be determined. Finally, the damages had been resolved in the context of arbitration. The subcontractor had not agreed to arbitration.

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