Posted December 14, 2012

Notwithstanding the Mayan prediction of the end of the world on December 21, 2012 or the “fiscal cliff” of December 31, 2012, the greater change to the construction world will be accomplished by California Senate Bill 474 going into effect on January 1, 2013. On and after January 1, 2013, the risk allocation for subcontractors and contractors on commercial or public construction projects in California will fundamentally change. Historically, general contractors have included Type 1 indemnity provisions which shifted most of the contract risk to subcontractors. Not only was the liability risk shifted to subcontractors and their insurance companies, but the contracts required the subcontractor to defend almost any claims. The burden of defense was exacerbated by the Crawford decision issued in 2008, which made the defense obligation an independent obligation of the subcontractor.

The change to the law is being made through Civil Code 2782 et seq. Previously, any effort to shift indemnity for a party’s willful negligence was void. After January 1, 2013, any clause which attempts to relieve a public owner, commercial owner, general contractor or higher tier subcontractor of its active negligence is also void. Curiously, a public entity can require a general contractor to cover its active negligence. One can still seek indemnity for passive negligence, typically a failure to act when one should have acted.

General contractors in particular may want to cover the additional risk relating to their active negligence with insurance. In fact, wrap-up insurance policies are exempted. Many know of wrap-up policies as OCIPs and CCIPs.

Although the statute does not preclude a clause which requires reimbursement of defense fees and costs, it limits that recovery. There must be a written tender requesting the defense, which tender must reference the portions of a claim relating to the subcontractor’s scope of work. A subcontractor then has a choice. It can defend the claim as to its scope of work (including defense of the general contractor or CM to the extent the issues were caused by the subcontractor) OR the subcontractor can have the contractor perform the defense and the general contractor will then invoice the subcontractor for a reasonable allocation of the costs. Where an issue relates to several subcontractors, a single contractor no longer has to pull the entire load. The subcontractor must then pay within 30 days, or risk losing the protection of this code section. Even if the contractor cannot collect from one subcontractor, it can’t reallocate those costs to the other subcontractors.

These changes affect new contracts after January 1, 2013.

SUMMARY: General contractors need to make better use of insurance, particularly OCIPs and CCIPs. Subcontractors need to understand that their risk is less and that they have a fundamental choice of how to defend claims that are tendered to them.

The better question is, what will the courts deem to be “active negligence” in the years to come?

Larry Lubka
Lubka & White LLP
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