Memorandum Re: The Crawford
Problem
(2/7/11 ed.)
Author: Lawrence A. Treglia, Jr.
What follows is a simple explanation of California's much-trumpeted Crawford problem. Unfortunately, because this problem involves the confluence of two arcane and unintuitive areas of law, any simple explanation is wrong; but the following is not as wrong as others.
To begin with, a fundamental problem with which all design professionals are confronted is this: all A/E E&O policies provide coverage only to the extent of an insured's fault, and not for contract obligations or risks. In particular, the standard insurance agreement provides coverage for damages that the insured firm becomes "legally obligated to pay because of Claims that arise from the insured's negligent act, error or omission in the performance of its professional services..." While all E&O policies contain a standard provision that purports to provide contractual coverage, in contrast with CGL policies, the E&O contractual coverage is illusory, with a typical provision providing: "We will not cover you for any liability you assume under any contract or agreement, whether written or oral, including but not limited to hold harmless and indemnity clauses, agreements to defend another, warranties, guarantees, certifications, penalty clauses or liquidated damages; however, this exclusion shall not apply if you would have been legally liable in the absence of contract or agreement because of your negligent act, error or omission in the performance of your professional services." These coverage provisions have been universal since at least the 1970s; but only in the last few years have E&O insurers asserted them. In any event, they are alive and well and being aggressively asserted today, and should not be taken lightly.
In combination with this severe limitation of E&O insurance coverage is the California Supreme Court's July of 2008 decision in Crawford v Weather Shield that if a contractual indemnification clause does not address the duty to defend (which has been the norm for decades), then by default, except for some governmental contracts, pursuant to California Civil Code §2778 that clause will be interpreted as requiring an immediate duty to defend even if the indemnitor is found to be totally innocent, essentially an obligation like that of an insurance company which must automatically defend its insureds as soon as asked to do so - which is to say that an innocent design professional indemnitor would have an immediate uninsured contractual obligation to retain and pay for its developer client's defense attorneys. While unintended and nonsensical, given the current state of the E&O insurance industry and California law, this result is now the accepted norm.
In negotiating contracts this problem can be addressed in any number of ways, one easy-to-administer and usually appropriate solution being to add the following clause:
"The other provisions of this agreement notwithstanding, in the event of a claim within the purview of any indemnification provision, the indemnitee will control its own defense, and at the time of claim resolution the indemnitor will provide reimbursement for those defense costs caused by any negligence or willful misconduct by or attributable to the indemnitor."
Alternatively, you could try something like:
"The other provisions of this agreement notwithstanding, in the event of a claim within the purview of any indemnification provision, the indemnitor will provide a defense to the full extent of any insurance coverage for the costs involved."
In defending against a Crawford claim, depending very much on the facts of the case, there may be various defenses available, or there may not.
Incidentally, the design professional community's efforts to have Crawford reconsidered in the UDC-Universal v CH2M Hill case has failed, as has an effort to amend the troublesome CC §2778 statute.