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INDEMNITY PROVISIONS IN CONTRACTS: COURTS WILL HOLD YOU TO THEM!

Indemnity clauses are arguably one of the most litigated provisions in a construction contract. An indemnity provision, simply put, transfers risk from one party (called the “indemnitee”) to another party (called the “indemnitor”). Under an indemnity provision, the indemnitor agrees to reimburse the indemnitee for losses resulting from a claim or claims brought by a third-party.

A recent case, American Title Insurance Company v. Spanish Inn, Case No D067137, California Court of Appeals for the Fourth District (August 14, 2015), illustrates the importance of such indemnity provisions in contracts.

In American Title Insurance Company, the Court of Appeals held that developers of a hotel project must indemnify First American Title Insurance Company for its costs of defending a construction lender against mechanic’s lien foreclosure suits. The Court emphasized that the title insurer was clearly entitled to indemnity through an agreement between the parties.

The title insurance company filed a motion for summary adjudication on its claims of express indemnity and breach of contract against the developers of the Spanish Inn Hotel. The trial court granted the motion and rejected the developers’ assertion that a dispute existed as to whether the mechanic’s lien claims were covered by the title policy.

A three-judge panel of an appellate court in the Fourth District agreed with the trial court and found that the title insurance company had established through undisputed evidence that it was entitled to indemnification under the indemnity agreement.

Defendants Spanish Inn Inc., Nejat Kohan and Hormoz Ramy, were owners of the Spanish Inn Hotel. A $6 million dollar loan was borrowed by Spanish Inn from Nara Bank to renovate the property. The bank recorded a construction deed of trust to secure the loan. The bank required Spanish Inn to obtain a title insurance policy to protect against any loss resulting from mechanic’s liens. Interestingly, the policy was issued on the condition that Spanish Inn agree to indemnify it if any mechanic’s liens were recorded against the property due to the owners’ or contractors’ failure to pay for work on the project.

Spanish Inn missed the completion deadline for the renovations and the bank declared the loan in default. The project’s contractor (who was also the owner/developer Kohan) and a subcontractor recorded liens totaling $850,000 against the property. The bank assigned the deed of trust to Pacifica L 39 LLC, a company that bought the property at a foreclosure sale. The project contractor and subcontractor then filed suit against Pacifica to foreclose on their liens. Pacifica tendered its defense to First American, who accepted the tender of defense. Attorneys for First American then demanded that the Defendants/developers; Spanish Inn Inc., Kohan and Ramy, indemnify it for all the costs and fees it had incurred pursuant to the indemnity agreement. The Defendants/developers refused to indemnify, resulting in First American filing a Complaint, asserting claims for express indemnity, breach of contract and specific performance of the contract. First American moved for summary adjudication on its express indemnity and breach of contract claims.

First American’s motion for summary adjudication was opposed by the Defendants/developers, who asserted that the mechanic’s lien was not covered under the title policy because the policy excluded liens “created, suffered, assumed or agreed to by an insured claimant.” The Defendants/developers claimed that the mechanic’s lien was filed because the bank had not provided the full loan amount, causing them to default. They argued that if no defense obligation existed, there could be no indemnity obligation.

The trial court disagreed and stated that the Defendants/developers failed to present any evidence to support their contention that the lien fell within the exclusion.

The appellate Court noted that the indemnity agreement gave First American the right to conclusively determine which claims were covered under the title policy. The Court stated: “That defendants disagree with First American’s conclusive determination does not establish that the determination was reached other than in good faith.”

In this case, a title insurer was able to rely on an indemnity agreement to seek reimbursement against the owners of the insured property. Therefore, it is important to note that if your contract has an indemnity provision, you can be assured that Courts will enforce that provision in just about any circumstance, even in this case wherein the indemnitor was the owner of the subject property.

Blog by: Joy Verma, San Diego

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