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Senate Bill 474 Extends Bar on Type 1 Indemnity Agreements to Commercial Construction Contracts Entered Into on or After January 1, 2013

– By Brian Sanders

On June 1, 2011 by majority vote, the California Senate passed SB 474 which amended Civil Code section 2782, and added Civil Code section 2782.05. The passage of this new law is a critical development for real estate developers, general contractors and subcontractors because it will affect how these projects are insured and how disputes are resolved. 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.

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. In addition, the bill applies to commercial construction contracts an option similar to existing law regarding residential contracts by exercise of which a subcontractor, after receiving claim information from the general contractor, may defend the claim or pay its portion of the claim. The bill was supported by a wide range of subcontractor associations and by some public agencies, but continues to be strongly opposed by general contractors and property owners.

In addition to the changes noted above, the new statute also provides that before the builder or general contractor can assert a right to defense or indemnity from a subcontractor, the builder or general contractor must provide: “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, including, but not limited to, information provided pursuant to subdivision (a) of Section 910, 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.” This provision equating an indemnity/defense tender to a legal proceeding will likely impact the current practice of many insurers who deny coverage for pre-litigation tenders on the ground that the insurer's obligations do not arise until their insured is named in a suit.

It is important to note that SB 474 does not apply to design professionals. However it expands the definition of “construction contract” to include agreements for renovations and such subjects as utility, water, sewer, oil and gas lines. 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.

In construction contracts with owners of privately owned real property to be improved, in which the owner is not also acting as a contractor or supplier, there can be no indemnity provision relieving the owner from his active negligence. The bill does not apply, however, to a homeowner performing improvement projects on his or her own single family dwelling.