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Bluebook 21st ed.

Mark C. Zebrowski, Indemnity Clauses and Workers' Compensation: A Proposal for
Preserving the Employer's Limited Liability, 70 CALIF. L. REV. 1421 (1982).

ALWD 7th ed.

Mark C. Zebrowski, Indemnity Clauses and Workers' Compensation: A Proposal for
Preserving the Employer's Limited Liability, 70 Calif. L. Rev. 1421 (1982).

APA 7th ed.

Zebrowski, M. C. (1982). Indemnity clauses and workers' compensation: proposal for
preserving the employer's limited liability. California Law Review, 70(6), 1421-1445.

Chicago 17th ed.

Mark C. Zebrowski, "Indemnity Clauses and Workers' Compensation: A Proposal for
Preserving the Employer's Limited Liability," California Law Review 70, no. 6
(December 1982): 1421-1445

McGill Guide 9th ed.

Mark C. Zebrowski, "Indemnity Clauses and Workers' Compensation: A Proposal for
Preserving the Employer's Limited Liability" (1982) 70:6 Calif L Rev 1421.

AGLC 4th ed.

Mark C. Zebrowski, 'Indemnity Clauses and Workers' Compensation: A Proposal for
Preserving the Employer's Limited Liability' (1982) 70(6) California Law Review 1421

MLA 9th ed.

Zebrowski, Mark C. "Indemnity Clauses and Workers' Compensation: A Proposal for
Preserving the Employer's Limited Liability." California Law Review, vol. 70, no. 6,
December 1982, pp. 1421-1445. HeinOnline.

OSCOLA 4th ed.

Mark C. Zebrowski, 'Indemnity Clauses and Workers' Compensation: A Proposal for
Preserving the Employer's Limited Liability' (1982) 70 Calif L Rev 1421
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 Indemnity Clauses and Workers'
Compensation: A Proposal for
Preserving the Employer's
Limited Liability
Under the California workers' compensation system,I an employee
injured on the job is compensated by the employer regardless of the
employer's responsibility for the injury.' The amount of compensation
is dictated by statute,3 and the employee is prohibited from pursuing
any additional recovery against the employer. The workers' compensa-
tion system thus benefits both the employee and the employer; by
avoiding the expense, delays, and uncertainties of litigation, the system
guarantees the employee a swift and certain recovery and limits the
extent of the employer's liability.
While the California workers' compensation system limits an em-
ployer's liability to the employee, it expressly preserves an employee's
right to recover full tort damages from a third-party tortfeasor.4 This
right, in conjunction with the rule of joint and several liability for mul-
tiple tortfeasors, may result in a negligent third-party tortfeasor being
held liable to an injured employee in an amount beyond the third
party's comparative responsibility for the employee's injury.
Where possible, third parties may seek to avoid this risk of liability
to employees through contractual indemnification clauses which re-
quire the employer to reimburse the third party for any such liability it
may incur. While these clauses do protect third parties, they create an
additional loss allocation problem, as they result in an employer being
responsible for the full tort recovery of its employee: a result in direct
conflict with the workers' compensation scheme.
This Comment examines this conflict in the context of the con-
struction industry. Part I provides background on the California work-
ers' compensation system and the employee's right to seek a full
recovery against third-party tortfeasors. Part II explains how indemni-
fication clauses shift the third party's liability to the employer, in con-
1. See CAL. LAB. CODE § 3600 (West Supp. 1982).
2. For the few exceptions to the exclusive and limited aspects of workers' compensation,
applicable to those cases in which the employer's actions are especially egregious, see generally
Note, Johns-Manville Products Corp. v. Superior Court: Intentional.4ggravation ofInjiry as an
Exception to Exclusive Workers' CompensationRemedies, 69 CALIF. L. REV. 1230 (1981).
3. See generall, CAL. LAB. CODE §§ 4550-4554 (West 1971):
4. Id. § 3852 (West Supp. 1982).

1421
1422 CALIFORNIA LAW REVIEW [Vol. 70:1421

tradiction to the design of the workers' compensation system, and

argues that insurance does not resolve this contradiction. Part III de-
scribes how Congress has addressed a similar problem in the maritime
area by prohibiting indemnity claims against the employer. Part IV
proposes a modified version of the federal approach for the California
construction industry. It recommends prohibiting clauses indemnify-
ing the third party, limiting third-party liability to its percentage of
comparative fault, and prohibiting subrogation liens by the employer
on the employee's tort recovery. The proposal is consonant with the
purpose of the workers' compensation system, and will eliminate dupli-
cative insurance costs and litigation expenses that are prevalent under
the current system.

I
COMPENSATION FOR INJURED EMPLOYEES

This Part describes the California workers' compensation system

and its preservation of the employee's right to sue third-party
tortfeasors.

A. Recoveryfrom the Employer: Workers' Compensation

California Labor Code sections 3600 and 3601 set out the funda-
mental elements of the California workers' compensation system. Sec-
tion 3600 provides that the employer shall be liable for injuries suffered
in the course of employment without regard to the employer's negli-
gence.5 Section 3601 adds that recovery of compensation under section
5. Id. § 3600. Section 3600 provides that:
Liability for the compensation provided by this division, in lieu of any other liability
whatsoever to any person except as provided in Section 3706, shall, without regard to
negligence, exist against an employer for any injury sustained by his employees arising
out of and in the course of the employment and for the death of any employee if the
injury proximately causes death, in those cases where the following conditions of com-
pensation concur
(a) Where, at the time of the injury, both the employer and the employee are sub-
ject to the compensation provisions of this division.
(b) Where, at the time of the injury, the employee is performing service growing
out of and incidental to his employment and is acting within the course of his employ-
ment.
(c) Where the injury is proximately caused by the employment, either with or
without negligence.
(d) Where the injury is not caused by the intoxication of the injured employee.
(e) Where the injury is not intentionally self-inflicted.
(f) Where the employee has not willfully and deliberately caused his own death.
(g) Where the injury does not arise out of an altercation in which the injured em-
ployee is the initial physical aggressor.
(h) Where the injury does not arise out of voluntary participation in any off-duty
recreational, social, or athletic activity not constituting part of the employee's work-re-
lated duties, except where such activities are a reasonable expectancy of, or are expressly
or impliedly required by, the employment. The administrative director shall promulgate
reasonable rules and regulations requiring employers to post and keep posted in a con-
 1982] INDEMNIFICATION AND WORKERS' COMPENSATION 1423

3600 is the employee's exclusive remedy against the employer.

Sections 3600 and 3601 are substantive declarations limiting the
employee's claim against his employer to those benefits provided by the
compensation law and foreclosing entitlement to the damages other-
wise available through legal action.7 The workers' compensation sys-
tem thus limits the liability of the employer while guaranteeiiig
recovery for the employee regardless of employer fault and despite any
defenses which the employer might otherwise plead.'
The workers' compensation system is in part recognized as a bar-
gain, a quid pro quo, reached between employers and employees for
their mutual benefit. 9 The system has also been viewed as "an unmis-
spicuous place or places a notice advising employees of the provisions of this subdivi-
sion. Failure of the employer to post such a notice shall not constitute an expression of
intent to waive the provisions of this subdivision.
See also CAL. CONST. art. XIV, § 4 (enabling the enactment of a comprehensive workers' compen-
sation system). Some 87% of the national work force is covered by a workers' compensation sys-
tem. J. CHELIUS, WORKPLACE SAFETY AND HEALTH: THE ROLE OF WORKERS' COMPENSATION
20 (1977). For an interesting history of the statutory movement toward workers' compensation,
see Tarpley & Jagmin, Worker's Compensation: Third Party Actions Against Employers Under
Comparative Causation, 47 J. AIR L. & COM. 187, 194-203 (1982).
6. CAL. LAB. CODE § 3601 (West Supp. 1982). Section 3601 provides that:
(a) Where the conditions of compensation exist, the right to recover such compen-
sation, pursuant to the provisions of this division is, except as provided in Section 3706,
the exclusive remedy for injury or death of an employee against the employer or against
any other employee of the employer acting within the scope of his employment, except
that an employee, or his dependents in the event of his death, shall, in addition to the
right to compensation against the employer, have a right to bring an action at law for
damages against such other employee, as if this division did not apply, in either of the
following cases:
(1) When the injury or death is proximately caused by the willful and unprovoked
physical act of aggression of such other employee.
(2) When the injury or death is proximately caused by the intoxication of such
other employee.
(b) An act which will not sustain an independent action for damages against such
other employee under paragraph (1) or (2) of subdivision (a) of this section may never-
theless be the basis of a finding of serious and willful misconduct under Section 4553 or
4553.1, if (I) such other employee is established to be one through whom the employer
may be charged under Section 4553; (2) such act of such other employee shall be estab-
lished to have been the proximate cause of the injury or death; and (3) such act is estab-
lished to have been of a nature, kind, and degree sufficient to support a finding of serious
and willful misconduct under Section 4553 or 4553.1.
(c) In no event, either by legal action or by agreement whether entered into by
such other employee or on his behalf, shall the employer be held liable, directly or indi-
rectly, for damages awarded against, or for a liability incurred by such other employee
under paragraph (I) or (2) of subdivision (a) of this section.
(d) No employee shall be held liable, directly or indirectly, to his employer, for
injury or death of a coemployee except where the injured employee or his dependents
obtain a recovery under subdivision (a) of this section.
But e Note, supra note 2 (outlining the intentionally egregious actions exception to the exclusiv-
ity of workers' compensation).
7. E.g., Azevedo v. Abel, 264 Cal. App. 2d 451,454, 70 Cal. Rptr. 710, 712 (3d Dist. 1968).
8. See Alameda Tank Co. v. Starkist Foods, Inc., 103 Cal. App. 3d 428, 432, 162 Cal. Rptr.
924, 926 (2d Dist. 1980); see generally J.CHELIUS, supra note 5, at 27.
9. See, e.g., Epstein, Coordination of Workers' Compensation Benefts with Tort Damage
Awards, 13 FORUM 464, 468-69 (1978).
1424 CALIFORANIA LAW REVIEW [Vol. 70:1421

takable declaration of legislative policy that the cost of industrial in-

jury, at a scale fixed by the compensation law, shall be borne by the
employing enterprise."' 0 The modem compensation system is proba-
bly best viewed as a product of a combination of these forces; that is,
the legislature intended to ensure that injured employees were compen-
sated, and it worked with employers and employees to devise a system
that accommodates their competing interests. Thus, the system is sol-
idly based upon both a bargained-for exchange between the parties in-
volved and a declaration of legislative policy.
Workers' compensation benefits are governed by statute and gen-
erally include medical expenses, partial compensation for lost wages,
and payments for temporary or permanent disabilities." Because of
the strict liability aspect of workers' compensation, as opposed to the
negligence standard that generally governs injuries to employees in tort
law, compensation benefits may exceed what the employee would re-
cover at common law. However, where the employee would have a
legal claim against a negligent employer but for the exclusivity of the
compensation system, the statutory scheme often results in a recovery
significantly smaller than the potential tort recovery or the actual loss
2
sustained by the employee.

B. Recoveryfrom Third-Party Torifeasors

Although the workers' compensation system applies to all injuries
sustained by an employee in connection with his job, its scope is limited
to claims against the employer. In many instances, however, the em-
ployee's injury results from the exclusive or concurrent fault of a third
party. In such cases, the Labor Code preserves the employee's right to

10. Pacific Gas & Elec. Co. v. Morse, 6 Cal. App. 3d 707, 714, 86 Cal. Rptr. 7, 11 (3d Dist.
1970).
11. See CAL. LAB. CODE §§ 4451-4754 (West 1971 & Supp. 1982).
12. Consider, for example, Edge v. Stapleton, No. 119403 (Cal. Riverside County Super. Ct.
Sept. 4, 1980), summarizedin 24 Jury Verdicts Weekly, Oct. 3, 1980, at 12. The plaintiff incurred
medical expenses of $13,000 and lost wages of $17,000. There was no claim of permanent, partial,
or total disability. The jury awarded $175,000, reduced by the plaintiff's 35% comparative fault
for a net recovery of$113,750. Under workers' compensation, such an injury would have resulted
in a recovery of the full medical expenses and only part of the lost wages: an amount totaling less
than $30,000. Though such results depend on particular facts, the case is illustrative of the fre-
quent differential between workers' compensation and tort awards.
See also Castro v. State, 114 Cal. App. 3d 503, 515, 170 Cal. Rptr. 734, 741 (4th Dist. 1981)
("It is common knowledge that workmen injured or killed in construction work do not receive full
compensation under the Workmen's Compensation Act for damages that they sustain. .... )
(quoting Widman v. Rossmoor Sanitation, Inc., 19 Cal. App. 3d 734, 747, 97 Cal. Rptr. 52, 59 (4th
Dist. 1971)). But see Johns-Manville Products Corp. v. Superior Court, 27 Cal. 3d 465, 474, 612
P.2d 948, 955, 165 Cal. Rptr. 858, 865 (1980); Magliulo v. Superior Court, 47 Cal. App. 3d 760,
778-79, 121 Cal. Rptr. 621, 635-36 (Ist Dist. 1975) (permitting an employee to avoid the workers'
compensation restrictions for injuries intentionally inflicted by the employer).
1982] INDEMNIFICATION AND WORKERS' COMPENSATION 1425
3
sue the third party in tort.'
The frequent discrepancy between workers' compensation benefits
and potential tort awards naturally gives the employee an incentive to
find a third-party defendant against whom the larger award can be ob-
tained, and employees have in fact been quite successful in doing so.4
As one commentator has stated, "Enterprising plaintiffs and accommo-
dating courts have frequently managed to circumvent the operation of
an immunity doctrine by finding a nonimmune third-party 'tortfeasor,'
whose liability is often tenuous, vicarious, or legally fictitious."' 5
This proliferation of employee tort claims is most apparent in suits
by employees against those who hire their employers. The duties of
such third parties have been expanded by such concepts as the peculiar
risk doctrine and the duty to exercise reasonable care over the manner
in which the work is performed.' 6 Increasingly, these third parties who
hire independent contractors have also become subject to liability for
the negligence of others on the jobsite as well as for their own negligent
acts or omissions.' 7 The result has been a plethora of employee suits
against third parties.
For several reasons, such employee suits against third parties have
become particularly common in the construction industry. First, doc-
trines of third-party liability, such as failure to provide a safe place to
work,' 8 are particularly applicable to the context of a construction job-
site where dangers abound. Second, construction sites are work places
shared by many parties, most of whom are not immune from suit under
the compensation laws. Often, on a construction site, several subcon-
tractors are present, as well as a general contractor and a property own-
er; each is potentially liable for jobsite injuries to employees. The
presence of several potential defendants makes available additional
theories of liability and increases the possibility of a tort recovery. As a
result, the multiple defendant situation increases the likelihood of a
claim being brought. 19

13. See CAL. LAB. CODE § 3852 (West Supp. 1982).

14. See generally J. CHELIUS, supra note 5, at 27.
15. Pulliam, Comparative Loss Allocation and the Rights and Liabilities of Third Parties
Against an Immune Employer: A Modest Proposal, 31 FED'N INS. COUNS. Q. 80, 80 (1980) (foot-
note omitted).
16. See, eg., Castro v. State, 114 Cal. App. 3d 503, 509-16, 170 Cal. Rptr. 737-42 (4th Dist.
1981).
17. Id. at 509-10, 514, 170 Cal. Rptr. at 737-38, 740.
18. See id. at 517-18, 170 Cal. Rptr. at 742-43.
19. For example, where only the employer is present and in control of the jobsite, statutory
benefits will be exclusive. When additional parties are present, the likelihood that a tortfeasor will
be found and thus that a party other than the employer will be liable for the injury increases. In
such situations, workers' compensation is no longer the exclusive remedy. Concomitantly, the
funds potentially available to compensate the employee are also likely to increase. Thus, the
1426 CALIFORNiA LAW REVIEW [Vol. 70:1421

II
THE PROBLEMS PRESENTED

A. ContractualIndemnf/ation v. Workers' Compensation

Not only does the construction site present an expanded opportu-
nity for employee tort suits, it also raises the problem of coordinating
the relative rights of the employee, the employer and the third-party
defendant once work-related tort claims are brought. This problem is
intensified by the operation of contractual indemnity clauses typically
contained in construction contracts.20 Such clauses usually require the
subcontractor to indemnify the general contractor for any liability the
general contractor may incur as a result of the subcontractor's perform-
ance of the contract. 2 '
When such indemnity clauses are applied to employee suits
against general contractors, they substantially threaten the successful
operation of the workers' compensation system. As mentioned earlier,
the system was designed to provide guaranteed benefits to the em-
ployee regardless of employer fault and, in exchange, guaranteed lim-
ited liability for the employer. Labor Code section 3852, allowing suits
by employees against negligent third parties, does not itself change the
quid pro quo of the compensation system: it merely creates the poten-
tial for additional employee recovery against parties other than the em-
ployer. However, if the employer is a subcontractor bound by contract
to indemnify a general contractor for any liability the general may face
as a defendant in the employee's action, the quid pro quo is destroyed
because the indemnity clause undermines the employer'§ protection
against unlimited liability. In this situation, contractual indemnity ef-
fectively makes the employer liable in tort to its own employee for

greater the number of potential defendants, the greater the likelihood that potential claims in
addition to workers' compensation will be pursued.
20. See Annot., 68 A.L.R.3d 7, 22 (1976).
21. A typical indemnity clause is contained in Article 11.11 of the American Institute of
Architects' standard form subcontract, as reprinted in R. CUSHMAN, M. SIMON & M. STOKES,
CONSTRUCTION INDUSTRY FORMBOOK 218-19 (1979):
11.11.1 To the fullest extent permitted by law, the Subcontractor shall indemnify and
hold harmless the Owner, the Architect and the Contractor and all of their agents and
employees from and against all claims, damages, losses and expenses including but not
limited to attorney's fees, arising out of or resulting from the performance of the Subcon-
tractor's Work under this Subcontract, provided that any such claim, damage, loss, or
expense is attributable to bodily injury, sickness, disease, or death, or to injury to or
destruction of tangible property (other than the Work itself) including the loss of use
resulting therefrom, to the extent caused in whole or in part by any negligent act or
omission of the Subcontractor or anyone directly employed by him or anyone for whose
acts he may be liable, regardless of whether it is caused in part by a party indemnified
hereunder. Such obligation shall not be construed to negate, or abridge, or otherise
reduce any other right or obligation of indemnity which would otherwise exist as to any
party or person described in this Paragraph 11.11.
 1982] INDEMNIFICATION AND WORKERS' COMPENSA4TION 1427

damages sustained in connection with the employment-a result the

workers' compensation system seeks to avoid.
Such a situation is common under California law 2 and is illus-
trated by Gonzales v. A J. Novick Construction Company. 3 In that
case, the plaintiff, Gonzales, was a brick tender employed by Vienna
Stone Company, a subcontractor hired by the defendant general con-
tractor, Novick. The subcontract contained an indemnity provision.
When Gonzales brought suit against Novick for work-related injuries,
Novick sought to enforce the indemnity provision against Vienna. Af-
ter considering the limitations imposed by Labor Code section 386424
and Civil Code section 278225 upon such indemnity provisions, the
California Supreme Court concluded that the indemnity provision was
valid and enforceable. As a result, despite the workers' compensation
provisions and despite Novick's negligence, Vienna was liable for 100%
of its own employee's tort recovery.
As Novick Construction demonstrates, enforcement of an indem-
nity clause against a subcontractor whose employee sues a negligent
general contractor completely circumvents the workers' compensation
system. The employee benefits from the existence of a third party who
is not protected from tort liability. Moreover, the employee may bene-
fit from a less than ardent defense by a general contractor who may
actually have nothing at risk. The general contractor, a nominal de-
fendant, need only avoid a determination that it is the sole negligent
party; in all other cases, the indemnity clause will protect the general
from any loss. 26 Therefore, it is actually to the general contractor's ad-
vantage to show that the subcontractor-employer was partially negli-
gent, thereby assuring indemnity protection. Thus, as the general
contractor defends its best interests, it may indirectly increase the lia-
bility of the subcontractor. At the least, the general contractor may be
indifferent to the defense of the claim where it is apparent that there is
concurrent negligence of additional parties. As a consequence, the em-
ployer is forced to bear the burdens of defense and ultimate tort liabil-
ity-the precise burdens of which the legislature intended to relieve it.
22. J. SWEET, LEGAL ASPECTS OF ARCHITECTURE, ENGINEERING AND THE CONSTRUCTION
PROCESS 752-53 (2d ed. 1977).
23. 20 Cal. 3d 798, 575 P.2d 1190, 144 Cal. Rptr. 408 (1978).
24. CAL. LAB. CODE § 3864 (West 1981) provides that indemnity can only be created by
express agreement; see infra text accompanying notes 54-55.
25. CAL. CIV. CODE § 2782 (West Supp. 1982) provides that parties to a construction con-
tract cannot contract for indemnification of liability arising solely from their own negligence; see
infra text accompanying note 69.
26. See infra notes 68-69 and accompanying text.
1428 CALIFORNI4 L,4WREVIEW [Vol. 70:1421

B. Insurance.- an Inadequate Solution

Courts27 and commentators28 often minimize the problem
presented, arguing that the availability of insurance reduces the issue to
an inconsequential question of which party must bear the burden of
insuring against the risk. However, insurance does not solve the prob-
lem; rather, insurance itself presents a major argument for change in
third-party suits involving indemnification.
The entire workers' compensation system is an insurance scheme
designed by the interested parties and the legislature to provide ade-
quate coverage against the risks of employment at minimum cost to the
parties. Moreover, the bargaining process that led to the workers' com-
pensation system created a balanced compromise: limited but certain
payments for work-related injuries. To the extent that the legislature
was successful in striking an efficient and equitable balance, it must be
recognized that interference by indemnity contracts with the normal
operation of the compensation system produces inefficient and inequi-
table results.
The most obvious inefficiency resulting from indemnity contracts
is the need for multiple insurance policies against a single risk. Al-
though indemnity requirements could conceivably be used to put the
entire risk on the party who can insure at lowest cost and thereby mini-
mize the overall cost to the enterprise, in reality such requirements do
not have this effect. The indemnity provision forces the subcontractor
to insure against the risk but does not thereby obviate the need for
insurance against the same risk by the general contractor or the owner.
The result is that several different parties have to purchase insurance
for the same underlying risk.29
Of course, since the premiums that insurance companies charge
are based in large part on the amount that they expect to pay out in
claims, if the total claim amount for injured parties does not rise, then
total premiums should rise only by the amount of increased adminis-
trative costs. In that case, the premiums paid by the subcontractor and
the general together would be more than that paid if only one party
were responsible for the whole risk, but only by the amount of these
administrative costs plus the insurer's profit-not insubstantial
amounts in themselves. To the extent the insurance market is not com-
pletely efficient, there will be additional costs associated with duplicate

27. Guy F. Atkinson Co. v. Schatz, 102 Cal. App. 3d 351,356, 161 Cal. Rptr. 436, 438-39 (1st
Dist. 1980); John E. Branagh & Sons v. Witcosky, 242 Cal. App. 2d 835, 838-39, 844, 51 Cal. Rptr.
844, 846-47, 850 (Ist Dist. 1966).
28. Pulliam, supra note 15, at 83; J. SWEET, supra note 22, at 753-54.
29. E.g., Hermen Christensen & Sons, Inc., v. Paris Plastering Co., 61 Cal. App. 3d 237, 246-
47, 132 Cal. Rptr. 86, 91 (Ist Dist. 1976).
1982] INDEMNIFICATION AND WORKERS' COMPENSATION 1429

coverage. In sum, rather than reducing overall insurance costs, indem-

nity provisions increase the total cost of insuring a construction project.
The increased insurance burden on the employer also thwarts the
° If a general contractor
built-in incentive structure of the tort system.
directly bears the burden for the results of its own negligence, a repeat-
edly negligent general will have to pay increased insurance premiums
and will be less able to compete with other, safer contractors as its in-
surance costs rise. However, if the general contractor is continually
able to contract out of responsibility for its own negligence, neither its
insurance costs nor its profits will reflect its poor safety record, and it
will, as a result, have little incentive to increase the safety of its opera-
tions. 3' The subcontractor, on the other hand, will repeatedly be ex-
posed to liability, at least in part for the negligence of others. Its
apparently poor safety record will increase its insurance premiums.
These higher costs may reduce its capacity for competitive bidding and
thus diminish its ability to compete in the market. Thus, the impact of
the indemnity requirement on insurance may be to punish relatively
safe employers for the negligence of general contractors who are not
being policed by the economic consequences of their unsafe operations.
The burden of double insurance associated with contractual in-
demnity also leads to wasteful duplication of litigation expenses. When
an injured employee brings suit, the general contractor's carrier must
assume the defense, because the general retains some potential for lia-
bility. 32 The general will of course raise the indemnity issue, bringing
30. For the "social engineering" incentive structure in the torts system, see generally W.
PROSSER, THE LAW OF TORTS § 3, at 14-16 (4th ed. 1971).
3 1. It might be argued that general contractors with bad loss records would in fact bear the
burden of the loss in the form of higher bids from subcontractors. That is, subcontractors could
pass back to general contractors the cost of their increased exposure resulting from a careless
general contractor. However, this argument has several flaws.
First of all, the subcontractor is generally not in such a powerful bargaining position vis-a-vis
a general contractor. See infra notes 58-70 and accompanying text. Thus, in the competitive
construction contracting market, the subcontractor may not actually have the power to pass on
these costs.
Second, relieving the general contractor of liability for his negligence removes the economic
signals that would otherwise serve to notify other parties of the contractor's poor record. While
insurance companies will be well aware of an insured's loss record and will adjust his premiums
accordingly, when a contractor is able to avoid the consequences of his loss record, subcontractors
who deal only by chance with the contractor will probably lack the full information necessary to
incorporate the increased exposure into the cosX of the contract. Rather, it is the subcontractor
who may later suffer increased insurance costs arising from a loss which was caused partly or
wholly through the fault of the general contractor.
32. See infra text accompanying notes 69-70, explaining that indemnity is not available
where the general contractor is found to be the sole negligent party. Moreover, the typical indem-
nity agreement requires the subcontractor not to assume the general contractor's defense, but
merely to indemnify. See supra note 21; but see CAL. CIV. CODE § 2778(3)-(4) (West 1974), re-
quiring the indemnitor to reimburse the indemnitee for the cost of defending the action and to
undertake the indemnitee's defense if the indemnitee requests. However, in construction injury
 1430 CALIFORNIA LAW REVIEW [Vol. 70:1421

the subcontractor-employer's general liability carrier into the suit as

well. Thus, there are two defendants; both must fully defend the same
claim while at the same time litigating the indemnity issue between
themselves. The situation gets even more complex and more expensive
when the employer's workers' compensation carrier, often different
from his general liability carrier, enters the litigation to enforce a sub-
33
rogation lien against the employee's recovery.
Armco Steel Corp. v. Roy H. Cox Co, 3 4 illustrates the inefficiency
involved. The plaintiff-employee prevailed at trial in 1974. The injury
was compensated, and the goal of the tort system was, in theory,
achieved. However, it was not until 1980, after more than six years of
additional litigation, that the insurance companies finally resolved the
question of who must pay what amount under the indemnity clause. A
system which exists to compensate injured parties could make more
efficient use of its resources.
III
THE FEDERAL APPROACH

In the maritime area, where workers are protected by the Federal

Longshoremen's and Harbor Workers' Compensation Act, 36 similar in-
demnification problems have been reduced by congressional action.

A. Indemnflcation Under the FederalLongshoremen's and Harbor

Workers' CompensationAct
Traditionally, longshoremen who were injured on a vessel could
sue the vessel owners only on a negligence theory. In 1946, the
Supreme Court extended the vessel owner's duty to longshoremen by
holding that owners had a duty to maintain the ship in a seaworthy
condition. 7 In effect, this standard imposed strict liability on the vessel
owner for injuries to longshoremen." Subsequently, in Ryan Stevedor-
ing Co. v. Pan-AtlanticS.S. Corp., the Supreme Court held that a vessel
owner found liable under this standard was entitled to indemnity,
litigation the obligation under the indemnity clause depends on the outcome of the litigation pro-
cess, necessitating a full defense by the general contractor on his own behalf.
33. See, e.g., Associated Constr. & Eng'g Co. v. Workers' Comp. Appeals Bd., 22 Cal. 3d
829, 842, 587 P.2d 684, 692, 150 Cal. Rptr. 888, 896 (1978).
34. 103 Cal. App. 3d 929, 163 Cal. Rptr. 330 (2d Dist. 1980).
35. For a review of the vast resources required for construction litigation, see L. HousE & G.
SMITH, CONSTRUCTION CONTRACT LITIGATION 51-55, 75 (1980).
36. 33 U.S.C. §§ 901-950 (1976 & Supp. IV 1980).
37. Seas Shipping Co. v. Sieracki, 328 U.S. 85, 99 (1946).
38. Id. at 93-94; Cohen & Dougherty, The 1972Amendments to the Longshoremen'randHar-
bor Workers' Compensation Act: An Opportunity for Equitable Unformity in Trloartite Industrial
Accident Litigation, 19 N.Y.L.F. 587, 589 (1974).
1982] INDEMNIFICATIONAND WORKERS' COMPENSATION 1431

either equitable or contractual, from the employer of the injured long-

shoreman. 39 These two Supreme Court decisions created a situation
like that involving California construction contracts: 40 the employer
paid the full tort damages for its employee's injury, despite the exist-
ence of a workers' compensation system designed to limit the em-
ployer's liability.
Congressional investigation revealed many of the problems which
California now faces in the construction industry. Congress was con-
cerned with the inadequacy of the benefits for injured longshoremen 4'
as well as with the indemnity problem. It recognized the dramatic in-
crease in employee tort actions, and the corresponding increase in em-
ployer liability.42 Moreover, it recognized that money spent to
administer such a system could be better spent to pay for employee
injuries. 43 Furthermore, although statutory benefits had not been in-
creased for eleven years and the number of injuries had decreased, the
cost of employer insurance had increased greatly because of these ad-
ministrative costs and the increased liability of employers. 44

B. The CongressionalResponse
In response to these problems, Congress not only increased the
statutory benefits available to injured longshoremen, 45 but also relieved
vessel owners of the broad liability to which they were exposed. 4 6 Most
important, Congress enacted section 905(b) of the Longshoremen's and
Harbor Worker's Compensation Act, which absolutely limits the em-
ployer's liability to that imposed by the compensation statute by
prohibiting any claim for indemnity from the employer, whether in
contract or in tort.47 In abolishing such indemnity claims, Congress
reasoned that "[u]nless such hold-harmless, indemnity or contribution
agreements are prohibited as a matter of public policy, vessels by their
superior economic strength could circumvent and nullify the provisions
of Section 5 of the Act [establishing the statutory benefits as absolute
and maximum liability for employers] by requiring indemnification
from a covered employer for employee injuries. '"48

39. 350 U.S. 124, 125 (1956).

40. See supra text accompanying notes 23-33.
41. H.R. REP. No. 1441, 92d Cong., 2d Sess. 1, reprintedin 1972 U.S. CODE CONG. & AD.
NEws 4698, 4698-99.
42. Id. at 5, 1972 U.S. CODE CONG. & AD. NEws at 4702.
43. Id.
44. Id.
45. Id. at 1, 2-4, 1972 U.S. CODE CONG. & AD. NEws at 4699, 4700-01.
46. Id. at 5-6, 1972 U.S. CODE CONG. & AD. NEWS at 4703.
47. Id. at 7, 1972 U.S. CODE CONG. & AD. NEws at 4704; 33 U.S.C. § 905(b) (1976).
48. H.R. REP. No. 1441, 92d Cong., 2d Sess. at 7, reprintedin 1972 U.S. CODE CONG. & AD.
NEws at 4704.
1432 CALIFORNIA LAW REVIEW [Vol. 70:1421

Similar considerations in employee suits against third-party in-

demnitees 49 should lead to similar legislative action in California. The
remainder of this Comment proposes a system for solving the problem.

IV
A PROPOSED SOLUTION

A. PriorLegislative Responses

San Francisco Un4fied School District v. CaliforniaBuildingMainte-

nance Co." was the first California case to assess the exclusivity of
workers' compensation liability in light of a third party's claim for eq-
uitable indemnification based on an alleged breach of contract by the
employer. After discussing the conflicts between the statutory scheme
and the tort system, the California court relied on the United States
Supreme Court reasoning in the Ryan case 5' and upheld the claim for
indemnification.52 Thus, the California approach to the indemnity
problem is directly based on reasoning which the United States Con-
gress has rejected as leading to an unacceptable result. 3
The California Legislature was also dissatisfied with the result
under the CalforniaBuilding Maintenance Co. approach. In response,
it enacted Labor Code section 3864.54 That section provides that, in
employee suits against third parties, "the employer shall have no liabil-
ity to reimburse or hold such third person harmless on such judgment
or settlement in absence of a written agreement so to do executed prior
to the injury.' ' 55 This section has been recognized in a few decisions as
an attempt by the legislature to eliminate the dual insurance burden
imposed upon employers by the operation of the equitable indemnity
doctrine,56 which allowed indemnification even without a contractual
agreement and thereby required the employer to obtain insurance
against the risk. However, as long as the statute continues to allow
contractual indemnity agreements, it neither guarantees exclusivity of

49. See supra text accompanying notes 23-33.

50. 162 Cal. App. 2d 434, 328 P.2d 785 (1st Dist. 1958).
51. See supra note 39.
52. 162 Cal. App. 2d at 447-49, 328 P.2d at 793-94.
53. See supra text accompanying notes 36-48.
54. See Fleming, Report to the Joint Committee of the California Legislature on Tort Liability
on the Problems Associated with American Motorcycle Association v. Superior Court, 30 HAS-
TINGS L.J. 1464, 1502 n.153 (1979). Seealso Gonzales v. R.J. Novick Constr. Co., 20 Cal. 3d 798,
807-08, 575 P.2d 1190, 1196, 144 Cal. Rptr. 408, 414 (1978).
55. CAL. LAB. CODE § 3864 (West 1971).
56. See Herman Christensen & Sons, Inc. v. Paris Plastering Co., 61 Cal. App. 3d 237, 243,
132 Cal. Rptr. 81, 89 (Ist Dist. 1976); see also E.B. Wills Co. v. Superior Court, 56 Cal. App. 3d
650, 654-55, 128 Cal. Rptr. 541, 544 (5th Dist. 1976) (§ 3864 "fully embraces the 'exclusive rem-
edy' concept visualized by the workers' compensation law of this state").
1982] INDEMNIFICATION AND WORKERS' COMPENSA4TION 1433
5
liability nor reduces the insurance burden. 1

B. Indemnity Clause Bargaining: An Illusion

In creating section 3864 but limiting its scope so as not to prohibit
express contractual indemnity, the California Legislature reasoned that
although employer liability should be limited, considerations of con-
tractual freedom dictated that if an employer engages in arms-length
bargaining and contracts to relinquish his limited liability under the 58
workers' compensation system, the agreement should be enforced.
However correct the legislature's approach may be in other situations,
its reasoning does not adequately justify enforcing contractual indem-
nity provisions in the typical construction contract.
In the majority of construction contracts, as in the typical long-
shoreman's contract,5 9 there is nothing resembling arms-length bar-
gaining or agreement over the indemnity clause. Rather, the clause is
typically imposed upon the independent contractor in boilerplate lan-
guage. The independent contractor either accepts the terms demanded
by the general contractor or does not work,60 for the market is domi-
nated by general contractors demanding such protection.
Confronted with a similar conflict between contractual freedom in
a commercial setting and limits on such freedom based upon public
policy considerations, the California Supreme Court recently recog-
6
nized that public policy may prevail. In Graham v. Scissor-Tail,Inc., "
the plaintiff, Bill Graham, was an experienced concert promoter who
entered into a contract with the defendants, musicians, for concert per-
formances. The parties used the standard contract required by the mu-
sicians' union.
The suit involved a standard contract provision requiring that all
disputes be resolved by arbitration before a union arbitrator. Despite
Graham's prominence in his field,6 2 the negotiability of other terms of
the contract,63 and the commercial setting of the transaction, the court
recognized that, since nearly all musicians use the standard contract,
Graham was in a take-it-or-leave-it situation, and that the contract was
an unconscionable and unenforceable contract of adhesion.' Thus,

57. Seesupra text accompanying notes 23-33. Express or contractual indemnity is created by
agreement between the parties, while implied or equitable indemnity arises by operation of law.
58. See Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal. 3d 622, 633, 532 P.2d 97, 104, 119
Cal. Rptr. 449, 456 (1975).
59. See supra text accompanying note 48.
60. J. SWEET, supra note 22, at 453-54.
61. 28 Cal. 3d 807, 623 P.2d 165, 171 Cal. Rptr. 604 (1981) (per curiam).
62. Id. at 812, 818-19, 623 P.2d at 167, 171-72, 171 Cal. Rptr. at 606, 610-11.
63. Id. at 819, 623 P.2d at 172, 171 Cal. Rptr. at 611.
64. Id. at 818-19, 826, 623 P.2d at 171-72, 177, 171 Cal. Rptr. at 610-11, 616.
1434 CALIFORNI/A LAW REVIEW [Vol. 70:1421

the court recognized that even in commercial settings involving sophis-

ticated and powerful parties, the circumstances may result in an unen-
forceable adhesion contract.
While such reasoning could apply to a wide range of contractual
settings,6 5 it is particularly applicable to the typical construction con-
tract. Courts have extended adhesion theory to the contracts between
general contractors and subcontractors,66 and have demonstrated some
concern over 67 the lack of true bargaining in the typical construction con-
tract process.
Perhaps most indicative of the lack of any arms-length bargaining
over indemnity provisions is the noticeable absence of cases in which a
general contractor has agreed to indemnify an independent contractor
for liability arising out of the performance of a construction contract.
Rather, indemnity protection for the general contractor is the norm. 8
The legislature has recognized the general contractor's ability to
demand indemnity protection from the independent subcontractor and
has responded in part by enacting Civil Code section 2782.69 That sec-
tion applies only to construction contracts and provides that terms
which purport to indemnify a party against its own sole negligence or
willful misconduct are "against public policy and are void and
unenforceable ... .

C. Eliminating Indemnfcaion
Since there is generally no bargained-for agreement to provide in-
demnity in construction contracts, freedom to contract cannot justify
excluding contractual agreements from the scope of Labor Code sec-
tion 3864.7 t Following the example of section 905(b) the Longshore-
men's and Harbor Workers' Compensation Act,72 section 3864 should
be expanded to prevent any potential for indemnification, either in tort
or in contract.

65. But see Note, Graham v. Scissor-Tail, Inc.: Unconscionablity of Presumpotively Biased
Arbitration Clauses WithinAdhesion Contracts,70 CALIF. L. REv. 1014, 1031-34 (1982) (criticizing
Scissor-Tail and arguing for its limited application).
66. See Player v. George M. Brewster & Son, Inc., 18 Cal. App. 3d 526, 536, 96 Cal. Rptr.
149, 156 (3d Dist. 1971).
67. See Castro v. State, 114 Cal. App. 3d 503, 510, 170 Cal. Rptr. 734, 737 (4th Dist. 1981).
68. See J. SWEET, supra note 22, at 750.
69. CAL. CIV. CODE § 2782 (West 1974); see supra text accompanying note 25.
70. CAL. CIV. CODE § 2782 (West Supp. 1981).
71. The existence of a bargained-for exchange is the typical justification for upholding in-
demnity clauses. See John E. Branagh & Sons v. Witcosky, 242 Cal. App. 2d 835, 843-44, 51 Cal.
Rptr. 844, 850 (1st Dist. 1966).
72. See supra text accompanying notes 36-48.
 1982] INDEMNIFICATION AND WORKERS' COMPENSATION 1435

L Adopting the FederalApproach

Several California cases have come close to following the federal
approach and prohibiting indemnification.73 The court of appeal has
recognized that allowing indemnification when the general contractor
is at all negligent may be against public policy, and that Civil Code
section 2782 could justifiably be expanded to prevent indemnification
under such circumstances.7 4 An expansion of Civil Code section 2782
would have essentially the same effect as the expansion of Labor Code
section 3864 proposed in this Comment: it would prevent indemnifica-
tion in all cases in which the general contractor is liable. Also, in the
first case upholding the constitutionality of Labor Code section 3864,
the court of appeal indicated that the goals of the compensation system
not only justified but perhaps required limiting the liability of employ-
ers to such third parties. Thus, section 3864 was an initial step in the
right direction; however, its scope must be expanded in order to accom-
plish fully its purpose.

2. Effects ofAbolishing Indemnflcation

Prohibiting indemnification will not only help achieve the pur-
poses of section 3864 and the compensation system in general; it will
also lead to a more efficient, less expensive system for compensating
employees for their injuries. To the extent general contractors are
made more directly responsible for their own negligence, they will have
a stronger incentive to promote jobsite safety, and the number of em-
ployee injuries may be reduced. 76 Furthermore, the need for multiple
insurance against the same risk will be eliminated, and costs will ac-
cordingly be reduced. By removing one liability issue and one insur-
ance company from the litigation or settlement process, the cost and
complexity of the claim process will also be lessened.
Finally, prohibiting indemnification of the general contractor will
alleviate the problems associated with a halfhearted defense by third
parties. Under the current California system, the third-party general
contractor is in most cases merely a nominal defendant with nothing
significant at risk, since it will be fully reimbursed for any liability it
may incur.7 7 Therefore, the employer's interests may be inadequately
represented, resulting in increased recoveries for plaintiff-employees.
73. See, e.g., supra text accompanying notes 7 & 10.
74. See Armco Steel Corp. v. Roy H. Cox Co., Inc., 103 Cal. App. 3d 929, 934, 163 Cal.
Rptr. 330, 333 (2d Dist. 1980).
75. Alameda Tank Co. v. Starkist Foods, Inc., 103 Cal. App. 3d 428, 432-33, 162 Cal. Rptr.
924, 926-27 (2d Dist. 1980).
76. See generally W. PROSSER, supra note 30, at 23.
77. See supra notes 68-69 and accompanying text (describing situations in which a general
contractor will not be protected by an indemnity clause).
1436 CALIFORNIA LAW REVIEW [Vol. 70:1421

The employer may of course attempt to take a more active role in the
litigation. However, this too results in an additional and unnecessary
expenditure of the subcontractor-employer's resources. Only an abso-
lute prohibition of indemnity provisions in construction contracts
would permit the subcontractor to benefit from the limitation on liabil-
ity under the workers' compensation system.

D. Limiting Third-PartyLiability to Comparative Fault

If, in accordance with the above proposal, the employer's liability
is limited to that provided in the workers' compensation statutes when
the plaintiff is an injured employee, the third-party defendant's liability
should be limited to that portion of the employee's damages for which
the third party is responsible. A system of comparative fault liability
should be applied to the third party, but the employer's workers' com-
pensation shield should not result in the third party bearing the burden
ofjoint and several liability normally associated with comparative fault
principles.
1. Justiflcationfor Joint and Several LiabiliZy
When comparative fault principles were first considered, many
commentators proposed limiting each defendant's liability to its pro-
portional responsibility for the injury.78 However, when the issue first
came before the California Supreme Court, the court held that al-
though comparative fault principles were to be applied, defendants
were still to be held jointly and severally liable for the total damages of
the plaintiff.79 The court reasoned that where a defendant is immune
from suit or is unable to pay its full share of the damages, it is better
that a concurrently negligent defendant bear an additional burden than
that a plaintiff should suffer a diminished recovery.80
Applying this reasoning to an employee suit against a third party,
the California Court of Appeal expressed concern over the inequity in-
herent in holding the third party liable for the full amount of the dam-
ages when workers' compensation prevented him from seeking
contribution from a concurrently negligent employer. Nevertheless,
the court held that the third party was subject to joint and several lia-
78. See, e.g., the discussion and authorities cited in Fleming, supra note 54, at 1494-98; Com-
ment, ComparativeNegligence, Multlple Parties,and Settlements, 65 CALIF. L. REv. 1264, 1285
(1977).
79. American Motorcycle Ass'n v. Superior Court, 20 Cal. 3d 578, 586, 578 P.2d 899, 903,
146 Cal. Rptr. 182, 186 (1978).
80. Id. at 586-90, 578 P.2d at 903-07, 146 Cal. Rptr. at 186-90. But 5f. Davis, Third-Party
Tortfeasors' Rights Where Compensation Covered-Employers are Negligent-here do Dole and
Sunspan Lead?, 3 WORKMeN'S COMP. L. REv. 1, 7 (1976) (criticizing the requirement that the
third-party tortfeasor must compensate for the employer's negligence).
1982] INDEMNIFICATION AND WORKERS' COMPENSATION 1437

bility for the plaintiff's injury, 8 and as a result the third party was ef-
fectively held liable for harm actually caused by the employer's
negligence.

2. Failure of the Justificationin the Construction Setting

The factors justifying joint and several liability in the typical tort
suit, however, are not present in the unique workers' compensation set-
ting: the codefendant-employer is not insolvent, immune, or a settling
party.
First, when the plaintiff has received workers' compensation bene-
fits, any analogy between the employer and an insolvent tortfeasor is
misplaced. Insolvency implies the inability of a defendant to satisfy its
obligation to the plaintiff.8 2 Under the workers' compensation system,
however, the employer's solvency is secured by insurance covering the
risk of an employee's injury.8 3 Thus, the statutory benefits are paid by
the employer's insurer, and there is no additional obligation of the em-
ployer for the third party defendant to satisfy.
Second, the immunity justification for joint and several liability is
inapplicable when workers' compensation is available. Immunity im-
plies that the plaintiff is unable to make a negligent party answer for
the harm to which it has contributed.84 Under the workers' compensa-
tion system, the employer is only "immune" from additional contribu-
tion to the third party; the employer is not immune from liability to the
employee for his loss.
Finally, the relationship between the general contractor and the
subcontractor is not analogous to that between a non-settling and a
settling defendant. A plaintiff who settles exchanges speculative rights
for the benefit of a certain recovery; a defendant who settles exchanges
a possible but perhaps remote chance of exculpation for a certain but
limited liability.8" The remaining defendants become liable for the full
amount of the damages less only the amount of the settlement, even if
such amount exceeds their comparative liability.8 6 Such a system en-

81. Arbaugh v. Procter & Gamble Mfg. Co., 80 Cal. App. 3d 500, 505-07, 145 Cal. Rptr. 608,
613 (2d Dist. 1978).
82. See CAL. COM. CODE § 1201(23) (West Supp. 1982).
83. Private employers may secure the payment of workers' compensation benefits to their
employees by purchasing insurance, see CAL. LAB. CODE § 3700(a) (West Supp. 1982), or by self-
insuring, see id. § 3700(b), which requires depositing cash, securities, or a surety bond with the
State Director of Industrial Relations, see id. § 3701. See also id. §§ 3700.5, 3702.3, 3706-3709.5
(describing penalties for failure to secure compensation adequately), and §§ 3710-3732 (establish-
ing an uninsured employers' fund).
84. W. PROSSER, supra note 30, at 970.
85. L. HOUSE & G. SMITH, CONSTRUcriON CONTRACT LITIGATION 51-55 (1980).
86. When a defendant settles, the liability of the non-settling defendants is diminished only
by the amount of the settlement, not by the proportional liability of the settling defendant for the
1438 CALIFORNIA LAWREVIEW [Vol. 70:1421

courages settlement by rewarding the settling defendant with limited

liability while increasing the potential liability of the non-settling
defendant.
No similar considerations justify liability beyond comparative
fault when a plaintiff receives workers' compensation from a concur-
rently negligent tortfeasor. The plaintiff and employer have not ex-
changed speculative rights; nor do they need encouragement to settle.
The employer and employee know their respective obligations and
rights to a statutory certainty. Moreover, the threat of increased expo-
sure will not influence the third party's inclination to settle. Although a
settlement will also establish with certainty the extent of its liability, it
is not faced with increased liability should a codefendant settle.
Rather, the employer and employee have with finality reached an ac-
ceptable allocation of liability in the form of workers' compensation
benefits. The third party's potential liability is thus defined, and the
imposition of joint and several liability will not be a factor influencing
the third party to settle.
Rather than justifying joint and several liability, the factors pres-
ent in employee suits against third parties support limiting third-party
liability to the third party's comparative fault.87 Limiting third-party
liability to the extent of comparative fault may itself facilitate settle-
ment. As the amount at stake is diminished, it becomes increasingly
likely that the parties can reach an agreement on the value of a settle-
ment. Moreover, limiting third-party fault removes several intangibles
from the calculation of the settlement value, 8 simplifying the calcula-

total tort damages. See CAL. CIv. PROC. CODE § 877 (West 1980). Thus, a non-settling defend-
ant, like a codefendant of an immune or insolvent tortfeasor, is exposed to potential liability
beyond its comparative fault. But see Baget v. Shepard, 180 Cal. Rptr. 396 (4th Dist. 1982), ofi-
cially depublishedpursuantto CAL. R. CT. 976(d) (West 1976) (reducing the nonsettling defend-
ant's liability by the full comparative liability of the settling defendant, thereby limiting the
nonsettling defendant's liabilty to its comparative fault).
87. Despite the exclusive aspect of the workers' compensation remedy against the employer,
a few courts have permitted third parties to recover from the employer an amount equal to the
employer's share of fault. See, e.g., Skinner v. Reed-Prentice Div. Package Mach. Co., 70 Ill. 2d 1,
14-16, 374 N.E.2d 437, 443 (1977), cert. denied,436 U.S. 946 (1978); Dole v. Dow Chem. Co., 30
N.Y.2d 143, 152-53, 282 N.E.2d 288, 295, 331 N.Y.S.2d 382, 390-91 (1972).
At least one other court has recognized that though the exclusivity of the workers' compensa-
tion statute prevents employer contribution, the third party's liability should nonetheless be lim-
ited to that party's comparative fault. See Barron v. United States, 473 F. Supp. 1077, 1085 (D.
Hawaii 1979), modfed, 654 F.2d 644 (9th Cir. 1981). The suggestion that a third party's liability
should be limited to that party's comparative fault is therefore not new. See, e.g., Tarpley &
Jagmin, supra note 5, at 214-24.
88. For example, with joint and several liability, third parties must consider the chance that
other defendants may settle or be insolvent and that their potential liability may thus be expanded
if a judgment were rendered against them. Thus, the settlement value of the claim may include
risk aversion factors and gambling tactics by the parties, rather than focusing narrowly on the
liability of the individual defendant.
 1982] INDEMNIFICATION AND WORKERS' COMPENSATION 1439

tion to damages times the comparative fault of the third party.

Under the comparative fault system, joint and several liability op-
erates to alleviate the inequitable results produced by unusual circum-
stances, such as the immunity or insolvency of one of a group of
defendants. 9 However, in third-party suits in which the plaintiff re-
ceives workers' compensation, such compensation has already ensured
that the employee is not the victim of any misfortune. The plaintiff is
the beneficiary not only of a guaranteed recovery but also of the good
fortune of having an additional party from whom he or she can re-
cover. 90 In such situations, it is the third party who may properly be
viewed as a victim of misfortune, since it will suffer a loss as a result of
the employer's immunity from contribution. Therefore, it is the third
party who needs the benefit of liability limited to its comparative fault.

3. RestrictedApplication of Limited Third-PartyLiability

The proposed limitations on liability can properly be restricted to
cases in which the third-party defendant is a party to the enterprise
which the plaintiff-employee was serving when injured. That is, only
defendants who are involved in the operation and implementation of
the construction project need be protected by liability limited to their
comparative fault. This group would of course include general con-
tractors and property owners-both of whom might hire subcontrac-
tors-and could include other subcontractors on the project as well.
This narrow application of the limited liability principle is proper
for several reasons. First, although the employee may be viewed as
having accepted the quid pro quo of guaranteed recovery through the
workers' compensation system, the scope of this arrangement should be
limited to those injuries closely connected with the performance of the
job. When the employee is injured in the ordinary course of employ-
ment through the negligence of a general contractor or its agent, the
injury is sufficiently tied to normal job risks to fall within the contem-
plated scope of the workers' compensation system of limited but certain
recovery. However, there is no reason to believe that an employee ever
intended to agree to a limited recovery when, for example, he is injured
on the jobsite by a negligent automobile driver not involved with the
9
job. '
Second, problems arise from employee suits because the parties

89. American Motorcycle Ass'n v. Superior Court, 20 Cal. 3d 578, 586-90, 578 P.2d 899, 903-
07, 146 Cal. Rptr. 182, 186-90 (1978).
90. See generally Edmonds v. Compagnie Generale Transatlantique, 443 U.S. 256, 273-80
(1979) (Blackmun, J., dissenting) (guarantee of statutory benefits plus risk-free chance at tort re-
covery called inequitable).
91. See, e.g., Mello v. Cooperheat, Inc., No. 174969 (Cal. Contra Costa County Super. Ct.
Apr. 4, 1980), summarizedin 24 JURY VERDIcTs WEEKLY, May 16, 1980, at 4.
1440 CA LIFORXZI4 L4W REVIEW [Vol. 70:1421

involved in the construction project pursue conflicting individual inter-

ests while the goal should be to make sure injured employees are com-
pensated at a minimum cost to the construction enterprise as a whole. 92
The current method of allocating the loss among the parties results in
inefficiency to the enterprise, which is the crux of the problem; the solu-
tion must provide a more efficient and equitable allocation of costs
among these parties. Thus, the limited liability principle is properly
addressed only to those parties involved in the construction project.
Third, when the workers' compensation system was conceived, few
jobsites had as many potential third-party defendants as do typical
modem construction projects. 3 The problem of loss allocation has
arisen as a result of the increased use of independent contractors; it is
only this narrowly defined conflict between competing interests which
must be resolved.
Finally, the frequency of employee suits against third parties who
are involved in the construction enterprise indicates the need as well as
the justification for legislative action aimed particularly at solving loss
allocation problems in this area.
4. Compensation Results Under Limited Liability. A FairBalance
Because the employer's liability is limited under workers' compen-
sation, the loss must be allocated other than through a directly propor-
tional sharing of the liability. Any solution will necessarily require a
compromise between conflicting interests. In resolving this conflict, the
employee's interests vis-a-vis the employer must be viewed as satisfied
when the statutory benefits have been paid. The third party's liability
must then be limited to its comparative fault.94 Although the injured
party may not receive full tort compensation in all cases, the employee
will always receive a recovery fully consistent with the workers' com-
pensation system. Such a recovery is not unjust, but is both fair and
adequate.

E. EliminatingSubrogation Liens
Once indemnity coverage is eliminated and third-party liability is
limited to the extent of comparative fault, the loss allocation system can
92. J. SwEET, supra note 22, at 753-54. In a majority of the states a general contractor is
treated as an employer of a subcontractor's employee, and is liable to the employee only to the
extent of the statutory benefits. See A. LARSON, WORKMEN'S COMPENSATION LAW § 72.3 1(a)
(1976).
93. Interview with John G. Fleming, Professor of Law, Boalt Hall School of Law, in Berke-
ley, California (Feb. 8, 1982).
94. This suggestion means that an employee's recovery due to employer negligence is neces-
sarily limited to workers' compensation benefits. Such a result is in accord with the purpose of the
system. See supra notes 8-10 and accompanying text.
1982] INDEMNIFICATIONAND WORKERS' COMPENSATION 1441

be further streamlined. This Section proposes eliminating any lien that

the employer or its insurance carrier, seeking to obtain reimbursement
for workers' compensation benefits paid, might impose on the em-
ployee's tort recovery.

1. The PresentLien System

Under the current system, the rule is that the concurrently negli-
gent employer should receive either credit or reimbursement for the
amount by which its compensation liability exceeds its proportional
share of the injured employee's recovery.9 5 Under this system, the em-
ployer96 receives a lien against the employee's tort recovery. It can en-
force this lien in several ways, including bringing a separate suit. 9 7 No
matter how the lien is enforced, however, pursuit of the lien recovery
not only results in its own administrative expenses, such as attorney
fees for the parties and the accompanying expenditure of judicial re-
sources, but may also yield a net loss to the lienholder-employer itself if
the cost of enforcing the lien exceeds the amount recovered.

2. Shortcomings of the Present System

The employer's recovery under its subrogation lien is partly de-
pendent on the employer's comparative fault. 98 The employer's lien on

95. Associated Constr. & Eng'g Co. v. Workers' Comp. Appeals Bd., 22 Cal. 3d 829, 842, 587
P.2d 684, 692, 150 Cal. Rptr. 888, 896 (1978).
96. CAL. LAB. CODE §§ 3850, 3852-3862 (West 1971 & Supp. 1982) establish the reimburse-
ment rights of the employer. Section 3850 provides that with respect to reimbursement, "em-
ployer" is defined to include a workers' compensation insurer. In most situations, it is actually an
insurer who is seeking to enforce the lien. Lasky, Subrogation Under the Workmen's Compensation
Laws-Rules, Remedies and Side Effects, 12 SANTA CLARA LAW. 1, 2 (1972). As used in this
Comment, "employer" includes an insurer as a subrogated lienholder.
97. See Witt v. Jackson, 57 Cal. 2d 57, 69, 366 P.2d 641, 648, 17 Cal. Rptr. 369, 376 (1961);
CAL. LAB. CODE § 3856 ('West 1971). The employer might also intervene in an action brought by
the employee, or allow the employee to prosecute the action himself and subsequently seek a lien
against the employee's recovery.
98. The employer recovers on the lien only to the extent the workers' compensation benefits
paid to the employee exceed the amount of the employee's total damages for which the employer
would be liable but for the limited liability protection of the workers' compensation system. For
example, if the employee receives a $50,000 judgment and the employer has paid $10,000 in com-
pensation benefits, the lien recovery would vary according to the employer's negligence as follows:
Employer's Employer's Liability
Comparative but for Workers' Value of
Negligence Compensation Limitations Lien Recovery
0% $ 0 $10,000
5% $ 2500 $ 7500
10% $ 5000 $ 5000
20% and above $10,000 $ 0
See, e.g., BAi No. 15.14 (6th rev. ed. Supp. 1981) and the accompanying examples.
To further complicate matters, if the employee settles with the third party, the lien must be
valued by first determining the employee's actual damages without regard to the amount of the
1442 CALIFORNIA LAW REVIEW [Vol. 70:1421

the employee's tort award is realized only when the amount paid to the
employee in workers' compensation benefits exceeds the amount for
which the employer would have been liable under ordinary compara-
tive fault but for the compensation shield. 9 However, such determina-
tions of comparative fault come only as the result of court judgments;
consequently, the lienholder-employer will have an interest in the liti-
gation from beginning to end, despite the possibility of little or no re-
covery." ° This adds to the complexity and therefore to the cost of
resolving the employee's underlying claim: it injects into the litigation
the employer, who would not be involved but for the lien, and whose
interest and presence complicate the trial and may confuse the jury. 01
Moreover, the presence of a lienholder in the litigation may lead to
decreased tort recoveries for injured employees, since the jury is
squarely presented with the fact that the plaintiff-employee has re-
ceived compensation from a collateral source.102
Some liens are no doubt easy and profitable to enforce. In a ma-
jority of the litigated cases, however, lien enforcement taxes the system
lienholder, whose lien may be worth less than the cost of
as well as the 03
enforcement.1
The compensation lien also needlessly complicates settlement ne-
gotiations, the method through which the vast majority of employee
tort claims are resolved." ° In order to ensure that settlement fully ex-

settlement. For example, even if the employee settles for $50,000, it may be determined that the
actual damages are $100,000. Next, the employer's comparative fault must be determined. The
lien is then worth the excess of benefits paid over the employer's comparative liability (but for the
statutory limitation), for the full extent of the employee's actual damages. See Associated Constr.
& Eng'g Co. v. Workers' Comp. Appeals Bd., 22 Cal. 3d 829, 842-47 & n.10, 587 P.2d 684, 692-95
& n.10, 150 Cal. Rptr. 888, 896-99 & n.10 (1978). Such determinations may be made by the
Workers' Compensation Appeals Board when the plaintiff and the third party settle before trial.
Id.
99. See, e.g., Rodriguez v. McDonnell Douglas Corp., 87 Cal. App. 3d 626, 151 Cal. Rptr.
399 (2d Dist. 1978).
100. See Lasky, supra note 96, at 20. Lasky points out that when the employer wishes to
defend against the comparative fault allegations and thus maximize its lien recovery, it must inter-
vene, since its interests are often inadequately protected by the employee. See also CALIFORNIA
CONTINUING EDUCATION OF THE BAR, CALIFORNIA WORKMEN'S COMPENSATION PRACTICE
§ 17.21 (M. Witt ed. 1973 & Supp. 1982) [hereinafter cited as WORKMEN'S COMPENSATION PRAC-
TICE]. Moreover, an employer will be encouraged to remain an active participant in order to
assure that it has the necessary bargaining power and information to obtain the most favorable
recovery possible in the event of a settlement.
101. See BAJI No. 15.14 & use note & comment (6th ed. 1977 & Supp. 1981).
102. To establish the value of its lien, the employer is entitled to offer as evidence the total
amount of benefits paid to the employee. See CAL. LAB. CODE § 3855 (West 1971); Mendenhall v.
Curtis, 102 Cal. App. 3d 786, 789, 162 Cal. Rptr. 569, 571 (4th Dist. 1980); Smith v. County of Los
Angeles, 276 Cal. App. 2d 156, 159-71, 81 Cal. Rptr. 120, 122-30 (2d Dist. 1969).
103. Telephone interview with Alan Tebb, General Manager of the California Workers'
Compensation Institute (Feb. 25, 1982).
104. See, e.g., ANNUAL REPORT, JUDICIAL COUNCIL OF CALIFORNIA 78 (1982) (In fiscal year
1982] INDEMNIFICATION AND WORKERS' COMPENSATION 1443

tinguishes their liability, third-party defendants typically make their

settlement offers contingent upon the plaintiffs agreement to satisfy the
lien from the settlement proceeds.10 5 Once such an agreement is
reached, the liens are greatly compromised.' 0 6 After settlement, the
lienholder must look to the plaintiff-employee to satisfy the lien. Since
the plaintiff will not be trying the case, the necessary finding of compar-
ative fault will never be made, and the value of the lien will therefore
be speculative. The lienholder may of course pursue the lien by bring-
ing an independent action, but it will be gambling on obtaining the
10 7
necessary comparative fault determination.
Thus, the lienholder's only opportunity for fully pursuing its lien is
in most situations impractical. The lienholder is left with little bargain-
ing power after a settlement, and, as a result of pressure from plaintiffs
counsel, the third-party defendant, and the presiding judge, it will often
accept a nominal settlement on the lien. 108
In the typical settlement scenario, then, the lienholder incurs sub-
stantial expense as an interested party; by complicating the settlement
process, it imposes increased expense on the other parties as well. Yet,
this burden typically yields at best only a nominal recovery. As a re-
sult, the availability of the lien leads only to a waste of resources-a
cost without a benefit.
Another justification offered for subrogation liens, in addition to
their loss allocation effect, is that they provide an incentive for em-
ployer safety. 10 9 However, any safety incentive is insufficient to justify
otherwise wasteful employer liens." 0
A potential lien recovery could increase employer safety only if it
had a direct impact upon the employer's insurance premiums. Of
course, if, as argued above, the liens are not profitable for insurance
companies to pursue, subrogation rights will in fact have no such effect
on premiums. However, even if they are in fact marginally profitable
for carriers, the existence of subrogation rights will not necessarily act
as a safety incentive for employers.
Insurance premiums are based on averages, not on anomalies."'

1980-81, 94.9% of all personal injury claims filed in the superior courts were settled, with only
2.8% going to contested trials.).
105. See WORKMEN'S COMPENSATION PRACTICE, supra note 100, § 17.18 at 626.
106. See id. § 17.17, at 625.
107. 1 S. HERLICK, CALIFORNIA WORKER'S COMPENSATION LAW HANDBOOK § 12.12, at 426
(2d ed. 1978).
108. See WORKMEN'S COMPENSATION PRAcTICE, supra note 100, §§ 17.7, 17.17, at 617, 625.
109. Lasky, supra note 96, at 34.
110. Epstein, supra note 9, at 467 (1978). "[O]ne of the unfortunate effects of the workers'
compensation law is that its relatively low benefit structure tends to encourage an underinvest-
ment in safety by employers. ... Id.
111. Lasky, supra note 96, at 5-6.
1444 CALIFORNIA LAW REVIEW [Vol. 70:1421

An employer with a consistently good safety record will be able to ob-

tain insurance at a lower premium. 1 2 Thus, even though they have
limited liability under the workers' compensation system, employers
have an incentive to promote workplace safety. On the other hand,
since subrogation recoveries may actually have little or no effect on the
premium an individual employer pays, their safety incentive is likely to
be minimal.
Workers' compensation insurance premiums are effectively set by
the California Inspection Rating Bureau. 1 3 To set the rates, the bu-
reau starts with the expected total accident cost, subtracts anticipated
subrogation recoveries, and adds operating and administrative ex-
penses to determine the amount which must be collected in premi-
ums." 4 By thus focusing on gross subrogation recoveries rather than
on net recoveries after excluding the cost of enforcing the liens, the
bureau's method of calculation furthers the perception that liens reduce
costs, reduce premiums, and result in significant safety incentives." 5
To an extent, this may be true. However, when lien recoveries are re-
duced by the costs of enforcement, the actual impact of lien recoveries
upon employer safety is significantly diminished, and the safety justifi-
cation for the lien system becomes much less convincing.

3. The Advantages ofAbolishing Liens

As originally conceived and intended, the workers' compensation
system keeps the employer out of the courtroom when an employee is
injured. 6 However, even if indemnification is prohibited, subrogation
liens have the unfortunate consequence of dragging the employer back
into court. If liens are abolished, the employer will again be properly
absent from the litigation process, settlement and trial will be facili-
tated, and time and expense will be saved. 17 The elimination of em-
ployer's liens against workers' tort recoveries would thus further the
policy behind the workers' compensation system.
Moreover, the elimination of subrogation liens is consistent with
the quid pro quo concept of the compensation system."i8 As considera-
tion for limited liability following employee injuries, employers have
agreed to pay certain minimum benefits regardless of fault. An em-
112. See id. at 6.
113. Id. at 5.
114. Id.
115. Telephone interview with Alan Tebb, General Manager of the California Workers'
Compensation Institute (Feb. 25, 1982).
116. See Epstein, supra note 9, at 472; Edmonds v. Compagnie Generale Transatlantique, 443
U.S. 256, 270-71 (1979).
117. Epstein, supra note 9, at 468.
118. For a discussion of the quid pro quo exchange, see supra text accompanying notes 5-10.
1982] INDEMNIFICATION AND WORKERS' COMPENSATION 1445

ployer, whether negligent or careful, should not expect to receive a ben-

efit in the form of a subrogation recovery because a third-party
tortfeasor is involved. The employer receives the benefit of limited lia-
bility; it can fairly be expected to pay for that benefit with certainty of
liability. 9 Thus, it is both justifiable and desirable to eliminate subro-
gation liens, because the resulting savings outweigh the lost recoveries.

CONCLUSION

The workers' compensation and tort systems can only be recon-

ciled by recognizing a common goal: to ensure adequate compensation
for all injured employees while minimizing the cost of providing such
protection.
The system proposed in this Comment ensures adequate recovery
for all employees. Moreover, it furthers the purpose of the workers'
compensation system by limiting absolutely an employer's liability to
that imposed by the statutory scheme. Finally, the proposed system
preserves safety incentives by ensuring the liability of third parties for
their own negligence.
Of course, under this system, employees will sometimes have to
sacrifice full tort recoveries, employers will sometimes have to sacrifice
their liens in exchange for truly limited liability, and third parties will
sacrifice contractual indemnity in exchange for liability limited to com-
parative fault. However, as this Comment has demonstrated, the en-
forcement of these parties' rights perpetuates the conflict and the
inefficiency in the current system of loss allocation. The proposed sys-
tem eliminates these inefficiencies and furthers the primary purpose of
both workers' compensation and the tort system by ensuring that the
legitimate needs of all parties are satisfied. It thus represents a vast
improvement over the present system of loss allocation.

Mark C. Zebrowski*

119. Denying subrogation Hens does present one problem: an employee may receive a recov-
ery in excess of his actual loss. To avoid this possibility, third-party liability could be reduced by
the amount necessary to prevent double recovery. See, e.g., Rodriguez v. McDonnell Douglas
Corp., 87 Cal. App. 3d 626, 669, 151 Cal. Rptr. 399, 423 (2d Dist. 1978).
* B.B.A. 1979, University of Wisconsin-Madison; third-year student, Boalt Hall School of
Law, University of California, Berkeley.