By Richard G. Erickson of Snell & Wilmer LLP
Published in the Fall 2022 Under Construction newsletter
Our construction clients may spend significant time, money, and effort refining and updating their contract provisions covering indemnification and the duty to defend claims. Consider spending an appropriate and adequate amount of time, money, and effort when sending notices, or “tenders,” to enforce those critical provisions. Tenders demanding defense and indemnity are strictly interpreted based on what the construction contract requires. Getting tenders wrong can result in losing one of the most significant risk-shifting tools in the construction contract. It can also be a monumental mistake if insurance coverage for indemnification damages and defense costs are lost because of an inadequate tender.
The legal definition of “tender” is simple; it is “[a]n unconditional offer of money or performance to satisfy a debt or obligation.” BLACK’S LAW DICTIONARY 1479-80 (7th ed. 1999). Whereas “tender of defense” to the insurance industry is “the act in which one party places its defense and all costs associated with said defense with another due to a contract or other agreement … [which] transfers the obligation of the defense and possible indemnification to the party to which the tender was made.” Int’l Risk Mgmt. Inst., Glossary. When claims arise on construction projects, notice by tenders of defense and indemnity will define dispute resolution and available insurance proceeds.
Most construction contracts identify very specific requirements to timely and sufficiently notify parties of their obligation to defend and indemnify claims. For example, in addition to specific steps for Notice of Claims under § 15.1.3, of the commonly used AIA Document A201©-2017 General Conditions, these General Conditions also identify more than 30 other sections in which the details for notice are expressly provided. When it comes to tenders for defense and indemnity, the parties must follow all contractual guidelines for notice. If not, there may be a valid legal argument that notice never occurred. In addition, the party deprived of notification may argue that the duty to defend and indemnify was lost due to the prejudice caused by the lack of reasonable opportunity to evaluate and resolve the claim.
In Arizona, tenders are often interpreted by the precedent set in Litton Sys., Inc. v. Shaw’s Sale & Serv., Ltd., 119 Ariz. 10, 14 (App. 1978), which established criteria for tenders of defense and indemnity as follows:
Tenders must “contain full and fair information concerning the pending action and an unequivocal, certain and explicit demand to undertake the defense thereof, with an offer to surrender control of the action to the indemnitor at least as to that portion of the claim for which the indemnitee seeks ultimately to hold the indemnitor liable. The notice should be given as soon after the institution of suit as to permit complete control of pretrial proceedings by the indemnitor. The tender may be written or oral.”
The Arizona holding governing tenders of defense and indemnity is consistent with most jurisdictions, but some courts have debated whether tenders should be determined by whether either actual or constructive notice to the indemnitor occurred. See Home Ins. Co. v. Nat’l Union Fire Ins. of Pittsburgh, 658 N.W.2d 522, 531-34 (Minn. 2003) (concluding from a multi-state analysis of tenders that insureds should not have to expressly notify insurers of their known obligation to defend and indemnify a claim).
You should consider, nonetheless, avoiding the debate over actual and constructive notice. The safest practice is to tender expressly in writing, immediately, and often. The more explicit you are with written details, the better chance the indemnitor is legally triggered to defend and indemnify. Communicating total surrender of the claim is also better than equivocating the tender and risking litigation over the tender’s sufficiency and legitimacy. Even while some circumstances surrounding liability may be pending, consider sending the tender anyway and leave open the opportunity to supplement the tender as information becomes available to you. There are, after all, no cases in which an indemnitor argued it was notified too soon. Finally, consider including and updating all incurred and anticipated costs of your defense to stress the urgency of the tender and the prejudicial consequences of any delay in the indemnitor taking over the claim.