BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



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          |SENATE RULES COMMITTEE            |                   SB 972|
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                              UNFINISHED BUSINESS


          Bill No:  SB 972
          Author:   Wolk (D)
          Amended:  8/24/10
          Vote:     21

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

           SENATE FLOOR  :  30-3, 6/1/10
          AYES: Aanestad, Alquist, Ashburn, Cogdill, Corbett, Correa,  
            Cox, DeSaulnier, Dutton, Florez, Hancock, Harman,  
            Hollingsworth, Huff, Kehoe, Leno, Liu, Lowenthal, Negrete  
            McLeod, Padilla, Pavley, Price, Runner, Simitian,  
            Steinberg, Strickland, Wolk, Wright, Wyland, Yee
          NOES: Calderon, Denham, Ducheny
          NO VOTE RECORDED: Cedillo, Oropeza, Romero, Walters,  
            Wiggins, Vacancy, Vacancy

           SENATE FLOOR  :  37-0, 8/30/10 (Concurrence)
          AYES: Aanestad, Alquist, Ashburn, Blakeslee, Calderon,  
            Cedillo, Cogdill, Corbett, Correa, Denham, DeSaulnier,  
            Ducheny, Dutton, Emmerson, Florez, Hancock, Harman,  
            Hollingsworth, Huff, Kehoe, Leno, Liu, Lowenthal, Negrete  
            McLeod, Padilla, Pavley, Price, Romero, Runner, Simitian,  
            Steinberg, Strickland, Walters, Wolk, Wright, Wyland, Yee
          NO VOTE RECORDED: Oropeza, Wiggins, Vacancy

           ASSEMBLY FLOOR  : 77-0, 08/30/10 - See last page for vote


           SUBJECT  :    Indemnity:  design professionals
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           SOURCE  :     American Council of Engineering Companies


           DIGEST  :    This bill revises the existing indemnity statute  
          regarding public works contracts with design professionals  
          to clarify that the duty to indemnify, including the duty  
          and the cost to defend, is regulated by the statute.  The  
          bill further requires that all contracts and all  
          solicitation documents, including requests for proposal,  
          invitations for bid, and other solicitation documents  
          between a public agency and a design professional are  
          deemed to incorporate the foregoing statute by reference.   
          The bill expressly applies only prospectively to services  
          offered pursuant to a design professional contract or  
          amendment entered into on or after January 1, 2011, and  
          does not abrogate the provisions of section 1104 of the  
          Public Contract Code. 

           Assembly Amendments  (1) declare that there are separate  
          duties to indemnify and to defend, and that both are within  
          the existing statutory regulation of contractual indemnity  
          provisions between specified design professionals and  
          public entitles with respect to public works of  
          improvement, (2) require that all contracts and all  
          solicitation documents, including requests for proposal,  
          invitations for bid, and other solicitation documents  
          between a public agency and a design professional are  
          deemed to incorporate the foregoing statue by reference,  
          (3) provide that the bill applies only prospectively to  
          services offered pursuant to a design professional contract  
          or amendment entered into on or after January 1, 2011, (4)  
          declare that the foregoing statutes does not abrogate the  
          provisions of Section 1104 of the Public Contract Code.   
          These amendments remove all opposition.

           ANALYSIS  :    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  

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            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. 

          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. 

          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.) 

          This bill:

          1.Declares that the duty to indemnify, including the duty  
            and the cost to defend is within the existing statutory  
            regulation of contractual indemnity provisions between  
            specified design professionals and public entities with  
            respect to public works of improvement. 

          2.Requires that all contracts and all solicitation  
            documents, including requests for proposal, invitations  
            for bid, and other solicitation documents between a  
            public agency and a design professional are deemed to  
            incorporate the foregoing statute by reference. 

          3.Provides that the bill applies only prospectively to  
            services offered pursuant to a design professional  
            contract or amendment entered into on or after January 1,  
            2011. 

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          4.Declares that the foregoing statute does not abrogate the  
            provisions of section 1104 of the Public Contract Code. 

           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  
          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  

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          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  
          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  8/27/10)

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

           ARGUMENTS IN SUPPORT  :    According to the author's office,  
          this bill is in response to the 2008 California Supreme  
          Court decision in  Crawford v. Weather Shield  in which 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.  Supporters of the bill also generally assert  

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          that, although  Crawford  construed a contract that was not  
          covered by AB 573 (Wolk and Jones) of 2006, the decision  
          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. 


           ASSEMBLY FLOOR  : 
          AYES: Adams, Ammiano, Anderson, Arambula, Bass, Beall, Bill  
            Berryhill, Tom Berryhill, Block, Blumenfield, Bradford,  
            Brownley, Buchanan, Caballero, Charles Calderon, Carter,  
            Chesbro, Conway, Cook, Coto, Davis, De La Torre, De Leon,  
            DeVore, Eng, Evans, Feuer, Fletcher, Fong, Fuentes,  
            Fuller, Furutani, Gaines, Galgiani, Garrick, Gatto,  
            Gilmore, Hagman, Hall, Harkey, Hayashi, Hernandez, Hill,  
            Huber, Huffman, Jeffries, Jones, Knight, Lieu, Logue,  
            Bonnie Lowenthal, Ma, Mendoza, Miller, Monning, Nava,  
            Nestande, Niello, Nielsen, Norby, V. Manuel Perez,  
            Portantino, Ruskin, Saldana, Silva, Skinner, Smyth,  
            Solorio, Audra Strickland, Swanson, Torlakson, Torres,  
            Torrico, Tran, Villines, Yamada, John A. Perez
          NO VOTE RECORDED: Salas, Vacancy, Vacancy


          RJG:nl  8/31/10   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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