BILL ANALYSIS SB 972 Page 1 Date of Hearing: June 29, 2010 ASSEMBLY COMMITTEE ON JUDICIARY Mike Feuer, Chair SB 972 (Wolk) - As Amended: June 23, 2010 As Proposed to be Amended SENATE VOTE : 30-3 SUBJECT : INDEMNITY: DESIGN PROFESSIONALS KEY ISSUE : SHOULD THIS "PLACEHOLDER" BILL BE ADVANCED WHILE THE AUTHOR CONTINUES HER WORTHY EFFORTS TO ADDRESS CONCERNS THAT EXISTING PUBLIC WORKS INDEMNITY OBLIGATIONS ARE IMPOSSIBLE OR COSTLY FOR DESIGN PROFESSIONALS TO INSURE? FISCAL EFFECT : As currently in print this bill is keyed non-fiscal. SYNOPSIS This bill is sponsored by the American Council of Engineering, growing out of strong concerns that existing contractual indemnity obligations routinely included in public works contracts are impossible or costly to insure because of the nature of the commercial insurance products available to them. Previous versions of the bill have generated wide opposition throughout the construction industry in light of the difficulty of legislating in this complicated area where a change in the rules for one group may cause cascading pressures and concerns among other participants. As proposed to be amended, the author has greatly reduced if not completely alleviated the basis for the opposition. Although there may not be consensus among all observers, it is believed that the proposed amendments paraphrase rather than substantively change existing law. As the bill moves forward, it will be incumbent on the parties to continue their discussions in an effort to reach an agreement. If the bill is subsequently amended, the author has pledged to return to Committee to present that proposal. SUMMARY : Revises the design professional indemnity statute. Specifically, this bill makes a technical change to refer to the duty to defend as an element of contractual indemnity. SB 972 Page 2 EXISTING LAW : 1)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.) 2)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.) 3)Interprets, under existing case law, 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.) COMMENTS : Supporters of this bill contend that it is necessary to change the law regarding the contractual indemnification obligations of design professionals because they are unable to obtain commercial insurance to cover the duty to defend that attends that obligation, both for public entities as well as residential or commercial construction. Solving that problem by changing the duty to defend, however, rather than the availability of insurance, leaves other contracting parties involved in a construction dispute to bear the increased risks and costs. As proposed to be amended, the bill would simply reference the SB 972 Page 3 duty to defend, along with the cost to defend, as emblems of the existing obligation arising out of contractual indemnity for design professionals. Existing law notes that the duty to indemnify includes the cost to defend. This bill adds a reference to the duty to defend - an obligation that is logically predicate to any cost to defend in that there would be no costs of defense if there were no duty to defend. This revision is intended to be non-substantive, allowing the bill to meet legislative deadlines while the parties continue discussions in an effort to reach consensus. This amendment greatly reduces, if not completely alleviates, the basis for the opposition. If the bill is subsequently amended, the author has pledged to return to Committee to review that proposal. Author's Proposed Amendment. As the basis for moving the bill forward while negotiations continue, the author appropriately proposes to substitute the following amendment for the current contents of the bill. 2782.8. (a) For all contracts, and amendments thereto, 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 any such contract, and amendments thereto, that purport to indemnify, including the duty and 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. This section shall not be waived or modified by contractual agreement, act, or omission of the parties. Contractual provisions, clauses, covenants, or agreements not expressly prohibited herein are reserved to the agreement of the parties. REGISTERED SUPPORT / OPPOSITION : SB 972 Page 4 Support (as proposed to be amended) None on file Opposition (as proposed to be amended) None on file Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334