BILL ANALYSIS Ķ
SB 885
Page 1
Date of Hearing: June 28, 2016
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
SB
885 (Wolk) - As Amended June 16, 2016
SENATE VOTE: 26-4
SUBJECT: DESIGN PROFESSIONALS: INDEMNITY AND DUTY TO DEFEND
KEY ISSUE: SHOULD DEFENSE COSTS ASSOCIATED TO DEFEND BE SHIFTED
TO OWNERS?
SYNOPSIS
Over the last decade, the Legislature has enacted a number of
measures aimed at addressing the issue of liability-shifting in
residential and commercial construction contracts. [See SB 972
(Wolk, Chap. 510, Stats. 2010); AB 2738 (Jones, Chap. 467,
Stats. 2008); SB 138 (Calderon, Chap. 32, Stats. 2007); AB 573
(Wolk, Chap. 455, Stats. 2006); AB 758 (Calderon, Chap. 394,
Stats. 2005).] It seems safe to say that the general intent
behind all of these bills was to prevent a party to a
construction contract from being held liable for harms caused by
a third party. The author and sponsors of this bill assert that
this bill falls into the same category as those previous
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indemnity bills. Proponents contend that this bill prevents
parties, such as public agencies and contractors, from shifting
unfair legal defense costs onto design professions (e.g.
architect, landscape architect, professional engineer, or
professional land surveyor) where the design professional may
not be at fault. Additionally, proponents argue that since
design professionals cannot obtain insurance coverage to cover
the claims of third parties (unlike general contractors), design
professionals should be treated differently from those other
construction-contract-parties who are also required in
construction contracts to defend the owner.
Although the Committee is sympathetic to the concerns raised by
the proponents of this bill, it is unclear whether this
bill-which simply appears to shift costs away from design
professional to other parties, including public agencies and
ultimately taxpayers-is the correct solution. Additionally,
should this bill become law, it is safe to assume that the costs
and insurance premiums of other parties-particularly, public
agencies-will increase. Furthermore, it is easy to predict the
kinds of legislative efforts that will come next should this
bill become law: other construction-contract-parties will ask
the Legislature for the same burden-relieving measure provided
under this bill. Of course, whether this parade of horribles
ever comes to pass remains to be seen; however, we do know that
this bill and that ugly parade will force public entities to
bear additional legal defense and insurance costs at the expense
of taxpayers and future projects. Besides, even if the
worst-case scenarios do not materialize, this bill might deter
the arrival of a true solution to the problem posed by this
bill: the availability of insurance.
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As this Committee is well-aware, the nature of construction
projects creates litigation exposure. The availability of
insurance allows parties to a construction project - the owner,
the contractor, the subcontractor, the builder, the manager, the
design professional - to collectively share and offset the risks
associated with a project. Indeed, the purpose of insurance is
to "transfer the risk of loss from entities that do not want, or
cannot afford, to absorb the financial losses that arise from
natural and unnatural events to well-capitalized insurers that
are able to spread the risk of loss across large pools of
policyholders." (French, The Role of the Profit Imperative in
Risk Management (2015) 17 U. Pa. J. Bus. L. 1081, 1084.)
Additionally, when we consider traditional tort principles of
deterrence, compensation, economic productivity, and efficiency,
we understand that insurance facilitates these principles by
allowing one party to spread the risk of loss to other parties
in the community.
Instead of shifting cost burdens from one [potentially
not-at-fault] party to another [potentially not-at-fault] party
to resolve a policy problem in a complex high-risk business
transaction where fault may not be easily determined, this bill
should focus on finding a solution that fairly spreads the risk
of loss. This Committee has offered the author a possible
solution by allowing a design professional to be able to name a
public entity as an additional named insured on a design
professional's insurance. Additionally, this solution also
requires public entities-during the bidding process for public
works projects-to require the design professional to have an
insurance policy that names the public entity as an additional
named insured. Although this Committee acknowledges the market
difficulties associated with this approach, this proposal
tackles the problem head-on, rather than veering around it for
the time being. Indeed, this Committee has learned that the
proposed solution removes significant opposition, and would even
garner support from general contractors, subcontractors, and
some local public entities if the bill were to be amended.
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With all that being said, this bill provides that in all
contracts entered into on or after January 1, 2017, 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; any contract that purports to require a
design professional to defend claims against another party shall
be unenforceable. The bill is sponsored by the American Council
of Engineering Companies of California, and supported by
countless design professionals across the state and by the
Department of Insurance. Opponents include local public
entities, general contractors, builders, and subcontractors,
including the State Building and Construction Trades Council.
SUMMARY: Provides that in all contracts entered into on or
after January 1, 2017, 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. Specifically,
this bill:
1)Provides that commencing with all contracts, and amendments
thereto, entered into on or after January 1, 2017, 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.
2)Provides 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.
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3)Establishes that the act 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
subsequent agreement after a claim is made does not waive or
modify the provisions of this act.
4)States that the act shall not be construed to affect any duty
of a design professional to defend any claims brought against
him or her on an ongoing basis during their pendency.
5)States that the act shall not be construed to affect the
design professional's obligation 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.
6)Provides that all contracts and all solicitation documents,
including requests for proposal, invitations for bid, and
other solicitation documents, are deemed to incorporate by
reference the provisions of the act.
7)Excludes the following from the act:
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.
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8)Provides that the provisions of this act shall not be waived
or modified by contract. Contract provisions in violation of
this subdivision are void and unenforceable.
9)Removes the duty and the cost to defend from provisions of law
that provide that contracts that purport to indemnify 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.
10)Makes various legislative findings and declarations.
EXISTING LAW:
1)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.
Unless otherwise stated, all further statutory references are
to the Civil Code.)
2)Establishes that, among other things, in the interpretation of
a contract of indemnity, the following rules are to be applied
unless a contrary intention appears:
a) 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. (Section 2778.)
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b) 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.
(Ibid.)
c) If, after request, the person indemnifying neglects to
defend the person indemnified, a recovery against the
latter suffered by him in good faith, is conclusive in his
favor against the former. (Ibid.)
3)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.)
4)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 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. (Section
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2782 (a).)
5)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. (Section 2782 (b).)
6)Provides separate indemnity and duty to defend restrictions
and requirements regarding residential construction contracts.
(Section 2782 (c)-(e).)
7)Provides that 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. Further provides that
these provisions shall not be waived or modified by
contractual agreement, act, or omission of the parties.
(Section 2782.8.)
8)Defines public agency, under 7) to include any county, city,
city and county, district, school district, public authority,
municipal corporation, or other political subdivision, joint
powers authority, or public corporation in the state. Public
agency does not include the State of California. (Ibid.)
9)Defines design profession, under 7), to include an individual
licensed or registered as an architect, landscape architect,
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professiona engineer, or professional land surveyor, as
provided. (Ibid.)
FISCAL EFFECT: As currently in print this bill is keyed
non-fiscal.
COMMENTS: Over the last decade, the Legislature has enacted a
number of measures aimed at addressing the issue of
liability-shifting in residential and commercial construction
contracts. [See SB 972 (Wolk, Chap. 510, Stats. 2010); AB 2738
(Jones, Chap. 467, Stats. 2008); SB 138 (Calderon, Chap. 32,
Stats. 2007); AB 573 (Wolk, Chap. 455, Stats. 2006); AB 758
(Calderon, Chap. 394, Stats. 2005).] It seems safe to say that
the general intent behind all of these bills was to prevent a
party to a construction contract from being forced to be held
liable for harms caused by another third party. The author and
sponsors of this bill assert that this bill falls in the same
category as those previous indemnity bills. Proponents contend
that this bill prevents parties (like public agencies and
contractors) from shifting unfair legal defense costs onto
design professions (e.g. architect, landscape architect,
professional engineer, or professional land surveyor) where the
design professional may not be at fault. Additionally,
proponents argue that since design professional professionals
cannot obtain insurance coverage to cover the claims of third
parties (unlike general contractors), design professionals
should be treated differently from those other
construction-contract-parties who are also required in
construction contracts to defend the owner.
Although the Committee is sympathetic to the concerns raised by
the proponents of this bill, it is unclear whether this
bill-which simply appears to shift costs away from design
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professional to other parties-is the correct solution.
Additionally, should this bill become law, it is safe to assume
that the costs and insurance premiums of other
parties-particularly, public agencies-will increase.
Furthermore, it is easy to predict the kinds of legislative
efforts that will come next should this bill become law: other
construction-contract-parties will ask the Legislature for the
same burden-relieving measure provided under this bill. Of
course, whether this parade of horribles ever comes to pass
remains to be seen; however, we do know that this bill and that
ugly parade will force public entities to bear additional legal
defense and insurance costs at the expense of taxpayers and
future projects. Besides, even if the worst-case scenarios do
not materialize, this bill might deter the arrival of a true
solution to the problem posed by this bill: the availability of
insurance.
With all that being said, this bill provides that in all
contracts entered into on or after January 1, 2017, 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; any contract the purports to require a
design professional to defend claims against another party shall
be unenforceable. Additionally, this bill states that the above
provisions shall not be construed to affect (1) any duty of a
design professional to defend claims brought against the design
professional on an ongoing basis during their pendency; and (2)
the design professional's obligation 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.
The problem this bill seeks to resolve: According to the
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author:
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. (Senate Judiciary
Committee analysis of SB 885; May 3, 2016.)
How did we get here? Generally, indemnity is when one party
(the indemnitor) agrees to be held liable for damages caused by
the party, or another third person. As previously mentioned,
the Legislature has enacted a number of measures aimed at
addressing the issue of liability-shifting in residential and
commercial construction contracts. [See SB 972 (Wolk, Chap.
510, Stats. 2010); AB 2738 (Jones, Chap. 467, Stats. 2008); SB
138 (Calderon, Chap. 32, Stats. 2007); AB 573 (Wolk, Chap. 455,
Stats. 2006); AB 758 (Calderon, Chap. 394, Stats. 2005).] It
seems safe to say that the general intent behind all of these
bills was to prevent a party to a construction contract from
being held liable for harms caused by a third party.
Of those measures that was most recently enacted, SB 972
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provided that contracts that require a design professional to
indemnify, including the duty and cost to defend, a public
agency 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. SB 972 was sponsored by the American
Council of Engineering Companies-who are the sponsors of this
bill. According to this Committee's analysis of SB 972, the
bill was responding to Crawford v. Weather Shield (2008) 44
Cal.4th 541, a 2008 California Supreme Court decision.
(Assembly Judiciary Committee analysis of SB 972; August 25,
2010.)
Crawford v. Weather Shield. In Crawford v. Weather Shield, the
California Supreme Court generally held that in every indemnity
contract (unless provided otherwise), the duty to defend does
not depend on the outcome of the litigation, as long as the
defense claim that has been tendered falls into claims embraced
by the indemnity. (Id. at 558.) In other words, as long as the
indemnitee (e.g., the party seeking reimbursement) tenders a
defense claim that is embraced by the indemnity agreement, the
indemnitor (e.g., the party providing reimbursement) bears the
duty to defend the claim even if the indemnitor is not found to
be liable. (Id. at 563.) Accordingly, if SB 972 was a response
to Crawford, it appears that the intent behind SB 972 was to
limit a design professional's indemnity to only certain types of
claims arising out of the negligence of the design professional.
The sponsors of this bill-who sponsored SB 972-believe that SB
972 has failed, even though it appears the law is operating the
way it was written. The sponsor asserts that public agencies
continue to force design professionals to defend claims made
against the public agency for the negligence of either the
public entity or other third parties (like general contractors
or subcontractors). This is because design professionals who
bid on public works contracts must sign contractual terms that
"trigger an immediate duty to defend claims against other
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parties, particularly in complex, multi-party actions."
However, it is unclear whether public entities are doing
anything wrong. From the public entity's perspective, SB 972
allows the public entity to tender a claim to a design
professional for claims that "arise out of, pertain to, or
relate to the negligence?of the design professional" when there
is an indemnity agreement between the public entity and the
design professional. Accordingly, the public entity is (or at
least should be) only tendering claims where there are factual
allegations that the design professional might be at fault.
The crux of this bill is about who must pay the defense costs
for claims that arise from the work of one of the parties to a
construction contract. Given the complexity of the issue, a
concrete example is instructive. Imagine the following
fictional scenario:
On a sunny day, Paul Plaintiff has gone to the roof top of a
school building, located in ABC School District, to observe
the skyline. While Paul is standing there, the floor gives
way, and Paul falls through the floor and suffers multiple
injuries. ABC School District obtained the design plans from
Artie Architect, and had the building built according to
design specifications by Connie Contractor. Who does Paul
sue? Did the School fail to maintain the building? Did Artie
Architect draw bad plans? Did Connie Contractor construct the
roof poorly? Obviously, the answer is unclear. In regular
civil practice, Paul will name ABC School District on the
civil complaint, and will make various allegations about who
was negligent in order to capture all of the possible
defendants.
In the scenario described above, we will assume that the
architect and the general contractor, when bidding and entering
into a contract with a local public entity to design and build
the building, have both signed indemnity clauses agreeing to
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indemnify the local public entity for claims arising out of
their negligence. Currently, general contractors are able to
purchase general liability insurance, and are usually able to
name a local public entity as an additional insured (for an
additional premium). Thus, when a local entity is served with a
lawsuit, the local entity will tender the defense to the general
contractor, whose insurer will hire independent counsel to
separately represent the local public entity. The same is not
true for design professionals. Currently, design professionals
cannot obtain the same kind of insurance available to general
contractors. Rather, design professionals purchase errors and
omissions (E&O) policies that only cover the professional
negligence of the design professional, not the negligence of
third parties. Thus, under current practice, when ABC School
District tenders the defense to Artie Architect, Artie's
insurance will not cover the costs of either (1) hiring
independent counsel for ABC School District; or (2) contributing
to the defense costs of ABC School District. Accordingly,
because of the duty to defend under existing law, design
professionals must contribute to the local entity's defense
costs, and pay for it out of pocket.
This bill would change this scenario. Essentially, this bill
provides that a design professional shall only have the duty to
defend himself or herself - and not third party claims - for
claims that arise out of, pertain to, or relate to the
negligence, recklessness, or willful misconduct of the design
professional. Accordingly, under this scenario, Artie Architect
would only have to defend himself - and not contribute to the
defense of the school district (who was originally sued). This
bill would require Artie 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." At issue is whether
this bill is fair. Well, it depends.
The issue of fairness depends on who is at fault, which usually
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cannot be determined until the end of the litigation. As the
imaginary scenario described above indicates, it is unclear who
is at fault. Indeed, it is possible that (1) only one of the
parties is completely at fault, (2) none of the parties are at
fault, or even (3) all of the parties are comparatively at
fault. The following analysis looks at how this bill would
apply, depending on who is at fault.
First: what if Artie was completely at fault? If Artie was
completely at fault, it seems reasonable to say that we would
have less sympathy for him, and we would expect him to pay ABC
School District's defense costs. Although this bill would
require Artie to reimburse ABC School District, it is unclear
whether the reference to "reasonable" defense costs would allow
Artie to challenge ABC School District's legal fees if they were
interpreted to be unreasonable. If Artie can challenge the
defense costs as being "unreasonable," this would expose ABC
School District and Connie Contractor to additional litigation
(since Connie Contractor's insurer paid for the ABC's counsel).
Moreover, what happens if Artie is not brought into the lawsuit
(nothing in this bill requires it), and the court later
determines that Artie's bad designs caused the injury? Could
Artie challenge the defense costs, arguing that he was not
brought into the lawsuit and should not have to pay for the
judgment? Coalition for Adequate School Housing (C.A.S.H.)
raises the following argument:
No design professional or its insurer will pay the back-end
defense costs without a fight, creating a second legal
challenge for the public entity?to extricate the
"reimbursement" of public funds spend defending the design
professional's deficient design. [Additionally] other partners
on the project, such as contractors, shoulder a larger burden
of the up-front defense costs but are ultimately not found
liable for some or all of those costs.
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If Artie cannot challenge the defense costs, the C.A.S.H. raises
the following argument:
In this scenario, the design professionals and their insurance
companies sit on the sidelines and wait, while schools
shoulder the costs. Fronting public money for private costs
is not an appropriate use of taxpayer dollars, tying up funds
that would otherwise be spent to construct, renovate, and
repair schools.
Second: what if none of the parties are at fault? If none of
the parties are at fault (because Paul was comparatively
negligent), this bill allows Artie to avoid all defense costs.
While this does seem fair on the surface, it is not very
equitable. First, one must remember that in complex
construction cases, litigation will go on for a long time before
a court issues a judgment. Thus, there will inevitably be some
defense costs that would have been incurred, even if no one is
found to be at fault. Under this bill, those legal defense
costs would be borne by the general contractor (and the insurer)
and/or the local public entity because this bill only requires
the design professional to reimburse the other parties if the
design professional bears a sufficient degree of fault.
Furthermore, this bill would seem to increase costs (aside from
the legal defense costs). This is true because in order for ABC
School District to have independent counsel, a general
contractor pays a higher insurance premium to be able to name
ABC School District as an additional named insured.
Additionally, it seems likely that Connie Contractor passes off
some of these costs onto ABC School District during the
procurement or bidding process. If this bill becomes law, not
only would legal defense costs be disproportionally-placed on
the local entity and the general contractor, but would likely
increase costs for general contractors and for public works
projects.
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Third: what if all of the parties are partially at fault? If
all of the parties are at fault, the concerns seem less
heightened, but remain. Although this bill does not prevent a
public entity from filing a cross-complaint to bring the design
professional into the lawsuit, there is still the issue over the
cost-sharing of defense costs described above. An interesting
issue also arises when only the design professional and the
general contractor are at fault. Given that the public entity
still needs independent counsel (since they are the named
defendant), is it fair to require the public entity or the
general contractor to pay for the entire defense cost of the
public entity's independent counsel from the start, when the
design professional doesn't and who could also challenge those
defense costs?
The trouble with not knowing who is at fault. Under the various
outcomes of fault outlined above, one common thread runs through
them all: we do not know who is at fault until the end of the
case. It must be remembered that existing law allows a public
entity to seek indemnity (and the duty to defend) for claims
that "arise out of, pertain to, or relate to the negligence,
recklessness, or willful misconduct of the design professional."
As illustrated above, it is easy to imagine a scenario where
fault is unclear, and where all the parties therefore need to
come together to resolve the suit. Surely, it would be unfair
for a local public entity to tender a defense claim for a
standard slip-and-fall case over to a design professional merely
because the plaintiff alleged design defect (unless there was a
factual scenario where a design defect led to the pooling of
water, for example, which caused the slip-and-fall). However,
this doesn't appear to be the problem. The problem lies in the
fact that there will be claims that arise that could be the
fault of the design professional, but ultimately, it turns out
they are not. But is this really a problem, given that this
premise is also true for all of the other parties involved? And
even if this Committee determines that this is indeed the
problem, the question remains: is this bill the solution? The
complexity behind the problem presented is not resolved by
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extracting parties from it - it is resolved by forcing parties
to come together to share the burden collectively.
This Committee has offered the author a possible solution that
tackles the problem head-on. If there is any agreement between
the proponents and the opponents of the bill, it is that the
market lacks an insurance product for design professionals to
defend third party claims. As this Committee is well-aware, the
nature of construction projects creates litigation exposure.
The availability of insurance allows parties to a construction
project - the owner, the contractor, the subcontractor, the
builder, the manager, the design professional - to collectively
share and offset the risks associated with a project. Indeed,
the purpose of insurance is to "transfer the risk of loss from
entities that do not want, or cannot afford, to absorb the
financial losses that arise from natural and unnatural events to
well-capitalized insurers that are able to spread the risk of
loss across large pools of policyholders." (French, The Role of
the Profit Imperative in Risk Management (2015) 17 U. Pa. J.
Bus. L. 1081, 1084.) Additionally, when we consider traditional
tort principles of deterrence, compensation, economic
productivity, and efficiency, we understand that insurance
facilitates these principles by allowing one party to spread the
risk of loss to other parties in the community.
Instead of shifting cost burdens from one [potentially
not-at-fault] party to another [potentially not-at-fault] party
to resolve a policy problem in a complex, high-risk, business
transaction where fault may not be easily determined, this bill
should focus on finding a solution that fairly spreads the risk
of loss - which means insurance. Indeed, insurance is often
viewed as a kind of safety net:
"As originally conceived and implemented in America in the
mid-1700s, insurance functioned as a social safety net through
which a community or group as a whole acted for the benefit of
the unlucky few who suffered losses?To address the problem of
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insurers refusing to cover the most common types of
catastrophic risks?legislation could be passed that prevents
insurers from excluding coverage for such risks." (Id. at
1086-87.)
This Committee has offered the author a possible solution by
allowing a design professional to be able to name a public
entity as an additional named insured on a design professional's
insurance. Additionally, this solution also requires public
entities-during the bidding process for public works projects-to
require the design professional to have an insurance policy that
names the public entity as an additional named insured.
Although this Committee acknowledges the market difficulties
associated with this approach, this proposal tackles the problem
head-on, rather than veering around it for the time being.
The Committee's proposed solution will remove opposition, and
garner support for the bill. This Committee has learned that
the proposed solution removes significant opposition, and even
garners support by general contractors, subcontractors, and some
local public entities were the bill to be amended.
The Construction Employers Association (CEA), which represents
commercial and industrial building contractors, and opposes the
bill in print, will support the bill if it is amended to include
the Committee's suggested amendments. CEA writes:
[If amended], SB 885 effectively addresses the underlying
insurance deficiency for design professionals that prompted
Senator Wolk to introduce the measure in the first place.
Rather than simply shift liability onto other parties, which
is what the measure does in its current form, the bill as
proposed to be amended directs the insurance industry to
create a more comprehensive product for design professionals
that will enable them to provide additional insured
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Page 20
endorsements to project owners that will cover their defense
obligations. This is a reasonable and effective solution.
Additionally, the State Building and Construction Trades Council
of California, AFL-CIO agrees with CEA, and will support the
bill if amended. It writes:
SB 885 as currently written would upend the decades old first
dollar defense process that is followed when a construction
defect is found at a construction project by removing design
professionals from that adjudicatory process. This would lead
to unnecessary costs and delay for public agencies,
contractors, and subcontractors by requiring them to bear an
unreasonable amount of new risk. This will inevitably lead to
new projects being delayed while issues with past projects are
dealt with in the new and inefficient model that SB 885 would
create. [The Committee's] proposed amendments would ensure
that those issues would not arise and would keep intact the
current first dollar defense process that has worked so well
for so many years.
Parade of Horribles? Notwithstanding the initial concerns that
have been raised about this bill, concededly, it is easy to feel
sympathy for design professionals who lack the ability to obtain
insurance and must pay third party defense costs out-of-pocket.
Indeed, this Committee has received hundreds of letters from
design professionals across the State informing the Committee
about a design professional's inability to obtain a professional
liability policy that "covers an agreement to defend a third
party, and does not afford additional insured status to a design
professional's client." Be that as it may, this bill raises
several questions about what will happen should this bill become
law.
First and foremost, the enactment of the bill would deter the
SB 885
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insurance market from producing an insurance product that would
fix this problem-which is the best solution to tackle this
policy issue. Next, will this bill significantly increase
insurance premiums for general contractors, who will likely pass
on the costs onto local public entities? Based on this
Committee's analysis, this seems likely. Furthermore, will this
bill force local public entities to obtain additional insurance
coverage, or trigger other parties in the construction industry
to seek burden-relieving bills, similar to this bill, which
would force public entities to obtain insurance coverage to the
detriment of taxpayers? Although this bill may provide some
relief to design professionals, the consequences (both
short-term and long-term) result in additional burdens on all
parties in a construction contract.
ARGUMENTS IN SUPPORT: The American Council of Engineering
Companies, California, the sponsor of this bill, writes that
this bill is supported by numerous individual architects,
engineers, and other design professions. ACEC writes:
Requiring a design professional to provide an immediate
defense to a third party creates an uninsured exposure that
places the public at risk, and the individual's personal
assets at risk, and it sets a false expectation for a public
agency or private developer that it will be defended in a
lawsuit. Frequently, parties who are afforded a free defense
have little incentive to settle a case, which further drives
up the skyrocketing cost of litigation in California, and has
a chilling effect on business overall. In addition, parties
who benefit from a free defense to a lawsuit may have little
incentive to minimize mistakes in the future. This in turn
can lead to shortcuts by developers and compromise public
health and safety.
If the status quo continues, design professionals may seek to
charge higher fees to cover their exposure, driving up the
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cost of public and private projects, and whittling down the
number of design firms willing to take the risk. All of this
creates a poor business environment in a state that already
poses significant challenges to small businesses. Over time,
this will result in a loss of jobs and tax revenue and an
increased cost of projects that will be borne by taxpayers.
The uninsured exposure places regular working class people at
an unnecessary risk of bankruptcy, and serves to undermine
small, minority and disadvantage businesses. This risk is not
the same for construction contractors.
SB 885 seeks to create less risk for the public through a more
balanced contractual landscape, albeit one in which the design
professional still faces personal liability and still has to
be responsible for its mistakes. By eliminating the immediate
defense obligations, and instead creating an obligation to
reimburse defense costs based on the design professional's
proportionate share of liability, the immediate uninsurable
burden is mitigated, and in some cases brings the
reimbursement obligation within the coverage parameters of
professional liability insurance?SB 885 is not an effort to
seek immunity or avoid liability. It's really about putting
design professionals on an even footing with construction
trades who have access to insurance that the design
professional does not have.
ARGUMENTS IN OPPOSITION: A coalition of opponents of public
agencies, including the California Special Districts
Association, the League of California Cities, and California
State Association of Counties, asserts that this bill creates an
exception to long-standing and wide-reaching California
indemnity law for one specific industry that happens to have an
unsecured risk. In opposition, they write:
The sponsors argue that their errors and omissions insurance
policies do not provide coverage for the defense of claims
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against other entities involved in construction projects. This
bill is not the appropriate response to that purported issue,
nor do we believe that it solves that problem. Case law has
well established that the duty to defend is inherent in the
obligation to indemnify. SB 885 forces taxpayers and
ratepayers to front the legal costs for the private sector,
even for claims where the design professional is ultimately
deemed to be 100 percent at fault. Requiring the public
agency to defend the actions of the design professional
creates a "reimbursement only" process that results in the
public agency defending the actions of the design professional
and shouldering upfront all of the associated costs. The
public agency would then have to seek reimbursement from the
design professional, to the extent the design professional is
found negligent, once a settlement is reached or the claim is
fully litigated and a court or arbitrator renders a final
decision. This process not only requires a public entity to
front the costs for a private entity, it also creates conflict
within the public-private partnership, effectually eliminating
the incentive to work together towards a swift settlement. SB
885 stipulates a "one-size fits all" solution to contractual
negotiations by establishing a reimbursement-only system, with
public entities paying defense costs until a final
determination of degree of fault is determined by a court,
arbitration or settlement. The bill specifies that these
provisions may not be waived or modified by contract. This
precludes public entities and their design professional
partners from negotiating other contractual arrangements that
may better suit the particulars of a project.
Author's Technical Amendment: At the Committee's suggestion,
the author wishes to take the following amendment to ensure that
the bill in print does not interfere with existing contracts:
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On page 9, line 25, after the period, insert: "(f) The
amendments made to this section by the act adding this
subdivision shall apply to services offered pursuant to a design
professional contract entered into on or after January 1, 2017."
On page 9, line 26, strike (f), and insert (g).
REGISTERED SUPPORT / OPPOSITION:
Support
American Council of Engineering Companies (sponsor)
AD Architects, Inc.
Adobe Associates, Inc.
AECOM
Alan Burr, Murphy Burr Curry Inc.
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Page 25
Albert Costa, Costa Brown Architecture
Alex Kiam, National Engineering & Consulting, Inc.
Align Architecture, LLP
Allied Geotechnical Engineers, Inc.
AllWest Environmental, Inc.
Alta Vista
AMA Inc.
American Institute of Architects California Council
American Society of Landscape Architects
Amor Architectural Corporation
Anderson Penna
Anissa Wong, CSDA Design Group
Archetype International
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Page 26
Archi|Logix
ARCSL Architecture Inc.
Associated Transportation Engineers
Athalye Consulting engineering Services, Inc.
Atkins
Avila and Associates
Axiom Engineers
Baker Nowicki Design Studio
Baker-Williams Engineering Group
Beazley Group
Bedrock Engineering
Benner and Caprenter, Inc.
Bennett Engineering Services
SB 885
Page 27
BergerABAM
BFK Engineers Surveyors Planners
Bhatia Associates, Inc.
Biggs Cardosa Associates Inc.
Bisbee Architecture + Design
Blackbird Designs
Blackburn Consulting
Blair, Church & Flynn
Blitz Design
Brian Foust Architecture
Brian J. Brown, architect
Britt Lindberg, AIA
Bror Monberg Architects
SB 885
Page 28
Buehler & Buehler Structural Engineers, Inc.
Burns McDonnell
Burohappold Engineering
Calhoun + Associates, Inc.
California Department of Insurance
California Geotechnical Engineering Association
California Professional Association of Specialty Contractors
California Society of Professional Engineers
Callas Architects
Calpo, Hom & Dong Architects
CALTROP
CASC Engineering & Consulting
CBC Geospatial Consulting, Inc.
SB 885
Page 29
CEI Engineering Associates, Inc.
Cesar A. Sifuentes, P.E.
Charles M Salter & Associates
Chaudhary & Associates, Inc.
Christensen Engineering & Surveying
Christian Wheeler Engineering
Civil Design Consultants
Civil Engineering Associates
Clark, Richardson and Biskup Consulting Engineers, Inc.
CNC Engineering
Coast Surveying, Inc.
Coffman Engineers
Coleman Engineering
SB 885
Page 30
Converse Consultants
Cornerstone Earth Group
Cornerstone Structural Engineering Group
Costa Brown Architecture, Inc.
CPC Architects
Craig Atkinson, IBI Group
Craig Hiett, Advanced Structural Design, Inc.
Crane Architectural Group
Creegan + D'Angelo
CSDA Design Group
CSW/Stuber-Stroeh Engineering Group, Inc.
Cullen-Sherry & Associates, Inc.
CYS Structural Engineers
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Page 31
D. Woolley & Associates
Dahlin Group
Dale Jendsbee, Mesiti-Miller Engineering Inc.
Dane Hansen, BWE Structural Engineering
Daniel D. White, architect
Danielian Associates
Danville Councilmember Newell Arnerich
Darden Architects
David Cocke, Structural Focus
David Goldstien Architect, Inc.
David H. Lee & Associates, Inc.
DC Architects
Dealey, Renton & Associates
SB 885
Page 32
Degenkolb Engineers
Derek Leavitt, AIA
DES Architects + Engineers, Inc.
DGA Planning Architecture Interiors
Diaz, Yourman & Associates
DL Smith Design Studio
DLR Group
Donald Shintani & Co.
Dorothy Howard, AIA
Drake Haglan and Associates
Earth Systems, Inc.
EC Moore, architect
Edwin Bruce Associates
SB 885
Page 33
EFS Engineering, Inc.
EHDD
Element Structural Engineers, Inc.
ENGEO Incorporated
Environmental Science Associates
ESA Associates
FOG Studios
Fougeron Architecture
Francis Lo, Miyamoto International
FTF Engineering, Inc.
Gang Chen, architect
Gast Architects
GEI Consultants
SB 885
Page 34
Gekko Engineering, Inc.
GEOCON Incorporated
Geoprofessional Business Association (GBA)
Geotechnical Professionals, Inc. (GPI)
Gereard M. Nieblas, S.E.
Ghirardelli Associates
Glenn T. Fearon, architect
Gouvela Engineering, Inc.
Greenbank Associates
Gregory P. Luth & Associates
Group Delta
Guida Surveying, Inc.
Gwynne Pugh Urban Studio
SB 885
Page 35
Haney Station, Inc.
Harris & Associates
Harris & Sloan Consulting Engineers, Inc.
Harris Design
Hartzog & Crabill, Inc.
Hatch Mott MacDonald
Hayes Group Architects
HDR
Henry Liang-AECOM
Hermann Design Group
Heston Chau Architect
Higginson Architects Inc.
HMC Architects
SB 885
Page 36
HMH
HNTB
Hogan Land Services
Hope Amundson, Inc.
Huitt-Zollars
Huntsman Architectural Group
IBI Group
In Studio Architecture
IFLAND Engineers, INC.
Infrastructural Engineering Corporation
Inland Foundation Engineering, Inc.
Insight Structural Engineers
IOA Insurance Services
SB 885
Page 37
Island Architects
Izor & Associates, Inc.
J. Peter Devereaux, HED Design
Jack Brewer, Advanced Structural Design, Inc.
James A. Adams, S.E.
James C. Corcoran
James Hill Architect
Jason Horwedel
Jeff Sultan, P.E.
Jeffery M. Fuller, CSDA Design Group
Jerry Penrose, IBI Group
John Corless, Nichols Melburg & Rossetto
John Valle Architecture
SB 885
Page 38
Jon P. Anderson, DLR Group
Joseph C. Truxaw and Associates, Inc.
Joseph P. Paoluccio
Josephson Werdowatz & Associates
Kal Krishnan Consulting Services, Inc.
Kalban Architects
Keary Gregg & Associates
Keir & Wright
Ken Okamoto & Associates, Inc.
Kennedy and Associates
Kennedy/Jenks Consults
Kenneth Luttrell, CYS Structural Engineers Inc.
Kevin Perry, Pacific Cornerstone Architects
SB 885
Page 39
KFA, LLP
Kimley Horn
Kirk Shimazu, IBI Group
Kister, Savio & REI, Inc.
Kjedlsen, Sinnock & Neudeck, Inc.
Kleinfelder
Klopf Architecture
KMA Architecture
KNA Consulting Engineers, Inc.
KOA Corporation
Konet Architecture
Koning Eizenberg Architecture, Inc.
KPF
SB 885
Page 40
KPFF Consulting Engineers, Inc.
Krong Design Inc.
KSA Design Studio
L & L Bridges
L.A. Paul & Associates
Land Concern
Lane Engineers, Inc.
Latitude 33 Planning & Engineering
Laugenour and Keikle
LCC Engineering & Survey, Inc.
Lee & Pierce, Inc.
Lee Engelmeier, Smith Structural Group, LLP
Lehrer Architects
SB 885
Page 41
Leighton Consulting, Inc.
Leppert Engineering Corporation
Lescure Engineers, Inc.
Lexington Insurance Company
Liftech Consultancts Inc.
Lopez Engineering, Inc.
Lucinda Tay, architect
Lynn Capouya, Inc.
Madrone
Marguerite Bello, S.E.
Mark Bozzo, Advanced Structural Design, Inc.
Mark Davis Design
Mark English Architects
SB 885
Page 42
Mark Froemsdorf, AIA
Mark Melzer, Melzer Deckert & Ruder Architects Inc.
Mark Thomas & Company
Martin & Libby Structural engineers
Mason Architects
Matthew Knusten, Peoples Associates Structural engineers
Max Moheb, S.E.
Melineh Zamorrodian, Structural Focus
Melissa Sanchez, Structural Focus
Mesiti-Miller Engineering, Inc.
Meyer & Allen Associates
Michael Baker International
Michael Caley, architect
SB 885
Page 43
Michael Parolini, Smith Structural Group, LLP
Michael Schoen, CSDA Design Group
Michael Smith, Smith Structural Group, LLP
Michael Woods, P.E.
Mike Kaszpurenko, S.E.
Miller Pacific Engineering Group
MNS
Monterey Bay Engineers, Inc.
Monterey Peninsula Chamber of Commerce
Morton Pitalo
Murtaugh, Meyer, Nelson & Treglia, LLP
Naslund
Naslund Engineering
SB 885
Page 44
Neil H. Perimutter, architect
Neil Rinella, AIA
Neri Landscape Architecture
Ninyo & Moore
Northwest Hydraulic Consultants
NV5
O'Day Consultants, Inc.
OLMM Consulting Engineers
One Option Consulting Engineers
Ordiz Melby Architects, Inc.
Pacific Cornerstone Architects
Palmer & Company
Pam Touschner, DLR Group
SB 885
Page 45
Parikh
Patel Burica & Associates Inc.
Paul Merdoch Architects
Peter Carlson, Miyamoto International
Peterson Brustad Engineering Consulting
Philip Overbaugh, architect
Praxis
Precision Civil Engineering, Inc.
Professional Liability Agents Network
Project Design Consultants
Provost & Pritchard Consulting Group
Prunuske Chatham, Inc.
Psomas
SB 885
Page 46
PZSE, Inc.
Quad Knopf, Inc.
Quattrocchi Kwak Architects
Quincy Engineering
R.E.D. Architectural Group
R2H Engineering, Inc.
Rainforth Grau Architects
Ralph Stone and Company, Inc.
Randall B. Devoto, CSDA Design Group
Randall Lamb
Rania Alomar - Design and Architecture
Raymond Fox & Associates
ReSquare Architecture and Construction
SB 885
Page 47
RFD
Richard McKenzie, AIA
Rick Engineering Company
Riggs Architecture
RJM Design Group
RMW Architecture & Interiors
Robert Dack, Advanced Structural Design, Inc.
Robert Gravano, Advanced Structural Design, Inc.
Ross Yamamoto, P.E.
Rossington Architecture
RRM Design Group
RSA+ Consulting Civil Engineers & Surveyors
RSPE Inc.
SB 885
Page 48
RT Engineering & Associates, Inc.
Rutherford + Chekene
S Design Group
SA Associates
Sage engineers
Salinas Valley Chamber of Commerce
Saunders + Wiant Architects
Sauter Architecture
Schaaf & Wheeler
Scott P. Bartley, AIA
Scott Wallace Structural Engineers
Sean Tracy, Pacific Cornerstone Architects
SESOL, Inc.
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Page 49
SGPA Architecture and Planning
Shannon & Wilson, Inc.
Skidmore, Owings & Merrill LLP
Smith Architects
Smith Structural Group, LLP
Snipes-Dye Associates
Sprotte Watson Architecture + Planning
Standard
Stephen Gonsalves, Nichols Melburg & Rossetto
Stephen L. Ball Architect, Inc.
Steve H. Nakashima Consulting Civil Engineer
Stevens Cresto Engineering, Inc.
Stoney-Meyer consultants, Inc.
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Page 50
Stover Engineering
Stratos Form
Strening Architects
Structural Engineers Association of California
Stuart Engineering
Studio Carver
Studio Robbins Cortina
Sukow Engineering
Sven Lavine Architecture
SW Structural, Inc.
Syska Hennessy
T.Y. Lin International
Taylor Design
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Page 51
Terra Insurance Company
TerraCosta Consulting Group, Inc.
The Covello Group
The Hold Group, Inc.
Tim Schulze, Pacific Cornerstone Architects
Tipping Structural Engineers
Tory R. Walker Engineering
Towill, Inc.
Transpedia Consulting Engineers
Transpogroup
Travelers
TSAC Engineering
Tuan and Robinson Structural Engineers, Inc.
SB 885
Page 52
Turpin & Rattan Engineering, Inc.
Twining
Utility Specialists
Vali Cooper & Associates, Inc.
Van Meter Williams Pollack LLP
Vasilis Papadatos, AIA
VER Consultants
Verdon Architects
Victor D. Schinnerer & Company, Inc.
Victor Garcia-Delgado
Victor O. Schinnerer & company
Wagner Engineering & Survey, Inc.
Wallace Group
SB 885
Page 53
Walter P Moore
Weatherby-Reynolds-Fritson
Weil & Drage
West Consultants, Inc.
Whitson Engineers
William Fisher Architecture, Inc.
William Gilmore Architect
Wood Rogers
XL Catlin
Yagade Consulting, Inc.
Yamabe & Horn engineering, Inc.
Yeh and Associates, Inc.
YEI Engineers, Inc.
SB 885
Page 54
ZFA Structural Engineers
Zurich
Opposition
Air Conditioning Sheet Metal Association
Alpine Village-Sequoia Crest Community Services District
American Canyon Fire Protection District
Apple Valley Fire Protection District
Associated General Contractors
Associated General Contractors of America
Association of California Healthcare Districts
Association of California School Administrators
SB 885
Page 55
Big Bear Area Regional Wastewater Agency
Big Bear Community Services District
Bighorn-Desert View Water Agency
Buckingham Park Water District
California Association of Joint Powers Authorities
California Association of School Business Officials
California Association of Sheet Metal and Air Conditioning
Contractors
California Building Industry Association
California Chapters of National Electrical Contractors
Association
California Legislative Conference of the Plumbing, Heating and
Piping Industry
California Special Districts Association
California State Association of Electrical Workers
SB 885
Page 56
California State Council of Laborers
California State Pipe Trades Council
California State University
California-Nevada Conference of Operating Engineers
Calleguas Municipal Water District
Carpinteria Sanitary District
Chino Valley Fire District
City of American Canyon
City of Burbank
City of Camarillo
City of Glendale
City of Murrieta
City of San Bruno
SB 885
Page 57
City of Tulelake
City/County Association of Governments of San Mateo County
Coachella Valley Water District
Coalition for Adequate School Housing
Community College Facility Coalition
Construction Employers Association
Consumnes Community Services District
Contra Costa Water District
County School Facilities Consortium
California School Boards Association
Cucumonga Valley Water District
Dublin San Ramon Services District
Eastern Municipal Water District
SB 885
Page 58
Eastside Rural County Fire Protection District
El Dorado Irrigation District
Fallbrook Public Utility District
Fresno Metropolitan Flood Control District
Fulton-El Camino Recreation & Park District
Garberville Sanitary District
Georgetown Divide Recreation District
Goleta Sanitary District
Goleta West Sanitary District
Granada Community Services District
Greater Vallejo Recreation District
Grizzly Flats community Services District
Grossmont Healthcare District
SB 885
Page 59
Hayward Area Recreation and Park District
High Valleys Water District
Hilmar County Water District
Independent Special Districts of Orange County
Indian Valley Community Services District
Indian Wells Valley Water District
Inland Empire Utilities Agency
International Brotherhood of Electrical Workers
International Union of Operating Engineers
Irvine Ranch Water District
Kern County Cemetery District No. 1
Lake Arrowhead Community Services District
Las Gallinas Valley Sanitary District
SB 885
Page 60
League of California Cities
Los Angeles Unified School District Board of Education
Los Rios Community College District
Lower Lake County Waterworks District No. 1
Malaga County Water District
Manila Community Services District
Mckinleyville Community Services District
Merced County
Metropolitan Transportation Commission
Midpeninsula Regional Open Space District
Midway City Sanitary District
Mission Resource Conservation District
Modesto Irrigation District
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Page 61
Mojave Water Agency
Monterey County Business Council
Monterey Regional Airport
Monterey-Salinas Transit
Mt. View Sanitary District
Murphys Sanitary District
National Electrical Contractors Association
North County Fire Protection District
North of the River Recreation & Park District
Northern California Allied Trades
Novato Sanitary District
Oakdale Irrigation District
Oceano Community Services District
SB 885
Page 62
Olivehain Municipal Water District
Orange County Cemetery District
Orange County Transportation Authority
Palos Verdes Library District
Phelan Piņon Hills Community Services District
Placer County Water Agency
Pleasant Hill Recreation & Park District
Rincon del Diablo Municipal Water District
Riverside County Office of Education
Riverside county Transportation Commission
Rosamond Community Services District
Rowland Water District
Rural County Representatives of California
SB 885
Page 63
Sacramento Municipal Utility District
San Diego Assocation of Governments
San Francisco Transportation Authority
San Juan Water District
San Lorenzo Valley Water District
San Ramon Valley Fire Protection District
Santa Barbara County Association of Governments
Santa Clara Board of Supervisors
Santa Clara County Board of Supervisors
Santa Clara Valley Water District
Santa Margarita Water District
Self-Help Counties Coalition
Sheet Metal Workers International Association
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Page 64
Silver Creek Valley Country Club, Geologic Hazard Abatement
District
Silverado-Modjeska Recreation and Park District
Sacramento Municipal Utility District
South Orange County Wastewater Authority
South San Joaquin Irrigation District
South Tahoe Public Utilities District
Southern California Contractors Association
Squaw Valley Public Service District
State Building and Construction Trades Council of California
Stege Sanitary District
Stockton East Water District
Sutter Community Services District
Tahoe City Public utility district
SB 885
Page 65
The California State University
Three Valleys Municipal Water District
Town of Discovery Bay
Tuolumne Fire District
Tuolumne Utilities District
Union Sanitary District
United Contractors
Urban Counties of California
Vallecitos Water District
Vista Irrigation District
Wall and Ceiling Alliance
West County Wastewater District
West Valley Sanitation District
SB 885
Page 66
Western States Council of Sheet Metal Worker
Yuima Municipal Water District
Analysis Prepared by:Eric Dang / JUD. / (916)
319-2334