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: 5/24/11
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 provides, for construction contracts
executed on and after January 1, 2013, that are not for
residential construction or executed by a public entity, as
defined, that any provision in a contract purporting to
indemnify, hold harmless, or defend another person against
actual or claimed liability, damage, or expense arising
from the negligence, willful misconduct, defective design,
violation of law, or other fault of that person or that
person's agents, employees, independent contractors,
CONTINUED
SB 474
Page
2
subcontractors, or representatives is against public policy
and is void and unenforceable. This bill requires that
California law be applied to these contracts regardless of
any choice-of-law rules that might otherwise apply. This
bill excepts certain contractual provisions and types of
insurance from its provisions. This bill provides that
waiver of these provisions is contrary to public policy,
void, and unenforceable.
Senate Floor Amendments of 5/24/11 exempt public entities
from the changes to indemnity and duty to defend clauses
proposed by this bill. Accordingly, existing law would
continue to apply to commercial construction agreements
regarding indemnity and duty to defend entered into by
public entities. These amendments delay the enactment date
to January 1, 2013, which would give contracting parties
time to comply with the provisions of 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
CONTINUED
SB 474
Page
3
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
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))
CONTINUED
SB 474
Page
4
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,
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,
2013, and the provisions under this bill apply to contracts
executed after that date, except as specified.
This bill provides that notwithstanding the above, this
subdivision shall continue to apply to contracts executed
by a public entity on and after January 1, 2013, and
Section 2782.05 shall not apply. For purposes of this
subparagraph, "public entity" means the state, including
every state agency, office, department, division, bureau,
board, or commission, a city, county, city and county,
including a charter city or a charter county, a charter
school, district, special district, public authority,
political subdivision, public corporation, and nonprofit
transit corporation wholly owned by a public agency and
CONTINUED
SB 474
Page
5
formed to carry out the purposes of the public agency.
This definition, and the exception provided by this
subparagraph, shall be construed broadly and shall include
the Regents of the University of California, the Trustees
of the California State University, and the Board of
Governors of the California Community Colleges.
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 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
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. Contracts executed by a public entity, as defined in
subparagraph (B) of paragraph (2) of subdivision (a) of
Section 2782;
3. Any wrap-up insurance policy or program, except as
CONTINUED
SB 474
Page
6
provided by this section;
4. A cause of action for breach of contract or warranty
that exists independently of an indemnity obligation;
5. A provision in a construction contract that requires the
promisor to purchase or maintain insurance covering the
acts or omissions of the promisor;
6. 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;
7. General agreements of indemnity required by sureties as
a condition of execution of bonds for construction
contracts;
8. The benefits and protections provided by the workers'
compensation laws; and
9. 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.
This bill applies to liability under a construction
contract entered into on or after January 1, 2013.
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.
CONTINUED
SB 474
Page
7
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 5/25/11)
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)
A Better Valley Crane
AGI Marble Company
Ahlborn Fence & Steel, Inc.
Ahlborn Structural Steel, Inc.
Air Conditioning Sheet Metal Association
Air-conditioning & Refrigeration Contractors Association
Alliance for Jobs and Safety in Construction
American Subcontractors Association - California
Anglemyer Crane Rental
Associated Plumbing & Mechanical Contractors
B.T. Mancini Co., Inc.
Bragg Crane & Rigging Co.
Burnett & Sons Planing Mill and Lumber Co., Inc.
Calender-Robinson Co., Inc.
California Association of Sheet Metal and Air Conditioning
Contractors National Association
California Chapter of the American Fence Association
California Chapters of the National Electrical Contractors
Association
California Crane & Rigging, LLC
California Erectors, Inc.
California Fence Contractors' Association
California Landscape & Irrigation Council
California Landscape Contractors Association
California Legislative Conference of the Plumbing, Heating
and Piping Industry
California Plumbing and Mechanical Contractors Association
California Sheet Metal
California State Association of Electrical Workers
California State Pipe Trades Council
CONTINUED
SB 474
Page
8
California-Nevada Conference of Operating Engineers
Carvist Corporation
Champion Crane Rental, Inc.
Chino Glass & Glazing Corp.
Chula Vista Electric Co.
Clark Steel Fabricators, Inc.
Coastline Steel Corporation
Collins Company
Concrete Contractors Association
Construction Preliens & Paperwork
Continental Plumbing, Inc.
Craig Electric, Inc.
Crane Rental Service, Inc.
Crown Fence
D&R Glass, Inc.
Daley's Drywall
Delta Electrical Construction, Inc.
Doty Bros. Construction Company
Dowdle & Sons
DPW, Inc.
Dynamic Precast Co., Inc.
Eckles Construction, Inc.
Engineering Contractors' Association
Enterprise Roofing Service, Inc.
Farwest Safety, Inc.
Fedco Construction, Inc.
Flasher/Barricade Association
Freas Plastering Company, Inc.
Fuller Electric Corporation
GB2 Services
Giroux Glass, Inc.
Greenscape
GT Industries
Guy Evans Contractor Services
H Toji and Company
Herman Weissker, Inc.
Hill Crane Service, Inc.
J. Noble Binns Plumbing Co., Inc.
James L. Harris' Painting & Decorating, Inc.
Jerry Thompson & Sons, Inc.
Kirk Builders
Lawson Roofing Co., Inc.
Los Angeles Painting & Finishing Contractors Association
Mammoth Electric
CONTINUED
SB 474
Page
9
Marina Landscape, Inc.
McIntyre Company
McLennon Law Corporation
Merona Enterprises
Mobile Crane Operators Group of Southern California
Morrow Painting, Inc.
Mr. Crane, Inc.
Mulhauser Steel, Inc.
Murphy Industrial Coatings, Inc.
Neal Electric Corporation
Nevel Group, Inc.
Nor-Cal Scaffolding, Inc.
Northern California Mechanical Contractors Association
Oak Grove Construction
Partition Specialties, Inc.
Paul Mackin Incorporated
Peninsula Crane & Rigging
Placer Electric, Inc.
Plastic Tops, Inc.
Porter Law Group
Power Communication Systems, Inc.
Precision Crane Service, Inc.
Reliable Crane Rigging
RFJ Meiswinkel Company
Rigging International
Rusco, Inc.
Saddleback Contractors and Consultants
Santa Barbara Glass Company
Saturn Electric, Inc.
Schetter Electric, Inc.
Seawright Custom Precast, Inc.
Select Electric, Inc.
Shane Alexander Custom Tile & Stone
Sheedy Drayage Co.
Sheet Metal Workers' International Association Local 273
Shepherd & Son, Inc.
Sherrin Glass & Metal, Inc.
Sierra Woodworking
Silva Caseworks, Inc.
SMG Stone Company, Inc.
Smith Steel Services
South Bay Crane & Rigging, Inc.
South Coast Industrial Door, Inc.
Southern California Contractors Association
CONTINUED
SB 474
Page
10
Specialty Crane & Rigging
State Building and Construction Trades Council of
California
Sterndahl Enterprises, Inc.
Surety Associates of Southern California Insurance Services
T&R Communications, Inc.
Thermal Mechanical
Tidwell Excavating, Inc.
Titan Crane & Rigging
Turman Commercial Painters
Union Roofing Contractors Association
Urata & Sons Cement, Inc.
Walters & Wolf
West Coast Cranes, Inc.
Western Fire Protection, Inc.
Western Floor Service, Inc.
Western Stabilization
Western States Council of Sheet Metal Workers
Whelan Building Specialties
OPPOSITION : (Verified 5/25/11)
Alameda County Board of Supervisors
Associated General Contractors
Association of California Cities - Orange County
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 Conference of Carpenters
California Hotel & Lodging Association
California Retailers Association
California Special Districts Association
California State Association of Counties
California Wind Energy Association
Castroville Community Services District
Cities of Bakersfield, Fontana, Highland, Lodi, Merced,
Palos Verdes Estates, Rancho Cucamonga, Selma, Tehachapi,
Tulare, and Wasco
City and County of San Francisco
City of Riverbank Community Development Department
Civil Justice Association of California
CONTINUED
SB 474
Page
11
Coalition for Adequate School Housing
Construction Employers Association
Costa Mesa Sanitary District Board of Directors
Cucamonga Valley Water District
Howard Jarvis Taxpayers Association
International Conference of Shopping Centers
League of California Cities
Modesto City School District
National Association of Industrial Office Properties
Oceanside Unified School District
Orange County Business Council
Rancho Simi Recreation and Park Districts
Regional Council of Rural Counties
Riverside Community College District
Riverside County Office of the Superintendent
Saddleback Valley Unified School District
San Diego Downtown Partnership
Simi Valley Unified School District
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:
"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
CONTINUED
SB 474
Page
12
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;
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
CONTINUED
SB 474
Page
13
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 5/26/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
CONTINUED