BILL ANALYSIS                                                                                                                                                                                                    



                                                                      



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          |SENATE RULES COMMITTEE            |                   SB 474|
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                                 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 
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          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 

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          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, 

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          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 

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          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.

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          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  5/18/11)

          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

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          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
          Sheedy Drayage Co.
          Southern California Contractors Association
          Specialty Crane & Rigging
          State Building and Construction Trades Council of 
          California
          Union Roofing Contractors Association
          Western States Council of Sheet Metal Workers

           OPPOSITION  :    (Verified  5/18/11)

          Associated General Contractors
          Association of California School Administrators
          Building Owners and Managers Association of California
          California Apartment Association
          California Association of Community Managers
          California Business Properties Association
          California Building Industry Association
          California Hotel & Lodging Association
          California Retailers Association
          California Special Districts Association
          California State Association of Counties
          California Wind Energy Association
          Cities of Bakersfield, Fontana, Highland, Rancho Cucamonga, 
            Selma, and Tehachapi
          City and County of San Francisco
          Civil Justice Association of California
          Coalition for Adequate School Housing
          Construction Employers Association
          Costa Mesa Sanitary District Board of Directors
          Howard Jarvis Taxpayers Association
          International Conference of Shopping Centers
          League of California Cities
          National Association of Industrial Office Properties
          Orange County Business Council
          Rancho Simi Recreation and Park Districts
          Regional Council of Rural Counties

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          Riverside County Office of the Superintendent
          San Diego Downtown Partnership
          Small School Districts' Association
          Town of Apple Valley
          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 
          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:
          
            "C]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 

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          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;

           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."

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          RJG:mw  5/18/11   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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