Good Faith Settlement Determination: Not a Free Pass

Good Faith Settlement Determination: Not a Free Pass

Often times, after a settlement in a construction defect litigation or case involving real property, such as a fall at a public park, defendants would run out to get their good faith settlement (“GFS”) determination as a matter of course. While a GFS determination protects a litigant from equitable comparative contribution, or partial or comparative indemnity, based on comparative negligence or comparative fault, it has no impact on claims not based on those theories—namely claims for equitable subrogation.

California Civil Code section 877.6 reads in pertinent parts as follows:

(a)(1) Any party to an action in which it is alleged that two or more parties are joint tortfeasors or co-obligors on a contract debt shall be entitled to a hearing on the issue of the good faith of a settlement entered into by the plaintiff or other claimant and one or more alleged tortfeasors or co-obligors, upon giving notice in the manner provided in subdivision (b) of Section 1005. [Emphasis added]

. . . .

(c) A determination by the court that the settlement was made in good faith shall bar any other joint tortfeasor or co-obligor from any further claims against the settling tortfeasor or co-obligor for equitable comparative contribution, or partial or comparative indemnity, based on comparative negligence or comparative fault. [Emphasis added]

By its language, section 877.6’s application clearly is limited to joint tortfeasors and co-obligors on a contract. See Tiffin Motorhomes, Inc. v. Superior Court, 202 Cal. App. 4th 24, 29 (2011) (“Tiffin”). Often times, parties with contractual indemnity obligations are neither “joint tortfeasors” nor “co-obligors on a contract” vis-à-vis the party with which they each contracted separately, i.e., a general contractor or owner.

In Tiffin, owners of a motorhome brought breach of warranty action against manufacturers of the vehicle’s engine, coach, and chassis, alleging the vehicle suffered from numerous defects which were not satisfactorily repaired. The engine manufacturer filed a motion for an order determining a good faith settlement, which was opposed by coach manufacturer. The Superior Court in San Bernardino County granted the motion. The coach manufacturer then petitioned for writ of mandate. The appellate court in Tiffin was asked to determine whether the manufacturer of a vehicle engine, which was sued on warranty grounds, may rely on the Code of Civil Procedure section 877.6 to escape any non-contractual obligation to indemnify a co-defendant. The appellate court concluded the statute does not apply in that situation, and that the trial court therefore erred in granting the engine manufacturer’s motion for approval of a good faith settlement. Answering in the negative, the appellate court summarizes:

As we have explained ante, the clear language of the statute indicates that the Legislature has not extended the umbrella of section 877.6 to obligors on separate contracts or other contractual obligations despite the fact that all obligors are obliged to the plaintiffs. Nor is this in any way unreasonable, despite [engine manufacture’s] claim that it will discourage the parties from settling in a case like this. Where defendants are not obligors on the same contract, their obligations to the plaintiffs may differ; they will not necessarily (and in fact will rarely) have caused the same harm to the plaintiffs. Each will, however, be liable for the contract damages stemming from the breach of the contract into which that defendant entered. These obligations are neither “joint” nor “joint and several” and, therefore, do not give rise to any right of contribution (Civ.Code, § 1432) because no defendant can be ordered to pay more than the amount of damages attributable to its own breach.

Thus, section 877.6 does not provide protection against suits such as equitable subrogation. The mistake many litigants make is the belief GFS determination ends their exposure. This is not so the case in multi-party litigation where there is a claim for contractual indemnity against numerous parties, especially where one of those parties picks up the defense.

Interstate Fire and Casualty Insurance Company v. Cleveland Wrecking Company, 182 Cal. App. 4th 23 (2010) (“Cleveland Wrecking”) is an example of such a scenario.  The First District Court of Appeals held Interstate Fire had a right to equitable subrogation against Cleveland Wrecking after it paid for Webcor’s defense. Cleveland Wrecking also addresses the effect of Cleveland Wrecking’s settlement with the plaintiff and the determination of good faith of that settlement on Interstate Fire’s right for equitable subrogation.

In Cleveland Wrecking, Webcor was the general contractor for the project. Cleveland Wrecking was a subcontractor responsible for certain demolition work. Delta was a subcontractor engaged in installation of steel stairways. Cleveland and Delta each entered into similar subcontracts with Webcor, by which they undertook to indemnify Webcor for liability arising out of their work and to procure general liability insurance with Webcor as an additional insured. Plaintiff Frisby was injured on the project, allegedly due to Cleveland’s conduct. Plaintiff sued Webcor and Cleveland. Webcor tendered its defense and indemnification to Cleveland pursuant to the terms of the Agreement. Cleveland rejected the tender. Webcor also tendered its defense and indemnification to Interstate pursuant to the terms of the Interstate–Delta Policy. Interstate accepted it. Webcor filed a cross-complaint against Cleveland (and Delta) for express indemnification, equitable indemnification, and breach of contract. Webcor and Frisby entered into a settlement by which Webcor would pay Frisby $575,000 and Frisby would dismiss his claims against Webcor. The court approved their agreement as a good faith settlement under the Code of Civil Procedure Section 877.6. Interstate funded the $575,000 settlement payment and additionally paid over $152,000 for the attorney fees and costs incurred in defending Webcor against Frisby’s claims. Cleveland also entered into a settlement with Frisby, which the court approved as a good faith settlement as well. Webcor dismissed its equitable indemnity and contribution claims with prejudice, but dismissed its cause of action for express indemnity and breach of contract without prejudice. Interstate filed a separate complaint for subrogation against Cleveland, alleging that Cleveland had breached its contract with Webcor by failing to defend and indemnify Webcor.

The trial court in Cleveland Wrecking sustained Cleveland’s demurrer without leave to amend. By written order, the court explained: “The good faith settlement in the Frisby case cut off Webcor’s ability to sue Cleveland for indemnity or contribution for its alleged negligent conduct. At the same time, Webcor has no claim against Cleveland for Cleveland’s breach of its duty to defend Webcor because Webcor has sustained no damages as a consequence of the breach. It is for this reason that Interstate’s equitable position is not superior to Cleveland’s equitable position.”

The Court of Appeal vacated the judgment of dismissal against Interstate and reversed the order sustaining the demurrer to Interstate’s first amended complaint. In doing so, the appellate court made the following ruling:

[A] general liability insurer that has paid a claim to a third party on behalf of its insured may have an equitable right of subrogation against (1) other parties who contributed to the harm suffered by the third party (joint tortfeasors) under an equitable indemnification theory, and (2) other parties who are legally liable to the insured for the harm suffered by the third party (such as by an indemnification agreement) under a contractual indemnity theory.

. . . .

Because an insurer stands in the shoes of its insured, the insurer can pursue a cause of action against the settling tortfeasor for breach of an express contractual indemnification clause. . . . Interstate’s first amended complaint against Cleveland sets forth a claim for express contractual indemnity, based on Cleveland’s refusal to defend and indemnify Webcor under the terms of the Agreement. The claim is not barred by the good faith settlement determination.

Therefore, many persons may be implicated in this type of lawsuit depending upon their work and their possible contractual duties to defend another party. Thus, it is important to be kept apprised of those contractual duties to defend another party because a GFS determination may not shield someone from a claim brought by either a carrier or another party which stepped in and defended.

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