Amended in Senate May 10, 2016

Amended in Senate April 18, 2016

Senate Bill No. 885

Introduced by Senator Wolk

January 19, 2016

An act to amend Section 2782 of the Civil Code, relating to contracts.

LEGISLATIVE COUNSEL’S DIGEST

SB 885, as amended, Wolk. Construction contracts: indemnity.

Existing law makes specified provisions in construction contracts void and unenforceable, including provisions that purport to indemnify the promisee against liability for damages for death or bodily injury to persons, injury to property, or any other loss arising from the sole negligence or willful misconduct of the promisee or the promisee’s agents who are directly responsible to the promisee, or for defects in design furnished by those persons.

This bill would specify, with certain exceptions, for construction contracts entered into on or after January 1, 2017, that a design professional, as defined, only has the duty to defend himself or herself from claims or lawsuits that arise out of, or pertain or relate to, negligence, recklessness, or willful misconduct of the design professional. begin delete Under the bill, a design professional would not have a duty to defend claims or lawsuits against any other person or entity arising from a construction project, except that person’s or entity’s reasonable defense costs arising out of the design professional’s degree of fault, end delete begin insert The bill would prohibit these provisions from being construed to affect any duty of a design professional to pay a reasonable allocated share of defense fees and costs with respect to claims and lawsuits alleging negligence, recklessness, or willful misconduct of the design professional, end insert as specified. The bill would prohibit waiver of these provisions and would provide that any begin delete clause in end delete begin insert clause, covenant, or agreement contained in, collateral to, or affecting end insert a contract that requires a design professional to defend claims or lawsuits against other persons or entities is void and unenforceable. The bill would provide legislative findings and declarations in support of these provisions.

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

The Legislature finds and declares all of the
following:

(a) Errors and omissions insurance for design professionals does
not provide coverage for the defense of claims against other persons
and other entities involved in construction projects.

(b) Requiring design professionals to defend claims against
other persons or other entities involved in construction projects
when insurance coverage is not available is unfair and contrary to
sound public policy.

(c) It is sound public policy for all persons and entities in
projects to defend themselves against claims of negligence or error.

(d) It is the intent of the Legislature in enacting this act to
prohibit indemnity agreements that require design professionals
to defend claims made against other persons or other entities
involved in construction projects.

SEC. 2.  

Section 2782 of the Civil Code is amended to read:

2782.  

(a) Except as provided in Sections 2782.1, 2782.2,
2782.5, and 2782.6, 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 against public policy and are void and
unenforceable; provided, however, that this section shall not affect
the validity of any insurance contract, workers’ compensation, or
agreement issued by an admitted insurer as defined by the
Insurance Code.

(b) (1) Except as provided in Sections 2782.1, 2782.2, and
2782.5, provisions, clauses, covenants, or agreements contained
in, collateral to, or affecting any construction contract with a public
agency entered into before January 1, 2013, 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.

(2) Except as provided in Sections 2782.1, 2782.2, and 2782.5,
provisions, clauses, covenants, or agreements contained in,
collateral to, or affecting any construction contract with a public
agency entered into on or after January 1, 2013, that purport to
impose on any contractor, subcontractor, or supplier of goods or
services, or relieve the public agency from, liability for the active
negligence of the public agency are void and unenforceable.

(c) (1) Except as provided in subdivision (d) and Sections
2782.1, 2782.2, and 2782.5, provisions, clauses, covenants, or
agreements contained in, collateral to, or affecting any construction
contract entered into on or after January 1, 2013, with the owner
of privately owned real property to be improved and as to which
the owner is not acting as a contractor or supplier of materials or
equipment to the work, that purport to impose on any contractor,
subcontractor, or supplier of goods or services, or relieve the owner
from, liability are unenforceable to the extent of the active
negligence of the owner, including that of its employees.

(2) For purposes of this subdivision, an owner of privately
owned real property to be improved includes the owner of any
interest therein, other than a mortgage or other interest that is held
solely as security for performance of an obligation.

(3) This subdivision shall not apply to a homeowner performing
a home improvement project on his or her own single family
dwelling.

(d) For all construction contracts, and amendments thereto,
entered into after January 1, 2009, for residential construction, as
used in Title 7 (commencing with Section 895) of Part 2 of
Division 2, all provisions, clauses, covenants, and agreements
contained in, collateral to, or affecting any construction contract,
and amendments thereto, that purport to insure or indemnify,
including the cost to defend, the builder, as defined in Section 911,
or the general contractor or contractor not affiliated with the
builder, as described in subdivision (b) of Section 911, by a
subcontractor against liability for claims of construction defects
are unenforceable to the extent the claims arise out of, pertain to,
or relate to the negligence of the builder or contractor or the
builder’s or contractor’s other agents, other servants, or other
independent contractors who are directly responsible to the builder,
or for defects in design furnished by those persons, or to the extent
the claims do not arise out of, pertain to, or relate to the scope of
work in the written agreement between the parties. This section
shall not be waived or modified by contractual agreement, act, or
omission of the parties. Contractual provisions, clauses, covenants,
or agreements not expressly prohibited herein are reserved to the
agreement of the parties. Nothing in this subdivision shall prevent
any party from exercising its rights under subdivision (a) of Section
910. This subdivision shall not affect the obligations of an
insurance carrier under the holding of Presley Homes, Inc. v.
American States Insurance Company (2001) 90 Cal.App.4th 571.
Nor shall this subdivision affect the obligations of a builder or
subcontractor pursuant to Title 7 (commencing with Section 895)
of Part 2 of Division 2.

(e) Subdivision (d) does not prohibit a subcontractor and builder
or general contractor from mutually agreeing to the timing or
immediacy of the defense and provisions for reimbursement of
defense fees and costs, so long as that agreement does not waive
or modify the provisions of subdivision (d) subject, however, to
paragraphs (1) and (2). A subcontractor shall owe no defense or
indemnity obligation to a builder or general contractor for a
construction defect claim unless and until the builder or general
contractor provides a written tender of the claim, or portion thereof,
to the subcontractor which includes all of the information provided
to the builder or general contractor by the claimant or claimants,
including, but not limited to, information provided pursuant to
subdivision (a) of Section 910, relating to claims caused by that
subcontractor’s scope of work. This written tender shall have the
same force and effect as a notice of commencement of a legal
proceeding. If a builder or general contractor tenders a claim for
construction defects, or a portion thereof, to a subcontractor in the
manner specified by this provision, the subcontractor shall elect
to perform either of the following, the performance of which shall
be deemed to satisfy the subcontractor’s defense obligation to the
builder or general contractor:

(1) Defend the claim with counsel of its choice, and the
subcontractor shall maintain control of the defense for any claim
or portion of claim to which the defense obligation applies. If a
subcontractor elects to defend under this paragraph, the
subcontractor shall provide written notice of the election to the
builder or general contractor within a reasonable time period
following receipt of the written tender, and in no event later than
90 days following that receipt. Consistent with subdivision (d),
the defense by the subcontractor shall be a complete defense of
the builder or general contractor of all claims or portions thereof
to the extent alleged to be caused by the subcontractor, including
any vicarious liability claims against the builder or general
contractor resulting from the subcontractor’s scope of work, but
not including claims resulting from the scope of work, actions, or
omissions of the builder, general contractor, or any other party.
Any vicarious liability imposed upon a builder or general contractor
for claims caused by the subcontractor electing to defend under
this paragraph shall be directly enforceable against the
subcontractor by the builder, general contractor, or claimant.

(2) Pay, within 30 days of receipt of an invoice from the builder
or general contractor, no more than a reasonable allocated share
of the builder’s or general contractor’s defense fees and costs, on
an ongoing basis during the pendency of the claim, subject to
reallocation consistent with subdivision (d), and including any
amounts reallocated upon final resolution of the claim, either by
settlement or judgment. The builder or general contractor shall
allocate a share to itself to the extent a claim or claims are alleged
to be caused by its work, actions, or omissions, and a share to each
subcontractor to the extent a claim or claims are alleged to be
caused by the subcontractor’s work, actions, or omissions,
regardless of whether the builder or general contractor actually
tenders the claim to any particular subcontractor, and regardless
of whether that subcontractor is participating in the defense. Any
amounts not collected from any particular subcontractor may not
be collected from any other subcontractor.

(f) Notwithstanding any other provision of law, if a
subcontractor fails to timely and adequately perform its obligations
under paragraph (1) of subdivision (e), the builder or general
contractor shall have the right to pursue a claim against the
subcontractor for any resulting compensatory damages,
consequential damages, and reasonable attorney’s fees. If a
subcontractor fails to timely perform its obligations under
paragraph (2) of subdivision (e), the builder or general contractor
shall have the right to pursue a claim against the subcontractor for
any resulting compensatory and consequential damages, as well
as for interest on defense and indemnity costs, from the date
incurred, at the rate set forth in subdivision (g) of Section 3260,
and for the builder’s or general contractor’s reasonable attorney’s
fees incurred to recover these amounts. The builder or general
contractor shall bear the burden of proof to establish both the
subcontractor’s failure to perform under either paragraph (1) or
(2) of subdivision (e) and any resulting damages. If, upon request
by a subcontractor, a builder or general contractor does not
reallocate defense fees to subcontractors within 30 days following
final resolution of the claim as described above, the subcontractor
shall have the right to pursue a claim against the builder or general
contractor for any resulting compensatory and consequential
damages, as well as for interest on the fees, from the date of final
resolution of the claim, at the rate set forth in subdivision (g) of
Section 3260, and the subcontractor’s reasonable attorney’s fees
incurred in connection therewith. The subcontractor shall bear the
burden of proof to establish both the failure to reallocate the fees
and any resulting damages. Nothing in this section shall prohibit
the parties from mutually agreeing to reasonable contractual
provisions for damages if any party fails to elect for or perform
its obligations as stated in this section.

(g) A builder, general contractor, or subcontractor shall have
the right to seek equitable indemnity for any claim governed by
this section.

(h) Nothing in this section limits, restricts, or prohibits the right
of a builder, general contractor, or subcontractor to seek equitable
indemnity against any supplier, design professional, or product
manufacturer.

(i) As used in this section, “construction defect” means a
violation of the standards set forth in Sections 896 and 897.

begin delete

(j) (1) Commencing with contracts entered into on or after
January 1, 2017, a design professional, as defined in paragraph (2)
of subdivision (c) of Section 2782.8, shall only have the duty to
defend himself or herself from claims and lawsuits that arise out
of, pertain to, or relate to, the negligence, recklessness, or willful
misconduct of the design professional. A design professional shall
have no duty to defend claims and lawsuits against other persons
or entities. A design professional shall be obligated to reimburse
reasonable defense costs incurred by other persons or entities,
limited to the design professional’s degree of fault, as determined
by a court, arbitration, or negotiated settlement.

end delete begin insert

(j) (1) Commencing with contracts entered into on or after
January 1, 2017, a design professional, as defined in paragraph
(2) of subdivision (c) of Section 2782.8, shall only have the duty
to defend himself or herself from claims that arise out of, pertain
to, or relate to the negligence, recklessness, or willful misconduct
of the design professional. All provisions, clauses, covenants, and
agreements contained in, collateral to, or affecting any such
contract that purport to require a design professional to defend
claims against another party shall be unenforceable.

end insert begin insert

(2) Paragraph (1) does not prohibit a design professional from
mutually agreeing with another party to the timing or immediacy
of a defense and provisions for reimbursement of defense fees and
costs, if that agreement does not waive or modify the provisions
of paragraph (1).

end insert begin insert

(3) Paragraph (1) shall not be construed to affect any duty of
a design professional to pay a reasonable allocated share of the
defense fees and costs with respect to claims and lawsuits alleging
negligence, recklessness, or willful misconduct of the design
professional on an ongoing basis during their pendency, including
any amounts reallocated upon final resolution of a claim or
lawsuit, either by settlement or judgment.

end insert begin delete

(2)

end delete

begin insert (4) end insert  The provisions of this subdivision shall not apply to either
of the following:

(A) A claim, lawsuit, or arbitration demand where a
project-specific general liability policy insures all project
participants for general liability exposures on a primary basis and
also covers all design professionals for their legal liability arising
out of their professional services on a primary basis.

(B) A design professional who is a party to a written
design-build joint venture agreement.

begin delete

(3)

end delete

begin insert (5) end insert  The provisions of this subdivision shall not be waived or
modified by contract. Contract provisions in violation of this
subdivision are void and unenforceable. The duty of a design
professional to defend is limited as provided in this subdivision.