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SB 474 Extends Bar on Type 1 Indemnity Agreements to Commercial Construction Contracts Entered Into On Or After January 1, 2013

Posted on February 11th, 2013

On June 1, 2011 by majority vote, the California Senate passed Senate Bill 474 amending Civil Code section 2782 and adding Civil Code section 2782.05. The passage of this new law is a critical event for real estate developers, general contractors and subcontractors because it will affect how construction projects are insured and how related disputes are resolved.

Type I Indemnity Now Barred in Commercial Construction Contracts

The identification of a contract’s indemnity provision as Type I, Type II, or Type III comes from case law (MacDonald & Kruse v. San Jose Steel (1972) 29 Cal.App.3d 413,420).  Type I indemnity is that version in which the party being indemnified (indemnitee – usually the owner or general contractor) is to be indemnified for its own active negligence.  The opinion noted above described it as a contract term “which provides ‘expressly and unequivocally’ that the indemnitor is to indemnify the indemnitee for, among other things, the negligence of the indemnitee. Under this type of provision, the indemnitee is indemnified whether his liability has arisen as the result of his negligence alone (citation omitted), or whether his liability has arisen as the result of his co-negligence with the indemnitor (citation omitted).”

 The new law amends Civil Code Section 2782 to extend to commercial construction contracts entered into on or after January 1, 2013 the Type 1 indemnity prohibitions that exist already for residential construction contracts. It also prohibits these construction contracts from requiring a subcontractor to indemnify, insure, or defend a general contractor for the active negligence or willful misconduct of the general contractor, its agents or other persons or subcontractors responsible to the general contractor. This bill, signed by the Governor and chaptered on October 9, 2011, has no stated retroactive effect and so should not revise the rights and obligations of construction project owners, contractors and subcontractors in existing agreements.

 Indemnitor May Elect to Pay Its Share or Defend

An option previously available only in the context of residential construction is now made available in connection with commercial construction contracts: after receiving claim information from the general contractor, a subcontractor on a commercial construction contract may now elect to either defend the claim or pay its portion of the claim and arguably terminate any defense/indemnity obligation at that point. The bill was supported by a wide range of subcontractor associations and by some public agencies. However, it was and continues to be strongly opposed by general contractors and property owners, who are likely to start testing its provisions and limitations in the courts relatively quickly.

Written Tender and Specific Claim Info Required to Trigger Defense Obligation

Before a builder or general contractor can assert a right to defense or indemnity from a subcontractor, the builder or general contractor must provide:

• Written tender of the claim, or portion thereof, to the subcontractor, including

• All information provided to the builder or general contractor by the claimant or claimants, including, but not limited to, information provided pursuant to Civil Code Section 910(a), relating to claims caused by that subcontractor’s scope of work.

• This written tender shall have the same force and effect as a notice of commencement of a legal proceeding.”

Statutory Pre-Litigation Notice Deemed an “Occurrence”?

In addition to all the other effects of this new law, it also seems to decrease the likelihood of an insurer successfully denying coverage under a general liability policy for claims asserted prior to the filing of litigation by statutorily giving the written tender by the GC or builder “the same force and effect as a notice of commencement of a legal proceeding.”  Both insurers and insureds will likely be seeking judicial determinations of the meaning and potential impact of this language.

No Application to Design Professionals – Glitch for Design-Build Contractors?

It is important to note that SB 474 does not apply to design professionals. It is unclear whether the statute will construe design-build subcontractors as design professionals, per se. This is another likely hot area for litigation.

Renovation Contractors Now Included in the Type I Indemnity Ban – Maybe

SB 474 expands the Civil Code definition of “construction contract” to include agreements for renovations (as well as such subjects as utility, water, sewer, oil and gas lines). However, there are some potentially conflicting provisions that will likely lead to early litigation. The new law provides that construction contracts with owners of privately owned real property to be improved, where the owner is not also acting as a contractor or supplier, cannot require indemnity of those owners for their own active negligence. A related provision states that the new law does not apply where an individual homeowner is performing improvement projects on his/her own single family dwelling. One interpretation of these seemingly contradictory provisions is that one deals with non-residential property and the other deals with single-family 1-4 residences. We expect that there will be a round of litigation to work out the nuances.

No Opt-Out, Choice-of-Law Provisions Ineffective to Avoid New Law

SB 474 applies to construction performed on property located in California, even if the parties have attempted to opt out of these changes or have agreed to a non-California choice of law provision in their contract.

 


Meet Your Construction Attorney Blogger

Posted on February 2nd, 2013

BRIAN M. SANDERS, Partner

As a member of the Real Estate and Construction practice groups, Brian’s primary focus is on complex construction defect litigation. He also has experience in personal injury, mortgage and real estate broker/agent defense and other professional responsibility and business defense, and premises liability matters.

Prior to law school, Brian’s business experience included government loan collections and serving as general manager of a consumer collection agency in Santa Ana, California, training and working as a DRPA mediator, and an appointment to the board of directors at the former Center for Community Mediation in Costa Mesa, California.