BILL ANALYSIS Ó
SB 474
Page 1
SENATE THIRD READING
SB 474 (Evans)
As Amended September 1, 2011
Majority vote
SENATE VOTE :22-13
JUDICIARY 6-3
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|Ayes:|Feuer, Atkins, Dickinson, | | |
| |Huber, Monning, | | |
| |Wieckowski | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Wagner, Beth Gaines, | | |
| |Jones | | |
| | | | |
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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
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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
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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
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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
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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