The defendants in this case owned the Spanish Hill Hotel in Palm Springs.  In order to renovate and rehabilitate the property, defendants obtained a $6 million construction loan secured by a deed of trust against the property. The lender on the construction loan required that defendants procure a lender's title insurance policy to protect against loss resulting from mechanics' liens. First American Title Insurance Company issued the policy. Before it would do so, however, First American required that defendants agree to indemnify it if any mechanics' liens were recorded against the property due to the contractor's or the owners' failure to pay for work furnished to the project. Accordingly, defendants and First American entered into a written indemnity agreement.

Defendants were unable to satisfy the repayment terms of the loan and the loan was declared to be in default by the lender. Two contractors also recorded mechanics' liens against the property totaling $885,000 followed by lawsuits to foreclose on their liens. The lender tendered those claims to First American, which accepted the tender. First American then retained counsel to defend against the foreclosure actions and to seek indemnity from defendants under the indemnity agreement. First American's counsel made a written demand under the indemnity agreement that defendants defend the lender against the mechanics' lien foreclosure actions, obtain releases of the mechanics' liens, and indemnify First American for all costs and fees incurred in connection with the liens. Defendants declined.

First American then sued defendants for express indemnity, breach of contract, and specific performance, seeking damages of $250,876.53, which consisted of $207,119.58 in costs and attorney fees incurred in defending against the mechanics' lien foreclosure actions and in seeking indemnity from defendants.  Defendants opposed the motion by arguing that the mechanics' liens fell within an exclusion from coverage in the title policy for "liens . . . created, suffered, assumed or agreed to by the insured claimant" (Exclusion 3(a)). Defendants asserted that Nara Bank, as the predecessor-in-interest to the insured claimant (Pacifica),the lender "created" the mechanic's lien "by failing to provide the full loan amount it contracted to provide." This caused defendants to default on the loan, which, in turn, caused the contractor to record his mechanic's lien.

The trial court granted First American's motion. The court ruled that defendants had not presented admissible evidence sufficient to create a triable issue of fact regarding whether the mechanic's lien fell within Exclusion 3(a).  The trial court also found that defendants had not raised a triable issue of fact regarding damages.  Defendants timely appealed.

As the appellate court explained, "in a contractual indemnity action in which the indemnitee settles the underlying liability without trial, 'the indemnitee must prove that liability is covered by the contract, that liability existed, and the extent thereof.' ( Peter Culley & Assocs. v. Superior Court (1992) 10 Cal.App.4th 1484, 1497, 1498 (Culley).)"  So for the appellate court, the determination of whether liability existed solely depended upon whether the lien claims tendered to First American were covered by the title policy, not whether there was an exclusion pursuant to Exclusion 3.  Since defendants were not disputing that liability was covered under the indemnity agreement, the appellate court affirmed the trial court's ruling in favor of First American.