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
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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  9/7/11)

          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 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  
           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.
          D.A. Whitacre Construction, Inc.  

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           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.
          Emerald Steel, 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  

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           Mechanical Environmental Systems Analysis Adjustment Agency  
           Merona Enterprises  
           Mobile Crane Operators Group of Southern California  
           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  
           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 
          Richwell Steel Co., Inc.  
           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.  

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           Sierra Woodworking  
           Silva Caseworks, Inc.  
           Small School Districts' Association - Opposed prior to June 
            24 amends  
           SMG Stone Company, Inc.
          Smith Heating & Air Conditioning, Inc.  
           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.  
           Steve Valle Painting, 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


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           OPPOSITION  :    (Verified  9/7/11)

           Current  : 

          Alameda County Board of Supervisors
          Associated General Contractors
          California Conference of Carpenters
          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 State Association of Counties
          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
          Regional Council of Rural Counties
          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 
          Urban Counties Caucus
          Vista Irrigation District


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           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."

          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 

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            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; 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 

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          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, 
            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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