BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 972|
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THIRD READING
Bill No: SB 972
Author: Wolk (D)
Amended: 5/12/10
Vote: 21
SENATE JUDICIARY COMMITTEE : 4-0, 5/4/10
AYES: Corbett, Harman, Hancock, Leno
NO VOTE RECORDED: Walters
SUBJECT : Indemnity: design professionals
SOURCE : American Council of Engineering Companies
DIGEST : This bill provides that all provisions, clauses,
covenants, and agreements contained in all contracts with a
public agency for design professional services that purport
to require an immediate defense under an indemnity
agreement are unenforceable, except as provided. This bill
only applies to contracts and amendments thereto entered on
or after January 1, 2011.
ANALYSIS : Existing law provides that specified rules are
to be applied in the interpretation of a contract of
indemnity, unless a contrary intention appears. Pursuant
to these rules, the person indemnifying is bound, on
request of the person indemnified, to defend actions or
proceedings brought against the latter in respect to the
matters embraced by the indemnity. However, the person
indemnified has the right to conduct those defenses, if he
or she chooses to do so. (Civ. Code Sec. 2778.)
CONTINUED
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Existing case law interprets the above-described provisions
to provide that, unless otherwise provided, a duty to
defend arises out of an indemnity obligation as soon as the
litigation commences, and regardless of whether the
indemnitor (the person indemnifying) is ultimately found
negligent. ( Crawford v. Weather Shield (2008) 44 Cal.4th
541; see also UDC- Universal Development, L.P. v. CH2M Hill
(2010) 181 Cal.App.4th 10.)
Existing law provides that, for all contracts entered into
after January 1, 2007, for residential construction, all
provisions, clauses, covenants, and agreements contained
in, collateral to, or affecting any such construction
contract, and amendments thereto, that purport to
indemnify, including the cost to defend, the builder, as
defined, by a subcontractor against liability for claims of
construction defects are unenforceable to the extent the
claims arise out of, pertain to, or relate to the
negligence of the builder or the builder's other agents,
other servants, or other independent contractors who are
directly responsible to the builder, or for defects in
design furnished by those persons, or to the extent the
claims do not arise out of, pertain to, or relate to the
scope of work in the written agreement between the parties.
These provisions may not be waived or modified by
contractual agreement, act, or omission of the parties.
However, contractual provisions, clauses, covenant, or
agreements not expressly prohibited are reserved to the
agreement of the parties. (Civ. Code Sec. 2782(c).)
Existing law provides that, for all contracts entered into
after January 1, 2009 for residential contracts, a
subcontractor has no defense or indemnity obligation to a
builder or general contractor for a construction defect
claim unless and until the builder or general contractor
provides a written tender of the claim, or portion thereof,
to the subcontractor which includes all of the information
provided to the builder or general contractor by the
claimant or claimants relating to claims caused by that
subcontractor's scope of work. The written tender has the
same force and effect as a notice of commencement of a
legal proceeding. (Civ. Code Sec. 2782(d).)
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Existing law provides that if a builder or contractor
tenders a claim, or a portion thereof, to a subcontractor,
the subcontractor is entitled to either defend the claim
with counsel of its choice or pay, within 30 days of
receipt of an invoice from the builder or general
contractor, no more than a reasonable allocated share of
the builder's or general contractor's defense fees and
costs. Existing law further provides that a builder,
general contractor, or subcontractor has the right to seek
equitable indemnity for construction defect claims pursuant
to these provisions. (Civ. Code Sec. 2782(d) & (f).)
Existing law provides, for all contracts, and amendments to
contracts, 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 these contracts, that
purport to indemnify, including the cost to defend, the
public agency by a design professional against liability
for claims against the public agency, are unenforceable,
except for claims that arise out of, pertain to, or relate
to the negligence, recklessness, or willful misconduct of
the design professional. (Civ. Code Sec. 2782.8.)
This bill provides that all provisions, clauses, covenants,
and agreements contained in, collateral to, or affecting
contracts with a public agency for design professional
services that purport to require an immediate defense under
an indemnity agreement are unenforceable, except as
provided below. This bill would apply to contracts, and
amendments to contracts, entered into on or after January
1, 2011.
This bill provides that a design professional is not
required to defend or indemnify the indemnified party
unless and until the indemnified party provides a written
tender of the claim to the design professional, at which
point the design professional may choose to either defend
the claim with counsel of its choosing or pay a reasonable
allocated share of the indemnified party's defense fees and
costs.
This bill provides for the allocation of damages and
attorney's fees if the design professional fails to fulfill
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his or her duties under the bill's provisions.
This bill provides that nothing in its provisions would
prohibit the parties from mutually agreeing to reasonable
contractual provisions for damages if any party fails to
elect for or perform its obligations under this bill.
This bill provides that a public agency or design
professional shall have the right to seek equitable
indemnity for any claim governed by this bill. This bill
would further provide that nothing in this section limits,
restricts, or prohibits the right of the indemnified party
or the design professional to seek equitable
indemnification against any entity other than the
indemnified party or design professional.
This bill defines design professional as including all of
the following: (1) an individual licensed as an architect,
and a business entity offering licensed architectural
services; (2) a licensed landscape architect, and a
business entity offering licensed landscape architectural
services; (3) an individual registered as a professional
engineer and, a business entity offering professional
engineering services; and (4) an individual licensed as a
professional land surveyor, and a business entity offering
professional land surveying services.
This bill defines "design professional services" as
including all contractual services offered or performed by
a design professional.
This bill defines "public agency" as including 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. This definition would not include the State
of California.
Background
During the last five years, the Legislature has enacted
several measures intended to address the use of certain
types of risk shifting in indemnity agreements,
particularly those that appear in contracts for residential
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construction.
In 2005, AB 758 (Calderon, Chapter 394, Statutes of 2005)
was enacted to address alleged abuses of "Type I"
indemnification clauses in contracts imposed on
subcontractors by builders. These clauses typically
required the subcontractor to assume liability for the
builder's negligence and misconduct, beyond what the
subcontractor would be obligated to pay under tort law in
the absence of the Type I agreement. Under AB 758, all
provisions contained in residential construction contracts
entered into after January 1, 2006 that purport to
indemnify the builder by a subcontractor against liability
for claims of construction defects are unenforceable to the
extent the claims pertain to, or relate to the negligence
of the builder or his or her agents. These provisions of
existing law may not be waived or modified by contractual
agreement, act, or omission of the parties. AB 758 was the
product of lengthy negotiations and discussions between
stakeholders.
The following year, the Legislature built upon AB 758 by
enacting AB 573 (Wolk, Chapter 455, Statutes of 2006) in
response to concerns that local public agencies were
requiring broad indemnity agreements in contracts with
design professionals. Those agreements were generally
requiring the design professional to hold the public agency
harmless against the conduct of the public agency or other
third parties in a public works project. AB 573 provided
that, for contracts entered into on or after January 1,
2007, with a public agency for design professional
services, all provisions that purport to indemnify the
public agency against liability for claims against the
public agency, are unenforceable, except for claims that
arise out of, pertain to, or relate to the negligence,
recklessness, or willful misconduct of the design
professional.
Subsequently, AB 2738 (Jones, Chapter 467, Statutes of
2008) was enacted as a follow up to AB 758 due to concerns
that builders had been circumventing the clear intent of AB
758 by requiring subcontractors to pay for the builder's
defense costs that had no relation to the contractor's
work. AB 2738, among other things, provided that a
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subcontractor would have no defense or indemnity obligation
to a builder or general contractor for a construction
defect claim unless, and until, the builder or general
contractor provides a written tender of the claim to the
subcontractor which includes all of the information
provided to the builder or general contractor by the
claimant or claimants relating to claims caused by that
subcontractor's scope of work.
This bill seeks to address issues left unresolved by prior
legislation with respect to a design professional's
exposure to liability for defense costs in indemnity
agreements contained in contracts with public agencies.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 5/12/10)
American Council of Engineering Companies (source)
American Institute of Architects, California Council
American Subcontractors Association California
California Council of the American Society of Landscape
Architects
California Geotechnical Engineers Association
Green Valley Consulting Engineers
Provost & Richard Engineering Group
Structural Engineers Association of California
OPPOSITION : (Verified 5/12/10)
Associated General Contractors of California
California Association of Joint Powers Authorities
California Special Districts Association
California State Association of Counties
Coalition for Adequate School Housing
CSAC Excess Insurance Authority
League of California Cities
Los Angeles Unified School District
Regional Council of Rural Counties
Riverside County Schools Advocacy Association
ARGUMENTS IN SUPPORT : According to the author's office:
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This bill is in response to the 2008 California
Supreme Court decision in Crawford v. Weather Shield .
In that decision the Court held that Civil Code
Section 2778 allows indemnity contracts that require
defense of [lawsuits] against others even if the
person providing the indemnity and defense has no
liability.
Under current law an indemnitor has a duty to defend a
lawsuit covered by an indemnification contract prior
to any fault determination. This exposes the
indemnitor to expense before they have been found at
fault, possibly exposing them to excessive defense
costs. An individual should only be responsible for
their own negligent conduct and not of other third
parties. Furthermore, if an individual is found to be
at fault, they should only be held liable for the
extent of the harm caused by the negligent conduct and
should only have to defend allegations involving their
own misconduct.
Supporters of the bill also generally assert that
Crawford has particularly grave implications for
design professionals because professional liability
insurance, in contrast to general liability insurance
typically used by owners, contractors and
subcontractors, does not cover contractually assumed
liability. Instead, professional liability insurance
will cover a design professional's common law
liability, i.e., negligent acts, errors, or omissions.
ARGUMENTS IN OPPOSITION : In opposition, the California
Special Districts Association writes:
This bill would impose a "one size fits all" solution
to contractual negotiations by specifying that the
only defense obligation a public agency can agree to
with a design professional is one in which the public
agency does not get an upfront defense from the design
professional, but has to rely on reimbursement of its
own defense costs incurred, and then only if the
design professional is found negligent? Parties to a
contract should be afforded the freedom to allocate
responsibilities as they see fit. This is critical to
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special districts. In order to best protect
taxpayers, a district may wish to negotiate a contract
which provides that the design professional defend the
district in any claim by a third party alleging a
design defect, whether the design professional is
liable for a defective design or not, on the theory
that the district is not involved in the design
process, has delegated those duties to a professional,
and should not have to expend taxpayer funds defending
the district in a lawsuit ? Many special districts
operate on small budgets with limited staff. These
districts purposefully contract for certain projects
that they do not have the expertise to construct. In
such situations, it seems most appropriate that the
district may wish to seek protection for legal defense
associated with the project.
Also in opposition, the League of California Cities writes:
SB 972 would benefit [architecture and engineering
(A/E)] consulting firms and their insurance carriers
at the expense of the public in two ways. First, the
net effect would be to shift to taxpayers legal
defense costs that should be borne to varying degrees
by A/E consulting firms and their insurance carriers.
Second, it would encourage protracted litigation
because, as a practical matter, a formal finding of
negligence or intentional misconduct will be a
prerequsite for the public agency to receive indemnity
from the A/E consulting firm or its insurance carrier.
The negotiation of terms between public agencies and
A/E consulting firms should be left to the free-play
of market forces. SB 972 would preclude negotiation
of broader protection, even where the public agency is
willing to pay extra for such protection.
California's Coalition for Adequate School Housing adds:
SB 972 seeks to inappropriately erase a separate "duty
to defend" from the "indemnification of defense
costs." It does so by making the duty to defend also
contingent upon the finding of a design professional's
liability. If SB 972 is made law, it will shift the
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responsibility of defending claims related to a design
professional's work from design professionals to the
public agencies that contract with them.
RJG:nl 5/12/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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