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Paladin Risk Management, Ltd = Mitigation of Loss Exposures
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Paladin Risk Management, Ltd = Mitigation of Loss Exposures
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Effective January 2013
California Restricts Allowable Indemnity & AI Coverage
On Commercial Construction Contracts
On October 9, the governor of California signed SB 474, which restricts the state's allowable scope of indemnity in construction contracts. Effective January 1, 2013, sections 2782 and 2783 of the California Civil Code will permit a party to a construction contract to require indemnification only with respect to the indemnitor's negligence. Previously, California placed this level of restriction only on subcontractor indemnification of a builder for a construction defect claim on a residential project. For other types of construction contracts, the only restriction on indemnification applied to indemnification for a party's sole negligence. Indemnification for parties' joint negligence was allowed. In a nutshell, this law transforms California from an intermediate form of indemnity state to a limited form of indemnity state.The limitations also apply to additional insured requirements, as noted in section 2782.05(b)(6):
This section does not apply to ... a provision in a construction contract that requires the promisor to purchase or maintain insurance covering the acts or omissions of the promisor, including additional insurance endorsements covering the acts or omissions of the promisor during ongoing and completed operations.
By limiting the scope of the insurance exception (which many states have) to additional insured coverage for the acts or omissions of the promisor, the statute effectively prohibits requiring additional insured coverage that would respond to one's own negligent acts.The law supersedes any choice-of-law rules that might otherwise apply. Further, any waiver of these provisions will be considered void and unenforceable as contrary to public policy.
This bill would provide, for construction contracts entered into on and after January 1, 2013, with a public agency, that purport to impose on any contractor, subcontractor, or supplier of goods or services, or relieve the public agency from, liability for the active negligence of the public agency are void and unenforceable. The bill also would provide, for construction contracts entered into on and after January 1, 2013, with the owner of privately owned real property to be improved, as specified, and as to which the owner is not acting as a contractor, construction manager, or supplier of materials or equipment to the work, that purport to impose on any contractor, subcontractor, or supplier of goods or services, or relieve the owner from, liability are unenforceable to the extent of the active negligence of the owner, including that of its employees. The bill would except from these provisions a homeowner performing improvement projects on his or her own single family dwelling.
This bill would expand the definition of “construction contract” for purposes of these provisions, to include agreements for renovations and would include agreements respecting, among other things, utility, water, sewer, oil, and gas lines.
Contractors operating in California should consult their legal counsel about appropriate changes to their subcontract indemnification language before the law goes into effect in January.
SB 474 takes effect on January 1, 2013
SB 474's synopsis as enrolled and sent to the Governor:
1. Prohibits construction contracts requiring indemnity, insurance, or defense obligations by a subcontractor for the active negligence or willful misconduct of a general contractor, his/her agents, or certain other subcontractors.
2. Provides that, unless otherwise prohibited under this bill, the parties to a construction contract can freely contract for other protections and obligations of each party, but allows numerous exemptions, including residential construction contracts, direct contracts with a public agency or owner, and insurance contracts for project wrap up and workers' compensation.
3. Requires an insurer to uphold their contractual obligations to additional insureds pursuant to Presley Homes, Inc. v. American State Insurance Company (2001) 90 Cal.App.4th 571.
4. Provides that an insurer maintains reimbursement rights from a general contractor or other subcontractor pursuant to the holding in Buss v. Superior Court (1997) 16 Cal.4th 35.
5. Provides a defense or settlement option for commercial construction contracts similar to existing law regarding residential construction contracts under which a subcontractor, after receiving claim information from the general contractor, has the option to defend the claim or pay its portion of the claim.
6. Provides that in the event a contractor fails to maintain its obligations to defend or pay its portion of the claim, the general contractor may make a claim for compensatory and consequential damages and reasonable attorney's fees.
7. Clarifies that a public agency is prohibited from shifting its liability for its active negligence to a contractor, subcontractor, or materials supplier.
8. Establishes that a project owner, not acting as a project manager, general contractor, or materials supplier, is prohibited from shifting liability for its active negligence to a contractor, subcontractor, or materials supplier.
9. Provides that these new rights and obligations shall be construed to affect the obligation, if any, of either a contractor or construction manager to indemnify, including defending or paying the costs to defend, a public agency against any claim arising from the alleged active negligence of the public agency under Civil Code Section 2782(b) or to indemnify, including defending or paying the costs to defend, an owner of privately owned real property to be improved against any claim arising from the alleged active negligence of the owner under Civil Code Section 2782(c).
10.Provides that the foregoing changes shall not be construed to affect the obligation, if any, of either a contractor or construction manager to provide or maintain insurance covering the acts or omissions of the promisor, including additional insurance endorsements covering the acts or omissions of the promisor during ongoing and completed operations pursuant to a construction contract with a public agency under Civil Code Section 2782(b) or an owner of privately owned real property to be improved under Civil Code Section 2782(c).
EFFECTIVE JANUARY 2009 CALIFORNIA LAW WILL REQUIRE
MAJOR CHANGES IN CONSTRUCTION CONTRACTS
(1) Owners and General Contractors Can No Longer Rely on Subcontractors to Defend and Indemnify Them for Certain Losses on Residential Projects.
(2) New Rules on Wrap-Up Insurance Programs Will Require Disclosures on Both Residential and Commercial Projects, and Affect the Allocation of Deductibles.
Under the new law, an indemnifying subcontractor can now elect to either:
1. Defend a claim “to the extent alleged to be caused by the subcontractor” using counsel of the subcontractor’s choice; or
2. Pay the subcontractor’s “reasonable allocated” share of the general contractor’s or owner’s total defense fees and costs. Because this change will likely result in disputes on how the general contractor’s and owner’s defense are split among multiple parties, owners and general contractors may need to rely more on their own insurance programs to cover the cost of defending lawsuits.
The new law also requires that owners and general contractors make certain disclosures in their contracts and subcontracts if the project uses a wrap-up or consolidated insurance program on either residential or commercial projects.
Wrap-Up Insurance Programs Limit Contractual Indemnity
Wrap-up insurance policies typically are taken out by a builder and are designed to cover multiple contractors and subcontractors against risks associated with a construction project. New Civil Code §2782.9 prohibits the builder from imposing contractual indemnity obligations on a subcontractor when a residential project is covered by a wrap-up insurance program.But, any party may make equitable indemnity claims for damages if the claims are not covered by the wrap-up policy. The builder or general contractor may require subcontractors or other participants to pay a reasonable share of the self-insured retention or deductible of the wrap-up policy. However, the maximum amount of the each participant’s contribution and the method of collection must be disclosed in the contract with the participant. The contribution may only be collected when the deductible or self-insured retention is incurred by the builder or general contractor and only in an amount that is reasonable and proportionate to the claim. Contributions may not exceed the deductible or self-insured retention due.Certain disclosures also now are required when wrap-up policies are in place for public or private construction projects. The party that obtained the wrap-up policy is required to disclose the total amount or method of calculating any credit or compensation for the policy premium sought from the subcontractor. The policy limits, scope of coverage, term and other specified information regarding the coverage also must be provided.AB 2738, adding Civil Code §§2782.9, 2782.95 and 2782.96
For construction contracts entered into after January 1, 2009, parties should modify any contracts which violate the new law and general contractors should update their contract forms and risk management programs to maximize legal protections and to assure sufficient insurance coverage for claims and losses.
For more information contact us at;
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