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Are The Construction Contract Indemnity Laws Going To Change In California?

Are The Construction Contract Indemnity Laws Going To Change In California?
Yes, if California Senate Bill 474 is passed and signed into law.
By
William C. Last, Jr.

Generally, indemnity is the act of making another party whole from liability which was caused by the indemnitor. A party can obligate itself in a contract to perform indemnity, and therein can define the limits and terms of indemnity. Indemnity clauses are almost ubiquitous in construction contracts and are the primary contractual vehicle used by project owners and general contractors to shift risk (e.g. from property damage or delays) associated with the construction project. Typically, project owners first seek to shift the risk to general contractors, who then likewise seek to shift risk to subcontractors.

Aside from the obligation to indemnify itself, most indemnity clauses encompass a duty to defend, as well. The duty to defend obligates that indemnifying party to pay for all legal costs and expenses (including attorney’s fees) required to defend against the liability in question. Given the typically immense costs of litigation, the duty to defend is often more burdensome than the duty to indemnify.

This is particularly vexing to indemnitors when they are being asked to defend a claim for which they are confident they share no responsibility. Yet, owners and general contractors are increasingly including provisions which obligate the indemnitor to defend claims based on mere allegations within the scope of the indemnity clause. Pursuant to these clauses, the duty to defend is triggered once allegations are made, regardless of whether the indemnitor is ultimately found to be at fault for the potential liability. California courts have approved these clauses and held that the indemnitor is obligated to defend claims for which it was ultimately held blameless. As if this were not onerous enough, many provisions now attempt to give the indemnified party nearly unlimited control over that defense. Given that such claims frequently present conflicts which prevent a single law firm from defending all the indemnified parties, the potential liability flowing from such clauses is staggering.

This year California Senate Bill 474 was introduced with the goal of the bill is to have construction businesses, large and small, be responsible for their own actions, so that construction companies will be able to obtain adequate insurance, the quality of construction will be improved, and workplace safety will be enhanced. The bill can be found at the following website: http://www.leginfo.ca.gov/bilinfo.html. To date it has passed the Senate and is being debated in the Assembly.

The Assembly analysis of the bill is as follows: The bill if signed into law:

  1. Prohibits construction contracts requiring indemnity, insurance, or defense obligations by a subcontractor for the active negligence or willful misconduct of a general contractor, his or her agents, or other subcontractors, as specified.
  2. Provides that, unless otherwise prohibited under this bill, the parties to a construction contract can freely contract for other protections and obligations of each party, but allows numerous exemptions, including residential construction contracts, direct contracts with a public agency or owner, and insurance contracts for project wrap up and workers' compensation.
  3. Requires an insurer to uphold their contractual obligations to additional insureds pursuant to Presley Homes, Inc. v. American State Insurance Company (2001) 90 Cal.App.4th 571.
  4. Provides that an insurer maintains reimbursement rights from a general contractor or other subcontractor pursuant to the holding in Buss v. Superior Court (1997) 16 Cal.4th 35.
  5. Provides a defense or settlement option for commercial construction contracts similar to existing law regarding residential construction contracts under which a subcontractor, after receiving claim information from the general contractor, has the option to defend the claim, as specified, or pay its portion of the claim, as specified.
  6. Provides that in the event a contractor fails to maintain its obligations to defend or pay its portion of the claim, the general contractor may make a claim for compensatory and consequential damages and reasonable attorney's fees.
  7. Clarifies that a public agency is prohibited from shifting its liability for its active negligence to a contractor, subcontractor, or materials supplier.
  8. Provides that active negligence on the part of the public agency does not include accepting or utilizing plans or designs provided by a licensed design professional, hiring a design professional, contractor, subcontractor, materials supplier or other independent contractor, and, to the extent the public agency is not managing the public works project, the failure to supervise the work of a design professional, contractor, subcontractor, or other independent contractor.
  9. Establishes that a project owner, not acting as a project manager, general contractor, or materials supplier, is prohibited from shifting liability for its active negligence to a contractor, subcontractor, or materials supplier.
  10. Provides that active negligence on the part of an owner does not include accepting or utilizing design plans, hiring, or failing to supervise the construction project, as specified.

This bill, if signed into law, will significantly limit the owner and upper tier contractor’s ability to unfairly shift the risk to lower tier contractors. As the legislative digest states: “This bill provides, for construction contracts executed on and after January 1, 2013, that are not for residential construction or executed by a public entity, as defined, that any provision in a contract purporting to indemnify, hold harmless, or defend another person against actual or claimed liability, damage, or expense arising from the negligence, willful misconduct, defective design, violation of law, or other fault of that person or that person's agents, employees, independent contractors, subcontractors, or representatives is against public policy and is void and unenforceable.” The bill will do that by outlawing construction contract clauses that require the other party to indemnify them for their active negligence.

This article, ©2011, was written by William C. Last, Jr. Mr. Last testified before the Assembly Judiciary Committee relative to SB 474 and has been active in reviewing and commenting on the proposed bill. Mr. Last is an attorney who has been specializing in Construction Law for over 32 years. In addition to belonging to a number of construction trade associations, Mr. Last holds a California “A” and “B” license. He can be contacted at 415-764-1990 or 650-696-8350. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.

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