Indemnity Provisions After SB 474

Double IndemnityAs I wrote in my 2013 Construction Law Update, among the new laws taking effect in 2013 is new indemnity legislation – SB 474.  SB 474 invalidates, what courts have referred to as  “Type I” indemnity provisions, in commercial (i.e., non-residential) construction contracts.  So where are we after SB 474?  Glad ya asked.

What is Indemnity?

In order to understand indemnity law in California you first need to have an understanding of what indemnity is.  “Indemnity,” according to Black’s Law Dictionary, is “[a]n undertaking whereby one agrees to indemnify another upon the occurrence of an anticipated loss.  A contractual or equitable right under which the entire loss is shifted from a tortfeasor who is only technically or passively at fault to another who is primarily or actively responsible.”

Black’s definition, while accurate, is useful to lawyers. But for laymen, perhaps not so much.  My Cliff Note version, while undoubtably less accurate than Black’s, is that indemnity is where one person (called the “indemnitor”) agrees to reimburse another person (called the “indemnitee”) for any loss from a claim or claims brought by a third-party.  An example would be someone (i.e., the third-party) tripping and falling on a set of stairs and suing the owner of the building (i.e., the indemnitee) for their injuries on the ground that the stairs were not built according to building code.  The owner, if he had an indemnity provision in his construction contract with the general contractor (i.e., the indemnitor), would look to the general contractor to reimburse the owner for any amounts the owner has to pay to the third-party.

In construction contracts, indemnity provisions are typically found in contracts between owners and general contractors and in contracts between general contractors and subcontractors.  In construction contracts between owners and general contractors, indemnity provisions  require the general contractor to reimburse the owner for any loss  from a  claim or claims brought by a third-party arising out of work performed by the general contractor.

In construction contracts between general contractors and subcontractors, indemnity provisions require the subcontractor to reimburse the general contractor for any loss from a claim or claims arising out of work performed by the subcontractor.  So, for example, if the owner sues the general contractor for defective work performed by one of the general contractor’s subcontractors, an indemnity provision would require the subcontractor to reimburse the general contractor for any amounts the general contractor has to pay to the owner.

As you might imagine, there can be and often are, occasions where multiple indemnity provisions apply.  Using the example above, if a third-party trips and falls and sues the owner on the ground that the steps were not built according to the building code, the owner may in turn sue the general contractor under the indemnity provisions of the contract between the owner and the general contractor, and the general contractor may in turn sue the subcontractor who built the steps under the indemnity provisions of the contract between the general contractor and the subcontractor.

It is also not uncommon for multiple parties to be sued for indemnity because it is not clear what caused the injury.  Again, using the example above, it may be unclear whether the steps were improperly designed, whether the framing subcontractor improperly built the steps, or whether some other subcontractor contributed to the accident.  In those situations, it is not uncommon for multiple subcontractors to be sued based on the indemnity provisions contained in their respective subcontracts.

Finally, indemnity provisions often include obligations – not only requiring one party to reimburse another party for losses they may sustain – but to also defend that party in the event of a lawsuit.  Such indemnity provisions typically contain language stating that the indemnitor has to  “indemnify and defend” the indemnitee from and against any loss.  It is also not uncommon for such provisions to require that the indemnitor defend the indemnitee using counsel (i.e., attorneys) selected or approved by the indemnitee.

Type I, II, and III Indemnity Provisions

California courts have categorized indemnity provisions into three types  - Type I, Type II, and Type III indemnity provisions.

Type I Indemnity Provisions

Type 1 indemnity provisions are the most onerous to  indemnitors and require indemnitors, say a subcontractor, to indemnify an indemnitee, say a general contractor, from any loss sustained by the general contractor regardless of any negligence, whether passive or active, of the general contractor.

Passive negligence is the failure to do something that should have been done.  For example, if the general contractor was required to inspect the subcontractor’s work but failed to do so, and if, had the general contractor done so, it would have revealed that the steps in the example above were not built according to building code, then the general contractor would have been passively negligent.

Active negligence is doing something that directly contributes to a loss or injury.  For example, if the general contractor incorrectly built a landing so that there was not enough space to build the stairs with the proper rise in accordance with the building code, then the general contractor would have been actively negligent.

Type II Indemnity Provisions

Type II indemnity provisions require indemnitors (again, say a subcontractor) to indemnify an indemnitee (again, say a general contractor) from any loss sustained by the general contractor including the passive, but not active negligence, of the general contractor.

It is important to note that under both Type I and Type II indemnity provisions it does not matter to what extent the indemnitee (in this case, the  general contractor) was negligent.  The injury may have been caused in large part by the general contractor, and the subcontractor may have only had a small part in contributing to the accident, but the subcontractor will nevertheless be required to  fully indemnify the general contractor.

Type III Indemnity Provisions

Type III indemnity provisions require indemnitors (again, say a subcontractor) to indemnify the indemnitee (again, say a general contractor) but only for losses caused by the subcontractor.  Thus, under a Type III indemnity provision, if a general contractor’s active or passive negligence contributed to the accident, the subcontractor would not need to indemnify the general contractor.

Limitations on Indemnity Provisions

Although SB 474 has garnered a lot of attention in the construction trade presses, indemnity provisions have already been limited by the California Legislature in a number of contexts.

  • No Indemnity for Sole Negligence or Willful Misconduct - Civil Code section 2782(a) provides that indemnity provisions in construction contracts in which an indemnitor is required to indemnify an indemnitee for their sole negligence or willful misconduct are void and unenforceable.
  • No Indemnity by Public Agencies for Active Negligence - Civil Code section 2782(b) provides that indemnity provisions in construction contracts in which a general contractor is required to indemnify a public agency for their active negligence are void and unenforceable.
  • Limitations on Indemnity in Residential Construction Contracts - Civil Code section 2782(d) provides that indemnity provisions in residential construction contracts entered into after January 1, 2009 in which an indemnitor is required to indemnify and/or defend a builder or general contractor are unenforceable to the extent that the builder or general contractor is negligent, for defects in design furnished by the builder or general contractor, or if a claim does not arise out of the work of the indemnitor.
  • Limitations on Indemnity by Public Agencies Against Design Professionals - Civil Code section 2782.8 provides that indemnification provisions in design professional contracts entered into with a public agency after January 1, 2007 in which a design professional is required to indemnify and/or defend a public agency are unenforceable except for claims that arise out of negligence, recklessness, or willful misconduct of the design professional.
  • Limitations on Indemnity in Wrap-Up Insurance Policies - Civil Code sections 2782.9 through 2782.96 provide that indemnity provisions in residential construction contracts with a wrap-insurance policy, also known as Owner Controlled Insurance Policies (“OCIP”), entered into after January 1, 2009 in which an  enrolled and participating subcontractor or other participant in the OCIP program is required to indemnify and/or defend another party for any claim covered by the wrap-insurance program are unenforceable.

What SB 474 Changes

  • No Indemnity for Active Negligence or Willful Misconduct - SB 474 enacted a new Civil Code section 2782.05 which provides that indemnity provisions in construction contracts entered into on or after January 1, 2013 in which a subcontractor is required to indemnify and/or defend a general contractor, construction manager, or other subcontractor for their active negligence or willful misconduct, for defects in design furnished by such persons, or for claims that do not arise out of the scope of work of the subcontractor are void and unenforceable.
  • No Indemnity by Public Agencies for Active Negligence - SB 474 also enacted a new Civil Code section 2782(b)(2) which provides that indemnity provisions contained in construction contracts with public agencies entered into on or after  January 1, 2013 in which  a general contractor, subcontractor or supplier of good or services is required to indemnify a public agency for their active negligence are void and unenforceable.
  • No Indemnity by Private Builder Not Acting as Contractor - Finally, SB 474 enacted a new Civil Code section 2782(c) which provides that indemnity provisions contained in construction contracts entered into on or after January 1, 2013 with the owner of  privately owned real property (in which the owner is not acting as a contractor or supplier of materials or equipment) in which a general contractor, subcontractor or supplier of goods or services is required to indemnify the owner for their active negligence are void and unenforceable.  However, Section 2782(c) does not apply to homeowners performing home improvement projects on their own single-family dwellings.

It is important to note that neither SB 474, nor any of the other statutory limitations on indemnity provisions discussed above, effect common law (i.e., law not based on a statute) rights to indemnity including equitable indemnity (where the person seeking indemnity from another is not at fault at all) and contribution (where the person seeking contribution from another is partially at fault).

Unlike express indemnity, which arises from language contained in a contract (i.e., an indemnity provision), equitable indemnity and contribution are not based on a contract, and are instead based on equitable considerations (i.e, considerations of fairness) determined by a court or jury.  If, however, parties have agreed to an indemnity provision, that provision will apply and equitable indemnity or contribution will not override that provision.

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