BILL ANALYSIS                                                                                                                                                                                                    ”



                                                                  SB 474
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          Date of Hearing:   June 28, 2011

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
                     SB 474 (Evans) - As Amended:  June 21, 2011

                              As Proposed to be Amended

           SENATE VOTE  :   22-13
           
          SUBJECT  :   CONSTRUCTION CONTRACTS:  INDEMNITY

           KEY ISSUES  : 

           1)SHOULD SUBCONTRACTORS HAVE PROTECTION AGAINST INDEMNIFICATION 
            AGREEMENTS RELATING TO PUBLIC AND PRIVATE CONSTRUCTION 
            PROJECTS?

          2)SHOULD THE RIGHTS AND RESPONSIBILITIES OF CONSTRUCTION PROJECT 
            OWNERS, CONTRACTORS AND SUBCONTRACTORS REGARDING THEIR OWN 
            WRONGDOING AND THAT OF OTHERS BE CLARIFIED AND ADJUSTED IN 
            ORDER TO FOSTER EACH PARTY'S INDIVIDUAL RESPONSIBILITY FOR 
            ITSELF?

           FISCAL EFFECT  :  As currently in print this bill is keyed 
          non-fiscal.

                                      SYNOPSIS
          
          This bill would revise the rights and obligations of 
          construction project owners, contractors and subcontractors 
          regarding claims for negligence and other misconduct.  The bill 
          extends to commercial construction contracts the prohibitions 
          against indemnification that currently exist for residential 
          construction contracts.  It also prohibits construction 
          contracts requiring indemnity, insurance, or defense obligations 
          by a subcontractor for the active negligence or willful 
          misconduct of a general contractor, his agents, or other 
          subcontractors.  In addition, the bill would apply to commercial 
          construction contracts an option similar to existing law 
          regarding residential contracts by which a subcontractor, after 
          receiving claim information from the general contractor, may 
          defend the claim or pay its portion of the claim.  The bill also 
          clarifies that a public agency is prohibited from shifting its 
          liability for its active negligence to a contractor, 








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          subcontractor, or materials supplier, and that a project owner, 
          not acting as a project manager, general contractor, or 
          materials supplier, is prohibited from shifting liability for 
          its active negligence to a contractor, subcontractor, or 
          materials supplier.  It is supported by a wide range of 
          subcontractor associations, and by some public agencies, but 
          continues to be strongly opposed by general contractors and 
          property owners, despite the author's proposed amendments.  
          Opponents argue that the bill immunizes subcontractors for their 
          own wrongdoing and unfairly shifts liability to general 
          contractors and owners.  Any shift in responsibility, opponents 
          argues, is unnecessary because existing practices and 
          relationships have been satisfactory, and because insurance is 
          readily available and affordable for subcontractors in 
          commercial construction.  Prior opposition by public agencies is 
          believed to be removed by the author's proposed amendments.

           SUMMARY :  Regulates indemnification agreements in specified 
          private commercial and public works construction contracts.  
          Specifically,  this bill  :

          1)Prohibits construction contracts requiring indemnity, 
            insurance, or defense obligations by a subcontractor for the 
            active negligence or willful misconduct of a general 
            contractor, his agents, or other subcontractors, as specified.

          2)Provides that, unless otherwise prohibited under this bill, 
            the parties to a construction contract can freely contract for 
            other protections and obligations of each party, but allows 
            numerous exemptions, including residential construction 
            contracts, direct contracts with a public agency or owner, and 
            insurance contracts for project wrap up and worker's 
            compensation.

          3)Requires an insurer to uphold their contractual obligations to 
            additional insureds pursuant to Presley v. American State 
            Insurance Company.

          4)Provides that an insurer maintains reimbursement rights from a 
            general contractor or other subcontractor pursuant to the 
            holding in Buss v. Superior Court. 

          5)Provides a defense or settlement option for commercial 
            construction contracts similar to existing law regarding 
            residential construction contracts under which a 








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            subcontractor, after receiving claim information from the 
            general contractor, has the option to defend the claim, as 
            specified, or pay its portion of the claim, as specified.

          6)Provides that in the event a contractor fails to maintain its 
            obligations to defend or pay its portion of the claim, the 
            general contractor may make a claim for compensatory and 
            consequential damages and reasonable attorney's fees.  

          7)Clarifies that a public agency is prohibited from shifting its 
            liability for its active negligence to a contractor, 
            subcontractor, or materials supplier.

          8)Provides that active negligence on the part of the public 
            agency does not include accepting or utilizing plans or 
            designs provided by a licensed design professional, hiring a 
            design professional, contractor, subcontractor, materials 
            supplier or other independent contractor, and, to the extent 
            the public agency is not managing the public works project, 
            the failure to supervise the work of a design professional, 
            contractor, subcontractor, or other independent contractor.

          9)Establishes that a project owner, not acting as a project 
            manager, general contractor, or materials supplier, is 
            prohibited from shifting liability for its active negligence 
            to a contractor, subcontractor, or materials supplier. 

          10)Provides that active negligence on the part of an owner does 
            not include accepting or utilizing design plans, hiring, or 
            failing to supervise the construction project, as specified.





           EXISTING LAW:

           1)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.  (Civ. Code Sec. 2772.)

          2)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.  (Civ. Code 
            Sec. 2775.)








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           3)Provides that, among other things, in the interpretation of a 
            contract of indemnity and unless a contrary intention appears:

             a)   upon an indemnity against liability, expressly, or in 
               other equivalent terms, the person indemnified is entitled 
               to recover upon becoming liable;
             b)   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
             c)   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. 
                (Civ. Code Sec. 2778.)

          4)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.) 
           
           5)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.  (Civ. Code Sec. 2779.)
           
           6)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 








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            admitted insurer as defined by the Insurance Code.  (Civ. Code 
            Sec. 2782(a).)

          7)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.  (Civ. Code Sec. 2782(b).)

          8)Provides separate indemnity and duty to defend restrictions 
            and requirements regarding residential construction contracts. 
             (Civ. Code Sec. 2782(c)-(e).)

          9)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.  (Civ. Code Sec. 
            2782(f).)

          10)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.  (Civ. Code Sec. 2782(g).)

          11)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.  (Civ. Code Sec. 
            2782.5.)

          12)Defines "construction contract" and "design defect," as 
            specified.  (Civ. Code Secs. 2783 and 2784.)

           COMMENTS  :  This bill, sponsored by a number of subcontractor 
          associations, would, except in certain instances, place 
          restrictions on commercial construction agreements, and 
          insurance provisions associated therewith, that require a 
          promisor to indemnify, release, hold harmless, insure, or defend 
          another person against the actual or claimed liability, damage, 
          or expense arising, in whole or in part, from the negligence, 








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          willful misconduct, defective design, violation of law, or other 
          fault of that person or that person's agents, employees, 
          independent contractors, subcontractors, or representatives.  
          This bill would thus provide that contract and insurance 
          requirements that shift indemnity away from at-fault parties to 
          non-fault parties would be void and unenforceable.
            
          The author describes the reason for the bill as follows:

               SB 474 would protect construction parties from bearing 
               liability for the negligence or willful misconduct 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.

               Under existing law, indemnity clauses requiring a non-fault 
               party to pay for the sole negligence of another party are 
               unenforceable.  Exceptions to this are indemnity clauses 
               contained in insurance contracts.  Indemnity clauses which 
               expressly provide for liability between the contracting 
               parties are enforceable.  Residential construction 
               contracts containing indemnity or duty to defend clauses 
               for claims arising out of the negligence of the builder or 
               contractor or their agents are unenforceable.  Aside from 
               this restriction, parties to residential construction 
               contracts can otherwise mutually agree on defense and 
               reimbursement provisions.  Existing law provides procedures 
               for residential construction defense costs.

               Because commercial construction contracts are not afforded 
               the same protections as residential construction contracts, 
               construction developers, builders, general contractors, and 
               public agencies are limiting their immediate costs and 
               financial exposure by requiring indemnity clauses in 
               construction contracts for negligence and construction 
               defect costs.  Further, subcontractors are being required 
               to add the developer, builder, general contract, or public 
               agency as additional insureds in insurance contracts.  
               Under these indemnity clauses and insurance policies, 








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               negligence and construction defect costs are being shifted 
               from at-fault parties to non-fault parties.  

               Consequently, subcontractors are bearing a significant cost 
               burden of potential negligence and construction defect 
               claims, regardless of fault.  Subcontractors suffering from 
               the current financial crisis are forced to sign these 
               construction and insurance contracts in order to obtain 
               work.  When the builder, general contractor, or other 
               subcontractor performs negligently or harms the 
               construction project, the non-fault subcontractors are left 
               to pay for the damage.  Subcontractors are increasingly 
               paying out of pocket to settle claims in which they had no 
               control and, as a result, many are going out of business.

               Many times when a claim is brought against a general 
               contractor, the general contractor, pursuant to the terms 
               of the subcontracts that require the subcontractors to 
               indemnify and defend the general contractor against all 
               claims related to the construction project, brings the 
               subcontractors together and tells the subcontractors that 
               they all have to pay a portion of a proposed settlement 
               amount.  In order to avoid lengthy and costly litigation, 
               the non-fault subcontractors pay the demanded amount mostly 
               out of pocket in hopes of avoiding increased insurance 
               premiums.  Because of these settlements, it is difficult to 
               know how many subcontractors are losing money because of 
               another subcontractor's or the general contractor's 
               negligence.  The sponsors report some of these problems as 
               follows:

                        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.
                        Subcontractor paid $11,000,000 in a personal 








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               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.

               Because of the heavy burden of providing indemnity and 
               defense to general contractors, subcontractors report that 
               they are losing business because they are unable to bid on 
               projects because of the potential cost of defending claims 
               caused by other parties, some subcontractors have gone out 
               of business due to settlement payouts, and workers have 
               been laid off to offset the settlement payouts.

               Insurance companies support this bill because too often, 
               insurance companies are required to pay claims for damage 
               caused by other parties.  Insurers determine premiums based 
               upon the potential risk of the insured.  However, because 
               of the current risk-shifting by general contractors, 
               insurance companies are being required to pay for other 
               parties' damage, which is an unknown risk for which the 
               insurance companies do not receive appropriate premiums.

               Further, because of the requirements of general contractors 
               to be added to the subcontractor's insurance policies as 
               additional insureds, the insurance companies are unable to 
               collect reimbursement from the general contractors.

          The sponsors of this bill cite numerous examples of the 
          allegedly harmful effects of these indemnity provisions, 
          including:

           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; 








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            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.

           Status of Law Regarding Indemnification Contracts  .  Supporters 
          argue that since 1967 construction contracts requiring a 
          contractor to indemnify another for the other's sole negligence 
          or willful misconduct resulting in construction defects or 
          liability for damages for death or bodily injury to persons, 
          injury to property, or any other loss, damage or expense are 
          void and unenforceable as a matter of public policy.  Various 
          other states also have enacted prohibitions on indemnity 
          provisions in order to restrict liability shifting from the 
          at-fault party to a non-fault party and these statutes range 
          from restrictions on shifting liability for sole negligence to 
          restrictions maintaining comparative negligence standards.  

          Construction contracts which require indemnity to a party, which 
          may be found to be wholly or partially at-fault, vary in 
          degrees.  Type I indemnity agreements require one party, the 
          indemnitor (in this case, a subcontractor), to indemnify another 
          party, the indemnitee (a general contractor or project owner), 
          in the event a claim arises from a construction project and 
          regardless of whether the damage was the result of the 
          indemnitee's sole negligence or willful misconduct.  Type II 
          indemnity agreements require the indemnitor to indemnify the 
          indemnitee in the event the damage was the result of the 
          indemnitee's passive negligence.  Type III indemnity agreements 
          require indemnity only if the indemnitee was not actively or 
          passively negligent.

          Along with contractual indemnity provisions, existing law 
          provides "that 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 








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          incurred in good faith, and in the exercise of a reasonable 
          discretion."  (Civ. Code Sec. 2778.)  Accordingly, an agreement 
          to provide a duty to defend the promisee from claims arising 
          from the construction project may be express or inherent and may 
          require a party that is not at fault to defend a party that is 
          at fault in claims arising from the construction project.  

          In 2007 and 2008, the Legislature recognized a disparity between 
          residential builders, owners, general contractors, and 
          subcontractors with respect to indemnity obligations between 
          these parties.  Accordingly, the Legislature enacted 
          restrictions on residential construction indemnity agreements 
          under SB 138 (Calderon, Ch. 32, Stats. 2007) and AB 2738 (Jones, 
          Ch. 467, Stats. 2008) as a matter of public policy in order to 
          protect non-fault parties from being held liable for the conduct 
          of at-fault parties.  However, these restrictions do not apply 
          to commercial or public works projects.

           This Bill Prohibits Commercial Construction Contracts From 
          Imposing Liability Obligations on Subcontractors.   This bill 
          would impose restrictions on commercial construction agreements, 
                                                     and insurance provisions associated therewith, that require a 
          promisor to indemnify, release, hold harmless, or insure another 
          person 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 that person or that person's agents, employees, 
          independent contractors, subcontractors, or representatives.  
          This bill contains various exceptions, as specified.  Existing 
          law prohibits construction contract indemnity agreements which 
          shift the burden of liability to a non-fault party when the 
          at-fault party is solely negligent.  (Civ. Code Sec. 2782(a).)  
          Existing law restricts the shifting of liability in residential 
          construction projects.  (Civ. Code Sec. 2782(c)-(e).)

          Proponents of this bill argue that, although California has an 
          anti-indemnity law that prohibits a contract requiring a 
          subcontractor to be liable for claims arising from the sole 
          negligence or willful misconduct by a project owner or the 
          general contractor, there is no prohibition on commercial 
          construction insurance contracts requiring such indemnity 
          provisions.  Accordingly, project owners and general contractors 
          now require subcontractors to carry insurance to provide 
          indemnity and defense for claims against the project owner or 
          general contractor resulting from claims associated with the 








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          project owner or general contractor's sole negligence.  Further, 
          the proponents argue that even if the project owner or general 
          contractor are not solely negligent, but 99 percent negligent, 
          the subcontractor should not have to bear the entire burden of 
          liability when the subcontractor was partially responsible, if 
          at all.  Under current commercial construction contracts and 
          insurance policies, the subcontractor could have to indemnify 
          and defend claims arising out of partial negligence on the part 
          of the project owner or general contractor and partial 
          negligence on the part of another subcontractor, regardless of 
          the lack of fault on the part of the indemnifying subcontractor.

          The author argues that this bill primarily is aimed at 
          prohibiting subcontractor liability in Type I commercial 
          construction indemnity agreements.  In the case where the 
          indemnitor is the subcontractor and the indemnitee is the 
          general contractor/projector owner, Type I indemnity agreements 
          require the subcontractor to indemnify the general 
          contractor/project owner in the event a claim arises from a 
          construction project and regardless of whether the damage was 
          the result of the general contractor's/project owner's sole 
          negligence or willful misconduct.  Type II indemnity agreements 
          require the subcontractor to indemnify the general 
          contractor/project owner in the event the damage was the result 
          of the general contractor's/project owner's passive negligence.  
          Type III indemnity agreements require indemnity only if the 
          general contractor/project owner was not actively or passively 
          negligent.

          Proponents of this bill argue that after the court's holding in 
          Crawford v. Weather Shield Manufacturing, Inc. (2008) 44 Cal.4th 
          541, general contractors are requiring subcontractors to execute 
          sweeping indemnity agreements which effectively make the 
          subcontractor the project insurer.  In Crawford, the 
          subcontractor was contractually required to indemnify a general 
          contractor against all claims for damages arising out of the 
          subcontractor's work if the subcontractor was found negligent.  
          The Crawford trial court found no negligence by the 
          subcontractor so no indemnification was owed to the general 
          contractor.  (Id. at pg. 549.)  The Crawford court noted that 
          "indemnity agreements resemble liability insurance policies, 
          rules for interpreting the two classes of contracts do differ 
          significantly.  Ambiguities in a policy of insurance are 
          construed against the insurer, who generally drafted the policy, 
          and who has received premiums to provide the agreed protection.  








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          In noninsurance contexts, however, it is the indemnitee who may 
          often have the superior bargaining power, and who may use this 
          power unfairly to shift to another a disproportionate share of 
          the financial consequences of its own legal fault."  (Id. at pg. 
          552; citations omitted; emphasis in original.)  The proponents 
          argue that it is this superior bargaining power on the part of 
          the project owners and general contractors that demonstrate the 
          unconscionability of Type I indemnification agreements.

          Since the ruling in Crawford, general contractors now 
          increasingly require contracts to contain explicit language 
          requiring the subcontractor to indemnify the general contractor 
          for any and all active or passive negligence on the part of the 
          general contractor, regardless of the subcontractor's lack of 
          fault for damages.  Proponents argue that, especially after the 
          recent fiscal crisis, subcontractors and their insurers are 
          unfairly burdened by these indemnity provisions.  Additionally, 
          the sponsors argue that "to the extent a party is not 
          responsible for their actions, they become more prone to making 
          mistakes and/or cause accidents.  The equitable distribution of 
          risk on a construction project would naturally increase safety 
          and reduce costs from claims associated with defects and 
          mistakes.  Accordingly, reduced costs would increase available 
          capital for more jobs and projects."

          Courts have held that parties are free to negotiate contractual 
          provisions and assign responsibilities as they see fit, subject 
          to public policy.  (Crawford at pg. 551.)  However, the 
          proponents argue that the indemnity requirements of general 
          contractors imposed upon subcontractors, who are arguably the 
          weaker contracting party, amount to contracts of adhesion.  If 
          the subcontractor wants the job, especially in this difficult 
          financial climate, the subcontractor must enter into indemnity 
          agreements.  This bill, in conforming to the Legislature's 
          history of public policy to hold at-fault parties responsible, 
          would provide that contract and insurance requirements shifting 
          indemnity away from at-fault parties to non-fault parties would 
          be void and unenforceable.  This bill would maintain the 
          exceptions to indemnity prohibitions that exist under current 
          law for sole negligence indemnity provisions.

           This Bill Limits the Ability of Contractors To Impose An 
          Obligation On Subcontractors To Defend The Contractor or Other 
          Subcontractors  .  Except in specified instances, this bill would 
          provide restrictions on commercial construction agreements, and 








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          insurance provisions associated therewith, that require a 
          promisor to defend another person 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 that person or that person's agents, 
          employees, independent contractors, subcontractors, or 
          representatives.  Existing law provides that, among other 
          things, in the interpretation of a contract of indemnity and 
          unless a contrary intention appears, a person indemnifying 
          another 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.  (Civ. Code Sec. 2778(4).)  

          Courts have held that when a subcontractor contractually agrees 
          to indemnify a general contractor or project owner against all 
          claims, unless expressly provided otherwise, the inherent or 
          express duty to defend in the contract will apply regardless of 
          whether the subcontractor was not at fault for the damages.  
          (Crawford at pgs. 555, 568.)  Proponents of this bill argue that 
          the duty to defend by the subcontractors has become a huge 
          financial burden for subcontractors which may not bear any 
          responsibility for the claimed damages.  Proponents contend that 
          requiring subcontractors to execute contracts containing an 
          express or implied duty to defend has the effect of 
          unconscionability because the subcontractor has the least amount 
          of power to negotiate these terms.  This bill would make such 
          duty to defend agreements void and unenforceable.

           Proposed Amendments Have Removed Opposition of Public Agency 
          Associations.   As reflected in the mock-up of the bill, the 
          author has agreed to take proposed amendments that remove the 
          opposition of many public agency associations, including the 
          League of California Cities, the California Special Districts 
          Association, Los Angeles Unified School District (now in 
          support), Small School Districts Association (now in support) 
          and Coalition for Adequate School Housing.  It is expected that 
          the individual members of these organizations that have 
          submitted separate letters of opposition are likewise now 
          neutral on the bill, although the committee has not received 
          letters from each of them.

           ARGUMENTS IN SUPPORT  :  The California Association of Sheet Metal 
          and Air Conditioning Contractors' National Association (CAL 








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          SMACNA) states:

               SB 474 (Evans) is a simple measure premised on the notion 
               that everybody should be held responsible for their own 
               actions. This measure would require the commercial 
               construction industry to adopt a fair and equitable 
               distribution of liability and that each party, including 
               subcontractors, be held responsible for the alleged defects 
               or damage on construction job-sites caused by them work but 
               not for the alleged defects or damage caused by other 
               parties. 

               Currently, subcontractors are required by "Type 1" 
               contractual provisions to assume the legal liability for 
               the negligent and injurious actions of others on the 
               jobsite including those of the general contractor and 
               owner. This is unfair and costly to small businesses. S8 
               474 would instead encourage contractual terms which 
               emphasize appropriate levels of responsibility for the 
               performance of each party on a construction jobsite. 

               CAL SMACNA members believe that no entity in a construction 
               contract should be allowed to hide, shift or transfer their 
               legal and/or financial liability to others. Unfortunately, 
               the transfer of risk and liability in California 
               construction contracts is becoming an all too common 
               phenomenon threatening family-owned businesses and eroding 
               responsible behavior. Please see attached one such 
               "liability shift" contractual provision that is currently 
               being used by a top-tier general contractor in their 
               contracts with California subcontractors.
                
               Responsibility and general care on construction projects 
               increase when all entities know they cannot escape legal or 
               financial penalties for their actions and/or poor 
               performance. This increased standard of care is a benefit 
               to all contractors on the job, their employees and 
               ultimately the project owner. Similar to the laws of 
               numerous other states, SB 474 would ensure construction 
               contracts in California are fair in the allocation of 
               liability. 

           ARGUMENTS IN OPPOSITION  :  The Construction Employers Association 
          is staunchly opposed to the bill, arguing in detail:
           








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                                                                  Page  15

                ›Existing law] provides that contractors and subcontractors 
               shall be liable for incomplete, deficient or 
               non-constructible architectural plans and specifications.  
               The measure narrowly defines "active negligence" to include 
               "plans or designs approved by a licensed design 
               professional," which is the usual source of problems 
               created by owners as a result of their hiring bad 
               architects and engineers.  Under 2784, "design defect" 
               requires that the "structure, item of equipment or 
               machinery or similar object" that "when constructed 
               substantially in accordance with its design, inherently 
               unfit, either wholly or in part, for its intended use or 
               which impairs or renders the use of such structure, 
               equipment, machinery or property dangerous."  Although 
               broad, this definition will not encompass designs that are 
               not constructible. For example, owners can require the 
               general contractor and subcontractors to indemnify owners 
               against claims arising from deficient designs that do not 
               constitute "design defects."  Invariably owners will 
               require contractors AND subcontractors to indemnify them to 
               get the full benefit of the new language.

               As amended the bill creates enormous incentives for owners 
               to pay as little as possible for designs, without any 
               regard to quality or constructability, and to seek to lay 
               off the responsibility for the deficiencies in the plans 
               onto innocent parties - the general contractor and 
               subcontractors.  It also would make it more difficult to 
               settle and resolve disputes involve poor plans, as the 
               design professionals would essentially be insulated from 
               liability because they could not be sued by anyone on the 
               construction team, and the owner would be able to hide 
               behind indemnity and risk shifting language.  This appears 
               to directly conflict with California law in effect since 
               1872.  See Civil Code ß 1511 (party who is prevented or 
               obstructed by the other party to the contract is relieved 
               from its obligations to perform, to the extent that its 
               performance was prevented or obstructed).

               Additionally, the bill repeals most of the protections 
               currently enacted under Section 2782(b) with respect to 
               public agencies, and lets both private and public owners 
               off the hook for many problems with the designs that they 
               furnish.  This is particularly a problem because it is 
               extremely difficult for a contractor to sue an owner's 








                                                                  SB 474
                                                                  Page  16

               architect or engineers directly, as there is a lack of 
               privity.  (Case law in the past permitted causes of action 
               to be brought by a third party against a design 
               professional even when the third party had not hired the 
               architect.  The law is more unsettled today.  Moreover, 
               even if it were possible to sue the owner's design 
               professional that prepared bad plans, the "economic loss" 
               doctrine will be argued by the design professionals to 
               preclude recovering any damages except for actual damage to 
               property other than the construction itself.

               SB 474 runs counter to long standing U.S. Supreme Court 
               decision and existing state law.  In 1918, in United 
               States. v. Spearin, the U.S. Supreme Court ruled "›I]f the  
               contractor is bound to build according to plans and 
               specifications prepared by the owner ›public entity], the 
               contractor will not be responsible for the consequences of 
               defects in the plans and specifications.  This 
               responsibility of the owner is not overcome by the usual 
               clauses requiring builders to visit the site, to check the 
               plans, and to inform themselves of the requirements of the 
               work."

               California codified the Spearin Doctrine in 1999, Public 
               Contracts Code Section 1104 (Pescetti, AB 1314, Chapter 
               875, Statutes of 1999).  Section 1104 provides that no 
               local public entity may require a contract bidder to assume 
               responsibility for the completeness and accuracy of 
               architectural or engineering plans and specifications on 
               public works contracts.  AB 1314 received only one "NO" 
               vote.  Due to an adverse court ruling, in 2008 CEA 
               sponsored AB 983 (Ma) to eliminate any ambiguity concerning 
               liability for plans and specifications.  That measure, 
               which received no "NO" votes, was vetoed due to a pending 
               case before the California Supreme Court.   The Court did 
               provide some clarity on the issue but this measure now 
               creates new confusion and once again makes contractors and 
               subcontractors liable for architectural and engineering 
               plans

               As a result of the broad definition of "active negligence" 
               an owner would be able to immunize itself of the risks 
               associated with its outside construction managers, 
               administrators, etc.  For example, an owner would be able 
               to require that the subcontractors and contractor indemnify 








                                                                  SB 474
                                                                  Page  17

               the owner for delays caused by its construction manager's 
               failure to coordinate and schedule multiple prime 
               contractors - a very common owner problem.

               Contractors would be liable for subcontractor's own 
               violation of law.  Section 2782.5 (a) provides that a 
               contractor may not seek indemnification or defense for "any 
               other loss, damage or expense."  Due to the broad nature of 
               this language, contractors may be held liable for 
               violations of law, environmental violations, etc., none of 
               which are insurable items.  What few examples that do exist 
               relate specifically to bodily injury, yet, proponents are 
               encompassing any possible costs.  On what basis is this 
               broad inclusion justified or reasonable?

               Because subcontractors have no vested interest in the 
               project or a relationship with the project owner, their 
               only goal in providing a defense it to limit their own 
               liability.  Even today when subcontractors try and provide 
               a defense the defense primarily centers on blaming other 
               parties. Once the subcontractor or their insurer makes this 
               assertion the general contractor's insurer insists upon 
               naming all parties.  In effect, it's the claims made by 
               subcontractors that trigger broad Type 1 provisions.  Under 
               this measure the contractor would be liable if the 
               assertions are proven to be false, yet, the subcontractor 
               would face no liability.  This is why 2782.5 (f) is 
               fundamentally flawed.

          The Associated General Contractors is likewise opposed, stating: 
          "One of AGC's principal concerns with the bill is that the issue 
          has not been properly vetted in a public forum.  Unlike the 
          residential liability construction issue there was a crisis that 
          had to be addressed due to the unavailability of insurance.  
          Insurance is readily available in the commercial construction 
          context which would suggest that the allocation of risk is not 
          disproportional.  The ability to insure one's potential 
          liability through contract law should be an acceptable practice 
          absent sole negligence or willful misconduct.  SB 474 now 
          attempts to redistribute how risk is allocated under a system 
          that although not perfect has worked well for decades. We are 
          establishing an entirely new way of allocating risk without 
          fully understanding what its impact will be on future 
          litigation."
           








                                                                 SB 474
                                                                  Page  18

           A coalition of property owners, led by the California Building 
          Industry Association contend that the measure would shift all 
          liability caused by a subcontractor to the general contractor 
          and property owner.  These groups argue that the bill eliminates 
          subcontractor's indemnity, defense and insurance obligations.  
          They contend that general contractors and construction managers 
          will not be able to recover against subcontractor during 
          litigation, because the bill prohibits indemnity, defense and 
          insurance for "claimed liability" - or post litigation, because 
          the bill prohibits defense, indemnity and insurance for "actual 
          liability".  They further argue that under the bill general 
          contractors and construction managers will be held liable for 
          damages caused by others.  If a subcontractor fails to respond 
          or chooses to go out of business and start as a new company, the 
          general contractor and construction manager are required to pay 
          for the absent subcontractor's liability, even where the general 
          contractor/construction manager did not cause and had no reason 
          to know that the subcontractor would evade its own 
          responsibility.  Finally, this group asserts that the bill will 
          ensure a divided defense in construction litigation because it 
          proposes to allow each subcontractor to defend, through separate 
          counsel, their own scope of work, increasing finger-pointing to 
          other subcontractors and driving up the frictional costs of 
          litigation rather than working cooperatively together.  

          In response to these arguments, the author states that she has 
          agreed to take a number of amendments requested by opponents, 
          including clarifying "active" negligence so that a subcontractor 
          could not avoid its own liability obligations.  Further, "loss, 
          damage, or expense" has been clarified using existing law under 
          sole negligence to more particularly identify which types of 
          claims (death, personal injury, and property) are subject to the 
          new active negligence provisions.  The author states that 
          general contractors proposed and the author agreed to clarify 
          the claim information that should be tendered by a general 
          contractor to the subcontractor to initiate the subcontractor's 
          liability obligations.  In addition, the author notes that the 
          bill does not seek to eliminate the responsibility of design 
          professionals from being liable for defective design plans.  
          Finally, the author states that existing law allows parties to 
          bring other liable parties into a claim, and this bill would not 
          change that right, nor would it impair the ability for general 
          contractors and subcontractors to seek equitable indemnity from 
          the design professional. 
   








                                                                  SB 474
                                                                  Page  19

           REGISTERED SUPPORT / OPPOSITION  :

           Support 

           California Association of Sheet Metal and Air Conditioning 
          Contractors' National Association (co-sponsor)
          California Legislative Conference of the Plumbing, Heating and 
            Piping Industry (co-sponsor)
          Concrete Contractors Association (co-sponsor)
          Crane Owners Association (co-sponsor)
          California Chapters of the National Electrical Contractors 
            Association (co-sponsor)
          A Better Valley Crane
          Aderholt Specialty Company, Inc.  
           AGC, Inc.  
           AGI Marble Company  
           Ahlborn Fence & Steel, Inc.  
           Ahlborn Structural Steel, Inc.  
           Air Conditioning Sheet Metal Association  
           Air-Conditioning & Refrigeration Contractors Association
          Air Systems
          Alliance for Jobs and Safety in Construction  
           American Subcontractors Association - California  
           Anglemyer Crane Rental
          Architectural Glass & Aluminum
          Associated Plumbing & Mechanical Contractors
          Bagatelos Architectural Glass Systems, Inc.
          Berger Bros., Inc.  
           B.T. Mancini Co., Inc.  
           Bragg Crane & Rigging Co. 
           Burnett & Sons Planing Mill and Lumber Co., Inc.  
           Calender-Robinson Co., Inc.  
           California Chapter of the American Fence Association
          California Chapter of the National Electrical Contractors 
          Association  
           California Crane & Rigging, LLC  
           California Erectors, Inc.  
           California Fence Contractors' Association  
           California Labor Federation, AFL-CIO  
           California Landscape & Irrigation Council  
           California Landscape Contractors Association
          California Legislative Conference of the Plumbing, Heating and 
          Piping Industry  
           California Local Unions of the Sheet Metal Workers' Western 
          States Council  








                                                                 SB 474
                                                                  Page  20

           California Plumbing and Mechanical Contractors Association
          California Professional Association of Specialty Contractors  
           California Sheet Metal  
           California State Association of Electrical Workers  
           California State Pipe Trades Council  
           California-Nevada Conference of Operating Engineers  
           The Carvist Corporation
          Case Pacific Company  
           Central Sierra Electric  
           Champion Crane Rental, Inc.  
           Chino Glass & Glazing Corp.  
           Chula Vista Electric Co.  
           Clark Steel Fabricators, Inc.  
           Coastline Steel Corporation  
           Collins Company  
           Construction Industry Legislative Council  
           Construction Preliens & Paperwork  
           Continental Plumbing, Inc.  
           Craig Electric, Inc.  
           Crane Rental Service, Inc.  
           Crown Fence 
          Custom Metal Fabricators  
           D&R Glass, Inc.  
           Daley's Drywall  
           Darden Painting, Inc.  
           Delta Electrical Construction, Inc.  
           Doty Bros. Construction Company  
           Dowdle & Sons 
           DPW, Inc.  
           Dynamic Precast Co., Inc.  
           Eberhard  
           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.  
           Glass & Sash, Inc.  
           Golden State Roofing Waterproofing  
           Greenscape  
           GT Industries  








                                                                 SB 474
                                                                  Page  21

           Guy Evans Contractor Services 
          Heating & Air Conditioning, Inc.  
           H Toji and Company  
           Herman Weissker, Inc.  
           Hill Crane Service, Inc.  
           Innovative Mechanical, Inc.  
           International Brotherhood of Electrical Workers Local Unions 
          Nos. 6, 40, 302, 340, 413, 441,                                  
           
               551, 569, 595, 639, and 684
          J & J Acoustics
          J.H. Simpson Co., Inc.  
           J. Noble Binns Plumbing Co., Inc.  
           James L. Harris' Painting & Decorating, Inc.  
           Jerry Thompson & Sons, Inc.  
           Lawson Roofing Co., Inc.  
           Los Angeles County Federation of Labor, AFL-CIO  
           Los Angeles Painting & Finishing Contractors Association
          Los Angeles Unified School District  
           Luppen and Hawley, Inc.
          Karysn Construction  
          Kirk Builders  
           Mammoth Electric  
           Marina Landscape, Inc.
          Masonry Concepts Inc.
          McClone Construction Company  
           McIntyre Company  
           McLennon Law Corporation  
           Mechanical Environmental Systems Analysis Adjustment Agency  
           Merona Enterprises 
          Mesa3, Inc.  
           Mobile Crane Operators Group of Southern California
          Monarch Mechanical  
           Morrow Painting, Inc.  
           Mr. Crane, Inc.  
           Mulhauser Steel, Inc.  
           Murphy Industrial Coatings, Inc.  
           Neal Electric Corporation  
           Nevell Group, Inc.  
           Nor-Cal Scaffolding, Inc.  
           Northern California Mechanical Contractors Association  
           Oak Grove Construction
          Panelized Structures, Inc.  
           Partition Specialties, Inc.  
           Paul Mackin Incorporated  








                                                                 SB 474
                                                                  Page  22

           Peninsula Crane & Rigging
          Performance Contracting Inc.  
           Placer Electric, Inc.  
           Plastic Tops, Inc.
          Plumbers, Steamfitters and Refrigeration Fitters Local Union 
          #467  
           Plumbers & Pipefitters Local Union Nos. 230, 447  
           Plumbers and Steamfitters Local Union Nos. 159, 398  
           Porter Law Group  
           Power Communication Systems, Inc.  
           Precision Crane Service, Inc.  
           Ray L. Hellwig Mechanical Co., Inc.  
           Reliable Crane Rigging
          Richewell Steel Co., Inc.  
           Rigging International  
           RFJ Meiswinkel Company  
           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 
          Sharpe Interior Sytems Drywall contractors  
           Sheedy Drayage Co.  
           Sheet Metal Workers' International Association Local Unions Nos. 
          104, 162 and 273
          Sheet Metal and Air Conditioning Contractors National 
          Association (Bay Area Chapter)  
           Shepherd & Son, Inc.  
           Sherrin Glass & Metal, Inc.
          Shore Steel, Inc.  
           Sierra Woodworking  
           Silva Caseworks, Inc.
          Small School Districts Association
          SMG Stone Company, Inc.  
           Smith Steel Services  
           South Bay Crane & Rigging, Inc.  
           South Coast Industrial Door, Inc.
          Southern California Contractors Association  
           Southland Industries  
           Specialty Crane & Rigging  
           Sprinkler Fitters Local Union No. 709  
           State Building and Construction Trades Council of California  








                                                                 SB 474
                                                                  Page  23

           Sterndahl Enterprises, Inc.  
           Strategic Mechanical, Inc.  
           Struc Steel, Inc.  
           Surety Associates of Southern California Insurance Services  
           T&R Communications, Inc.  
           Tardiff Sheet Metal and Air Conditioning, Inc.  
           Thermal Mechanical  
           Tidwell Excavating, Inc.  
           Titan Crane & Rigging  
           Turman Commercial Painters  
           United Association of Journeymen and Apprentices of the Plumbing 
          and Pipe Fitting Industry of the United States and Canada - 
          Plumbers & Steamfitters Local Unions 93, 114, 230 and 398  
           Union Roofing Contractors Association  
           Urata & Sons Cement, Inc.
          USGA Inc.  
           Ventura County Plumbers and Pipe Fitters Local Union No. 484  
           Waco Scaffolding & Equipment
          Walters & Wolf 
          Warren Consulting Engineers, Inc.
          Warren Land Surveying, Inc.  
           West Coast Cranes, Inc.  
           Western Allied Corporation
          Western Allied Mechanical, Inc.  
           Western Fire Protection, Inc.  
           Western Floor Service, Inc.  
           Western Stabilization  
          Western States Council of Sheet Metal Workers
          Western Wall & Ceiling Contractors Association
          Whelan Building Specialties
          Wittler Young Co. Inc.

           Opposition (prior to proposed amendments)  :

          Alameda County Board of Supervisors 
          Associated General Contractors
          Association of California Cities - Orange County 
          Association of California Construction Managers
          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








                                                                  SB 474
                                                                  Page  24

          California Hospital Association
          California Hotel & Lodging Association
          California Landscape Contractors Association
          California Retailers Association
          California State Association of Counties
          California Wind Energy Association 
          Castroville Community Services District 
          City and County of San Francisco
          City of Bakersfield 
          City of Encinitas
          City of Highland
          City of Huron
          City of Livingston 
          City of Lodi 
          City of Manteca
          City of Merced
          City of Newman
          City of Palos Verdes Estates
          City of Rancho Cucamonga 
          City of Riverbank Community Development Department 
          City of Rosemead
          City of Selma 
          City of Tehachapi 
          City of Tulare 
          City of Vista
          City of Wasco
          City of Waterford 
          Civil Justice Association of California
          Construction Employers Association
          Corona-Norco Unified School District 
          Costa Mesa Sanitary District Board of Directors
          Cucamonga Valley Water District
          Cupertino Union School District
          Howard Jarvis Taxpayers Association
          International Conference of Shopping Centers
          Irvine Ranch Water District
          Modesto City School District 
          Modesto City Schools
          National Association of Industrial Office Properties
          Oceanside Unified School District 
          Orange County Business Council
          Rancho Simi Recreation and Park District
          RGM and Associates
          Riverside Community College District
          Regional Council of Rural Counties








                                                                  SB 474
                                                                  Page  25

          Riverside County Office of the Superintendent
          Riverside County School Superintendents' Association 
          Saddleback Valley Unified School District 
          San Diego Downtown Partnership
          Simi Valley Unified School District
          St. Helena Unified School District
          Tenet HealthSystems
          Three Valleys Municipal Water District
          Town of Apple Valley 
          Urban Counties Caucus
          Vista Irrigation District


           Analysis Prepared by  :    Kevin G. Baker / JUD. / (916) 319-2334