GRIBALDO JACOBS JONES AND ASSOCIATES v. AGRIPPINA VERSICHERUNGES (1969)

This is an appeal by plaintiffs from a declaratory judgment. Plaintiffs commenced this action seeking a judicial determination of their rights and duties under an errors and omissions indemnity insurance policy issued to plaintiff corporations by defendants. In essence, the declaration sought by plaintiffs was directed to the meaning of the deductible feature of the policy and its application to defense costs.

Statement of the Case

Defendants, foreign organizations engaged in the business of writing insurance in California through duly dualified brokers, issued to plaintiffs and architects or engineers professional indemnity insurance policy covering the period from April 13, 1964 to April 13, 1967.

The policy ‘indemnifies the Assured [plaintiffs] against any claim or claims for breach of professional duty * * * which may be made against them during the period * * * by reason of any negligent act, error or omission, * * *’ The policy further provides that defendants ‘shall not be liable for any claim or claims unless the amount of claim exceeds the amount stated in the said Schedule as the deductible, * * *’ The deductible stated in the schedule is $2,500.

The policy does not directly impose a duty on defendants to defend actions against plaintiffs. The matters of defense and defense costs are mentioned only in the ‘conditions' to the policy as follows: ‘2. The Assured shall not admit liability for or settle any claim or incur any costs or expenses in connection therewith without the written consent of the Underwriters, who shall be entitled at any time to take over and conduct in the name of the Assured the defense of any claim. [¶]Nevertheless, the Assured shall not be required to contest any regal proceedings unless the Lawyer (to be mutually agreed upon by the Assured and the Underwriters) shall advise that such proceedings should be contested. 3. The Underwriters shall not settle any claim without the consent of the Assured. If, however, the Assured shall refuse to consent to any settlement recommended by Underwriters and shall elect to contest or continue any legal proceedings in connection with such claim, then the Underwriters' liability for the claim shall not exceed the amount for which the claim could have been so settled, together with the costs and expenses incurred with their consent * * *.’

The dispute below centered around defendants' position that their liability is limited to situations where the actual claim paid plus applicable defense costs actually total more than the deductible amount of $2,500. It was plaintiffs' position that defendants had an actual duty to defend and that defendants were required to pay defense costs whenever the initial demand against plaintiffs exceeded the deductible, no matter what the outcome of the demand.

Findings of Fact and Conclusions of Law

Among other things the trial court found that the policy was neither ambiguous nor uncertain; that under the terms of the policy defendants were not required to defend plaintiffs against the claims or demands of third parties for alleged breach of professional duty within the purview of the policy; that defendants' obligation under the policy arises only if the liability of plaintiffs is fixed and is discharged in an amount exceeding the deductible $2,500; and that in accordance with the policy and Civil Code section 2778,¹ subdivision 3, defendants are obligated to reimburse plaintiffs for costs and attorney fees incurred and paid by plaintiffs in the defense of claims embraced within the provisions of the policy, that is, those claims in excess of $2,500 actually paid by plaintiffs.²

The court then concluded that the policy is neither anbiguous nor uncertain and that defendants are obligated to reimburse plaintiffs for attorney's fees, costs and expenses incurred in the defense of any claim only when the claim is paid by plaintiffs and only when the payment exceeds $2,500. Judgment was entered accordingly.

The Agreement of Indemnity

Before proceeding to discuss the interpretation of the subject insurance policy we observe that ‘An indemnity provision of a contract is to be construed under the same rules governing other contracts with a view of determining the actual intent of the parties.’ (J.A. Payton v. KuhnMurphy Inc., 253 Cal.App.2d 278, 281, 61 Cal.Rptr. 575, 578; Buchalter v. Levin, 252 Cal.App.2d 367, 375, 60 Cal.Rptr. 369.) In indemnity contracts, moreover, the provisions of section 2778³ prescribing the rules for interpreting indemnity agreements, are as much a part of such instrument as those set out therein, unless a contrary intention appears. (Thode v. McAmis, 96 Cal.App.2d 833, 836–837, 216 P.2d 548; Weaver v. Grunbaum, 31 Cal.App.2d 42, 49–50, 87 P.2d 406.)

Plaintiffs place strong reliance upon the case of Gray v. Zurich Insurance Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, and particularly on the principle they extract therefrom that ‘In interpreting an insurance policy we apply the general principle that doubts as to meaning must be resolved against the insurer and that any exception to the performance of the basic underlying obligation must be so stated as clearly to apprise the insured of its effect.’ (p. 269, 54 Cal.Rptr. p. 107, 419 P.2d p. 171.) We take cognizance of this rule but also observe that it must be applied in conjunction with the rules applicable to the interpretation of contract.⁴

The Question of Ambiguity

Plaintiffs contend that the insurance policy is ambiguous and uncertain. Accordingly, they offered extrinsic evidence for the purpose of establishing that it was the intent of the parties that the policy afford plaintiffs the right to recover defense costs and expenses regardless of the amount paid by plaintiffs as the result of a claim of a third party. This evidence was admitted subject to defendants' motion to strike, which was timely interposed.⁵ The trial court took the motion under submission and in its written memorandum of decision stated that it was unnecessary for the court to rule on the motion on the basis that there was nothing in the evidence offered by plaintiffs which showed an intent of the parties contrary to that expressed in the policy as interpreted pursuant to section 2778.

In Delta Dynamics, Inc. v. Arioto, 69 Cal.2d 525, 528, 72 Cal.Rptr. 785, 787, 446 P.2d 785, 787 the Supreme Court, relying on Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co., 69 Cal.2d 33, 39–40, 69 Cal.Rptr. 561, 442 P.2d 641, states the applicable principle thusly: “The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.' To determine whether offered evidence is relevant to prove such a meaning the court must consider all credible evidence offered to prove the intention of the parties. ‘If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, is ‘fairly susceptible of either one of the two interpretations contended for * * *’ [citations], extrinsic evidence to prove either of such meanings is admissible.' [Citation.]'

In applying the foregoing test, the preliminary consideration of all credible evidence offered to prove the intention of the parties requires that the trial court consider evidence which includes testimony as to the circumstances surrounding the making of the agreement including the object, nature and subject matter of the writing so that the court can place itself in the same situation in which the parties found themselves at the time of contracting. (Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co., supra, at p. 40, 69 Cal.Rptr. 561, 442 P.2d 641.)

Adverting to the extrinsic evidence offered by plaintiffs and preliminarily considered by the trial court in the instant case, we observe the following testimony. Donald Brown, plaintiffs' insurance broker, testified that he discussed with Ralph Jackson, a surplus line underwriter for Appleton & Cox of California, Inc., the local agents for defendants, how the deductible operated in relationship to the defense costs; that when he told Jackson, following the receipt of a policy form and prior to the issuance of the policy, that he could not ‘interpret’ the exact action that would be taken if claims did occur, Jackson advised him that there would be a $2,500 deductible applicable to a claim under the policy and that legal fees would be taken care of under the policy without a deductible. Brown also testified that he later got a different interpretation from Jackson when he asked Jackson to contact the underwriters directly to get an interpretation from them, and that he was advised by the underwriters that the interpretation made by plaintiffs was completely wrong. He testified that this communication was not received until early 1967.

Guy Blase, an attorney for plaintiffs, also testified that prior to the issuance of the policy he too had a conversation with Jackson concerning defense costs. He testified that Jackson told him that if a claim was in excess of the deductible then defense costs would be paid ‘from the ground up,’ that is, that in any case involving a claim in excess of $2,500 defense costs in their entirety would be paid by the insurer, but that if the claim was less than $2,500 defense costs would not be indemnified.

Avery Tindell, vice-president of Appleton & Cox in charge of surplus line operations, testified that on July 24, 1964 he sent a letter to Blase to the effect that they were not liable for the defense of claims not ‘likely to exceed the $2500 deductible.’ Ralph Jackson testified that he advised Blase that as far as the deductible was concerned the defense costs would be included ‘from the ground up’ provided the claim exceeded the deductible, and that by the term ‘from the ground up’ he (Jackson) meant from the first dollar, provided the claim exceeded $2500. Jackson also testified that by the term ‘claim’ he meant the claim made by the assured against the assurer, and not the claim made by a third party against the assured.

In addition to the foregoing extrinsic evidence, several letters and a cablegram were admitted into evidence. A letter dated April 3, 1964, from Jackson to the underwriters' representative in London, indicated an understanding that the deductible would not apply to defense costs and that if the plaintiffs used their own attorney in cases where the claim was under the deductible, the use of such attorney was in order but at the assured's cost. The same letter stated that if the claim was in excess of the deductible and plaintiffs had used their own attorney and his use was approved by the underwriters, the total legal cost would be borne by the underwriters. This letter requested a verification by cable of this understanding. The response to this letter with respect to the matter of defense was by a cablegram, dated April 8, 1964, which, in pertinent part, read: ‘* * * please refer to policy Conditions One and Two.’ Another letter, dated April 8, 1964, from Jackson to Brown, with a copy to Blase, directed attention, with respect to defense, to conditions 1, 2 and 3 of the insuring agreement and noted that these ‘will be found to be self-explanatory.’ Another letter, dated July 22, 1964, from the claims manager of Appleton & Cox, confirmed the understanding had with Jackson on the question of fees. Blase responded to this letter on July 24, 1964, by a letter wherein he stated, ‘I feel it is clear that only in the event that a claim appears to exceed $2,500.00 will the Underwriter assume the cost of attorneys fees and your defense expenses of the insured.’

As already pointed out the trial court did not formally rule upon defendants' motion to strike the offered extrinsic evidence but stated that it did not do so because that evidence did not show an intent of the parties contrary to that expressed in the policy as interpreted by section 2778.⁶ The trial court's statement, notwithstanding the failure to rule formally, is, in essence, an implied ruling against the admissibility of the evidence. In so ruling the trial court indicated that, although the language of the policy was reasonably susceptible to the meaning contended for by plaintiffs, it had decided, after considering this evidence, that the language of the policy, in the light of all the circumstances was not fairly susceptible of the interpretation contended for by plaintiffs and that such evidence did not show an intention different from that expressed by the words of the policy as interpreted by section 2778. In the light of this determination the trial court concluded that the pertinent provisions of the policy were not uncertain or ambiguous, and therefore concluded that these provisions were to be interpreted according to the intention expressed by the words of the policy as interpreted by section 2778. (See Estate of Russell, 69 Cal.2d 200, 211–212, 70 Cal.Rptr. 561, 444 P.2d 353.)

It is appropriate to observe here that neither of the parties contend it was error for the trial court not to admit the extrinsic evidence. Indeed, both of the parties assert that the basic insuring clauses and the subject conditions of the policy should be interpreted according to the provisions of section 2778. Accordingly, plaintiffs' claim of error is based on their contention that the trial court erroneously applied the rules of interpretation specified in section 2778. Our inquiry, therefore, is whether the trial court's interpretation was erroneous. In this regard we note that, since the interpretation does not turn on the credibility of extrinsic evidence, the interpretation is solely a judicial function and is, therefore, a question of law. Under these circumstances we are not bound by the trial court's interpretation. (See Parsons v. Bristol Development Co., 62 Cal.2d 861, 865–866, 44 Cal.Rptr. 767, 402 P.2d 839; Estate of Platt, 21 Cal.2d 343, 352, 131 P.2d 825; Estate of Russell, supra, 69 Cal.2d 200, 213, 70 Cal.Rptr. 561, 444 P.2d 353.) We, therefore, proceed to make an independent examination of the policy concurrently with the applicable provisions of section 2778.

The ‘Claim’

As previously noted, the subject policy ‘indemnifies the Assured against any claim or claims for breach of professional duty * * *.’ Plaintiffs contend that under the terms of the policy they are entitled to recover from defendants all costs and expenses incurred by them during the policy period in contesting claims of third parties where the demand of the third party exceeds $2,500. In this connection they assert that the word ‘claim’ means all third party claims, whether or not actually paid.

In considering plaintiffs' contention we observe, initially, that the subject undertaking constitutes a contract of indemnity as against loss or damage, rather than indemnity against liability. (See San Pedro Properties, Inc. v. Sayre and Toso, Inc., 203 Cal.App.2d 750, 755, 21 Cal.Rptr. 844 where the policy of insurance contained similar language.) As noted in Ramey v. Hopkins, 138 Cal.App. 685, 689, 33 P.2d 443, the distinction between an indemnity against liability and an indemnity against loss is that in the former the essence of the contract is that the event shall not happen while in the latter the indemnity is against the consequences of the event if it should happen. Accordingly, the trial court properly invoked the rule of interpretation provided for in subdivision 2 of section 2778, applying to an indemnity against claims, rather than subdivision 1 of that section applying to an indemnity against liability.

Subdivision 2 of section 2778 provides that ‘Upon an indemnity against claims, or demands * * * or costs * * * the person indemnified is not entitled to recover without payment thereof.’ This rule of interpretation was properly utilized by the trial court in finding that ‘The obligation of UNDERWRITERS under the policy arises only if the liability of plaintiffs is fixed and plaintiffs discharge the liability by payment and only if such payment by plaintiffs exceeds the deductible amount of $2,500.00.’⁷ Although it is true that the word ‘claim’ connotes an assertion of a legal right and includes within its meaning a money demand (see San Pedro Properties, Inc. v. Sayre & Toso, Inc., supra, 203 Cal.App.2d 750, 755, 21 Cal.Rptr. 844; Tanner v. Best, 40 Cal.App.2d 442, 445, 104 P.2d 1084), an indemnitor is not liable for a claim made against the indemnitee until the indemnitee suffers actual loss by being compelled to pay the claim. (San Pedro Properties Inc. v. Sayre & Toso, Inc., supra, at p. 756, 21 Cal.Rptr. 844; Ramey v. Hopkins, supra, 138 Cal.App. 685, 686, 33 P.2d 443; see Sunset-Sternau Food Co. v. Bonzi, 60 Cal.2d 834, 843, 36 Cal.Rptr. 741, 389 P.2d 133.)

Costs of Defense

The trial court properly determined that by applying subdivision 3 of section 2778 defendants were only obligated to reimburse plaintiffs for the costs, expenses and attorney fees in the defense of claims actually paid by plaintiffs in a sum in excess of the deductible amount of $2,500. Subdivision 3 of section 2778 provides that ‘An indemnity against claims, or demands, or liability, * * * embraces the costs of defense against such claims, demands, or liability incurred in good faith, * * *’ (Emphasis added.) As properly analyzed by the trial judge in his ‘Memorandum Decision,’ subdivision 3 must be considered in connection with subdivision 2 with respect to what is meant by indemnification of a ‘claim.’ Accordingly, the costs and expenses referred to in subdivision 3 are those attendant to a claim which results in a loss within the purview of subdivision 2. (See Buchalter v. Levin, supra, 252 Cal.App.2d 367, 372–373, 60 Cal.Rptr. 369.)

The Duty to Defend

The record discloses that plaintiffs gave notice of certain claims and the course of action being taken by plaintiffs with respect to said claims, but that in each instance plaintiffs voluntarily undertook the defense of such claims. The record is devoid of any evidence that plaintiffs at any time requested or demanded that defendants assume the defense of any claim.

As already noted the subject policy does not set out any underlying obligation on the part of defendants to defend against the claims covered by the policy. In condition ‘2’ defendants are given the right to require plaintiffs to undertake the defense of claims where a lawyer mutually agreed upon by plaintiffs and defendants advises that legal proceedings should be contested. Plaintiffs urge that the duty to defend arises from an application of the rule of interpretation provided for in subdivision 4 of section 2778 which provides: ‘The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if he chooses to do so; * * *.’

The trial court interpreted the terms of the policy to mean that defendants were not obligated to defend plaintiffs against the claims or demands of third parties and that plaintiffs may be required by defendants to contest legal proceedings arising out of such demand or claim if a mutually agreed upon lawyer advises that such proceedings should be contested. The trial court also found that plaintiffs at no time requested or demanded that defendants assume or undertake the defense of any demand or claim, or legal proceeding arising out of such claim or demand, but voluntarily undertook the defense of all such demand or claim, or legal proceeding arising out of such claim or demand, but voluntarily undertook the defense of all such demands, claims, and litigation.

It is clear that under the provisions of subdivision 4 of section 2778 the indemnitor is required to defend matters embraced by the indemnity if the indemnitor is requested to do so by the indemnitee. However, it is apparent that with respect to the duty to defend the parties have indicated by the terms of the policy an intent to that expressed in subdivision 4 insofar as defendants' duty to defend is concerned. Accordingly, the policy permits defendants to undertake a defense at their option. This same option is extended to plaintiffs except in the situation where a lawyer mutually agreed upon advises that an action should be defended, in which case plaintiffs are required to defend. The basis for this agreement is apparent because, as we have already indicated, the obligation of defendants to reimburse plaintiffs does not arise until plaintiffs have paid or discharged a claim in an amount in excess of the deductible. As pointed out by the trial court in its ‘Memorandum Decision’ defendants ‘in each instance could stand by and assume the risk that the loss to the assureds might exceed the deductible amount, in which event they would become obligated not only to pay the assureds the excess loss but also all expenses and costs including attorney fees.'⁸

With respect to subdivision 4, we observe, moreover, that the trial court properly concluded that this subdivision would not, in any event, be applicable because there was no showing that defendants failed to assume the defense of claims after a request to defend was made. The record is entirely devoid of any evidence that such a request was made, but discloses that in each instance plaintiffs voluntarily undertook the defense of claims.

Plaintiffs also argue that mention of ‘costs and expenses' in the condition of the policy also indicates that it was the purpose of the policy to impose the duty to defend.⁹ This contention is without merit. As pointed out above, these costs and expenses are embraced and payable under the rule set out in subdivision 3 of section 2778.¹⁰

Reasonable Expectation

In contending that the subject policy must be interpreted to cover all defense costs where the prayer in the action against them is for an amount exceeding the deductible, regardless of the sum ultimately paid, plaintiffs assert that this interpretation was reasonably expected by them and therefore should be recognized by this court. Plaintiffs rely particularly on a statement in Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, to the effect that: ‘Although courts have long followed the basic precept that they would look to the words of the contract to find the meaning which the parties expected from them, they have also applied the doctrine of the adhesion contract to insurance policies, holding that in view of the disarate bargaining status of the parties we must ascertain that meaning of the contract which the insured would reasonably expect.’ (pp. 269–270, 54 Cal.Rptr. p. 107, 419 P.2d p. 171.)

A contract of adhesion is ‘* * * a standardized contract which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’ (Kessler, Contracts of Adhesion (1943) 43 Colum.L.Rev. p. 629; see Schmidt v. Pacific Mut. Life Ins. Co., 268 Cal.App.2d 735, 737, 74 Cal.Rptr. 367.) Contracts of adhesion concerning insurance which are ambiguous are subject to the same rules of construction as are applied to other contracts. (Schmidt v. Pacific Mut. Life Ins. Co., supra.) In addition such contracts are to be interpreted in the light of the reasonable and normal expectation of the parties as to the extent of the coverage. (Atlantic Nat. Ins. Co. v. Armstrong, 65 Cal.2d 100, 112, 52 Cal.Rptr. 569, 416 P.2d 801; Schmidt v. Pacific Mut. Life Ins. Co., supra.)

The Gray case is factually distinguishable from the instant case. There the policy contained a specific provision requiring the insurance carrier to defend the insured against claims for bodily injury, and the issue was whether the insured was covered for a claim for an intentional tort in view of the excluded coverage in the policy for intentional torts. The Supreme Court there noted the rule of Steven v. Fidelity & Casualty Co., 58 Cal.2d 862, 878, 27 Cal.Rptr. 172, 377 P.2d 284, to the effect that where the insurer deals with the public on a mass basis, the notice of noncoverage, in a situation in which the public may reasonably expect coverage, must be conspicuous, plain and clear. (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 271, 54 Cal.Rptr. 104, 419 P.2d 168.) Accordingly, in Gray, the court took note of the ‘disparate bargaining status' (p. 270, 54 Cal.Rptr. 104, 419 P.2d 168) as between an insurance carrier and a layman and held under the circumstances before it that uncertainties in an insurance policy must be resolved in favor of the insured and its provisions interpreted ‘according to the layman's reasonable expectations.’ (pp. 274–275, 54 Cal.Rptr. pp. 110–111, 419 P.2d pp. 174–175.)

In the instant case we do not have the ‘disparate bargaining status' found to exist in Gray. We observe, moreover, that the question of an insured's reasonable expectations turns on the insured's intentions with respect to the coverage sought. (See Gray v. Zurich Insurance Co., supra, 65 Cal.2d at p. 274, fn. 13, 54 Cal.Rptr. 104, 419 P.2d 168; Meyer v. Pacific Employers Ins. Co., 233 Cal.App.2d 321, 327–328, 43 Cal.Rptr. 542.) Here the trial court found that the policy was not ambiguous after preliminarily permitting extrinsic evidence to show the intention of the parties. It determined that such evidence did not disclose the interpretation contended for by plaintiffs and that the intention of the parties was that expressed in the words of the policy. As already discussed the trial court properly determined that defendants were not obligated to pay claims unless they were paid or satisfied by plaintiffs in an amount in excess of $2,500 and that defendants did not have a duty to defend against claims made against plaintiffs. The determination made by the trial court, in the light of the extrinsic evidence offered and its proper interpretation of the words of the policy, are tantamount to a holding that plaintiffs did not reasonably entertain the meaning they now maintain that they expected from the words of the policy.

The DeJaeger Claim

Plaintiffs contend that defendants are obligated to reimburse for the defense and settlement of a suit arising out of work done by a corporation (Hersey Testing & Controls, Inc.) dissolved in 1962. Plaintiffs argue that this liability subsists against defendants because the Gribaldo and Hersey shareholders are the same. The trial court found that the work in question was performed prior to the incorporation of plaintiff Gribaldo, et al., and that certain shareholders of Hersey acted as organizers and officers of plaintiff Gribaldo. The Court further found that the policy does not obligate defendants to indemnify for work performed by parties other than plaintiff.¹¹ We agree with the interpretation of the trial court. The policy as issued in 1964 clearly insures against breach of professional duty on the part of the assured or their employees.

The Palo Alto Unified School District Claim

The trial court found that plaintiff Testing & Controls, Inc. had forgiven certain fees due from the Palo Alto Unified School District in order to avoid a third party claim by the school district. The court also found that the consent of defendants to the forgiveness was never obtained. Plaintiffs do not directly challenge this finding which is, in any event, supported by the record. Since policy condition number 2 specifically precludes settlement without written consent of defendants, we are compelled to conclude that plaintiffs' contention is without merit and that the analysis of the trial court is correct.¹²

Conclusion

In view of our independent examination of the terms of the policy in question we conclude that these terms were properly interpreted by the trial court. Accordingly, the trial court properly applied the applicable principles of interpretation to the various and several claims against plaintiffs which were submitted to the trial court for its determination as to whether defendants were obligated to pay said claims and the costs of defense of said claims.

The judgment is affirmed.

FOOTNOTES

1.  Unless otherwise indicated, all statutory references hereinafter made are to the Civil Code.

2.  Other findings and conclusions of the court are discussed below where particularly pertinent to the contention under consideration.

3.  Section 2778 reads in pertinent part: ‘In the interpretation of a contract of indemnity, the following rules are to be applied, unless a contrary intention appears: 1. Upon an indemnity against liability, expressly, or in other equivalent terms, the person indemnified is entitled to recover upon becoming liable; 2. Upon an indemnity against claims, or demands, or damages, or costs, expressly, or in other equivalent terms, the person indemnified is not entitled to recover without payment thereof; 3. An indemnity against claims, or demands, or liability, expressly, or in other equivalent terms, embraces the costs of defense against such claims, demands, or liability incurred in good faith, and in the exercise of a reasonable discretion; 4. The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if he chooses to do so; * * *.’

4.  With respect to Gray v. Zurich Insurance Co., supra, we note that the construction of the insurance policy was based upon its terms without the aid of extrinsic evidence.

5.  The procedure of admitting evidence conditionally by either reserving its ruling on the objection or by admitting the evidence subject to a motion to strike is proper where the trial court is not in a position to determine, whether in the light of all the offered evidence, the item objected to will turn out to be admissible. (See Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co., 69 Cal.2d 33, 40, fn. 7, 69 Cal.Rptr. 561, 442 P.2d 641; and see Evid.Code, § 403.)

6.  The trial judge, in his memorandum opinion, states as follows: ‘A fair interpretation of the correspondence of the parties relating to the negotiations for the insurance coverage and the testimony given at the trial confirms the understanding of the underwriters as expressed in the policy. It demonstrated that the underwriters did not agree to pay costs of defense unless they authorized and undertook the defense or unless the plaintiffs paid a claim in an amount exceeding $2500.00 previously consented to by them in writing.’

7.  The ‘Memorandum Decision’ which we are entitled to use for the purpose of discovering the process by which the trial judge arrived at his conclusions (Union Sugar Co. v. Hollister Estate Co., 3 Cal.2d 740, 750, 47 P.2d 273; Henderson v. Fisher, 236 Cal.App.2d 468, 472, 46 Cal.Rptr. 173), indicates that the trial court specifically applied this rule. The trial court notes that ‘* * * a policy which indemnifies against any claim is not one which indemnifies against ‘liability’ but, rather, is one which imposes the obligation upon the indemnitor only if the indemnitee has paid a claim for which coverage is provided in the policy. Thus the liability occurs only when an actual loss has been sustained by the indemnitee.'

8.  We point out that even if defendants were required to defend upon request of plaintiffs, this duty would only arise in respect to the matters embraced by the indemnity, that is, those cases where the obligation to reimburse for a claim paid exceeded the deductible.

9.  Condition number 1 to the policy reads: ‘The total liability of the Underwriters hereunder in respect of all claims made against the Assured in any one policy year * * * together with the costs and expenses incurred in the defense of any claim shall not exceed the sum stated in the said Schedule.’

10.  Plaintiffs make a related argument that the ‘duty to defend’ is broader than the ‘duty to indemnify.’ However, the cases relied on (Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168; Lowell v. Maryland Casualty Co., 65 Cal.2d 298, 54 Cal.Rptr. 116, 419 P.2d 180; Fireman's Fund Ins. Co. v. Chasson, 207 Cal.App.2d 801, 24 Cal.Rptr. 726), all involve policies including an express obligation to defend.

11.  The court specifically found: ‘That the claim asserted against the plaintiff, GRIBALDO, JACOBS, JONES & ASSOCIATES, for alleged liability arising out of engineering work performed by Hersey Testing & Controls, Inc., a corporation, is not a claim covered by the subject policy of insurance and UNDERWRITERS have no obligation to said plaintiff by reason of such claim. The policy provides coverage only for plaintiffs and only for claims arising out of alleged negligent acts, errors or omissions committed by plaintiffs or their employees. The claim arising out of work performed by Hersey Testing & Controls, Inc. is not such a claim.’

12.  The trial court found that the forgiveness of a debt as consideration for the settlement of a claim imposes an obligation upon defendants to reimburse plaintiffs for the debt forgiven and the expenses incurred in defense of the claim if the debt forgiven exceeds $2,500, provided the forgiveness was made with the express consent of defendants.

MOLINARI, Presiding Justice.

SIMS and ELKINGTON, JJ., concur.