BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 474
                                                                  Page  1


          SENATE THIRD READING
          SB 474 (Evans)
          As Amended  September 1, 2011
          Majority vote 

           SENATE VOTE  :22-13  
          
           JUDICIARY           6-3                                         
           
           ----------------------------------------------------------------- 
          |Ayes:|Feuer, Atkins, Dickinson, |     |                          |
          |     |Huber, Monning,           |     |                          |
          |     |Wieckowski                |     |                          |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Wagner, Beth Gaines,      |     |                          |
          |     |Jones                     |     |                          |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
          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 or her 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 workers' 
            compensation.

          3)Requires an insurer to uphold their contractual obligations to 
            additional insureds pursuant to Presley Homes, Inc. v. 
            American State Insurance Company (2001) 90 Cal.App.4th 571.

          4)Provides that an insurer maintains reimbursement rights from a 
            general contractor or other subcontractor pursuant to the 
            holding in Buss v. Superior Court (1997) 16 Cal.4th 35. 








                                                                  SB 474
                                                                  Page  2


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

          9)Provides that these new rights and obligations shall be 
            construed to affect the obligation, if any, of either a 
            contractor or construction manager to indemnify, including 
            defending or paying the costs to defend, a public agency 
            against any claim arising from the alleged active negligence 
            of the public agency under Civil Code Section 2782(b) or to 
            indemnify, including defending or paying the costs to defend, 
            an owner of privately owned real property to be improved 
            against any claim arising from the alleged active negligence 
            of the owner under Civil Code of Section 2782(c). 

          10)Provides that the foregoing changes shall not be construed to 
            affect the obligation, if any, of either a contractor or 
            construction manager to provide or maintain insurance covering 
            the acts or omissions of the promisor, including additional 
            insurance endorsements covering the acts or omissions of the 
            promisor during ongoing and completed operations pursuant to a 
            construction contract with a public agency under Civil Code 
            Section 2782(b) or an owner of privately owned real property 
            to be improved under Civil Code Section 2782(c).

           FISCAL EFFECT  :  None
           








                                                                 SB 474
                                                                  Page  3

          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, 
          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 states that the bill 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, the bill 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, negligence and construction defect costs are 








                                                                  SB 474
                                                                  Page  4

          being shifted from at-fault parties to non-fault parties.  
          Consequently, supporters argue, subcontractors are bearing a 
          significant cost burden of potential negligence and construction 
          defect claims, regardless of fault.  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.

          Supporters argue that 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.  

          Opponents argue that 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.  Opponents 
          further contend that the bill 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.  They assert that the bill repeals most 
          of the protections currently enacted under Civil Code 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.  As a result of the broad definition 
          of "active negligence," opponents contend, an owner would be 
          able to immunize itself of the risks associated with its outside 
          construction managers, administrators and others.  

          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 








                                                                  SB 474
                                                                  Page  5

          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. 

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


                                                                FN: 0002554