No. 81-1717

Citation: 725 F.2d 87Docket: 87

Court: Court of Appeals for the Tenth Circuit; January 10, 1984; Federal Appellate Court

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In the case of United Riggers and Erectors, Inc. v. Marathon Steel Company, the dispute involves contractors working on a coal preparation plant in Wyoming, with Marathon Steel as the general contractor and United Riggers as a subcontractor. Hartford Accident and Indemnity Company held the performance bond for United Riggers. The trial court's decision to deny Hartford's request for reimbursement of attorney's fees and costs incurred while defending a separate litigation from United Riggers is under review. 

The construction project faced significant delays, partly due to issues with another subcontractor. Ultimately, Marathon terminated United Riggers' subcontract due to performance dissatisfaction, leading another subcontractor to finish the work. Following the termination, Marathon sought to enforce United Riggers' performance bond, but Hartford contested this, arguing that United Riggers had not defaulted and that the contract had been materially modified without their consent, releasing them from the bond obligations. Nevertheless, Hartford agreed to loan Marathon $554,314 interest-free to facilitate the project’s completion, while reserving its rights regarding the bond.

United Riggers initiated a lawsuit against Marathon for breach of contract, which led Marathon to counterclaim and include Hartford as a third-party defendant. Hartford asserted a right to indemnity from United Riggers if Marathon succeeded in its claims against Hartford. The jury ruled in favor of United Riggers, finding no default, negligence, or overpayment related to their subcontract, and determined that there were no significant changes to the contract that would release Hartford from its surety obligations. Consequently, United Riggers was not liable to Marathon, resulting in no loss for Hartford on the bond.

Hartford later sought reimbursement from United Riggers for legal fees incurred by hiring its own attorney, a decision the district court deemed unjustified, as United Riggers could have adequately defended Hartford's interests. The court also ruled that Hartford failed to request a defense from United Riggers, which precluded reimbursement.

In its appeal, Hartford referenced the indemnity agreement's sections V and VII, which outline the indemnitors' obligations to cover the surety's liabilities and the conditions under which the surety may adjust or settle claims. Under California law, an indemnitee typically cannot refuse the indemnitor's offered defense without justification and still claim separate legal costs. The district court concluded that Hartford's separate defense was unjustified, a finding with which the appellate court disagreed.

Hartford presented two defenses against liability to Marathon. First, it argued that it was not liable as a surety for United Riggers since United Riggers had not defaulted on its subcontract. However, Hartford had concerns regarding United Riggers' financial stability and ability to cover a potential $1,000,000 liability under its performance bond. United Riggers failed to provide requested collateral, and Marathon cited issues such as non-payment to laborers and suppliers as grounds for terminating United Riggers' subcontract. These factors warranted Hartford hiring separate legal counsel, and the district court's findings to the contrary were deemed clearly erroneous.

Second, Hartford contended that it was released from liability under the performance bond due to a material alteration of the contract between Marathon and United Riggers, which occurred without Hartford's consent. This defense could disadvantage United Riggers, leaving them without the bond to satisfy their obligations to Marathon. Separate defenses justify a surety's decision to engage its own counsel if made in good faith. United Riggers challenged Hartford's good faith, pointing to independent appraisals indicating no default. Despite the jury ruling in favor of United Riggers, the trial judge acknowledged the complexity of the case and indicated that while he might not have reached the same conclusion as the jury, he could not deem the evidence insufficient to support their verdict. This context underscores the reasonableness of Hartford's decision to defend itself separately.

The district court incorrectly determined that Hartford's failure to request a defense from United Riggers barred its recovery. The court mistakenly relied on the Gribaldo case, which involved a different context concerning an errors and omissions policy where the engineers were prohibited from incurring defense costs without the insurer's consent. In contrast, the indemnity agreement in the present case granted Hartford control over the defense unless United Riggers met specific conditions, which it did not. The agreement also allowed Hartford to incur defense costs, which were to be reimbursed by United Riggers, making it illogical to require Hartford to request a defense.

Additionally, the district court ruled that Hartford was not entitled to reimbursement for defense costs, citing a lack of distinction between the fees related to the surety bond and those for defending its interests. However, the court found that Hartford's motivation in both instances was to minimize its liability under the bond, warranting reimbursement for all associated fees. The indemnity agreement stipulated that Hartford’s defense costs were reimbursable, and United Riggers failed to provide valid grounds to deny Hartford’s claim for those fees, including costs incurred during the appeal.

Hartford's decision to hire its own counsel was deemed justified, but the trial court did not address the amount of attorney's fees, which remains an outstanding issue. The key consideration is not merely whether Hartford retained separate counsel, but whether the services provided by this counsel were reasonable and necessary, given that the principal's counsel was also available. The court emphasizes the need to evaluate the extent of services required from Hartford’s separate counsel. The case is remanded to the district court to determine the reasonable amount of attorney's fees expended by Hartford. The decision is reversed and remanded for further proceedings consistent with this opinion.