BILL ANALYSIS Ó
SB 474
Page 1
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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ÝExisting 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 § 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
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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 "ÝI]f the
contractor is bound to build according to plans and
specifications prepared by the owner Ýpublic 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
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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."
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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.
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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
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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
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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
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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
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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