Valloric v. Dravo Corp.

• Citation: 178 W.Va. 14,357 S.E.2d 207
• Decision Date: 03 March 1987
• Docket Number: MATTHEWS-M,CRACKEN-RUTLAND,No. 16956,16956
• Court: Supreme Court of West Virginia
• Parties: Carl Stephen VALLORIC, et al., Plaintiff Below, Appellee, v. DRAVO CORP., etc. and Mobay Chemical Corporation, etc., Defendants Below, Appellees, v.cCORP., Third-Party Defendant Below, Appellant. DRAVO CORPORATION, Third Party Plaintiff Below, Appellee, v.cCORP., Third-Party Defendant Below, Appellant.

Page 207

357 S.E.2d 207

178 W.Va. 14

Carl Stephen VALLORIC, et al., Plaintiff Below, Appellee, v. DRAVO CORP., etc. and Mobay Chemical Corporation, etc., Defendants Below, Appellees, v. MATTHEWS-McCRACKEN-RUTLAND CORP., Third-Party Defendant

Below, Appellant.

DRAVO CORPORATION, Third Party Plaintiff Below, Appellee, v. MATTHEWS-McCRACKEN-RUTLAND CORP., Third-Party Defendant

Below, Appellant.

No. 16956.

Supreme Court of Appeals of

West Virginia.

March 3, 1987.

Rehearing Denied June 3, 1987.

Syllabus by the Court

1. There are two basic types of indemnity: express indemnity, based on a written agreement, and implied indemnity, arising out of the relationship between the parties. One of the fundamental distinctions between express indemnity and implied indemnity is that an express indemnity agreement can provide the person having the benefit of the agreement, the indemnitee, indemnification even though the indemnitee is at fault. Such result is allowed because express indemnity agreements are based on contract principles. Courts have enforced indemnity contract rights so long as they are not unlawful.

2. Where a party having a duty to indemnify has been notified or been made a party to the underlying proceedings and given an opportunity to participate in its settlement negotiations, courts have concluded that the defendant-indemnitee should not be required to prove the plaintiff's actual ability to recover the amount paid in the settlement. It is sufficient if the defendant-indemnitee proves that he was potentially liable to the plaintiff.

3. Where an indemnitor has not been notified of the underlying litigation and given an opportunity to participate in the settlement negotiations, then an indemnitee must prove that he was actually liable to the plaintiff.

4. Under a potential liability standard, the indemnitee must in his indemnity suit show that the original claim is covered by the indemnity agreement. Then he must demonstrate that he was exposed to liability which could reasonably be expected to lead to an adverse judgment. Finally, he must prove that the amount of the settlement was reasonable.

5. Ordinarily, if an indemnitor does not assume control of the indemnitee's defense, he will be held liable for the attorney's fees and costs incurred by the indemnitee in the defense of the original action. This rule is predicated on the fact that the indemnitor has originally been notified of the underlying action, has been requested to assume the defense, and has refused to do so.

6. In an indemnity action, interest ordinarily may be obtained on the amount paid in settlement of the underlying case.

William C. Gallagher, Timothy Cogan, O'Brien, Cassidy & Gallagher, Wheeling, for Matthews-McCracken-Rutland Corp.

Lester C. Hess, Jr., John E. Artimez, Jr., Bachmann, Hess, Bachmann & Garden, Wheeling, for Dravo.

Jack S. Francis, New Martinsville, for Mobay Corp.

Samuel White, and William D. Lemon, Lemon & Lemon, New Martinsville, for Valloric.

MILLER, Justice:

Matthews-McCracken-Rutland Corporation (M-M-R) appeals from a judgment entered against it in the Circuit Court of Marshall County. The main issue raised is whether M-M-R was required to indemnify the Dravo Corporation (Dravo) and the Mobay Chemical Corporation (Mobay) under the terms of an express indemnity agreement. Dravo and Mobay settled with the plaintiff prior to trial, but at trial the plaintiff was found to be 50 percent contributorily negligent and was therefore barred from recovery under Bradley v. Appalachian Power Co., 163 W.Va. 332, 256 S.E.2d 879 (1979). ¹ As a consequence, M-M-R asserts that Dravo and Mobay were simply volunteers who had paid without being under any legal compulsion.

The trial court found in its memorandum opinion that Dravo and Mobay had prior to trial settled under a reasonable good faith belief that they would be found liable to the plaintiff and this was sufficient to sustain their indemnity claim against M-M-R. We conclude the circuit court acted correctly in determining that potential liability and not actual liability was the standard of proof to sustain the indemnity claim.

The accident which gave rise to this indemnity issue occurred on September 23, 1980, when Carl Valloric, an electrician employed by M-M-R, was injured at a construction site owned by Mobay. He was working in the course of his employment when he struck his forehead on some low-hanging scaffolding allegedly erected by Dravo. As a result of the accident, Mr. Valloric suffered a rather severe neck injury and was unable to work for a considerable period of time.

M-M-R had contracted with Mobay to perform electrical work and Dravo was the general contractor in charge of the entire construction project. The indemnity clause in the contract between Mobay and M-M-R referred to M-M-R as the "Contractor," Mobay as the "Owner," and Dravo as the "General Contractor," and contained this language:

"The Contractor agrees to indemnify and hold harmless the Owner, Engineer and General Contractor against any and all claims for loss, liability, or damage, on account of property damage or personal injury (including death), arising out of or in connection with the work done or to be performed and in connection with or arising out of the acts or omissions of Contractor's employees, however caused, while said employees are upon, entering or leaving the premises upon which this Agreement is being or is to be performed, provided that Contractor does not hereby assume responsibility for the sole negligence of General Contractor, Engineer or Owner." ²

On December 14, 1981, Mr. Valloric and his wife sued Dravo and Mobay for their alleged negligence in causing the accident. Dravo and Mobay then filed a third-party complaint against M-M-R, claiming that under the foregoing indemnity language, M-M-R would have to indemnify them for any damages suffered by the Vallorics. ³

Prior to trial, Dravo and Mobay made a settlement with the plaintiffs in the amount of $105,000. The trial court found that M-M-R was invited to participate in the settlement, but declined to make any payment. Under the settlement agreement, the plaintiffs were able to proceed to trial against Dravo and Mobay, but the latter were insulated from any further payments if the jury verdict exceeded $105,000. The settlement agreement also provided that if the jury verdict exceeded $105,000 and Dravo and Mobay recovered in excess of $105,000 against M-M-R in their third-party indemnity suit, this excess amount would be given to the plaintiffs. ⁴

A trial was held with Dravo, Mobay, and M-M-R participating in defense of the action. The jury found Mr. Valloric to have been 50 percent contributorily negligent, Dravo 30 percent negligent, Mobay 0 percent negligent, and M-M-R 20 percent negligent. Because Mr. Valloric was found to have been 50 percent negligent, no damages were awarded.

After the jury's verdict was returned, Dravo, Mobay, and M-M-R each filed motions for summary judgment on the indemnity issue. Dravo and Mobay sought to recover the $105,000 settlement they had paid to the Vallorics as well as attorney's fees and expenses from M-M-R based on the indemnity agreement. M-M-R argued that since the jury did not award any damages against Dravo and Mobay, they were not entitled to any recovery under the indemnity agreement.

The trial court granted summary judgment for Dravo and Mobay, holding that M-M-R was obligated for the $105,000 paid in the pretrial settlement along with interest from the date of the jury's verdict. The court also awarded to Dravo and Mobay their attorney's fees and expenses incurred in defense of the original suit brought by the Vallorics.

I.

In this case we deal with an express indemnity agreement. We recognized in Sydenstricker v. Unipunch Products, Inc., 169 W.Va. 440, 445, 288 S.E.2d 511, 515 (1982), that there are two categories of indemnity, i.e., express and implied, and pointed out that express indemnity is based on contractual principles:

"There are two basic types of indemnity: express indemnity, based on a written agreement, and implied indemnity, arising out of the relationship between the parties. One of the fundamental distinctions between express indemnity and implied indemnity is that an express indemnity agreement can provide the person having the benefit of the agreement, the indemnitee, indemnification even though the indemnitee is at fault. Such result is allowed because express indemnity agreements are based on contract principles. Courts have traditionally enforced indemnity contract rights so long as they are not unlawful." (Citations omitted). ⁵

The main argument of the parties centers over whether the defendants-indemnitees, Dravo and Mobay, had to prove in their indemnity claim against M-M-R that they were actually liable to the plaintiffs or whether it was sufficient to show that at the time they made the settlement, they had a reasonable belief that they were potentially liable to the plaintiffs. If an actual liability standard is required, Dravo and Mobay cannot recover on their indemnity claim because the jury found against the plaintiffs in the underlying suit.

The resolution of this issue of whether actual or potential liability must be shown depends on whether the indemnitor, M-M-R, had actual notice of the underlying claim, an opportunity to defend it, and the right to participate in any settlement negotiations. These conditions are generally held to be prerequisites for an indemnitee to have the benefit of the potential liability standard along with the further element that the settlement amount must be deemed to be reasonable in view of the potential liability. E.g., Fontenot v. Mesa Petroleum Co., 791 F.2d 1207 (5th Cir.1986); Burlington Northern, Inc. v. Hughes Bros., Inc., 671 F.2d 279 (8th Cir.1982); Chicago, R.I. & P.R. Co. v. Dobry Flour Mills, 211 F.2d 785 (10th Cir.), cert. denied, 348 U.S. 832, 75 S.Ct. 55, 99 L.Ed....