Worker’s Compensation Exclusivity Rule Gets “Trumped” by Indemnity Provision

Sorry, I couldn’t help myself with the title.

The next case, Aluma Systems Concrete Construction of California v. Nibbi Bros., Inc., California Court of Appeals for the First District, Case No. A145734 (August 16, 2016), discusses the interplay between indemnity provisions and the worker’s compensation exclusivity rule.

The worker’s compensation exclusivity rule generally provides that worker’s compensation insurance is the exclusive remedy of employees for injuries or death arising out of the course and scope of their employment.

In the Aluma case, the California Court of Appeals, addressed what happens when a subcontractor’s employees are injured on a project, sue the general contractor, and the general contractor, pursuant to an indemnity provision in its subcontract, tenders the claim to the subcontractor whose worker’s compensation insurance has already paid the employees.

The Trial Court Decision

Here’s the case background in a nutshell:

• In 2011, general contractor Aluma Systems Concrete Construction of California (“Aluma”) hired subcontractor Nibbi Bros. Associates, Inc. (“Nibbi”) to design and supply materials for wall framework and deck shoring at a project.
• Aluma’s subcontract with Nibbi included a fairly typical indemnity clause which provides that Nibbi will defend, indemnify and hold harmless Aluma against any claims including for “personal injuries” arising out of the contract “except to the extent” caused by “the acts or omissions” of Aluma.
• While performing work on the project, employees of Nibbi were injured when a shoring system designed by Aluma collapsed. The employees later filed suit against Aluma alleging that the collapse was due to Aluma’s negligent design of the shoring.
• Thereafter, Aluma tendered defense of the lawsuit to Nibbi pursuant to the subcontract’s indemnity provision. Nibbi does not respond. Alma later files suit against Nibbi alleging that Nibbi has breached the subcontract’s indemnity provision.

In the trial court, Nibbi successfully argued that the indemnity provision did not apply because it expressly excludes “acts or omissions” of Aluma and: (1) the employee’s claim was against Aluma only; and (2) could not, in any event, be brought against Nibbi under the worker’s compensation exclusivity rule, which provides that worker’s compensation insurance is the exclusive remedy of employees for injuries or death arising out of the course and scope of employment.

On appeal, the Court of Appeal for the First District addressed two issues:

1. Was Aluma entitled to indemnity from Nibbi when the employees sued Aluma only and the indemnity provision expressly excluded “acts or omissions” of Aluma?; and
2. Was Aluma entitled to be indemnified by Nibbi from the lawsuit filed against Aluma by Nibbi’s employees when Nibbi’s employees could not sue Nibbi directly under the worker’s compensation exclusivity rule?

As to the first issue, the Court of Appeals explained that a party’s duty to indemnify is different from a party’s duty to defend. While a party’s duty defend arises immediately  even if no duty to indemnify is ultimately found, a duty to indemnify does not arise until liability is proven. Thus, explained the Court, while the employees’ complaint against Aluma may not give rise to an immediate duty by Nibbi to defend Aluma under the terms of the indemnity provision, Nibbi may still be required to indemnify Aluma:

The cases cited above considering a third party’s allegations to determine whether there is a duty to defend do not govern the question of whether these allegations determine the duty to indemnify. As noted above, we see not basis in the Contract’s language to so limit the indemnification provision. We note also, as [Aluma] argues, the employees have no reason to allege [Nibbi] was liable, as they cannot recover damages from [Nibbi]. Indeed, the employees have reason not to make such allegations, because their damages from [Aluma] may be reduced by workers’ compensation benefits attributable to [Nibbi’s] fault. While the allegations may be relevant to [Nibbi’s] duty to defend, they do not govern [Nibbi’s] duty to indemnify.

As to the second issue, the Court of Appeal explained that Aluma’s potential liability depended on whether the employees were awarded economic damages (e.g., medical bills, lost wages, lost future wages) and/or non-economic damages (e.g., pain and suffering, loss of consortium).

If the employees were awarded economic damages, Aluma would be responsible for 100% of those economic damages, even if Aluma could show that its negligence was only one of two or more causes of the employees’ injuries.

However, if the employees were awarded non-economic damages, Aluma would only be responsible for its proportionate share of those non-economic damages. Thus, if Aluma could show that its negligence was only one of two or more causes of the employees’ injuries, and it could show that it was only 25% at fault, Aluma would only be responsible for 25% of the employees’ non-economic damages.

Thus, explained the Court of Appeals, Aluma could be responsible for 100% of the employees’ economic damages despite Nibbi’s partial responsibility for those damages and would not be able to recover for those damages except through the indemnity provision:

[Aluma], like all third parties so sued, may be entitled to offset part or all of the workers’ compensation benefits received by the employees if [Nibbi] is also at fault for the injuries. . . . However, when “the employer’s share of fault exceed[s] the benefits aid or owed . . . third party defendants remain[ ] jointly and severally liable to the injured employe for all damages attributable to the employer’s fault which were not covered by the workers’ compensation benefits,” except for noneconomic damages. Therefore, despite [Aluma’s] claim in the [e]mployee[s’] [l]awsuits for an offset for workers’ compensation benefits attributable to [Nibbi], [Aluma] may still be liable for a portion of [Nibbi’s] share of the employee’s economic damages. Contractor could only recover this portion pursuant to the indemnification provision, if it applies.

Conclusion

The Aluma case highlights the continuing importance of indemnity provision as a risk shifting tool among owners, general contractors, subcontractors, material suppliers and equipment lessors, the credence courts give to indemnity provisions, and their application.

Believe me.