Publication

Brooke Hartman, Mark Russell and Ernest Isola 

The California Legislature and Governor Brown recently approved California Senate Bill 474, which generally provides that in all construction contracts for private commercial projects entered into on or after January 1, 2013, any indemnity obligations (including the cost to defend) arising out of the active negligence or willful misconduct of the indemnified party are void and unenforceable.  

This new law will dramatically affect risk allocations in construction projects, and also lead to a likely increase in insurance-related litigation and associated costs. Under current practice, California developers and general contractors typically use what is referred to as a “Type I” indemnity provision in construction contracts.  “Type I” indemnity allows one party (usually owners, developers, and general contractors) to require the other party (typically subcontractors) to indemnify them for their own active negligence or fault.  Although some legislative changes have been made to ameliorate the effects of Type I agreements in the context of residential construction, SB 474 extends these protections to commercial projects.   

SB 474’s other important aspects include the following:

• If the property on which the construction is performed is located in California, then California law would apply regardless if the parties have a contrary choice of law provision in their contract. 
• SB 474 does not apply to design professionals. 
• SB 474 has no effect on additional insured obligations, i.e., contractual provisions requiring a party to obtain additional insured endorsements covering the party’s acts or omissions during ongoing and/or completed operations. 
• SB 474 expands the definition of “construction contract” to include agreements for renovations and such subjects as utility, water, sewer, oil, and gas lines.
• SB 474 does not apply to Owner Controlled Insurance Programs (often called OCIPS or WRAPs) 
• Prior to SB 474, California law prohibited indemnity provisions requiring a “contractor” to indemnify a public agency for its own active negligence.  SB 474 amends this law to clarify “contractor” to include “contractor, subcontractor, or supplier of goods and services”.
  A new section (c) is added to Civil Code Section 2782 providing that 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. However this does not apply to a homeowner performing an improvement on a single family dwelling.  

“Type II” indemnity agreements, which allow a party to be indemnified for another party’s passive, as opposed to active, negligence are still legal and enforceable.  Passive negligence can include a failure to discover a dangerous condition or a failure by a general contractor to identify a subcontractor’s defective work, among other things.    

The Effects of SB 474

General Contractors/Developers:  General contractors and developers are adversely impacted since the new law eliminates an effective risk control tool. A likely result will be increased insurance premiums for general contractors and developers.  Language in existing model contracts containing the Type I indemnity language will also have to be modified, and general contractors must be diligent in obtaining all subcontractors insurance information prior to the project’s commencement. 

SB 474 proponents assert it adds fairness by making each party responsible for its own negligence.  Opponents, i.e., owners, developers, and general contractors, claim it will lead to increased litigation.  They argue parties will expend more resources to determine actual liability instead of having a predetermined contractual obligation regardless of fault, resulting in additional discovery, depositions, etc.  OCIPs (and other forms of WRAP insurance) will likely increase because developers and general contractors will be precluded from shifting all the risk on to subcontractors and their insurance carriers.    

Subcontractors:  The law’s primary purpose was to equitably shift the risk from the subcontractor trades towards the higher tier construction participants.  Proponents argued that “Type I” indemnity placed the majority of the burden of liability and defense costs on the subcontractor.   Although in theory subcontractors have been free to negotiate contracts without “Type I” indemnity provisions, in reality they have been unable to do so given the superior bargaining power of the developer/general contractor, especially in today’s economic environment.  The intended result of SB 474 is that the cost of subcontractors’ insurance will likely decrease.  

The effect of SB 474 on defense obligations between construction participants remains to be seen.  This new law may conflict with the recent Crawford and UDC decisions, which require a contractor or design professional to provide an immediate defense if a tender is made under a clause requiring them to “defend” another.  Since SB 474 speaks to not only indemnity obligations but also “the cost to defend,” an argument can be made that the defense obligation does not arise until a determination is made whether the general contractor was “actively negligent.”  On the other hand, SB 474 does not specifically mention the Crawford/UDC line of cases, so it is unclear whether the California Legislature meant to abrogate these cases and their language concerning an immediate defense obligation.

Design Professionals:  SB 474 does not apply to design professionals.  However, design professionals have been advocating for expanding the laws protecting them from defense and indemnity obligations.  While SB 474 only addresses Type I indemnity for contractors, subcontractors, and material suppliers, it may pave the way for similar legislation affecting design professionals. 

California is the seventeenth state to eliminate Type I indemnity provisions in construction contracts. 

To read the full text of this statute, please click here.

Kimberly Blake

Amendments To California’s Professional Design and
Mechanic's Lien Laws

In 2010, California passed SB 189 to revamp the professional design and mechanic's lien statutes.  Effective July 1, 2012, the amendments repeal the current professional design and mechanic's lien statutes and enact a new chapter and title incorporating both professional design and mechanic's liens.  This bill added licensed landscape architects to the current list of design professionals (licensed architects, engineers, and surveyors) who may claim a design professional lien.  Additionally, the process for filing a lien has been streamlined.

To read the complete article, please click here.  

Amy Darby

Equitable Tolling in Arizona and Colorado: Diverging Perspectives

Please click here to read an overview of recent pending legislation in Arizona and Colorado that may affect design professionals in the construction industry.   
 

The Construction litigation team of Keith Cramer and Robert Larsen won complete summary judgment in a commercial construction defect case against an architectural firm. The case concerned the construction of a retail home improvement box store. Part of the construction required use of a particular stone veneer panel. The firm’s client was the architect and engineer of record. The construction plans specified that installation of the stone veneer was to be performed according to the manufacturer’s specifications.

To read more about this case, please click here.

The Las Vegas construction litigation team of Managing Partner Robert Schumacher and Senior Counsel Jon Ludwig obtained a $9 million settlement in favor of a Las Vegas contractor involving construction of the MGM/CityCenter project. Gordon & Rees's client was owed monies for contract balance, unapproved change orders and damages for project inefficiencies due to design and scheduling delays. The contractor recorded several mechanic's liens on the project (CityCenter had not yet been amalgamated into one parcel) pursuant to NRS 108 et seq.

To read more about this case, please click here.

Denver attorneys John Palmeri and Mary Byrne Fletcher prevailed on a motion for summary judgment in an insurance coverage/bad faith case in the United States District Court for the District of Colorado. The dispute arose during construction of a forty-one-story residential project in downtown Denver. A water pipe failed during construction, causing damage throughout the building.  The piping throughout the building was replaced. Plaintiff, an additional insured subcontractor under a builders’ risk policy, alleged the insurance company breached the policy by denying reimbursement of the costs to remove and replace the piping.  The insurance company paid for water damage caused by a failed pipe but denied coverage for the costs to remove and replace the faulty piping. 

To read more about this case, please click here.   

In April, 2011, Las Vegas construction Partner Robert Schumacher won Summary Judgment in Clark County District Court in favor of a Las Vegas contractor.  Gordon & Rees's client was awarded over $570,000.00 in judgment as a result, including attorney’s fees, costs, and pre-judgment interest

To read more about this case, please click here.

In February 2011, Partner Ken Strong of the San Francisco office and Partner Andrew Wallace of the Dallas office received an arbitration award of $1,548,338, plus an attorneys fee award of $750,000 in favor of Gordon & Rees's engineering, design and construction services client after a two week binding arbitration in Dallas Texas.

To read more about this case, please click here.

In November 2010 and following a nine week trial, San Francisco Construction group partner Ernest Isola and associate Brendan Bradley obtained a complete defense verdict against a $3.2 million claim for indemnity brought by a general contractor. The case involved paint coatings delaminating from steel ceiling panels installed by Gordon & Rees’s client at a city-owned natatorium. The last settlement demand two weeks prior to the defense verdict was over $1 million.

To read more about this case, please click here.

On November 4, 2011 Jesse Blyth presented to the San Diego chapter of AIA on managing risk for design professionals and a summary of hot topics in construction litigation. The seminar was a huge success. Please contact him at jblyth@gordonrees.com if you have any questions about this presentation.   

On September 7 - 9, MC Consultants Inc. hosted its 17th Annual West Region Construction Defect & Insurance Coverage Conference in San Diego, California.  Panelists from Gordon & Rees included San Francisco partner Sandy Kaplan’s presentation: “It’s a WRAP! – 2011 Market Update” and Denver partner Amy Darby’s presentation: “Rocky Mountain Coverage and Current Trends.”

On July 14, Las Vegas Partner Robert Schumacher conducted two presentations through Lorman Education Services program titled “What to Do When Construction Projects Go Bad in Nevada.”  This seminar for attorneys, hotel executives and construction industry leaders focused on issues that arose during the construction process, including disputes surrounding termination, liens and bond claims. Mr. Schumacher’s presentation included topics: “Commercial General Liability Policies” and “Wrap Insurance: OCIPs and CCIPs.”