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 SB 885 Page 2 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. SB 885 Page 3 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. SB 885 Page 4 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. SB 885 Page 5 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. SB 885 Page 6 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.) SB 885 Page 7 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 SB 885 Page 8 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, SB 885 Page 9 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 SB 885 Page 10 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 SB 885 Page 11 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 SB 885 Page 12 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 SB 885 Page 13 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 SB 885 Page 14 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 SB 885 Page 15 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. SB 885 Page 16 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. SB 885 Page 17 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 SB 885 Page 18 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 SB 885 Page 19 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 SB 885 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 Page 21 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 SB 885 Page 22 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 SB 885 Page 23 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: SB 885 Page 24 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. SB 885 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 SB 885 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 SB 885 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. SB 885 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. SB 885 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 SB 885 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 SB 885 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 SB 885 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