Pecialized Contracting, Inc. v. St. Paul Fire & Marine Ins. Co

Decision Date18 December 2012
Docket NumberNo. 20120195.,20120195.
Citation2012 ND 259,825 N.W.2d 872
CourtNorth Dakota Supreme Court
PartiesSPECIALIZED CONTRACTING, INC., a North Dakota corporation, Plaintiff v. ST. PAUL FIRE & MARINE INS. COMPANY, a foreign insurance company, Defendant and Third–Party Plaintiff v. City of Valley City, a municipal corporation, Third–Party Defendant, Third–Party Plaintiff and Appellee v. Geo E. Haggart, Inc., Kadrmas, Lee & Jackson, Inc., North Dakota corporations, Third–Party Defendants Kadrmas, Lee & Jackson, Inc., a North Dakota corporation, Appellant.

OPINION TEXT STARTS HERE

Daniel Lee Gaustad, Grand Forks, N.D., for third-party defendant, third-party plaintiff and appellee.

Michael J. Maus, Dickinson, N.D., for appellant.

MARING, Justice.

[¶ 1] Kadrmas, Lee & Jackson, Inc., (KLJ) appeals from a district court judgment awarding the City of Valley City (City) $32,696.63 for costs and expenses the City incurred defending itself in the underlying lawsuit and pursuing its indemnity claim against KLJ. We conclude KLJ did not have a duty to defend the City in the underlying action under the plain language of the parties' indemnity agreement. We reverse and remand.

I

[¶ 2] The City entered into a contract with KLJ to provide engineering services for a paving and sewer project. The City hired Geo. E. Haggart, Inc. (Haggart), to provide services as a general contractor for the project. The contract between the City and Haggart required Haggart to furnish all labor, materials, and equipment for the project. Haggart was required to provide a payment bond under the terms of its contract with the City, and St. Paul Fire & Marine Insurance Company (St. Paul) was the surety under the bond. Specialized Contracting, Inc. (SCI), entered into a subcontract with Haggart to complete some of the work on the project.

[¶ 3] In 2007, SCI sued St. Paul for breach of its duties under the payment bond, seeking compensation for additional work SCI alleged it completed on the project for which Haggart refused to pay. SCI alleged it was entitled to additional compensation for the removal and replacement of concrete that KLJ, as the project engineer, rejected because of cracking and inadequate drainage. In 2009, St. Paul served a third-party complaint against the City for breach of contract and indemnity, alleging the concrete repair work was outside the scope of the City's contract with Haggart, the City was liable to Haggart for any additional compensation SCI was claiming against Haggart's payment bond if SCI established KLJ's decision to replace the concrete was beyond the scope of the contract, and the City was required to indemnify St. Paul for any judgments against it in favor of SCI arising from decisions made by KLJ. The City filed an answer to St. Paul's complaint and served a third-party complaint against Haggart and KLJ, alleging Haggart and KLJ had an obligation to defend and indemnify the City from all allegations and liability arising from SCI and St. Paul's claims and any damages were the direct and proximate result of Haggart and KLJ's negligence, malpractice, breach of contract, or breach of warranty.

[¶ 4] The City and KLJ moved for summary judgment seeking to be dismissed from the action. The court denied their motions. A jury trial was held. A special verdict form was used and the jury found SCI did not meet its burden of proof. The district court dismissed SCI's claims and a judgment was entered. The court ordered the City's duty to defend and indemnification claims against Haggart and KLJ were preserved.

[¶ 5] The City and KLJ each filed a memorandum on the remaining issues. After a hearing, the court entered an order identifying the remaining issues to be litigated, including whether KLJ had a duty to defend the City. The City filed a brief in support of its duty to defend claims, arguing its contract with KLJ included an indemnity provision that required KLJ to defend the City in the underlying action under the language of the agreement and N.D.C.C. § 22–02–07.

[¶ 6] After a hearing, the court ordered KLJ to pay the City's costs and expenses, including attorney's fees, incurred in defending against SCI and St. Paul's claims and in pursuing its indemnity claim against KLJ. The court applied N.D.C.C. § 22–02–07(4) and concluded KLJ had a statutory duty to defend the City. The court subsequently entered a judgment, ordering KLJ to pay the City $32,696.63 in costs, expenses, and attorney's fees.

II

[¶ 7] KLJ argues the district court erred in concluding it had a duty to defend the City under the indemnity provision in KLJ's contract with the City, which states:

Indemnification for Professional Services:

[KLJ] agrees to indemnify, save, and hold harmless the [City] from liability, including all costs, expenses, and reasonable attorneys' fees, which may arise out of or result from [KLJ's] negligent acts or omissions in rendering professional services under this agreement. [KLJ] shall not be responsible for an amount disproportionate to [KLJ's] culpability.

[¶ 8] The district court concluded KLJ had a duty to defend the City against SCI and St. Paul's claims, KLJ breached that duty, and the City's costs and expenses were proximately caused by KLJ's breach of the duty to defend:

The court finds that SCI's claims, and St. Paul's cross-claim against the City, were matters embraced by KLJ's indemnity to the City against liability arising out of KLJ's professional negligence. SCI was seeking additional compensation from Haggart and St. Paul on the theory that SCI's work conformed to the plans and specifications, and therefore any defects were due to errors in KLJ's plans and specifications and surveying work. The theory of St. Paul's cross-complaint was that if SCI was entitled to more money for its work, it was because of KLJ's actions as the City's agent, and hence the City was liable for any monies owed to SCI. The order denying summary judgment identifies KLJ's negligence as an issue of fact for the jury, and KLJ's “fault” is referenced several times in the special verdict form. The Supreme Court has ruled there is a duty to defend under a professional liability policy “if the allegations in the complaint [against the insured] give rise to potential liability or a possibility of coverage under the insurance policy.” Schulte [ Schultze ] v. Continential Ins. Co., 2000 ND 209, ¶ 8, 619 N.W.2d 510, 513.

KLJ contends, correctly, that since the jury found SCI was not entitled to additional compensation, the jury never made a finding that KLJ was negligent. KLJ is incorrect, however, in asserting that it had no duty to defend the City unless actual negligence was proven, and that the City “is asking the Court to legislate and rule ... that a clause providing for indemnity if one is negligent requires a duty to defend even if not negligent.” KLJ is wrong because it steadfastly refuses to acknowledge that the legislature has legislated that the “person indemnifying is bound, on the request of the person indemnified, to defend actions brought against the latter in respect to matters embraced by the indemnity.” NDCC § 22–02–07(4). KLJ's duty to defend arises from a statutory rule of interpretation applicable to indemnity contracts.

That statutory duty was activated when the demand was made on KLJ to defend the City “in respect to matters embraced by the indemnity” clause of their contract. KLJ was then required to defend the City “unless a contrary intention appears” in the indemnity clause. Section 22–02–07. KLJ asserts the indemnity provision “explicitly states that KLJ is only obligated to defend in situations when it is negligent”; that assertion is simply wrong as a matter of fact, however, since the “Indemnification for Professional Services” never even mentions a duty to defend. The indemnity provision could have explicitly disclaimed KLJ's statutory duty to defend the City, or limited it to cases where KLJ was actually negligent—but it did not. The language of the contract governs its interpretation if it is clear and explicit, and does not involve an absurdity. NDCC § 9–07–02. It is not absurd—indeed, it is economically rational—for the indemnity contract to require the project engineer to defend its actions and decisions on the City's behalf, which was merely a passive participant in the dispute over SCI's work.

....

The Court concludes that KLJ breached its duty to defend the City, and that the City's costs and expenses in defending SCI's claims and pursuing indemnity from KLJ after the date of the demand (May 27, 2009), including attorney's fees, were proximately caused by KLJ's breach of the duty to defend.

A

[¶ 9] KLJ argues the issue of its contractual liability to the City was decided by the jury and the district court was precluded from further considering whether KLJ had a duty to defend the City under the doctrine of res judicata. KLJ claims the issue of contractual liability was submitted to the jury at the City's request, the City agreed the jury would not have to separately decide whether KLJ was liable if the jury found SCI failed to meet its burden of proving it was entitled to additional compensation, the jury did not find KLJ was liable, and the City cannot ask the court to decide an issue that was submitted to the jury. KLJ contends the City waived any right to have the issue decided by the court.

[¶ 10] In Mills v. City of Grand Forks, this Court explained the doctrine of res judicata:

Res judicata, or claim preclusion, prevents relitigation of claims that were raised, or could have been raised, in prior actions between the same parties or their privies. Thus, res judicata means a valid, existing final judgment from a court of competent jurisdiction is conclusive with regard to claims raised, or those that could have been raised and determined, as to the parties and their privies in all other actions. Res judicata applies even if subsequent claims are based upon a different legal theory.

2012 ND 56, ¶ 8, 813 N.W.2d 574 (quo...

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