BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 474| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 474 Author: Evans (D) Amended: 5/2/11 Vote: 21 SENATE JUDICIARY COMMITTEE : 3-2, 5/12/11 AYES: Evans, Corbett, Leno NOES: Harman, Blakeslee SUBJECT : Commercial construction contracts: indemnity SOURCE : California Association of Sheet Metal and Air Conditioning Contractors National Association California Legislative Conference of the Plumbing, Heating and Piping Industry Concrete Contractors Association Crane Owners Association California Chapters of the National Electrical Contractors Association DIGEST : This bill makes void and unenforceable commercial construction agreements that require a promisor to indemnify, release, hold harmless, insure, or defend a promisee against the actual or claimed liability, damage, or expense arising, in whole or in part, from the negligence, willful misconduct, defective design, violation of law, or other fault of the promisee or the promisee's agents, employees, independent contractors, subcontractors, or representatives, except as specified. This bill also CONTINUED SB 474 Page 2 makes void and unenforceable contract provisions requiring the purchase of additional insured coverage, or any coverage endorsement or provision within an insurance policy providing additional insurance coverage to the extent it requires coverage that is prohibited under this bill. ANALYSIS : Existing law defines "indemnity" as a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person. (Civil Code Section 2772) Existing law provides that an agreement to indemnify against the acts of a certain person, applies not only to his acts and their consequences, but also to those of his agents. (Civil Code Section 2775) Existing law provides that, among other things, in the interpretation of a contract of indemnity and unless a contrary intention appears: Upon an indemnity against liability, expressly, or in other equivalent terms, the person indemnified is entitled to recover upon becoming liable; An indemnity against claims, or demands, or liability, expressly, or in other equivalent terms, embraces the costs of defense against such claims, demands, or liability incurred in good faith, and in the exercise of a reasonable discretion; and 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. (Civil Code Section 2778) 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 CONTINUED SB 474 Page 3 541) Existing law provides that where one, at the request of another, engages to answer in damages, whether liquidated or unliquidated, for any violation of duty on the part of the latter, he is entitled to be reimbursed in the same manner as a surety, for whatever he may pay. (Civil Code Section 2779) Existing law provides, except as specified, that provisions, clauses, covenants, or agreements contained in, collateral to, or affecting any construction contract and that purport to indemnify the promisee against liability for damages for death or bodily injury to persons, injury to property, or any other loss, damage or expense arising from the sole negligence or willful misconduct of the promisee or the promisee's agents, servants, or independent contractors who are directly responsible to the promisee, or for defects in design furnished by those persons, are against public policy and are void and unenforceable. Existing law provides that this section does not affect the validity of any insurance contract, workers' compensation, or agreement issued by an admitted insurer as defined by the Insurance Code. (Civil Code Section 2782(a)) Existing law provides, except as specified, that provisions, clauses, covenants, or agreements contained in, collateral to, or affecting any construction contract with a public agency that purport to impose on the contractor, or relieve the public agency from, liability for the active negligence of the public agency are void and unenforceable. (Civil Code Section 2782(b)) Existing law provides separate indemnity and duty to defend restrictions and requirements regarding residential construction contracts. (Civil Code Section 2782(c)-(e)) Existing law provides that a builder, general contractor, or subcontractor shall have the right to seek equitable indemnity for any claim governed by Civil Code Section 2782. (Civil Code Section 2782(f)) Existing law provides that Civil Code Section 2782 does not limit, restrict, or prohibit the right of a builder, CONTINUED SB 474 Page 4 general contractor, or subcontractor to seek equitable indemnity against any supplier, design professional, or product manufacturer. (Civil Code Section 2782(g)) Existing law provides that Section 2782 does not prevent a party to a construction contract and the owner or other party for whose account the construction contract is being performed from negotiating and expressly agreeing with respect to the allocation, release, liquidation, exclusion, or limitation as between the parties of any liability for design defects or liability of the promisee to the promisor arising out of or relating to the construction contract. (Civil Code Section 2782.5) Existing law defines "construction contract" and "design defect," as specified. (Civil Code Sections 2783 and 2784) This bill provides that the provisions under Section 2782(a) apply only to contracts executed before January 1, 2012, and the provisions under this bill apply to contracts executed after that date, except as specified. This bill provides that provisions, clauses, covenants, or agreements contained in, collateral to, or affecting a contract or agreement, with exceptions, whether executed in this state or without, for the design, construction, alteration, renovation, repair, or maintenance of a building, structure, highway, road, bridge, water line, sewer line, oil line, gas line, appurtenance, or other improvement to public or private real property located in the state, including any erection, moving, lifting, demolition, or excavation that requires a promisor to indemnify, release, hold harmless, insure, or defend another person against actual or claimed liability, damage, or expense arising, in whole or in part, 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 are against public policy and are void and unenforceable. This bill provides that a provision in a contract that requires the purchase of additional insured coverage, or any coverage endorsement or provision within an insurance CONTINUED SB 474 Page 5 policy providing additional insured coverage, primary or noncontributing coverage or waivers, is void and unenforceable to the extent that it requires or provides coverage the scope of which is prohibited under this bill for an agreement to indemnify, hold harmless, or defend. This bill exempts from its provisions the following: 1. Contracts for residential construction, as used in Title 7 (commencing with Section 895) of Part 2 of Division 2; 2. Any wrap-up insurance policy or program, except as provided by this section; 3. A cause of action for breach of contract or warranty that exists independently of an indemnity obligation; 4. A provision in a construction contract that requires the promisor to purchase or maintain insurance covering the acts or omissions of the promisor; 5. Indemnity provisions contained in loan and financing documents, other than construction contracts to which the contractor and a contracting project owner's lender are parties; 6. General agreements of indemnity required by sureties as a condition of execution of bonds for construction contracts; 7. The benefits and protections provided by the workers' compensation laws; and 8. The benefits or protections provided by the governmental immunity laws. This bill also exempts from its provisions agreements in construction contracts that require a promisor to purchase the following: owners and contractors protective liability insurance; railroad protective liability insurance; contractors all-risk insurance; and builders all-risk or named perils property insurance. CONTINUED SB 474 Page 6 This bill applies to liability under a construction contract entered into on or after January 1, 2012. This bill provides that, notwithstanding any choice-of-law rules that would apply the laws of another jurisdiction, the law of California shall apply to every contract to which this bill applies. This bill provides that any waiver of the provisions of this bill is contrary to public policy and is void and unenforceable. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No SUPPORT : (Verified 5/16/11) California Association of Sheet Metal and Air Conditioning Contractors' National Association (co-source) California Legislative Conference of the Plumbing, Heating and Piping Industry (co-source) Concrete Contractors Association (co-source) Crane Owners Association (co-source) California Chapters of the National Electrical Contractors Association (co-source) Air Conditioning Sheet Metal Association Air-conditioning & Refrigeration Contractors Association American Subcontractors Association - California Anglemyer Crane Rental Associated Plumbing & Mechanical Contractors Bragg Crane & Rigging Co. California Chapter of the American Fence Association California Crane & Rigging, LLC California Fence Contractors' Association California Landscape & Irrigation Council California Landscape Contractors Association California Plumbing and Mechanical Contractors Association California State Association of Electrical Workers California State Pipe Trades Council California-Nevada Conference of Operating Engineers Champion Crane Rental, Inc. Crane Rental Service, Inc. Engineering Contractors' Association CONTINUED SB 474 Page 7 Flasher/Barricade Association Hill Crane Service, Inc. Mobile Crane Operators Group of Southern California Mr. Crane, Inc. Northern California Mechanical Contractors Association Peninsula Crane & Rigging Reliable Crane Rigging Rigging International Specialty Crane & Rigging State Building and Construction Trades Council of California Union Roofing Contractors Association Western States Council of Sheet Metal Workers OPPOSITION : (Verified 5/12/11) Associated General Contractors Association of California School Administrators Building Owners and Managers Association of California California Apartment Association California Business Properties Association California Building Industry Association California Hotel & Lodging Association California Retailers Association California Special Districts Association California State Association of Counties City and County of San Francisco Civil Justice Association of California Coalition for Adequate School Housing Construction Employers Association Howard Jarvis Taxpayers Association International Conference of Shopping Centers League of California Cities National Association of Industrial Office Properties Orange County Business Council Regional Council of Rural Counties Riverside County Office of the Superintendent San Diego Downtown Partnership Small School Districts' Association Urban Counties Caucus ARGUMENTS IN SUPPORT : The author writes: "SB 474 would protect construction parties from bearing liability for the negligence or design defects of other parties engaged in CONTINUED SB 474 Page 8 the construction project by making risk-shifting contract clauses unenforceable. For this purpose, SB 474 would provide that indemnity and duty to defend clauses contained in all construction and insurance contracts would be unenforceable to the extent that the clauses required the non-fault party to be responsible for claims arising from the negligence or fault of another contracting party." The California Association of Sheet Metal and Air Conditioning Contractors' National Association, a sponsor of this bill, writes: "ÝC]ontractual clauses known as 'Type 1 indemnity' allow a general contractor who is ninety-nine percent at-fault for an injury or damage to shift ALL of the liability and responsibility for defense to a subcontractor who is only one percent at-fault (or to a subcontractor who has no liability for the circumstances surrounding the matter, but whose work is peripherally connected to an underlying accident). Emerging and small businesses simply cannot grow or survive in an environment where they are required to pay for the accidents and mistakes created by other larger companies. "Additionally, these contract provisions are leading to a decline in jobsite safety. General contractors are the "controlling employer" and have the overall responsibility to keep construction jobsites safe. Without liability reform legislation for commercial and industrial construction contracts, they lack incentive to ensure that all safety measures are in place and enforced because they are not financially responsible for any accidents." The sponsors of this bill have numerous examples of the harmful effects of these indemnity provisions. The following are a few of these examples: Project owner made a claim for construction defects against the general contractor; the subcontractor's insurer contributed $20,000 to remove the subcontractor from the lawsuit, even though the subcontractor had not contributed to the construction defect; CONTINUED SB 474 Page 9 Subcontractor providing HVAC installation was cross-claimed into a complaint regarding water leaks on the exterior of a building; the total amount paid by the subcontractor was $500,000 to settle the claim even though the subcontractor was not at-fault; Subcontractor paid $500,000 toward settlement even though the construction defects were not the fault of the subcontractor; and Subcontractor paid $11,000,000 in a personal injury action due to the indemnity provisions in the subcontract, even though the subcontractor was deemed not at fault for the injury; this payout has resulted in the subcontractor being deemed a high risk insured and, as a result, the subcontractor's insurance premiums have increased. These subcontractors report that, due to increased costs and insurance premiums related to these payouts for construction defects and injuries resulting from the construction project, they are having difficulty providing competitive bidding on projects and growing their businesses. ARGUMENTS IN OPPOSITION : Various opponents have raised concerns with this bill: "General contractor and project owners groups have expressed opposition to this bill for various reasons, the most significant of which is the claim that this bill, they argue, would eliminate an immediate obligation to provide a unified defense. Accordingly, when a claim is presented against a project owner or general contractor, they argue that the construction project could come to a standstill while the parties discover who was at fault for the claimed damages." RJG:mw 5/16/11 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED SB 474 Page 10 CONTINUED