Appellate Court Clarifies Employers' Third-Party Indemnity Obligations In Employee Suits
LGC Staff
Mon August 29, 2016
4:14 AM UTC
Richard J. Reese

By Richard J. Reese

It is well established in California that, in a case involving an employee who is injured on the job, the employee’s judgment against a third party must be reduced by the amount attributable to the employer’s proportionate share of fault, up to the amount of workers’ compensation benefits paid.  However, when the employer’s share of fault exceeds the benefits paid or owed, the third-party defendant remains jointly and severally liable to the injured employee for all economic damages attributable to the employer’s fault that were not covered by workers’ compensation benefits.  In other words, it is possible for a third party to be held liable for the portion of the employer’s share of economic damages that exceed the workers’ compensation offset.  When the third-party has a contract with the employer, it can reduce the risk of such an occurrence by including an indemnity provision in the contract.

A recent California Court of Appeal decision examined this issue in detail while deciding that an employer’s indemnity obligation to a third party is enforceable when an injured employee sues the third party for personal injuries.  In Aluma Systems Concrete Construction of California v. Nibbi Bros., Inc., Aluma Systems entered into a contract with Nibbi Bros. to design and supply the materials for a shoring system at Nibbi Bros.’ construction project.  The terms of the contract included an indemnity provision that required Nibbi Bros. to defend and indemnify Aluma Systems against any and all claims for personal injuries arising from or in connection with the contract, except to the extent such claims were caused by the acts or omissions of Aluma Systems.

Employees of Nibbi Bros. subsequently filed two lawsuits against Aluma Systems alleging that the employees were injured after the shoring system designed by Aluma Systems collapsed.  The complaints stated that the collapse was due to Aluma Systems’ negligence.

Aluma Systems tendered its indemnity and defense to Nibbi Bros. but received no response.  Aluma Systems therefore filed a lawsuit against Nibbi Bros. for breach of contract, express indemnity, and declaratory relief.  Nibbi Bros. demurred to the complaint.  The demurrer included arguments that (1) the complaints only alleged negligence by Aluma Systems, which was specifically excluded from the indemnity provision, and (2) the offset for workers’ compensation benefits obviated the need for indemnification.  The trial court granted the motion.

On appeal, however, the Court found that the trial court's narrow reading of the indemnity provision was erroneous.  The fact that the complaints only alleged negligence by Aluma Systems was not conclusive because the jury could still apportion fault to Nibbi Bros.  In fact, the employees had no reason to allege Nibbi Bros. was negligent in the complaints because the employees’ exclusive remedy against Nibbi Bros. was the workers’ compensation system.

Additionally, there was a potential for Aluma Systems to be held liable for the portion of Nibbi Bros.’ share of the employees’ economic damages that exceeded the workers’ compensation offset.  Aluma Systems could only recover that portion via indemnity.  The offset therefore did not negate the need for indemnification.  As a result, the Court of Appeal reversed, and ordered the trial court to enter an order overruling the demurrer.

Without a contractual indemnity provision, Aluma Systems would have been responsible for the difference between Nibbi Bros.' share of the employees’ economic damages and the workers’ compensation offset.  The Aluma Systems case therefore highlights one of the many risks that can be shifted with the use of a contractual indemnity provision.

For more information regarding the use of indemnity provisions, contact Rich Reese in LGC’s San Diego office.

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