BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



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          |SENATE RULES COMMITTEE            |                   SB 972|
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                                 THIRD READING


          Bill No:  SB 972
          Author:   Wolk (D)
          Amended:  5/12/10
          Vote:     21

           
           SENATE JUDICIARY COMMITTEE  :  4-0, 5/4/10
          AYES:  Corbett, Harman, Hancock, Leno
          NO VOTE RECORDED:  Walters


           SUBJECT  :    Indemnity:  design professionals

           SOURCE  :     American Council of Engineering Companies


           DIGEST  :    This bill provides that all provisions, clauses,  
          covenants, and agreements contained in all contracts with a  
          public agency for design professional services that purport  
          to require an immediate defense under an indemnity  
          agreement are unenforceable, except as provided.  This bill  
          only applies to contracts and amendments thereto entered on  
          or after January 1, 2011.

           ANALYSIS  :    Existing law provides that specified rules are  
          to be applied in the interpretation of a contract of  
          indemnity, unless a contrary intention appears.  Pursuant  
          to these rules, 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.  However, the person  
          indemnified has the right to conduct those defenses, if he  
          or she chooses to do so.  (Civ. Code Sec. 2778.)
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          Existing case law interprets the above-described provisions  
          to provide that, unless otherwise provided, a duty to  
          defend arises out of an indemnity obligation as soon as the  
          litigation commences, and regardless of whether the  
          indemnitor (the person indemnifying) is ultimately found  
          negligent.  (  Crawford v. Weather Shield  (2008) 44 Cal.4th  
          541; see also UDC-  Universal Development, L.P. v. CH2M Hill   
          (2010) 181 Cal.App.4th 10.) 

          Existing law provides that, for all contracts entered into  
          after January 1, 2007, for residential construction, all  
          provisions, clauses, covenants, and agreements contained  
          in, collateral to, or affecting any such construction  
          contract, and amendments thereto, that purport to  
          indemnify, including the cost to defend, the builder, as  
          defined, by a subcontractor against liability for claims of  
          construction defects are unenforceable to the extent the  
          claims arise out of, pertain to, or relate to the  
          negligence of the builder or the builder's other agents,  
          other servants, or other independent contractors who are  
          directly responsible to the builder, or for defects in  
          design furnished by those persons, or to the extent the  
          claims do not arise out of, pertain to, or relate to the  
          scope of work in the written agreement between the parties.  
           These provisions may not be waived or modified by  
          contractual agreement, act, or omission of the parties.   
          However, contractual provisions, clauses, covenant, or  
          agreements not expressly prohibited are reserved to the  
          agreement of the parties.  (Civ. Code  Sec. 2782(c).)

          Existing law provides that, for all contracts entered into  
          after January 1, 2009 for residential contracts, a  
          subcontractor has no defense or indemnity obligation to a  
          builder or general contractor for a construction defect  
          claim unless and until the builder or general contractor  
          provides a written tender of the claim, or portion thereof,  
          to the subcontractor which includes all of the information  
          provided to the builder or general contractor by the  
          claimant or claimants relating to claims caused by that  
          subcontractor's scope of work.  The written tender has the  
          same force and effect as a notice of commencement of a  
          legal proceeding.  (Civ. Code Sec. 2782(d).)








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          Existing law provides that if a builder or contractor  
          tenders a claim, or a portion thereof, to a subcontractor,  
          the subcontractor is entitled to either defend the claim  
          with counsel of its choice or pay, within 30 days of  
          receipt of an invoice from the builder or general  
          contractor, no more than a reasonable allocated share of  
          the builder's or general contractor's defense fees and  
          costs.  Existing law further provides that a builder,  
          general contractor, or subcontractor has the right to seek  
          equitable indemnity for construction defect claims pursuant  
          to these provisions.  (Civ. Code Sec. 2782(d) & (f).)

          Existing law provides, for all contracts, and amendments to  
          contracts, entered into on or after January 1, 2007, with a  
          public agency for design professional services, all  
          provisions, clauses, covenants, and agreements contained  
          in, collateral to, or affecting these contracts, that  
          purport to indemnify, including the cost to defend, the  
          public agency by a design professional against liability  
          for claims against the public agency, are unenforceable,  
          except for claims that arise out of, pertain to, or relate  
          to the negligence, recklessness, or willful misconduct of  
          the design professional.  (Civ. Code Sec. 2782.8.)

          This bill provides that all provisions, clauses, covenants,  
          and agreements contained in, collateral to, or affecting  
          contracts with a public agency for design professional  
          services that purport to require an immediate defense under  
          an indemnity agreement are unenforceable, except as  
          provided below.  This bill would apply to contracts, and  
          amendments to contracts, entered into on or after January  
          1, 2011.

          This bill provides that a design professional is not  
          required to defend or indemnify the indemnified party  
          unless and until the indemnified party provides a written  
          tender of the claim to the design professional, at which  
          point the design professional may choose to either defend  
          the claim with counsel of its choosing or pay a reasonable  
          allocated share of the indemnified party's defense fees and  
          costs.  

          This bill provides for the allocation of damages and  
          attorney's fees if the design professional fails to fulfill  







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          his or her duties under the bill's provisions.

          This bill provides that nothing in its provisions would  
          prohibit the parties from mutually agreeing to reasonable  
          contractual provisions for damages if any party fails to  
          elect for or perform its obligations under this bill.

          This bill provides that a public agency or design  
          professional shall have the right to seek equitable  
          indemnity for any claim governed by this bill.  This bill  
          would further provide that nothing in this section limits,  
          restricts, or prohibits the right of the indemnified party  
          or the design professional to seek equitable  
          indemnification against any entity other than the  
          indemnified party or design professional.  

          This bill defines design professional as including all of  
          the following:  (1) an individual licensed as an architect,  
          and a business entity offering licensed architectural  
          services; (2) a licensed landscape architect, and a  
          business entity offering licensed landscape architectural  
          services; (3) an individual registered as a professional  
          engineer and, a business entity offering professional  
          engineering services; and (4) an individual licensed as a  
          professional land surveyor, and a business entity offering  
          professional land surveying services.  

          This bill defines "design professional services" as  
          including all contractual services offered or performed by  
          a design professional.  

          This bill defines "public agency" as including any county,  
          city, city and county, district, school district, public  
          authority, municipal corporation, or other political  
          subdivision, joint powers authority, or public corporation  
          in the state.  This definition would not include the State  
          of California.

           Background
           
          During the last five years, the Legislature has enacted  
          several measures intended to address the use of certain  
          types of risk shifting in indemnity agreements,  
          particularly those that appear in contracts for residential  







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          construction.

          In 2005, AB 758 (Calderon, Chapter 394, Statutes of 2005)  
          was enacted to address alleged abuses of "Type I"  
          indemnification clauses in contracts imposed on  
          subcontractors by builders.  These clauses typically  
          required the subcontractor to assume liability for the  
          builder's negligence and misconduct, beyond what the  
          subcontractor would be obligated to pay under tort law in  
          the absence of the Type I agreement.  Under AB 758, all  
          provisions contained in residential construction contracts  
          entered into after January 1, 2006 that purport to  
          indemnify the builder by a subcontractor against liability  
          for claims of construction defects are unenforceable to the  
          extent the claims pertain to, or relate to the negligence  
          of the builder or his or her agents.  These provisions of  
          existing law may not be waived or modified by contractual  
          agreement, act, or omission of the parties.  AB 758 was the  
          product of lengthy negotiations and discussions between  
          stakeholders.

          The following year, the Legislature built upon AB 758 by  
          enacting AB 573 (Wolk, Chapter 455, Statutes of 2006) in  
          response to concerns that local public agencies were  
          requiring broad indemnity agreements in contracts with  
          design professionals.  Those agreements were generally  
          requiring the design professional to hold the public agency  
          harmless against the conduct of the public agency or other  
          third parties in a public works project.  AB 573 provided  
          that, for contracts entered into on or after January 1,  
          2007, with a public agency for design professional  
          services, all provisions that purport to indemnify the  
          public agency against liability for claims against the  
          public agency, are unenforceable, except for claims that  
          arise out of, pertain to, or relate to the negligence,  
          recklessness, or willful misconduct of the design  
          professional.

          Subsequently, AB 2738 (Jones, Chapter 467, Statutes of  
          2008) was enacted as a follow up to AB 758 due to concerns  
          that builders had been circumventing the clear intent of AB  
          758 by requiring subcontractors to pay for the builder's  
          defense costs that had no relation to the contractor's  
          work.  AB 2738, among other things, provided that a  







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          subcontractor would have no defense or indemnity obligation  
          to a builder or general contractor for a construction  
          defect claim unless, and until, the builder or general  
          contractor provides a written tender of the claim to the  
          subcontractor which includes all of the information  
          provided to the builder or general contractor by the  
          claimant or claimants relating to claims caused by that  
          subcontractor's scope of work.  

          This bill seeks to address issues left unresolved by prior  
          legislation with respect to a design professional's  
          exposure to liability for defense costs in indemnity  
          agreements contained in contracts with public agencies. 

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  No    
          Local:  No

           SUPPORT  :   (Verified  5/12/10)

          American Council of Engineering Companies (source) 
          American Institute of Architects, California Council
          American Subcontractors Association California
          California Council of the American Society of Landscape  
          Architects
          California Geotechnical Engineers Association
          Green Valley Consulting Engineers
          Provost & Richard Engineering Group
          Structural Engineers Association of California

           OPPOSITION  :    (Verified  5/12/10)

          Associated General Contractors of California
          California Association of Joint Powers Authorities
          California Special Districts Association
          California State Association of Counties
          Coalition for Adequate School Housing
          CSAC Excess Insurance Authority
          League of California Cities
          Los Angeles Unified School District
          Regional Council of Rural Counties
          Riverside County Schools Advocacy Association

           ARGUMENTS IN SUPPORT  :    According to the author's office: 








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               This bill is in response to the 2008 California  
               Supreme Court decision in Crawford v. Weather Shield  .   
               In that decision the Court held that Civil Code  
               Section 2778 allows indemnity contracts that require  
               defense of [lawsuits] against others even if the  
               person providing the indemnity and defense has no  
               liability.

               Under current law an indemnitor has a duty to defend a  
               lawsuit covered by an indemnification contract prior  
               to any fault determination.  This exposes the  
               indemnitor to expense before they have been found at  
               fault, possibly exposing them to excessive defense  
               costs.  An individual should only be responsible for  
               their own negligent conduct and not of other third  
               parties.  Furthermore, if an individual is found to be  
               at fault, they should only be held liable for the  
               extent of the harm caused by the negligent conduct and  
               should only have to defend allegations involving their  
               own misconduct.

               Supporters of the bill also generally assert that  
                Crawford  has particularly grave implications for  
               design professionals because professional liability  
               insurance, in contrast to general liability insurance  
               typically used by owners, contractors and  
               subcontractors, does not cover contractually assumed  
               liability.  Instead, professional liability insurance  
               will cover a design professional's common law  
               liability, i.e., negligent acts, errors, or omissions.

           ARGUMENTS IN OPPOSITION  :    In opposition, the California  
          Special Districts Association writes:

               This bill would impose a "one size fits all" solution  
               to contractual negotiations by specifying that the  
               only defense obligation a public agency can agree to  
               with a design professional is one in which the public  
               agency does not get an upfront defense from the design  
               professional, but has to rely on reimbursement of its  
               own defense costs incurred, and then only if the  
               design professional is found negligent?  Parties to a  
               contract should be afforded the freedom to allocate  
               responsibilities as they see fit.  This is critical to  







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               special districts.  In order to best protect  
               taxpayers, a district may wish to negotiate a contract  
               which provides that the design professional defend the  
               district in any claim by a third party alleging a  
               design defect, whether the design professional is  
               liable for a defective design or not, on the theory  
               that the district is not involved in the design  
               process, has delegated those duties to a professional,  
               and should not have to expend taxpayer funds defending  
               the district in a lawsuit ? Many special districts  
               operate on small budgets with limited staff.  These  
               districts purposefully contract for certain projects  
               that they do not have the expertise to construct.  In  
               such situations, it seems most appropriate that the  
               district may wish to seek protection for legal defense  
               associated with the project.

          Also in opposition, the League of California Cities writes:

               SB 972 would benefit [architecture and engineering  
               (A/E)] consulting firms and their insurance carriers  
               at the expense of the public in two ways.  First, the  
               net effect would be to shift to taxpayers legal  
               defense costs that should be borne to varying degrees  
               by A/E consulting firms and their insurance carriers.   
               Second, it would encourage protracted litigation  
               because, as a practical matter, a formal finding of  
               negligence or intentional misconduct will be a  
               prerequsite for the public agency to receive indemnity  
               from the A/E consulting firm or its insurance carrier.

               The negotiation of terms between public agencies and  
               A/E consulting firms should be left to the free-play  
               of market forces.  SB 972 would preclude negotiation  
               of broader protection, even where the public agency is  
               willing to pay extra for such protection.

          California's Coalition for Adequate School Housing adds:

               SB 972 seeks to inappropriately erase a separate "duty  
               to defend" from the "indemnification of defense  
               costs."  It does so by making the duty to defend also  
               contingent upon the finding of a design professional's  
               liability.  If SB 972 is made law, it will shift the  







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               responsibility of defending claims related to a design  
               professional's work from design professionals to the  
               public agencies that contract with them.  


          RJG:nl  5/12/10   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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