BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 474| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ 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 SB 474 Page 2 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 SB 474 Page 3 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 SB 474 Page 4 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: SB 474 Page 5 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 SB 474 Page 6 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 9/8/11) 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 SB 474 Page 7 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. SB 474 Page 8 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 Framers 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 SB 474 Page 9 McLennon Law Corporation McMurray Stern 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 P.T.S. Masonry, Inc. Pacific Southwest Structures, Inc. 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 River City Glass, Inc. 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 SB 474 Page 10 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. 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 University Mechanical & Engineering Contractors 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 SB 474 Page 11 Western Fire Protection, Inc. Western Floor Service, Inc. Western Stabilization Western States Council of Sheet Metal Workers Western Steel Council Whelan Building Specialties 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 SB 474 Page 12 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 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." SB 474 Page 13 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 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 SB 474 Page 14 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, 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 9/8/11 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****