BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 474 (Evans)
As Amended May 2, 2011
Hearing Date: May 12, 2011
Fiscal: No
Urgency: No
TW
SUBJECT
Commercial Construction Contracts: Indemnity
DESCRIPTION
This bill would make void and unenforceable commercial
construction agreements that require a promisor to indemnify,
release, hold harmless, insure, or defend a promisee against the
actual or claimed liability, damage, or expense arising, in
whole or in part, from the negligence, willful misconduct,
defective design, violation of law, or other fault of the
promisee or the promisee's agents, employees, independent
contractors, subcontractors, or representatives, except as
specified. This bill also would make void and unenforceable
contract provisions requiring the purchase of additional insured
coverage, or any coverage endorsement or provision within an
insurance policy providing additional insurance coverage to the
extent it requires coverage that is prohibited under this bill.
BACKGROUND
Since 1967, construction contracts requiring a contractor to
indemnify another for the other's sole negligence or willful
misconduct resulting in construction defects or liability for
damages for death or bodily injury to persons, injury to
property, or any other loss, damage or expense are void and
unenforceable as a matter of public policy. Various other
states also have enacted prohibitions on indemnity provisions in
order to restrict liability shifting from the at-fault party to
a non-fault party and these statutes range from restrictions on
shifting liability for sole negligence to restrictions
maintaining comparative negligence standards.
(more)
SB 474 (Evans)
Page 2 of ?
Construction contracts which require indemnity to a party, which
may be found to be wholly or partially at-fault, vary in
degrees. Type I indemnity agreements require one party, the
indemnitor (in this case, a subcontractor), to indemnify another
party, the indemnitee (a general contractor or project owner),
in the event a claim arises from a construction project and
regardless of whether the damage was the result of the
indemnitee's sole negligence or willful misconduct. Type II
indemnity agreements require the indemnitor to indemnify the
indemnitee in the event the damage was the result of the
indemnitee's passive negligence. Type III indemnity agreements
require indemnity only if the indemnitee was not actively or
passively negligent.
Along with contractual indemnity provisions, existing law
provides "that 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." (Civ. Code Sec. 2778.) Accordingly, an agreement
to provide a duty to defend the promisee from claims arising
from the construction project may be express or inherent and may
require a party that is not at fault to defend a party that is
at fault in claims arising from the construction project.
In 2007 and 2008, the Legislature recognized a disparity between
residential builders, owners, general contractors, and
subcontractors with respect to indemnity obligations between
these parties. Accordingly, the Legislature enacted
restrictions on residential construction indemnity agreements
under SB 138 (Calderon, Ch. 32, Stats. 2007) and AB 2738 (Jones,
Ch. 467, Stats. 2008) as a matter of public policy in order to
protect non-fault parties from being held liable for the conduct
of at-fault parties. However, these restrictions do not apply
in the commercial context.
This bill, sponsored by the California Association of Sheet
Metal and Air Conditioning Contractors' National Association,
the California Legislative Conference of the Plumbing, Heating
and Piping Industry, the Concrete Contractors Association, the
Crane Owners Association, and the California Chapters of the
National Electrical Contractors Association, would, except in
certain instances, place restrictions on commercial construction
agreements, and insurance provisions associated therewith, that
require a promisor to indemnify, release, hold harmless, insure,
SB 474 (Evans)
Page 3 of ?
or defend another person against the actual or claimed
liability, damage, or expense arising, in whole or in part, from
the negligence, willful misconduct, defective design, violation
of law, or other fault of that person or that person's agents,
employees, independent contractors, subcontractors, or
representatives. This bill would thus provide that contract and
insurance requirements that shift indemnity away from at-fault
parties to non-fault parties would be void and unenforceable.
CHANGES TO EXISTING LAW
Existing law 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. (Civ. Code Sec.
2772.)
Existing law provides that an agreement to indemnify against the
acts of a certain person, applies not only to his acts and their
consequences, but also to those of his agents. (Civ. Code Sec.
2775.)
Existing law provides that, among other things, in the
interpretation of a contract of indemnity and unless a contrary
intention appears:
upon an indemnity against liability, expressly, or in
other equivalent terms, the person indemnified is entitled
to recover upon becoming liable;
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; and
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.
(Civ. Code Sec. 2778.)
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.)
Existing law provides that where one, at the request of another,
SB 474 (Evans)
Page 4 of ?
engages to answer in damages, whether liquidated or
unliquidated, for any violation of duty on the part of the
latter, he is entitled to be reimbursed in the same manner as a
surety, for whatever he may pay. (Civ. Code Sec. 2779.)
Existing law 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. (Civ. Code Sec. 2782(a).)
Existing law 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. (Civ. Code Sec. 2782(b).)
Existing law provides separate indemnity and duty to defend
restrictions and requirements regarding residential construction
contracts. (Civ. Code Sec. 2782(c)-(e).)
Existing law provides that a builder, general contractor, or
subcontractor shall have the right to seek equitable indemnity
for any claim governed by Civil Code Section 2782. (Civ. Code
Sec. 2782(f).)
Existing law provides that Civil Code Section 2782 does not
limit, restrict, or prohibit the right of a builder, general
contractor, or subcontractor to seek equitable indemnity against
any supplier, design professional, or product manufacturer.
(Civ. Code Sec. 2782(g).)
Existing law provides that Section 2782 does not prevent a party
to a construction contract and the owner or other party for
whose account the construction contract is being performed from
negotiating and expressly agreeing with respect to the
SB 474 (Evans)
Page 5 of ?
allocation, release, liquidation, exclusion, or limitation as
between the parties of any liability for design defects or
liability of the promisee to the promisor arising out of or
relating to the construction contract. (Civ. Code Sec. 2782.5.)
Existing law defines "construction contract" and "design
defect," as specified. (Civ. Code Secs. 2783 and 2784.)
This bill would provide that the provisions under Section
2782(a) (see page 3, above) would apply only to contracts
executed before January 1, 2012, and the provisions under this
bill would apply to contracts executed after that date, except
as specified.
This bill would provide that provisions, clauses, covenants, or
agreements contained in, collateral to, or affecting a contract
or agreement, with exceptions, whether executed in this state or
without, for the design, construction, alteration, renovation,
repair, or maintenance of a building, structure, highway, road,
bridge, water line, sewer line, oil line, gas line,
appurtenance, or other improvement to public or private real
property located in the state, including any erection, moving,
lifting, demolition, or excavation that requires a promisor to
indemnify, release, hold harmless, insure, or defend another
person against actual or claimed liability, damage, or expense
arising, in whole or in part, from the negligence, willful
misconduct, defective design, violation of law, or other fault
of that person or that person's agents, employees, independent
contractors, subcontractors, or representatives are against
public policy and are void and unenforceable.
This bill would provide that a provision in a contract that
requires the purchase of additional insured coverage, or any
coverage endorsement or provision within an insurance policy
providing additional insured coverage, primary or
noncontributing coverage or waivers, is void and unenforceable
to the extent that it requires or provides coverage the scope of
which is prohibited under this bill for an agreement to
indemnify, hold harmless, or defend.
This bill would exempt from its provisions the following:
(1) contracts for residential construction, as used in Title 7
(commencing with Section 895) of Part 2 of Division 2;
(2) any wrap-up insurance policy or program, except as provided
by this section;
(3) a cause of action for breach of contract or warranty that
SB 474 (Evans)
Page 6 of ?
exists independently of an indemnity obligation;
(4) a provision in a construction contract that requires the
promisor to purchase or maintain insurance covering the acts or
omissions of the promisor;
(5) indemnity provisions contained in loan and financing
documents, other than construction contracts to which the
contractor and a contracting project owner's lender are parties;
(6) general agreements of indemnity required by sureties as a
condition of execution of bonds for construction contracts;
(7) the benefits and protections provided by the workers'
compensation laws; and
(8) the benefits or protections provided by the governmental
immunity laws.
This bill also would exempt from its provisions agreements in
construction contracts that require a promisor to purchase the
following:
(1) owners and contractors protective liability insurance;
(2) railroad protective liability insurance;
(3) contractors all-risk insurance; and
(4) builders all-risk or named perils property insurance.
This bill would apply to liability under a construction contract
entered into on or after January 1, 2012.
This bill would provide that, notwithstanding any choice-of-law
rules that would apply the laws of another jurisdiction, the law
of California shall apply to every contract to which this bill
applies.
This bill would provide that any waiver of the provisions of
this bill is contrary to public policy and is void and
unenforceable.
COMMENT
1. Stated need for the bill
The author writes:
SB 474 would protect construction parties from bearing
liability for the negligence or design defects of other
parties engaged in the construction project by making
risk-shifting contract clauses unenforceable. For this
purpose, SB 474 would provide that indemnity and duty to
defend clauses contained in all construction and insurance
SB 474 (Evans)
Page 7 of ?
contracts would be unenforceable to the extent that the
clauses required the non-fault party to be responsible for
claims arising from the negligence or fault of another
contracting party.
California Association of Sheet Metal and Air Conditioning
Contractors' National Association, a sponsor of this bill,
writes:
�C]ontractual clauses known as "Type 1 indemnity" allow a
general contractor who is ninety-nine percent at-fault for an
injury or damage to shift ALL of the liability and
responsibility for defense to a subcontractor who is only one
percent at-fault (or to a subcontractor who has no liability
for the circumstances surrounding the matter, but whose work
is peripherally connected to an underlying accident).
Emerging and small businesses simply cannot grow or survive in
an environment where they are required to pay for the
accidents and mistakes created by other larger companies.
Additionally, these contract provisions are leading to a
decline in jobsite safety. General contractors are the
"controlling employer" and have the overall responsibility to
keep construction jobsites safe. Without liability reform
legislation for commercial and industrial construction
contracts, they lack incentive to ensure that all safety
measures are in place and enforced because they are not
financially responsible for any accidents.
The sponsors of this bill have numerous examples of the harmful
effects of these indemnity provisions. The following are a few
of these examples:
Project owner made a claim for construction defects
against the general contractor; the subcontractor's insurer
contributed $20,000 to remove the subcontractor from the
lawsuit, even though the subcontractor had not contributed
to the construction defect;
Subcontractor providing HVAC installation was
cross-claimed into a complaint regarding water leaks on the
exterior of a building; the total amount paid by the
subcontractor was $500,000 to settle the claim even though
the subcontractor was not at-fault;
Subcontractor paid $500,000 toward settlement even
though the construction defects were not the fault of the
subcontractor; and
SB 474 (Evans)
Page 8 of ?
Subcontractor paid $11,000,000 in a personal injury
action due to the indemnity provisions in the subcontract,
even though the subcontractor was deemed not at fault for
the injury; this payout has resulted in the subcontractor
being deemed a high risk insured and, as a result, the
subcontractor's insurance premiums have increased.
These subcontractors report that, due to increased costs and
insurance premiums related to these payouts for construction
defects and injuries resulting from the construction project,
they are having difficulty providing competitive bidding on
projects and growing their businesses.
2. Indemnity agreements
This bill would impose restrictions on commercial construction
agreements, and insurance provisions associated therewith, that
require a promisor to indemnify, release, hold harmless, or
insure another person against the actual or claimed liability,
damage, or expense arising, in whole or in part, from the
negligence, willful misconduct, defective design, violation of
law, or other fault of that person or that person's agents,
employees, independent contractors, subcontractors, or
representatives. This bill contains various exceptions, as
specified. Existing law prohibits construction contract
indemnity agreements which shift the burden of liability to a
non-fault party when the at-fault party is solely negligent.
(Civ. Code Sec. 2782(a).) Existing law restricts the shifting
of liability in residential construction projects. (Civ. Code
Sec. 2782(c)-(e).)
Proponents of this bill argue that, although California has an
anti-indemnity law that prohibits a contract requiring a
subcontractor to be liable for claims arising from the sole
negligence or willful misconduct by a project owner or the
general contractor, there is no prohibition on commercial
construction insurance contracts requiring such indemnity
provisions. Accordingly, project owners and general contractors
now require subcontractors to carry insurance to provide
indemnity and defense for claims against the project owner or
general contractor resulting from claims associated with the
project owner or general contractor's sole negligence. Further,
the proponents argue that even if the project owner or general
contractor are not solely negligent, but 99 percent negligent,
the subcontractor should not have to bear the entire burden of
liability when the subcontractor was partially responsible, if
SB 474 (Evans)
Page 9 of ?
at all. Under current commercial construction contracts and
insurance policies, the subcontractor could have to indemnify
and defend claims arising out of partial negligence on the part
of the project owner or general contractor and partial
negligence on the part of another subcontractor, regardless of
the lack of fault on the part of the indemnifying subcontractor.
The author argues that this bill primarily is aimed at
prohibiting subcontractor liability in Type I commercial
construction indemnity agreements. In the case where the
indemnitor is the subcontractor and the indemnitee is the
general contractor/projector owner, Type I indemnity agreements
require the subcontractor to indemnify the general
contractor/project owner in the event a claim arises from a
construction project and regardless of whether the damage was
the result of the general contractor's/project owner's sole
negligence or willful misconduct. Type II indemnity agreements
require the subcontractor to indemnify the general
contractor/project owner in the event the damage was the result
of the general contractor's/project owner's passive negligence.
Type III indemnity agreements require indemnity only if the
general contractor/project owner was not actively or passively
negligent.
Proponents of this bill argue that after the court's holding in
Crawford v. Weather Shield Manufacturing, Inc. (2008) 44 Cal.4th
541, general contractors are requiring subcontractors to execute
sweeping indemnity agreements which effectively make the
subcontractor the project insurer. In Crawford, the
subcontractor was contractually required to indemnify a general
contractor against all claims for damages arising out of the
subcontractor's work if the subcontractor was found negligent.
The Crawford trial court found no negligence by the
subcontractor so no indemnification was owed to the general
contractor. (Id. at pg. 549.) The Crawford court noted that
"indemnity agreements resemble liability insurance policies,
rules for interpreting the two classes of contracts do differ
significantly. Ambiguities in a policy of insurance are
construed against the insurer, who generally drafted the policy,
and who has received premiums to provide the agreed protection.
In noninsurance contexts, however, it is the indemnitee who may
often have the superior bargaining power, and who may use this
power unfairly to shift to another a disproportionate share of
the financial consequences of its own legal fault." (Id. at pg.
552; citations omitted; emphasis in original.) The proponents
argue that it is this superior bargaining power on the part of
SB 474 (Evans)
Page 10 of ?
the project owners and general contractors that demonstrate the
unconscionability of Type I indemnification agreements.
Since the ruling in Crawford, general contractors now
increasingly require contracts to contain explicit language
requiring the subcontractor to indemnify the general contractor
for any and all active or passive negligence on the part of the
general contractor, regardless of the subcontractor's lack of
fault for damages. Proponents argue that, especially after the
recent fiscal crisis, subcontractors and their insurers are
unfairly burdened by these indemnity provisions. Additionally,
the sponsors argue that "to the extent a party is not
responsible for their actions, they become more prone to making
mistakes and/or cause accidents. The equitable distribution of
risk on a construction project would naturally increase safety
and reduce costs from claims associated with defects and
mistakes. Accordingly, reduced costs would increase available
capital for more jobs and projects."
Courts have held that parties are free to negotiate contractual
provisions and assign responsibilities as they see fit, subject
to public policy. (Crawford at pg. 551.) However, the
proponents argue that the indemnity requirements of general
contractors imposed upon subcontractors, who are arguably the
weaker contracting party, amount to contracts of adhesion. If
the subcontractor wants the job, especially in this difficult
financial climate, the subcontractor must enter into indemnity
agreements. This bill, in conforming to the Legislature's
history of public policy to hold at-fault parties responsible,
would provide that contract and insurance requirements shifting
indemnity away from at-fault parties to non-fault parties would
be void and unenforceable. This bill would maintain the
exceptions to indemnity prohibitions that exist under current
law for sole negligence indemnity provisions.
3. Duty to defend
Except in specified instances, this bill would provide
restrictions on commercial construction agreements, and
insurance provisions associated therewith, that require a
promisor to defend another person against the actual or claimed
liability, damage, or expense arising, in whole or in part, from
the negligence, willful misconduct, defective design, violation
of law, or other fault of that person or that person's agents,
employees, independent contractors, subcontractors, or
representatives. Existing law provides that, among other
SB 474 (Evans)
Page 11 of ?
things, in the interpretation of a contract of indemnity and
unless a contrary intention appears, a person indemnifying
another 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. (Civ. Code Sec. 2778(4).)
Courts have held that when a subcontractor contractually agrees
to indemnify a general contractor or project owner against all
claims, unless expressly provided otherwise, the inherent or
express duty to defend in the contract will apply regardless of
whether the subcontractor was not at fault for the damages.
(Crawford at pgs. 555, 568.) Proponents of this bill argue that
the duty to defend by the subcontractors has become a huge
financial burden for subcontractors which may not bear any
responsibility for the claimed damages. As noted in Comment 2,
requiring subcontractors to execute contracts containing an
express or implied duty to defend has the effect of
unconscionability because the subcontractor has the least amount
of power to negotiate these terms. This bill would make such
duty to defend agreements void and unenforceable.
4. Opponents' concerns
Various opponents have raised concerns with this bill as
described below.
a. General contractors and project owners
General contractor and project owners groups have expressed
opposition to this bill for various reasons, the most
significant of which is the claim that this bill, they argue,
would eliminate an immediate obligation to provide a unified
defense. Accordingly, when a claim is presented against a
project owner or general contractor, they argue that the
construction project could come to a standstill while the
parties discover who was at fault for the claimed damages.
Under existing law, a project owner or general contractor can
require a subcontractor (without knowledge as to whether this
subcontractor is responsible in any way for the claimed
damages) to immediately defend the claim.
Proponents of this bill argue that the party which oversees
the construction project (the general contractor or project
owner) is in the best position to determine which parties have
SB 474 (Evans)
Page 12 of ?
the highest likelihood of involvement in the claim.
Accordingly, the general contractor or project owner is the
proper party to immediately defend the claim while liability
issues are sorted out. Given the complexity of this issue,
the author has committed to working with general contractor
and project owner stakeholders to find a fair and reasonable
solution.
b. Public entities
Various public entities have expressed opposition to this
bill, arguing that it will result in shifting liability from
those who control the risk on a project to the public entity,
and ultimately the taxpayer. Existing law provides, with
exceptions, 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. (Civ. Code Sec. 2782(b).)
However, public entities have found a way around this ban on
Type I indemnity clauses by hiring a "construction manager,"
who is oftentimes a general contractor, which enters into a
contract with a public entity, at the general contractor's
risk. The general contractor guarantees a price to the public
entity, then requires all subcontractors to execute
subcontracts which include indemnity agreements in favor of
the general contractor and project owner should a claim be
made arising out of the construction project. In these
situations, called "GC at risk" contracts, the subcontractors
are unable to propose any changes to the terms of these
contracts and the subcontractor is disqualified or terminated
for the failure to execute the subcontract. Accordingly,
these subcontracts effectively are non-negotiable.
The author's office and committee staff have engaged in
numerous communications with the public entity opponents to
address their concerns. The author's office indicates that
nothing in this bill is intended to shift liability back on to
the public entities. The author has committed to working with
public entity opponents to address this concern, and these
opponents have indicated their willingness to continue to work
with the author on this issue.
Support : Air Conditioning Sheet Metal Association;
SB 474 (Evans)
Page 13 of ?
Air-conditioning & Refrigeration Contractors Association;
American Subcontractors Association - California; Associated
Plumbing & Mechanical Contractors; Bragg Crane & Rigging Co.;
California Chapter of the American Fence Association; California
Crane & Rigging, LLC; California Fence Contractors' Association;
California Landscape & Irrigation Council; California Landscape
Contractors Association; California Plumbing and Mechanical
Contractors Association; California State Association of
Electrical Workers; California State Pipe Trades Council;
California-Nevada Conference of Operating Engineers; Champion
Crane Rental, Inc.; Crane Rental Service, Inc.; Engineering
Contractors' Association; Flasher/Barricade Association; Hill
Crane Service, Inc.; Mobile Crane Operators Group of Southern
California; Mr. Crane, Inc.; Northern California Mechanical
Contractors Association; Peninsula Crane & Rigging; Reliable
Crane Rigging; Rigging International; Specialty Crane & Rigging;
State Building and Construction Trades Council of California;
Union Roofing Contractors Association; Western States Council of
Sheet Metal Workers
Opposition : Associated General Contractors; Association of
California School Administrators; Building Owners and Managers
Association of California; California Apartment Association;
California Business Properties Association; California Building
Industry Association; California Hotel & Lodging Association;
California Retailers Association; California Special Districts
Association; California State Association of Counties; City and
County of San Francisco; Civil Justice Association of
California; Coalition for Adequate School Housing; Construction
Employers Association; Howard Jarvis Taxpayers Association;
International Conference of Shopping Centers; League of
California Cities; National Association of Industrial Office
Properties; Orange County Business Council; Regional Council of
Rural Counties; Riverside County Office of the Superintendent;
San Diego Downtown Partnership; Small School Districts'
Association; Urban Counties Caucus
HISTORY
Source : California Association of Sheet Metal and Air
Conditioning Contractors' National Association; California
Legislative Conference of the Plumbing, Heating and Piping
Industry; Concrete Contractors Association; Crane Owners
Association; California Chapters of the National Electrical
Contractors Association
SB 474 (Evans)
Page 14 of ?
Related Pending Legislation : None Known
Prior Legislation : See Background.
**************