BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 474|
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UNFINISHED BUSINESS
Bill No: SB 474
Author: Evans (D)
Amended: 9/1/11
Vote: 21
SENATE JUDICIARY COMMITTEE : 3-2, 5/12/11
AYES: Evans, Corbett, Leno
NOES: Harman, Blakeslee
SENATE FLOOR : 22-13, 6/1/11
AYES: Alquist, Calderon, Corbett, Correa, De León,
DeSaulnier, Evans, Hancock, Hernandez, Kehoe, Leno, Lieu,
Liu, Lowenthal, Negrete McLeod, Padilla, Pavley, Price,
Rubio, Steinberg, Vargas, Yee
NOES: Anderson, Berryhill, Blakeslee, Dutton, Fuller,
Gaines, Harman, Huff, La Malfa, Runner, Strickland,
Walters, Wyland
NO VOTE RECORDED: Cannella, Emmerson, Simitian, Wolk,
Wright
ASSEMBLY FLOOR : 69-1, 9/6/11 - See last page for vote
SUBJECT : Commercial construction contracts: indemnity
SOURCE : California Association of Sheet Metal and Air
Conditioning Contractors National
Association
California Legislative Conference of the
Plumbing, Heating and Piping Industry
Concrete Contractors Association
Crane Owners Association
CONTINUED
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California Chapters of the National Electrical
Contractors Association
DIGEST : This bill regulates indemnification agreements
in specified private commercial and public works
construction contracts.
Assembly Amendments (1) expand the definition of
"construction contract", (2) recast language relative to
contracts entered into on or after January 1, 2013, (3)
clarify and narrow the bill by deleting certain legislative
findings and declarations, eliminating contentious
exceptions regarding active negligence, exempting
homeowners from the bill's provisions, further delineating
the contracts to which the new restrictions on
indemnification clauses apply, requiring additional
information to be shared with general contractors and
construction managers, defining terms, and specifying the
interrelationship between the new proposed restrictions on
indemnification contracts and existing obligations, and (4)
make clarifying changes.
Senate Floor Amendments of 5/24/11 exempt public entities
from the changes to indemnity and duty to defend clauses
proposed by this bill. Accordingly, existing law would
continue to apply to commercial construction agreements
regarding indemnity and duty to defend entered into by
public entities. These amendments delay the enactment date
to January 1, 2013, which would give contracting parties
time to comply with the provisions of this bill.
ANALYSIS : Existing law defines "indemnity" as a contract
by which one engages to save another from a legal
consequence of the conduct of one of the parties, or of
some other person. (Civil Code Section 2772)
Existing law provides that an agreement to indemnify
against the acts of a certain person, applies not only to
his acts and their consequences, but also to those of his
agents. (Civil Code Section 2775)
Existing law provides that, among other things, in the
interpretation of a contract of indemnity and unless a
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contrary intention appears:
Upon an indemnity against liability, expressly, or in
other equivalent terms, the person indemnified is
entitled to recover upon becoming liable;
An indemnity against claims, or demands, or liability,
expressly, or in other equivalent terms, embraces the
costs of defense against such claims, demands, or
liability incurred in good faith, and in the exercise of
a reasonable discretion; and
The person indemnifying is bound, on request of the
person indemnified, to defend actions or proceedings
brought against the latter in respect to the matters
embraced by the indemnity, but the person indemnified has
the right to conduct such defenses, if he chooses to do
so. (Civil Code Section 2778)
Existing case law interprets the above-described provisions
to provide that, unless otherwise provided, a duty to
defend arises out of an indemnity obligation as soon as the
litigation commences, and regardless of whether the
indemnitor (the person indemnifying) is ultimately found
negligent. ( Crawford v. Weather Shield (2008) 44 Cal.4th
541)
Existing law provides that where one, at the request of
another, engages to answer in damages, whether liquidated
or unliquidated, for any violation of duty on the part of
the latter, he is entitled to be reimbursed in the same
manner as a surety, for whatever he may pay. (Civil Code
Section 2779)
Existing law provides, except as specified, that
provisions, clauses, covenants, or agreements contained in,
collateral to, or affecting any construction contract and
that purport to indemnify the promisee against liability
for damages for death or bodily injury to persons, injury
to property, or any other loss, damage or expense arising
from the sole negligence or willful misconduct of the
promisee or the promisee's agents, servants, or independent
contractors who are directly responsible to the promisee,
or for defects in design furnished by those persons, are
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against public policy and are void and unenforceable.
Existing law provides that this section does not affect the
validity of any insurance contract, workers' compensation,
or agreement issued by an admitted insurer as defined by
the Insurance Code. (Civil Code Section 2782(a))
Existing law provides, except as specified, that
provisions, clauses, covenants, or agreements contained in,
collateral to, or affecting any construction contract with
a public agency that purport to impose on the contractor,
or relieve the public agency from, liability for the active
negligence of the public agency are void and unenforceable.
(Civil Code Section 2782(b))
Existing law provides separate indemnity and duty to defend
restrictions and requirements regarding residential
construction contracts. (Civil Code Section 2782(c)-(e))
Existing law provides that a builder, general contractor,
or subcontractor shall have the right to seek equitable
indemnity for any claim governed by Civil Code Section
2782. (Civil Code Section 2782(f))
Existing law provides that Civil Code Section 2782 does not
limit, restrict, or prohibit the right of a builder,
general contractor, or subcontractor to seek equitable
indemnity against any supplier, design professional, or
product manufacturer. (Civil Code Section 2782(g))
Existing law provides that Section 2782 does not prevent a
party to a construction contract and the owner or other
party for whose account the construction contract is being
performed from negotiating and expressly agreeing with
respect to the allocation, release, liquidation, exclusion,
or limitation as between the parties of any liability for
design defects or liability of the promisee to the promisor
arising out of or relating to the construction contract.
(Civil Code Section 2782.5)
Existing law defines "construction contract" and "design
defect," as specified. (Civil Code Sections 2783 and 2784)
This bill:
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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/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.
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
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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 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 : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 9/6/11)
California Association of Sheet Metal and Air Conditioning
Contractors' National Association (co-source)
California Legislative Conference of the Plumbing, Heating
and Piping Industry (co-source)
Concrete Contractors Association (co-source)
Crane Owners Association (co-source)
California Chapters of the National Electrical Contractors
Association (co-source)
A Better Valley Crane
AGC, Inc.
AGI Marble Company
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Ahlborn Fence & Steel, Inc.
Ahlborn Structural Steel, Inc.
Air Conditioning Sheet Metal Association
Air-conditioning & Refrigeration Contractors Association
American Council of Engineering Companies
American Subcontractors Association - California
Anglemyer Crane Rental
Architectural Glass & Aluminum
Associated Plumbing & Mechanical Contractors
B.T. Mancini Co., Inc.
Bragg Crane & Rigging Co.
Burnett & Sons Planing Mill and Lumber Co., Inc.
Calender-Robinson Co., Inc.
California Chapter of the American Fence 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 Local Unions of the Sheet Metal Workers' Western
States Council
California Plumbing and Mechanical Contractors Association
California Sheet Metal
California State Association of Electrical Workers
California State Pipe Trades Council
California-Nevada Conference of Operating Engineers
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
D&R Glass, Inc.
Daley's Drywall
Darden Painting, Inc.
Delta Electrical Construction, Inc.
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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
Guy Evans Contractor Services
H Toji and Company
Herman Weissker, Inc.
Hill Crane Service, Inc.
Innovative Mechanical, Inc.
International Brotherhood of Electrical Workers Local
Unions Nos. 6, 302, 340, 413, 441, 551, 569, 639, and 684
J. Noble Binns Plumbing Co., Inc.
James L. Harris' Painting & Decorating, Inc.
Jerry Thompson & Sons, Inc.
Kirk Builders
Lawson Roofing Co., Inc.
Los Angeles County Federation of Labor, AFL-CIO
Los Angeles County Unified School District (opposed prior
to 6/24 amends)
Los Angeles Painting & Finishing Contractors Association
Luppen and Hawley, Inc.
Mammoth Electric
Marina Landscape, Inc.
McIntyre Company
McLennon Law Corporation
Mechanical Environmental Systems Analysis Adjustment Agency
Merona Enterprises
Mobile Crane Operators Group of Southern California
Morrow Painting, Inc.
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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
Orange County Business Council - Opposed prior to September
1 amends
Partition Specialties, Inc.
Paul Mackin Incorporated
Peninsula Crane & Rigging
Placer Electric, Inc.
Plastic Tops, Inc.
Plumbers & Pipefitters Local Union No. 447
Plumbers and Steamfitters Local Union No. 159
Plumbing-Heating-Cooling Contractors Association of
California
Porter Law Group
Power Communication Systems, Inc.
Precision Crane Service, Inc.
Ray L. Hellwig Mechanical Co., Inc.
Reliable Crane Rigging
RFJ Meiswinkel Company
Rigging International
Rusco, Inc.
Saddleback Contractors and Consultants
Santa Barbara Glass Company
Saturn Electric, Inc.
Schetter Electric, Inc.
Seawright Custom Precast, Inc.
Select Electric, Inc.
Shane Alexander Custom Tile & Stone
Sheedy Drayage Co.
Sheet Metal Workers' International Association Local Unions
Nos. 104 and 273
Shepherd & Son, Inc.
Sherrin Glass & Metal, Inc.
Sierra Woodworking
Silva Caseworks, Inc.
Small School Districts' Association - Opposed prior to June
24 amends
SMG Stone Company, Inc.
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Smith Steel Services
South Bay Crane & Rigging, Inc.
South Coast Industrial Door, Inc.
Southern California Contractors Association
Specialty Crane & Rigging
Sprinkler Fitters Local Union No. 709
State Building and Construction Trades Council of
California
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.
The Carvist Corporation
Thermal Mechanical
Tidwell Excavating, Inc.
Titan Crane & Rigging
Turman Commercial Painters
Union Roofing Contractors Association
United Association of Journeymen and Apprentices of the
Plumbing and Pipe Fitting Industry of the United States
and Canada - Plumbers & Steamfitters Local Unions Nos.
93, 114, 230 and 398
Urata & Sons Cement, Inc.
Ventura County Plumbers and Pipe Fitters Local Union No.
484
Walters & Wolf
West Coast Cranes, Inc.
Western Allied Corporation
Western Electrical Contractors Association
Western Fire Protection, Inc.
Western Floor Service, Inc.
Western Stabilization
Western States Council of Sheet Metal Workers
Whelan Building Specialties
OPPOSITION : (Verified 9/1/11)
Current :
Alameda County Board of Supervisors
Associated General Contractors
California Conference of Carpenters
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Construction Employers Association
Prior Version (unable to reverify):
Association of California Cities - Orange County
Association of California School Administrators
California Association of Construction Managers
California Wind Energy Association
Castroville Community Services District
Cities of Bakersfield, Highland, Huron, Livingston, Lodi,
Manteca, Merced, Newman, Palos Verdes Estates, Rancho
Cucamonga, Rosemead, Selma, Tehachapi, Tulare, Vista,
Wasco, and Waterford
City and County of San Francisco
City of Riverbank Community Development Department
Corona-Norco Unified School District
Costa Mesa Sanitary District Board of Directors
Cucamonga Valley Water District
Cupertino Union School District
Engineering & Utility Contractors Association
Irvine Ranch Water District
Modesto City School District
Modesto City Schools
National Association of Industrial Office Properties
Oceanside Unified School District
Rancho Simi Recreation and Park District
RGM and Associates
Riverside Community College District
Saddleback Valley Unified School District
Simi Valley Unified School District
St. Helena Unified School District
Town of Apple Valley
Vista Irrigation District
ARGUMENTS IN SUPPORT : The author writes: "SB 474 would
protect construction parties from bearing liability for the
negligence or design defects of other parties engaged in
the construction project by making risk-shifting contract
clauses unenforceable. For this purpose, SB 474 would
provide that indemnity and duty to defend clauses contained
in all construction and insurance contracts would be
unenforceable to the extent that the clauses required the
non-fault party to be responsible for claims arising from
the negligence or fault of another contracting party."
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The California Association of Sheet Metal and Air
Conditioning Contractors' National Association, a sponsor
of this bill, writes:
"ÝC]ontractual clauses known as 'Type 1 indemnity' allow
a general contractor who is ninety-nine percent at-fault
for an injury or damage to shift ALL of the liability and
responsibility for defense to a subcontractor who is only
one percent at-fault (or to a subcontractor who has no
liability for the circumstances surrounding the matter,
but whose work is peripherally connected to an underlying
accident). Emerging and small businesses simply cannot
grow or survive in an environment where they are required
to pay for the accidents and mistakes created by other
larger companies.
"Additionally, these contract provisions are leading to a
decline in jobsite safety. General contractors are the
"controlling employer" and have the overall
responsibility to keep construction jobsites safe.
Without liability reform legislation for commercial and
industrial construction contracts, they lack incentive to
ensure that all safety measures are in place and enforced
because they are not financially responsible for any
accidents."
The sponsors of this bill have numerous examples of the
harmful effects of these indemnity provisions. The
following are a few of these examples:
Project owner made a claim for construction defects
against the general contractor; the subcontractor's
insurer contributed $20,000 to remove the subcontractor
from the lawsuit, even though the subcontractor had not
contributed to the construction defect;
Subcontractor providing HVAC installation was
cross-claimed into a complaint regarding water leaks on
the exterior of a building; the total amount paid by the
subcontractor was $500,000 to settle the claim even
though the subcontractor was not at-fault;
Subcontractor paid $500,000 toward settlement even though
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the construction defects were not the fault of the
subcontractor; and
Subcontractor paid $11,000,000 in a personal injury
action due to the indemnity provisions in the
subcontract, even though the subcontractor was deemed not
at fault for the injury; this payout has resulted in the
subcontractor being deemed a high risk insured and, as a
result, the subcontractor's insurance premiums have
increased.
These subcontractors report that, due to increased costs
and insurance premiums related to these payouts for
construction defects and injuries resulting from the
construction project, they are having difficulty providing
competitive bidding on projects and growing their
businesses.
ARGUMENTS IN OPPOSITION : 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.
ASSEMBLY FLOOR : 69-1, 9/6/11
AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall,
Block, Blumenfield, Bonilla, Bradford, Brownley,
Buchanan, Butler, Charles Calderon, Campos, Carter,
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Cedillo, Chesbro, Conway, Davis, Dickinson, Eng, Feuer,
Fletcher, Fong, Fuentes, Furutani, Beth Gaines, Galgiani,
Garrick, Gatto, Gordon, Grove, Hagman, Hall, Harkey,
Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman,
Jeffries, Lara, Bonnie Lowenthal, Ma, Miller, Mitchell,
Monning, Nestande, Nielsen, Norby, Olsen, Pan, Perea, V.
Manuel Pérez, Portantino, Silva, Skinner, Smyth, Solorio,
Swanson, Torres, Valadao, Wagner, Wieckowski, Williams,
Yamada, John A. Pérez
NOES: Jones
NO VOTE RECORDED: Bill Berryhill, Cook, Donnelly, Gorell,
Halderman, Knight, Logue, Mansoor, Mendoza, Morrell
RJG:mw 9/7/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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