[440]*440Opinion
BURKE, J.
In this case, involving the interpretation of an errors and omissions indemnity insurance policy, a hearing was granted by this court after decision by the Court of Appeal, First Appellate District, for the purpose of giving further study to the problems presented. After such study we have concluded that the opinion of the Court of Appeal, prepared by Presiding Justice Molinari, correctly treats and disposes of the issues involved, and with certain further comments pertinent to contentions urged, it is adopted as and for the opinion of this court. Such opinion (with appropriate deletions and additions as indicated) is as follows:1
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 qualified brokers, issued to plaintiffs an 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: [“1. 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 ex[441]*441penses incurred in the defense of any claim shall not exceed the sum stated in the Schedule.] 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 legal 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 [ ] [to indemnify plaintiffs and reimburse defense costs is limited to situations where the actual claim paid by plaintiffs totals] 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 Fací 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 2778,2 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.3 [ ] Judgment was entered accordingly.
[442]*442
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. Kuhn-Murphy, Inc., 253 Cal.App.2d 278, 281 [61 Cal.Rptr. 575]; Buchalter v. Levin, 252 Cal.App.2d 367, 375 [60 Cal.Rptr. 369].) In indemnity contracts, moreover, the provisions of section 27784 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.) We take cognizance of this rule but also observe that it must be applied in conjunction with the rules applicable to the interpretation of contracts.5
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 [443]*443evidence was admitted subject to defendants’ motion to strike, which was timely interposed.6 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, 446 P. 2d 785], the Supreme Court, relying on Pacific Gas & Elec. Co. v. G. W. Thomas Drayage etc. Co., supra, 69 Cal.2d 33, 39-40 [69 Cal.Rptr. 561, 442 P.2d 641], states the applicable principle thusly: 66 ‘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 & Elec. Co. v. G. W. Thomas Drayage etc. Co., supra, at p. 40.)
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 brokerage firm which procured the policy from defendants] how the deductible operated in relationship to the [444]*444defense 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 [after the policy had been issued].
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 [ ] [defendants were not liable for the defense of claims not “likely to exceed the $2,500 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 $2,500. 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, [445]*445dated 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.” [The foregoing correspondence was exchanged prior to the issuance of the policy. Subsequently,] 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 2778.7 [ ] 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 Dev. Co., 62 Cal.2d 861, 865-866 [44 Cal.Rptr. 767, 401 P.2d 839]; Estate of Platt, 21 Cal.2d [446]*446343, 352 [131 P.2d 825]; Estate of Russell, supra, 69 Cal.2d 200, 213.) 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 & 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.”8
[447]*447Although 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; 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; Ramey v. Hopkins, supra, 138 Cal.App. 685, 686; 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, . . .” (Italics 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.)
[It has been suggested that if plaintiffs may only recoup defense costs with respect to paid claims which exceed $2,500, they will have no incentive to defeat such claims, at least where their defense costs exceed the deductible amount. In other words, it would be to plaintiffs’ advantage to lose and pay a claim in excess of $2,500, and to recover defense costs from defendants, rather than to defeat such a claim and thereby forfeit the right to reimbursement of those costs. However, “There is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. [Citation.] This principle is applicable to policies of insurance. [Citation.]” (Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 658 [328 P.2d 198].) Moreover, defendants have the right to take over and conduct the defense of any claim (Condition “2”), and are willing to “assume the risk” that plaintiffs will deliberately, or through apathy, fail to conduct an adequate defense.]
[448]*448
The Duty to Defend
[ ] As already noted the subject policy does not set out any underlying obligation on the part of defendant to defend against the claims covered by the policy. In condition “2” defendants are given the right [ ] [to take over and conduct the defense of any claim, and plaintiffs are not required to contest any claim unless an attorney, selected by mutual agreement, so advises.] 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. [ ]
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 contrary 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 [ ] [and requires plaintiffs to defend claims where so advised by counsel. These provisions make it apparent that defendants had no affirmative duty to defend plaintiffs, regardless of the size of any particular claim asserted against them. Accordingly, plaintiffs could have had no reasonable expectation that defendants had a duty to defend them. (See Gray v. Zurich Insurance Co., supra, 65 Cal.2d 263, 269.)] 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.”
[ ] [Even if we assume, arguendo, that the policy failed to exclude the duty to defend arising under subdivision 4 of section 2778, the record [449]*449shows that plaintiffs voluntarily incurred defense costs without first obtaining defendants’ consent thereto (as required by Condition “2” of the policy), and without first requesting defendants to furnish a defense (as required by section 2778, subdivision 4). The provisions of Condition “2,” requiring defendants’ prior consent to the expenditure of defense costs and permitting defendants to assume the defense of any claim are common in liability insurance policies. Their purpose “is to prevent collusion as well as to invest the insurer with the complete control and direction of the defense or compromise of suits or claims. . . (44 Am.Jur.2d, Insurance, § 1524, p. 398; see 7a Appleman, Insurance Law and Practice, § 4681, pp. 422-423.)
[Similarly, the rationale underlying the statutory requirement of a prior request or demand to defend is evident: “An insurer’s unwarranted refusal to defend a suit against the insured has been held to relieve the latter from his contract obligation to leave the management of such suits to the insurer, and to justify him in defending the action on his own account. [Fn. omitted.] And where the insured is thus compelled to conduct his own defense, it is uniformly held that he may recover the expenses of litigation, including costs and attorneys’ fees, from the insurer. ...” (Italics added; 7a Apple-man, supra, § 4691, pp. 498-499; see Arenson v. National Auto. & Cas. Ins. Co., 48 Cal.2d 528, 537 [310 P.2d 961].)
[In other words, it is only when the insured has requested and been denied a defense by the insurer that the insured may ignore the policy’s provisions forbidding the incurring of defense costs without the insurer’s prior consent, and under the compulsion of that refusal undertake his own defense at the insurer’s expense. Thus, the sole question at issue is whether Underwriters refused a request to defend plaintiffs or consented to plaintiffs incurring defense costs at Underwriters’ expense.
[The trial court expressly found that the plaintiffs made no request or demand that defendants undertake the defense of any claim, but that plaintiffs voluntarily undertook to defend all claims themselves. Nor is there any basis in the record for holding that defendants elected to employ plaintiffs’ attorney to discharge their duty to defend. The fact is that defendants simply chose not to exercise their contractual right, under Condition “2,” to control the defense themselves. There is no evidence whatsoever to support the theory that in doing so defendants also intended to discharge their statutory duty to defend plaintiffs. Simply put, defendants permitted plaintiffs to continue to use their own attorney, but at plaintiffs’ own expense. In the absence of any demand by plaintiffs for a defense, defendants were clearly entitled to do so.
[450]*450[Nor can it be said that defendants misled plaintiffs by failing to clarify the issue regarding defendants’ obligation to reimburse plaintiffs for their own defense costs. When the question was raised, prior to the issuance of the policy, defendants’ London broker referred plaintiffs’ broker, Jackson, to Condition “2” of the policy which, as we have seen, unambiguously forbade plaintiffs from incurring any defense costs without defendants’ prior consent. This reply was sufficient to disabuse plaintiffs of any notion that defendants would assume responsibility for the payment of plaintiffs’ defense costs. Nevertheless, plaintiffs voluntarily incurred these costs without first demanding a defense from defendants.
[Had plaintiffs made the statutory demand, defendants would have been required to choose between accepting the defense at their expense, consenting to the expenditure of defense costs by plaintiffs’ attorney, or refusing to defend (in which case plaintiffs could have assumed the defense at defendants’ expense). Having failed to make such a demand and thereby put defendants to a choice, plaintiffs should not be entitled to recover defense costs voluntarily incurred by them.
Other Claims
[Plaintiffs asked the trial court to determine if defendants were required to reimburse them for two claims of third parties made against plaintiffs. One of these involves the alleged negligence of a company known as Hersey Testing & Control, Inc. This company performed work for William DeJaeger and his wife in 1960. The company was dissolved in 1962 and its assets were distributed to its shareholders, who used the assets to form plaintiff Gribaldo, Jacobs, Jones and Associates. The shareholders of the two companies were identical. After plaintiff Gribaldo purchased the policy involved here the DeJaegers brought suit against Hersey and Gribaldo, alleging that the work had been negligently performed. Gribaldo was apparently joined in the action on the theory that it was Hersey’s successor in interest and its alter ego. Gribaldo moved to dismiss on the ground that it was not in existence when the alleged negligence occurred, but the trial court denied the motion. Gribaldo thereupon participated in the settlement and it sought from the trial court in the present case a declaration that defendants were liable under the policy to reimburse it for the amount it was compelled to pay to the DeJaegers.
[The policy indemnifies plaintiffs against any claim for breach of professional duties which may be brought against “them ... or any person who has been, is now, or may hereafter during the subsistence of the Insurance be [451]*451employed” by them or “any Architect or Engineer . . . retained or employed” by them. The trial court found that the claim made against Gribaldo for the negligence of Hersey is not covered by the policy since, by its terms, it applies only to culpable conduct committed by Gribaldo and its employees.
[Gribaldo argues that defendants are liable because the trial court’s ruling in the De Jaeger action establishes that Hersey and Gribaldo are identical. We do not know the basis upon which the trial court in the De Jaeger action denied the motion to dismiss Gribaldo. Although it has been held that a person need not be described by name in order to be an insured under the policy, his identity as an insured must be ascertainable by applying the description contained in the policy. (4 Appleman, Insurance Law and Practice, § 2341, p. 328.) Here the description of the insured does not cover a predecessor to Gribaldo. Thus plaintiffs cannot prevail as to this item.
[Another claim which plaintiffs contend defendants must pay involves the Palo Alto Unified School District.9 Plaintiff Testing & Controls, Inc. performed certain work for the district but determined to forego its fee in order to avoid a potential claim by the district against Testing & Controls. The trial court found that Testing & Controls had failed to obtain defendants’ consent for the forgiveness of the debt and that if consent had been obtained defendants would have been liable under the policy for these fees. Admittedly, Testing & Controls did not request defendants’ consent to forego payment. However, it is asserted that defendants in effect gave their consent because they were kept informed of the situation involving the district and knew of Testing & Controls’ decision to forego payment. The trial court’s finding that it failed to obtain defendants’ consent to the settlement, as required by the policy, is supported by the evidence. Thus plaintiffs’ claim on this item was also properly denied.]
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 defend[452]*452ants were obligated to pay said claims and the costs of defense of said claims.
The judgment is affirmed.
Wright, C. J., McComb, J., and Sullivan, J., concurred.