Opinion ID: 2750362
Heading Depth: 2
Heading Rank: 1

Heading: Indemnity under the BOA

Text: Liberty claims that Westchester must reimburse it for the settlement payments it made on MMR’s behalf because MMR was not responsible for the fire in the Joseph trailer. Westchester responds that MMR agreed to indemnify Fluor pursuant to the BOA’s indemnity provision and therefore that Liberty must reimburse Westchester for its settlement payments. The BOA’s indemnity provision states that “[MMR] agrees to defend, indemnify and hold harmless [Fluor] . . . from and against any claim, demand, cause of action, liability, loss or expense . . . arising directly or indirectly out of [the BOA] or out of any acts or omissions of [MMR].” Westchester contends that the Joseph and Mabry lawsuits triggered this indemnity provision because the injuries resulting from the trailer fire arose “directly or indirectly out of [the BOA] or out of any acts or omissions of [MMR].” Liberty argues that the indemnity provision was not triggered because none of MMR’s acts, omissions, or obligations under the BOA bore any connection to the trailer fire. We agree. Under California law—the law governing the BOA—Westchester, as the party seeking to enforce the BOA’s indemnity provision, has the burden to prove that the indemnity provision was triggered, i.e., that MMR was obligated to indemnify Fluor. See Four Star Electric, Inc. v. F & H Constr., 10 Cal. Rptr. 2d 1, 3 (Cal. Ct. App. 1992) (“An indemnitee seeking to recover on an agreement for indemnification must allege the parties’ contractual relationship, the indemnitee’s performance of that portion of the contract which gives rise to the indemnification claim, the facts showing a loss within the meaning of the parties’ indemnification agreement, and the amount of damages sustained.”). California courts have interpreted indemnity provisions that use the phrase “arising . . . out of” to require at least a but-for connection between the alleged harm and the indemnitor’s contractual obligations. See, e.g., Transcon. Ins. Co. v. Ins. Co. of the State of Penn., 56 Cal. Rptr. 3d 491, 499 (Cal. Ct. App. 11 Case: 13-30541 Document: 00512832743 Page: 12 Date Filed: 11/11/2014 No. 13-30541 2007) (“Although the phrase ‘arising out of’ should be broadly read to require only a minimal causal connection, it requires more than ‘but for’ causation.”). 4 Similarly, California courts construe language equivalent to “arising directly or indirectly” out of a contract to require causation. See Centex Golden Constr. Co. v. Dale Tile Co., 93 Cal. Rptr. 2d 259, 262, 264 (Cal. Ct. App. 2000) (interpreting an agreement to indemnify “with respect to all work which is covered by or incidental to this subcontract” as requiring “some connection between the subcontractor’s work and the claim”); Cont’l Heller Corp. v. Amtech Mech. Servs., Inc., 61 Cal. Rptr. 2d 668, 670 (Cal. Ct. App. 1997) (stating that indemnity obligation for a loss that “arises out of or is in any way connected” with the performance of work requires proof of causation). In this case, the district court determined that the fire was caused by (1) someone—but not MMR—having left the gas on in the trailer for approximately three days before the fire and (2) the LP detector failing to alarm. Westchester does not suggest that MMR could owe Fluor indemnity if the sole cause of the fire had been that someone left one of the gas burners on. Accordingly, for the fire to have arisen directly or indirectly out of either the BOA or MMR’s acts or omissions, there must have been a connection between MMR’s acts, omissions or obligations under the BOA and the LP detector’s failure to alarm. Westchester argues that MMR’s purported obligations to test the LP detector and ensure general trailer quality supply the requisite 4 Westchester criticizes the district court for focusing on whether MMR’s own negligence caused the detector to fail. Under California law, as the district court itself pointed out, “courts will enforce indemnity agreements even for losses caused by acts over which the indemnitor had no control.” Cont’l Heller Corp. v. Amtech Mech. Servs., Inc., 61 Cal. Rptr. 2d 668, 670 (Cal. Ct. App. 1997). Westchester does not suggest the fire can be attributed to MMR’s negligence, but the operative question is whether there exists a connection between the fire and MMR’s obligations under the BOA such that the fire can be said to have arisen, directly or indirectly, out of the BOA. 12 Case: 13-30541 Document: 00512832743 Page: 13 Date Filed: 11/11/2014 No. 13-30541 connection. Westchester’s argument, however, is not supported by either the evidence or the case law. Westchester concedes that the BOA did not specifically require MMR to test the LP detector. In support of its claim, Westchester instead points to the BOA’s general provisions instructing MMR to install the trailers as directed by Fluor and to conduct any additional tests or inspections that Fluor required. Westchester alleges that MMR had a specific obligation to test the LP detector by virtue of a separate document, the QC/QA RFO Checklist, which included the item “LP detector installed and operates properly.” At trial, one of Fluor’s program managers testified that Fluor had provided MMR the QC/QA RFO Checklist before MMR bid on the haul-and-install contract. The district court concluded, however, that the checklist had never been incorporated into the BOA. Fluor’s failure to incorporate the checklist severely undermines Westchester’s position, particularly because the BOA contained a merger clause, stating that the BOA, together with its attachments, exhibits and drawings, “sets forth the entire Contract and agreement between the Parties pertaining to the Scope of Work . . . and supersedes all inquiries, proposals, agreements, negotiations and commitments[] . . . prior to the date of execution of this Contract, pertaining to said Work or this Contract.” The mere fact that Stanley (the MMR employee who conducted a quality control inspection of the Joseph trailer) or other MMR inspectors occasionally performed certain tasks that happened to be on the checklist did not transform the checklist into a contractual obligation. Indeed, the QC/QA RFO checklist was a document used by Fluor’s, not MMR’s, employees. Westchester responds that the BOA permitted Fluor to “require additional inspections and tests,” and therefore argues that the QC/QA RFO checklist was incorporated into the BOA as such an “additional inspection[] [or] test[]” that Fluor could insist upon. The question then becomes whether 13 Case: 13-30541 Document: 00512832743 Page: 14 Date Filed: 11/11/2014 No. 13-30541 the checklist—or any other evidence—reflects that Fluor in fact requested MMR to test the LP detector in the Joseph trailer. The evidence in the record indicates that Fluor did not. First, Stanley (MMR’s inspector) testified that MMR was not required to test the LP detector. Second, although Stanley testified that he would sometimes perform certain tasks that he was not required to perform, including testing the LP detector, he explained that he would do so at the request of the Fluor inspector because Stanley was “right there” or because Stanley was in the way, and the Fluor inspector could not get to it. Stanley’s testimony thus indicates that he would sometimes test a trailer’s LP detector, but for the sake of convenience, not because he was required to do so as part of MMR’s work arising out of the BOA. Furthermore, that the BOA permitted Fluor to require additional testing or inspection does not mean that individual Fluor inspectors, on an ad-hoc basis, were authorized to impose such requirements on MMR or its inspectors. Third, although Stanley testified that, based on documentation from the inspection, someone tested the LP gas detector, he did not confirm that he had in fact been the one who tested it. Given its burden to prove indemnity, see Four Star Electric, 10 Cal. Rptr. 2d at 3, Westchester’s failure to cite to record evidence indicating that it in fact required MMR to test the detector in the Joseph trailer is fatal to its argument. Accordingly, the district court did not err when it determined that MMR was not required to test the LP gas detector. 5 Westchester also argues that MMR assumed the responsibility to ensure that trailers had properly-functioning LP detectors by virtue of its general In the alternative, the district court concluded that, even if MMR had been obligated 5 to test the LP gas detector, testing would not have made a difference in exposing the detector’s latent defect and preventing the fire. Because we conclude that MMR was not required to test the LP detector, we do not consider Liberty’s argument that we should affirm on this further ground. 14 Case: 13-30541 Document: 00512832743 Page: 15 Date Filed: 11/11/2014 No. 13-30541 obligation to assure quality. The BOA stated that MMR “has primary responsibility for quality. [MMR] is to implement the measures necessary to build quality into the work in accordance with the contract, drawings, and specifications.” The “work” for which MMR had the responsibility to ensure quality, as described in the “Travel Trailer Installation” exhibit to the specific Individual Release relevant here, consisted primarily of towing the FEMA trailers, levelling the ground for installation, transferring them onto concrete piers, anchoring them, installing sewer and water lines, connecting electrical service, filling propane tanks, constructing wooden steps to the front door, and generally making the trailer ready for occupancy. This was the work whose quality MMR ensured. Although MMR’s work was mostly limited to transporting the trailers, installing them and connecting utilities, MMR’s obligation to make the trailers ready for occupancy did include some testing of appliances and appurtenances. One of MMR’s few obligations in this respect was to “[t]est smoke detector and replace if faulty.” While the work release specifically obligated MMR to test smoke detectors, it included no obligation to test LP detectors. If Fluor had wished to create such an obligation, it could have done so easily. See, e.g., White v. W. Title Ins. Co., 710 P.2d 309, 314 & n.4 (Cal. 1985) (applying the familiar principle that the inclusion of one thing implies exclusion of others to contract interpretation). We will not add an obligation to test LP detectors where Fluor, the party that drafted the BOA, chose not to. Thus, since MMR’s “work” under the BOA was unrelated to the LP detectors, MMR’s general obligation “to build quality into the work” did not include an obligation to ensure that the LP detectors functioned properly. Finally, the two cases on which Westchester seeks principally to rely— St. Paul Fire & Marine Ins. Co. v. Am. Dynasty Surplus Lines Ins. Co., 124 Cal. Rptr. 2d 818 (Cal. Ct. App. 2002), and Continental Heller—instead support Liberty’s position. In St. Paul, the court concluded that a subcontractor had 15 Case: 13-30541 Document: 00512832743 Page: 16 Date Filed: 11/11/2014 No. 13-30541 no duty to indemnify the general contractor based on the terms of the parties’ agreement. See 124 Cal. Rptr. 2d at 830. The contract between the parties required the subcontractor to indemnify the general contractor for claims “arising out of or resulting from the performance of the Work, either directly or indirectly” so long as the claim “arises from or is alleged to have arisen in whole or in part by any act or omission of Subcontractor or any subcontractor under him.” Id. at 821-22. There, an explosion occurred while the general contractor was pressure testing a pipe, which resulted in injuries to an employee of the subcontractor. Id. at 822. The general contractor’s insurer sought indemnity from the subcontractor’s insurer, arguing that the subcontract’s indemnity provision covered the injuries. Id. at 822-23. The court reasoned that the subcontractor “expressly undertook no duty to indemnify [the general contractor] except for a liability that arose from an ‘act or omission’ by [the subcontractor] during the performance of the work called for by the Subcontract.” Id. at 828. “Such language,” the court said, “can have no other meaning or purpose than to limit the scope of [the subcontractor]’s indemnity to injuries occurring in circumstances over which it has at least some control and where it is engaged in activity that is causally related in some manner to the injury for which indemnity is claimed.” Id. “On the record before us,” the court explained, “not only is there no basis for finding [the subcontractor] at fault for [the] injury, but also [the subcontractor] did not do any act that was in any way connected to such injury.” Id. at 829. Consequently, the court concluded that the subcontractor’s duty to indemnify “was never triggered.” Id. at 830. Liberty concedes that the BOA’s indemnity provision is broader than the language at issue in St. Paul. The BOA requires that MMR indemnify Fluor not only for claims arising out of MMR’s own “acts or omissions,” but also for claims arising directly or indirectly out of the BOA itself. Nevertheless, 16 Case: 13-30541 Document: 00512832743 Page: 17 Date Filed: 11/11/2014 No. 13-30541 because the connection between MMR’s duties and the fire is weaker—MMR completed its work with respect to the trailer five weeks before the fire occurred—Liberty reasons that St. Paul supports its position. We agree. Like in St. Paul, there is no evidence that MMR was “at fault for [the] injury” or did “any act that was in any way connected to such injury.” 124 Cal. Rptr. 2d at 829. Westchester’s argument, then, depends on asserting that MMR, under the BOA, was responsible for installing trailers with properly functioning LP detectors. However, as previously discussed, the evidence indicates that MMR was not required to test the LP detector in the Joseph trailer. Accordingly, St. Paul better supports Liberty’s position than Westchester’s. In Continental Heller, the general contractor hired the subcontractor to install an ammonia refrigeration system in an Oscar Meyer meat-packing plant. 61 Cal. Rptr. at 669. Following the installation, “an explosion occurred at the plant causing property damage and injuring several Oscar Meyer employees.” Id. “The explosion was caused by the failure of a valve . . . [selected and] installed by [the subcontractor] in the course of its work on the refrigeration system.” Id. at 669, 671. The court considered whether the subcontractor was obligated to indemnify the general contractor under an agreement that required indemnification for “a loss which ‘arises out of or is in any way connected with the performance of work under th[e] Subcontract,’” including “any acts or omissions[] . . . on the part of Subcontractor.” Id. at 670. “[The subcontractor] d[id] not deny its installation of the valve in the refrigeration plant was ‘an act’ carried out in ‘the performance of work under [the] Subcontract.’” Id. (third alteration in original). “Nor d[id] it deny the loss suffered by [the general contractor] was ‘in any way connected’ with that act.” Id. “Therefore,” the court concluded, “under the contract as written, [the general contractor] is entitled to indemnity from [the subcontractor] for its losses.” Id. The court, however, noted that, 17 Case: 13-30541 Document: 00512832743 Page: 18 Date Filed: 11/11/2014 No. 13-30541 [c]ontrary to [the subcontractor]’s contention, the causal connection defined in the agreement does not impose virtually unlimited liability on [it]. [The subcontractor]’s liability must be connected to an “act” or “omission” in the performance of its subcontract, not merely to the performance itself. Therefore, the fact [the subcontractor] installed the refrigeration system in the plant would not make it liable for indemnity for the loss incurred in paying damages to someone who suffered food poisoning from eating an Oscar Meyer hot dog on the theory that but for the refrigeration system Oscar Meyer could not have made the hot dog. The indemnitee in this hypothetical case would have to establish the loss was in some way connected to a specific act or omission of [the subcontractor]. Id. at 672. In this case, by contrast, MMR neither selected nor installed the faulty detector. In other words, unlike the subcontractor in Continental Heller, MMR performed no work under the BOA that was in any way connected to the injuries. Westchester’s argument to the contrary depends on the assertion, which is not borne out by the record, that MMR was responsible for inspecting and assuring the quality of the LP detector. Admittedly, Westchester also notes that, under the BOA, MMR was primarily responsible for assuring the quality of the trailers it hauled and installed, which, according to Westchester, “necessarily encompasses the quality of the trailer’s critical safety devices.” Certainly, the fire in the Joseph trailer would not have occurred had MMR not hauled and installed the trailer, as required by the BOA. But to conclude that MMR owes Fluor indemnity under this reasoning would run afoul of the Continental Heller court’s admonition that the subcontractor would not be “liable for indemnity for the loss incurred in paying damages to someone who suffered food poisoning from eating an Oscar Meyer hot dog on the theory that but for the refrigeration system Oscar Meyer could not have made the hot dog.” Id. Even under the but-for test, indemnity requires a closer connection than that to find that “a loss . . . ‘arises out of or is in any way connected with the 18 Case: 13-30541 Document: 00512832743 Page: 19 Date Filed: 11/11/2014 No. 13-30541 performance of work under th[e] Subcontract.’” See id. at 670, 672. Westchester acknowledges as much by conceding that it “could not seek indemnification on the attenuated theory that but for the fact of the trailer’s installation, there would have been no oven knobs to mishandle, and hence no fire and no injuries,” but argues indemnification is required here because the trailer was installed with a faulty LP detector, which MMR had a duty under the BOA to test “for the very purpose of avoiding the harm that later occurred.” Since, however, the BOA assigned no such duty to MMR, the connection between MMR’s obligation to install the Joseph trailer and the subsequent fire is just as attenuated as the subcontractor’s installation of the faulty valve and the hypothetical spoiled hot dog in Continental Heller. Ultimately, the record evidence and case law on which Westchester seeks to rely supports the district court’s conclusion that the BOA did not obligate MMR to test the trailer’s LP detector and that, therefore, neither the BOA itself nor any act or omission on the part of MMR was a but-for cause of the injuries. Westchester’s arguments to the contrary are unavailing.