BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 885|
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THIRD READING
Bill No: SB 885
Author: Wolk (D)
Amended: 5/10/16
Vote: 21
SENATE JUDICIARY COMMITTEE: 6-0, 5/3/16
AYES: Jackson, Moorlach, Anderson, Leno, Monning, Wieckowski
NO VOTE RECORDED: Hertzberg
SUBJECT: Construction contracts: indemnity
SOURCE: American Council of Engineering Companies of
California
DIGEST: This bill provides that a design professional 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,
as specified. This bill states that 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. This bill specifies that it 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, and specifies that it
shall not be 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, as specified.
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Page 2
ANALYSIS:
Existing law:
1)Provides that specified rules are to be applied in the
interpretation of a contract of indemnity, unless a contrary
intention appears. Pursuant to these rules, an indemnity
against claims, or demands, or liability, embraces the costs
of defense against such claims, demands, or liability. (Civ.
Code Sec. 2778.)
2)Provides that 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. However, the person indemnified has the
right to conduct those defenses, if he or she chooses to do
so. (Civ. Code Sec. 2778.)
3)States that, unless otherwise provided, a duty to defend under
the above provisions 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;
see also UDC-Universal Development, L.P. v. CH2M Hill (2010)
181 Cal.App.4th 10.)
4)States, for all contracts, and amendments thereto, entered
into on or after January 1, 2007, with a public agency for
design professional services, all provisions, clauses,
covenants, and agreements contained in, collateral to, or
affecting any such contract, and amendments thereto, that
purport to indemnify, including the duty and the cost to
defend, the public agency by a design professional against
liability for claims against the public agency, are
unenforceable, except for claims that arise out of, pertain
to, or relate to the negligence, recklessness, or willful
misconduct of the design professional. (Civ. Code Sec.
2782.8.)
SB 885
Page 3
5)Specifies, for purposes of the above provision, that "design
professional" includes all of the following:
An individual licensed as an architect, and a business
entity offering architectural services, as specified;
An individual licensed as a landscape architect, and a
business entity offering landscape architectural services,
as specified;
An individual registered as a professional engineer, and
a business entity offering professional engineering
services as specified; and
An individual licensed as a professional land surveyor,
and a business entity offering professional land surveying
services, as specified.
This bill:
1)Provides that, commencing with contracts entered into on or
after January 1, 2017, a design professional, as specified,
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.
2)States that the above provision 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, so long as that
agreement does not waive or modify the above provision.
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Page 4
3)States that the above provision 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.
4)Specifies that its provisions do not apply to either of the
following:
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; or
A design professional who is a party to a written
design-build joint venture agreement.
1)Specifies that its provisions shall not be waived or modified
by contract, that contract provisions in violation these
provisions are void and unenforceable, and that the duty of a
design professional to defend is limited as provided in the
above provisions.
2)Makes related findings and declarations.
Background
During the past several years, the Legislature has enacted a
number of measures intended to address the use of certain types
of risk shifting in indemnity agreements, particularly those
that appear in contracts for residential construction and public
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works. In 2005, AB 758 (Calderon, Chapter 394, Statutes of
2005) was enacted to address alleged abuses of "Type I"
indemnification clauses in contracts imposed on subcontractors
by builders. These clauses typically required the subcontractor
to assume liability for the builder's negligence and misconduct,
beyond what the subcontractor would be obligated to pay under
tort law in the absence of the Type I agreement. Under AB 758,
all provisions contained in residential construction contracts
entered into after January 1, 2006, that purport to indemnify
the builder by a subcontractor against liability for claims of
construction defects are unenforceable to the extent the claims
pertain to, or relate to the negligence of the builder or his or
her agents. These provisions of existing law may not be waived
or modified by contractual agreement, act, or omission of the
parties.
The following year, the Legislature built upon AB 758 by
enacting AB 573 (Wolk, Chapter 455, Statutes of 2006) in
response to concerns that local public agencies were requiring
broad indemnity agreements in contracts with design
professionals. Those agreements were generally requiring the
design professional to hold the public agency harmless against
the conduct of the public agency or other third parties in a
public works project. AB 573 provided that, for contracts
entered into on or after January 1, 2007, with a public agency
for design professional services, all provisions that purport to
indemnify the public agency against liability for claims against
the public agency, are unenforceable, except for claims that
arise out of, pertain to, or relate to the negligence,
recklessness, or willful misconduct of the design professional.
That same year, the Legislature enacted SB 138 (Calderon,
Chapter 32, Statutes of 2007), which provided that in
residential construction contracts, provisions that purported to
require subcontractors to indemnify a general contractor or
contractor not affiliated with the builder would be
unenforceable to the extent they related to the negligence of
the non-affiliated general contractor or contractor. SB 138
sought to end a practice in residential construction contracting
where existing laws limiting risk shifting agreements were being
circumvented through hiring an unaffiliated general contractor
or contractor to act in the builder's stead in contracting with
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subcontractors.
Subsequently, AB 2738 (Jones, Chapter 467, Statutes of 2008) was
enacted as a follow up to AB 758 due to concerns that builders
had been circumventing the intent of AB 758 by requiring
subcontractors to pay for the builder's defense costs that had
no relation to the contractor's work. AB 2738, among other
things, provided that a subcontractor would have 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 to the
subcontractor which includes all of the information provided to
the builder or general contractor by the claimant or claimants
relating to claims caused by that subcontractor's scope of work.
Finally, SB 972 (Wolk, Chapter 510, Statutes of 2010) was
enacted to address issues left unresolved by prior legislation
with respect to a design professional's exposure to liability
for defense costs in indemnity agreements contained in contracts
with public agencies. SB 972 provided, with respect to
contracts and solicitation documents between design
professionals and public agencies, that all provisions which
purport to require the design professional to defend the public
agency under an indemnity agreement, including the duty and the
cost to defend, are unenforceable, except for claims that arise
out of, pertain to, or relate to the negligence, recklessness,
or willful misconduct of the design professional.
This bill extends liability protections for design professionals
beyond those enacted in SB 972. Specifically, this bill
provides that design professionals shall only have the duty to
defend themselves from claims that arise out of, pertain to, or
relate to, their negligence, recklessness, or willful
misconduct, and that any contract term purporting to require a
design professional to defend claims against another party shall
be unenforceable.
Comments
SB 885
Page 7
The author writes:
Senate Bill 885 prohibits contracts that require state
licensed design professionals, including engineers, land
surveyors, architects, and landscape architects, to defend
claims made against other persons or entities involved in
construction projects. A design professional's Errors &
Omissions professional liability insurance does not provide
coverage for the defense of claims against other persons and
entities involved in construction projects. It only covers
claims related to the negligent acts of the design
professional. A first-dollar expense obligation essentially
converts the design professional's firm into the functional
equivalent of an unlicensed insurance company. It is in the
public's best interest for all persons and entities in
projects to defend themselves against claims of negligence or
error. Design professionals will pay their proportional share
of defense costs. However, when insurance coverage is not
available, it is unfair to obligate them to defend lawsuits
against other persons or entities.
This bill maintains the current requirement that design
professionals have the duty to defend claims that are the
result of their misconduct, but specifies that design
professionals do not have an immediate and uninsurable duty to
defend claims against other persons or entities with whom they
contract.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified5/10/16)
American Council of Engineering Companies of California (source)
American Institute of Architects, California Council
American Society of Landscape Architects, California Council
Associated Transportation Engineers
California Department of Insurance
California Land Surveyors Association
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California Professional Association of Specialty Contractors
California Society of Professional Engineers
Geoprofessional Business Association
Lexington Insurance Company
Monterey Peninsula Chamber of Commerce
Salinas Valley Chamber of Commerce
Structural Engineers Association of California
Travelers
274 engineering and architectural firms (See Senate Judiciary
Committee analysis of 5/3/16 for a complete list.)
OPPOSITION: (Verified5/16/16)
Associated General Contractors of California
Association of California Healthcare Districts
Association of California School Administrators
California Association of Joint Powers Authorities
California Association of School Business Officials
California Building Industry Association
California Legislative Conference of the Plumbing, Heating and
Piping Industry
California School Boards Association
California Special Districts Association
California State Association of Counties
California State Council of Laborers
California State University
California Transit Association
California-Nevada Conference of Operating Engineers
Coalition for Adequate School Housing
Community College Facility Coalition
Construction Employers' Association
League of California Cities
Los Angeles Unified School District
National Electrical Contractors Association
Northern California Allied Trades
Northern California Power Agency
San Diego Association of Governments
Self-Help Counties Coalition
Southern California Contractors Association
State Building and Construction Trades Council
Urban Counties of California
121 local Agencies and Special Districts (See Senate Judiciary
SB 885
Page 9
Committee analysis of 5/3/16 for a complete list.)
Prepared by:Tobias Halvarson / JUD. / (916) 651-4113
5/16/16 9:46:32
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