How California’s Construction Industry has dealt with the New Indemnity Law
October 22, 2014 —
Mark S. Himmelstein, Esq. - Newmeyer & DillionIt has been almost two years since the California legislature enacted changes to the state’s indemnity law affecting commercial construction contracts. Although we do not yet have any court opinions analyzing the new statutes, the attorneys at
Newmeyer & Dillion now have real world experience in negotiating such indemnity provisions. It is time to evaluate how the construction community has reacted to the changes. In this article, we examine the practical applications of the new law to various construction agreements.
Enacted on January 1, 2013, the new legislation was the latest in a series of efforts by subcontractors and their insurers to eliminate “Type I” indemnity clauses. Under a Type I provision, a subcontractor has a duty to indemnify the developer or general contractor for the negligence of the developer or general contractor or other subcontractors, in addition to the negligence of the subcontractor itself. In 2006, the law was changed to preclude Type I provisions regarding “For Sale” residential construction defect claims. At that time, there was no such restriction enacted for commercial construction contracts. However, since then, commercial subcontractors have been seeking similar legislation. Their efforts culminated in the 2013 revisions regarding commercial contracts.
Commercial Subcontracts
Pursuant to the new indemnity statute — Civil Code section 2782.05 — we have revised our clients’ commercial subcontracts to:
(a) Eliminate the requirement that the subcontractor indemnify the general contractor for the general contractor’s “active negligence;” and
(b) Include the subcontractor’s options for defending claims for which they have an indemnity obligation.
Many subcontractors have responded: “Hey, wait a minute, the new legislation eliminated Type I indemnity so you (general contractor) cannot still require any indemnification for the general contractor’s negligence”. Well, that might be the rumor in subcontractor circles, but the new statute does not eliminate indemnity for the general contractor’s passive fault. In addition, the Civil Code lists 13 instances where the new indemnity restrictions do not apply.
Residential Subcontracts
The legislature did not make anyone’s job easier by drafting a different indemnity provision for commercial subcontracts than for residential subcontracts. In fact, the residential and commercial statutes are different in several critical respects. First, the restrictions on indemnity in the residential statute apply only to construction defect claims in newly constructed “For Sale” houses. The statute does not preclude Type I indemnity provisions for any other claims arising out of residential subcontracts. In contrast, the indemnity restrictions in the commercial statute apply to all claims arising out of commercial subcontracts. In addition, the commercial statute allows indemnity for the general contractor’s passive fault. Since some subcontractors on “residential” projects perform off-site “commercial” work as well, we have amended even residential subcontracts to address the subcontractors’ various indemnity obligations for different parts of their work (e.g., residential work versus commercial work).
Owner-Contractor Agreements
The January 1, 2013 new indemnity provisions apply not only to subcontracts, but also to owner-contractor agreements. Civil Code section 2782(c)(1) precludes indemnity for an owner’s active negligence. Interestingly, the exclusions contained in Civil Code section 2782.05 for subcontracts do not apply, and the statute does not provide contractors with the option of defending claims set forth in the sections concerning subcontracts. Therefore, we have revised the indemnity provisions in owner-contractor agreements to exclude indemnity for the owner’s active negligence.
Design Professional Agreements
The 2007 revisions with respect to “For Sale” residential contracts (discussed above), and the 2013 revisions for commercial contracts do not apply to design professionals. The new indemnity statute concerning commercial subcontracts specifically excludes design professionals from the “anti-indemnity” benefits provided to subcontractors. Therefore, Type I indemnity provisions are fair game and can still be included in design professional contracts.
Conclusion
In sum, Civil Code sections 2782 et seq. now contain an increasingly complex framework for indemnity rules in construction contracts. For example, there is one set of rules for “For Sale” residential construction defect claims (no indemnity for the developer’s active or passive negligence), another for any other claims arising out of residential construction (Type I indemnity is permitted), another for commercial subcontracts (no indemnity for the general contractor’s active negligence, but indemnity for the general contractor’s passive negligence unless any of the exceptions apply, in which case Type I indemnity is permitted), and yet another for commercial owner contractor agreements (no indemnity for the owner’s active negligence, but indemnity for the owner’s passive negligence with no exceptions).
California’s indemnity laws are complex, and rumors as to the impact of the new legislation have made it even more difficult to negotiate these provisions. It is imperative that indemnity clauses in construction contracts clearly delineate the obligations for the specific type or types of work contemplated by the contract. The legislature’s attempt to simplify indemnity obligations has actually made such provisions lengthier and more cumbersome. As experienced construction attorneys, our task is to draft indemnity provisions that comply with the laws, address potential claims, and are understandable.
Mr. Himmelstein is a partner in the Newport Beach office of Newmeyer & Dillion and practices in the areas of construction, real estate, business and insurance litigation. He also specializes in drafting and negotiating construction and real estate contracts. Mark can be reached at mark.himmelstein@ndlf.com.
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Meet Your Future Team Members: AI Agents
December 10, 2024 —
Aarni Heiskanen - AEC BusinessIf you’ve been following the discussion around AI, you’re familiar with the concept of AI agents.
AI agents can be understood as intelligent automation that operates independently, monitoring its environment and taking action without constant human input. Unlike traditional software requiring specific inputs to produce predictable outputs, AI agents can adapt to varying conditions and user needs.
AI agents can be based on various technologies, including Large Language Models. They can also be constructed using other AI technologies, such as rule-based systems, machine learning algorithms, and specialized models tailored to specific tasks.
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Aarni Heiskanen, AEC BusinessMr. Heiskanen may be contacted at
aec-business@aepartners.fi
Senate’s Fannie Mae Wind-Down Plan Faces High Hurdles
March 19, 2014 —
Clea Benson, Cheyenne Hopkins and Kathleen Hunter – BloombergA bipartisan U.S. Senate plan to dismantle Fannie Mae (FNMA) and Freddie Mac must clear many political hurdles in a short time if it is to become law, leaving narrow chances of a housing-finance overhaul being enacted this year.
Senate Banking Committee leaders said the proposal, which they plan to release later this week, would replace the two U.S.-owned mortgage financiers with government bond insurance that would kick in only after private capital suffered severe losses.
It will be left to the courts to decide how investors in Fannie Mae and Freddie Mac are treated as the two companies are wound down, Mike Crapo, an Idaho Republican who co-wrote the bill, said today in an interview on Bloomberg Television. Investors including Perry Capital and Fairholme Capital Management are suing the U.S. to challenge an arrangement in which all the companies’ profits go to the Treasury.
Ms. Benson may be contacted at cbenson20@bloomberg.net; Ms. Hunter may be contacted at khunter9@bloomberg.net; Ms. Hopkins may be contacted at chopkins19@bloomberg.net
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Clea Benson, Cheyenne Hopkins and Kathleen Hunter, Bloomberg
Prevailing Parties Entitled to Contractual Attorneys’ Fees Under California CCP §1717 Notwithstanding Declaration That Contract is Void Under California Government Code §1090
December 20, 2017 —
Zachary Price & Lawrence ZuckerIn California-American Water Co. v. Marina Coast Water District (Nos. A146166, 146405, filed 12/15/17), the First District Court of Appeal held that a prevailing party was entitled to an award of contractual attorneys’ fees under Code of Civil Procedure §1717 even though the underlying contracts were declared void under Government Code §1090.
Appellant Marina Coast Water District (“Marina”) and Respondent Monterey County Water Resources Agency (“Monterey”), both public water agencies, and Respondent California-American Water Company (“California-American”), a water utility, entered into several contracts to collaborate on a water desalination project. The parties agreed that the prevailing party of any action in any way arising from their agreements would be entitled to an award of attorneys’ fees.
Reprinted courtesy of
Zachary Price, Haight Brown & Bonesteel LLP and
Lawrence Zucker, Haight Brown & Bonesteel LLP
Mr. Price may be contacted at zprice@hbblaw.com
Mr. Zucker may be contacted at lzucker@hbblaw.com
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Rhode Island Affirms The Principle That Sureties Must be Provided Notice of Default Before They Can be Held Liable for Principal’s Default
August 21, 2023 —
Dennis Cavanaugh & Tasnuva Islam - Construction Law ZoneMost bond forms in use today, including the standard form AIA A312-2010, contain express condition precedents that trigger a surety’s obligations under the bond. Under a performance bond, the bond obligee is required to provide formal notice to the surety that the principal has materially defaulted and that the surety must begin to perform under the terms of the bond. This principle is grounded in the idea that the surety should have an opportunity to address the default and investigate the claim so as to mitigate its own liability. Failure to provide sufficient notice will discharge the surety of its obligations under the bond.
Reprinted courtesy of
Dennis Cavanaugh, Robinson & Cole LLP and
Tasnuva Islam, Robinson & Cole LLP
Mr. Cavanaugh may be contacted at dcavanaugh@rc.com
Ms. Islam may be contacted at tislam@rc.com
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Big Policyholder Win in Michigan
January 05, 2017 —
Jeremiah M. Welch – Saxe Doernberger & Vita, P.C.Jeremiah Welch and
Michael Barrese recently had a big win in front of the Michigan Court of Appeals.
The case (Skanska-Schweitzer v. Farm Bureau General Insurance Company of Michigan) involved Skanska’s claim for defense and indemnity from Farm Bureau Ins. Co. of Michigan for an injury to an elementary school student arising out of the removal of playground equipment by a landscaping company, Horrocks. Farm Bureau denied coverage because it claimed that the work was not part of Horrocks’ contract with the project owner and therefore Skanska, the construction manager, did not qualify as an additional insured on the policy.
SDV argued that the AI endorsement did not specify that Horrocks’ work be performed as part of its contract with the owner; it only required that the work be performed “for Skanska.”
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Jeremiah M. Welch, Saxe Doernberger & Vita, P.C.Mr. Welch may be contacted at
jmw@sdvlaw.com
Hawaii Supreme Court Bars Insurers from Billing Policyholders for Uncovered Defense Costs
April 23, 2024 —
Amanda C. Stefanatos - Saxe Doernberger & Vita, P.C.Across the country, there is a split in authority as to whether an insurance company should be allowed to recoup defense costs where it is ultimately determined that the carrier has no duty to defend under the policy and the policy is silent as to such reimbursement. The Hawaii Supreme Court is the latest to enter the fray to address this very question, ruling in favor of policyholders in the recent case of
St. Paul Fire & Marine Insurance Company v. Bodell Construction Company.
Facts of the Case and Procedural History
The Bodell case arose in response to a pair of certified questions from the US District Court for Hawaii to the Hawaii Supreme Court. The case involved a group of primary and excess insurers that sold liability policies to Bodell Construction and sought reimbursement of defense costs that the insurers had paid to defend a construction defect claim against Bodell. In the Underlying Action, the District Court ultimately ruled that the claims against Bodell Construction were not covered under the policies. Because the claims were not covered, the insurers demanded reimbursement of the defense fees from Bodell . Having determined there was no Hawaii state law on this issue, and in light of conflicting decisions in the district courts, the US District Court for Hawaii requested guidance from the Hawaii Supreme Court.
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Amanda C. Stefanatos, Saxe Doernberger & Vita, P.C.Ms. Stefanatos may be contacted at
AStefanatos@sdvlaw.com
Condominium Construction Defect Resolution in the District of Columbia
October 26, 2017 —
Nicholas D. Cowie - Maryland Condo Construction Defect Law BlogNewly constructed and newly converted condominiums in the District of Columbia often contain concealed or “latent” construction defects. Left undetected and unrepaired, defects in the construction of a condominium can cause extensive damage over time, requiring associations to assess their members substantial repair costs that could have been avoided by making timely developer warranty claims.
This article provides a general overview of how Washington DC condominium associations transitioning from developer control can proactively and successfully identify defects and resolve construction defect claims with condominium developers and builders.
Condominium Association Responsibility for Timely Evaluation of Common Element Construction
Condominium associations are charged with the responsibility of overseeing and maintaining condominium common element facilities, typically consisting of building roofs, exterior walls, foundations, lobbies, common hallways, elevators, surrounding grounds, and the common structural mechanical, electrical, and plumbing systems. Following the period of developer control, it is incumbent upon a condominium association’s first unit owner elected board of directors to evaluate the construction of the condominium common element facilities and determine whether the existing, developer-created, budget and reserve fund are adequate to cover the cost of maintaining, repairing, and ultimately replacing the condominium facilities over time.
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Nicholas D. Cowie, Cowie & Mott, P.A.Mr. Cowie may be contacted at
ndc@cowiemott.com
