California's long-standing anti-indemnity laws prohibit a
public agency from forcing a contractor to indemnify the agency for
its "active negligence." That prohibition has now been
expanded in new and amended anti-indemnity statutes, which protect
subcontractors and suppliers of goods and services (not just
contractors) and prevent certain private owners (not just public
agencies) from enforcing an indemnity for their own "active
negligence" (the meaning of which is discussed below). The new
laws apply to provisions contained in or affecting any construction
contract entered into on or after January 1, 2013.
The new laws also contain additional protections for
subcontractors. Now, in many situations, a subcontractor entering
into a construction contract after January 1, 2013 cannot be forced
to indemnify or insure another party for that other party's
"active negligence or willful misconduct," for defects in
the project's design provided to the subcontractor, or for
claims arising outside the scope of the subcontractor's
work.
California's new anti-indemnity laws and subcontractor
protections are nuanced and depend on whether the project is public
or private, whether the project is residential or nonresidential,
and the role of the indemnifying and indemnified participants on
the project. Unfortunately, these new laws are not always clear and
consistent. Construction participants attempting to navigate their
way through these new laws may find themselves in treacherous
waters fraught with the risk of disputes and litigation. This
Commentary analyzes the preexisting and new anti-indemnity
laws and flags several uncertainties and risks in the hope that
construction participants can better navigate these waters.
California's Preexisting Indemnity Protections for
Construction Projects
In 1967, California enacted Civil Code section 2782 barring
indemnity for a party's own "sole negligence" or
"willful misconduct." Cal. Civ. Code §2782(a). (All
further statutory citations are to the California Civil Code.) That
is, any indemnification clause purporting to require a promisor,
such as a general contractor ("GC"), construction manager
("CM"), or subcontractor, to indemnify any promisee, such
as an owner, for liability for death, bodily injury, injury to
property, or any other loss arising from the promisee's sole
negligence or willful misconduct is against public policy and void
and unenforceable. Id. The practical effect of section
2782 is that no one can be forced to indemnify another party for
that other party's sole negligence or willful misconduct.
There are, however, several situations where section 2782's
anti-indemnity rule does not apply: certain agreements with
adjacent land owners (see §2782.1), certain
agreements with professional engineers providing inspection
services to plants or facilities (see §2782.2), and
certain agreements with geologists providing services in connection
with hazardous materials (see §2782.6). Additionally,
section 2782(a) does not prevent parties to a construction contract
from negotiating and agreeing on certain liability limitations,
namely the allocation, release, liquidation, exclusion, or
limitation of any liability for design defects or for the
promisee's liability to the promisor arising out of or relating
to the construction contract (see §2782.5).
In 1982, the Legislature amended section 2782 to specify that
indemnity agreements that required contractors to indemnify a
public agency for the public agency's own "active
negligence" are void and unenforceable. §2782(b)(1). (As
explained below, the recent amendments have expanded the reach of
the protection against having to indemnify another party for its
"active negligence.")
In 2008, the Legislature added section 2782(d) to govern
residential construction contracts entered into on or after January
1, 2009. As to those contracts, section 2782(d) provides that a
clause that purports to require a subcontractor to insure or
indemnify (including the cost to defend) a builder or general
contractor is unenforceable (i) for claims of construction
defects to the extent the claims arise out of, or relate to, the
negligence of the builder or contractor (or their agents),
(ii) for defects in design furnished to the subcontractor, and
(iii) to the extent the claims do not arise out of, or relate
to, the scope of work in the subcontract. This subcontractor
protection cannot be waived or modified by the parties'
contract, acts, or omissions. Id.
Recently Amended Section 2782: Expanding the Bar Against
Indemnity for an Owner's Active Negligence
The recent amendments to California's anti-indemnity laws
expand the protections for contractors, subcontractors, and
suppliers of materials and services against having to indemnify
public and private owners for the owners' "active
negligence." Specifically, aside from two exceptions discussed
below, the amendments invalidate any provisions, clauses,
covenants, and agreements contained in, collateral to, or affecting
any construction contract entered into on or after January 1, 2013
with a public owner (§2782(b)(2)) or a private owner
(§2782(c)(1)) that purports to impose liability on a
contractor, subcontractor, or supplier of goods or services, or
relieve the owner from liability, to the extent of the owner's
"active negligence."
This expansion of protections against indemnity obligations can be
seen in two ways. First, as explained above, while the 1982
amendment to section 2782 already invalidated clauses that require
a contractor to indemnify a public agency for its own "active
negligence" (maintained in §2782(b)(1) for contracts
entered into before January 1, 2013), the recent amendments expand
that restriction to any provision with a private owner,
unless the private owner is acting as a contractor or supplier of
materials or equipment to the work (§2782(c)(1)), or is a
homeowner performing an improvement on his or her single-family
dwelling (§2782(c)(3)). If either the (c)(1) or (c)(3)
situation exists, section 2782(c)(1)'s anti-indemnity rule does
not apply, although other anti-indemnity rules should be
considered, such as section 2782(a)'s bar against indemnity for
sole negligence or willful misconduct (see above), or
section 2782.05's bar against indemnity for active negligence
(see below).
Second, the 1982 amendment to section 2782 prohibited only a
contractor from having to indemnify a public agency for its active
negligence. Now, the amended statute invalidates clauses requiring
contractors, subcontractors, or suppliers of goods or services to
indemnify public and private owners for the owners' active
negligence. §2782(b)(2) (public owners), (c)(1) (private
owners).
However, two types of agreements are exempted from these
anti-indemnity rules, both for public and private projects under
2782(b)(1), (b)(2), and (c): certain agreements with adjacent land
owners (see §2782.1), and certain agreements with
professional engineers providing inspection services to plants or
facilities (see §2782.2).
Additionally, these anti-indemnity rules do not prevent parties to
a construction contract from negotiating and agreeing on certain
liability limitations, namely the allocation, release, liquidation,
exclusion, or limitation of any liability for design defects or for
the promisee's liability to the promisor arising out of or
relating to the construction contract. §2782.5.
Recently Enacted Section 2782.05: Additional Protections
for Subcontractors
As explained above, section 2782 protects certain contractors,
subcontractors, and suppliers from having to indemnify public or
private owners for the owners' active negligence. Now, a
recently enacted statute—section 2782.05—expands the
protections for subcontractors under new contracts. Although it is
not applicable in a number of circumstances, including residential
projects, section 2782.05 now prevents other participants from
imposing certain indemnity, insurance, and defense duties on
subcontractors.
Specifically, a GC, CM, or another subcontractor (or their agents)
cannot force a subcontractor to indemnify or insure them for their
"active negligence." Any provisions, clauses, covenants,
and agreements contained in, collateral to, or affecting any
construction contract and amendments thereto entered into on or
after January 1, 2013 that attempt to do so are void and
unenforceable. §2782.05(a). Thus, while subcontractors are
protected against having to indemnify owners (§2782(b)(2),
(c)), section 2782.05 expands this protection by (i) expanding the
list of participants that cannot force a subcontractor to indemnify
them for their own active negligence to include GCs, CMs, and other
subcontractors (or their agents), and (ii) barring these
participants from forcing a subcontractor to insure them
for their "active negligence."
The new regime adds two further subcontractor protections. A
subcontractor can no longer be forced to indemnify or insure a GC,
CM, or another subcontractor (or their agents) (i) for defects
in the project's designprovided by them to that subcontractor,
or (ii) to the extent the claims at issue arise outside the scope
of that subcontractor's work. § 2782.05(a).
Section 2782.05(a)'s new subcontractor protections cannot be
waived or modified by the parties' contractual agreement, act,
or omission. §2782.05(a), (d). While a GC or CM might try to
avoid section 2782.05's subcontractor protections by adding a
choice-of-law clause to a new contract that designates more
tolerant indemnity laws of another state, the statute provides that
these protections cannot be subverted through a choice of law
clause. Rather, "[n]otwithstanding any choice-of-law rules
that would apply the laws of another jurisdiction, the law of
California shall apply to every contract to which this section
applies." §2782.05(c). The statute does not explain the
circumstances that would render a contract one "to which this
section applies."
However, as noted above, section 2782.05(a) does not apply in a
variety of circumstances enumerated in section 2782.05(b):
- Contracts for residential construction that are subject to any part of Title 7 (commencing with Section 895) of Part 2 of Division 2;
- Direct contracts with a public agency that are governed by subdivision (b) of Section 2782;
- Direct contracts with the owner of privately owned real property to be improved that are governed by subdivision (c) of Section 2782;
- Any wrap-up insurance policy or program;
- A cause of action for breach of contract or warranty that exists independently of an indemnity obligation;
- 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;
- Indemnity provisions contained in loan and financing documents, other than construction contracts to which the contractor and a contracting project owner's lender are parties;
- General agreements of indemnity required by sureties as a condition of execution of bonds for construction contracts;
- The benefits and protections provided by the workers' compensation laws;
- The benefits or protections provided by the governmental immunity laws; and
- Provisions that require the purchase of any of the following: (i) owners and contractors protective liability insurance; (ii) railroad protective liability insurance; (iii) contractors all-risk insurance; (iv) builders all-risk or named perils property insurance.
Some of these exceptions are not as clear on their face as others.
Unfortunately, section 2782.05 offers no guidance as to the meaning
or scope of these exceptions. This lack of guidance will at best
create uncertainty and, worse, could result in disputes and
litigation.
Moreover, section 2782.05(a) also states that it shall not alter
the obligations of an insurance carrier under Presley Homes,
Inc. v. American States Ins. Co., 90 Cal.App.4th 571, 573-576
(2001), which held that a subcontractor's liability insurance
carrier is required to provide a full and complete defense to all
claims, covered and uncovered, brought by a third party against an
additional insured under that insurance policy. Thus, under the new
statute, it appears that insurance carriers will be required to
honor defense obligations owed to additional insureds (e.g., a GC),
but the circumstances where a subcontractor can be required to name
a GC, CM, or another subcontractor as an additional insured may be
narrower.
Section 2782.05(a) also states that it shall not affect the rights
of an insurance carrier under Buss v. Superior Court, 16
Cal.4th 35, 39 (1997), which held that insurance carriers
(i) may seek reimbursement of certain defense costs for claims
that are not even potentially covered by the policy (but not for
claims that are potentially covered), and (ii) bear the burden of
proving the right to reimbursement and the amount of such defense
costs.
While section 2782.05(a) does not apply to certain residential
projects, subcontractors remain protected on residential projects
by preexisting section 2782(d). That statute prohibits a
"builder," as defined in section 911,1 from
requiring a subcontractor to indemnify the builder for its
negligence in connection with construction defect claims, for
defects in design furnished to the subcontractor, or to the extent
a claim arises outside of the subcontractor's scope of
work.
What Is Meant by "Active
Negligence"?
The preexisting and now expanded anti-indemnity laws do not define
what constitutes "active negligence." Before the
amendments, the California Supreme Court explained the difference
between "active" and "passive" negligence,
albeit in the context of determining what contractual language is
sufficient to require one party to indemnify another party for the
latter's own active negligence:
Passive negligence is found in mere nonfeasance, such as the
failure to discover a dangerous condition or to perform a duty
imposed by law.... Active negligence, on the other hand, is found
if an indemnitee has personally participated in an affirmative act
of negligence, was connected with negligent acts or omissions by
knowledge or acquiescence, or has failed to perform a precise duty
which the indemnitee had agreed to perform.
Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal. 3d 622,
629 (1975). The Court also explained that distinguishing
"active" from "passive" negligence should be
addressed on a case-by-case basis, with "each case [turning]
on its own facts." Id. at 634.
Disagreements can be expected to arise among construction
participants as to whether the indemnitee's negligence was
"active" or "passive." This is especially true
given the absence of a statutory definition of "active
negligence" in sections 2782 and 2782.05. It remains to be
seen whether courts will look to Rossmoor and its progeny
for guidance in resolving such disagreements.
Charts Summarizing the Prohibited Indemnity
Claims
The following two charts—the first for public projects and
the second for private projects—summarize the prohibited
indemnity claims, with bold italics
signifying those applicable to construction contracts entered into
on or after January 1, 2013 based on the recent amendments. The
indemnifying party (i.e., the indemnitor) is listed in the left
column, with the type of project listed to the right.
Cross-referencing the indemnifying party with the type of project
shows those claims that the indemnifying party cannot be required
to indemnify.
|
||
Indemnifying Party |
Residential Projects |
Nonresidential Projects |
|
Anyone's sole negligence or willful misconduct
[§2782(a)]1 Public Agency's active
negligence |
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
|
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
Subcontractor |
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
1 Subject to exceptions under §§2782.1, 2782.2,
2782.5, and 2782.6 (see above) |
|
||
Indemnifying Party |
Residential Projects |
Nonresidential Projects |
|
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
|
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
Subcontractor |
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
Anyone's sole negligence or willful misconduct
[§2782(a)]1 |
1 Subject to exceptions under §§2782.1, 2782.2,
2782.5, and 2782.6 (see above) |
Parting Thoughts
The California Legislature appears to have taken a big step in
the direction of holding construction participants accountable for
their own "active negligence" by not allowing them, in
many circumstances, to foist their liability onto other
participants. Additional protections have been added to protect a
subcontractor from having to indemnify other participants for their
active negligence, for defects in the project's design, and for
claims arising outside the scope of the subcontractor's work.
However, these new laws are not always clear and consistent. Adding
to this uncertainty is the fact that while some of these
protections can be addressed by the parties through contract
negotiation, others cannot be waived or modified.
This new regime of anti-indemnity laws will likely result in
disagreements and even litigation among construction participants.
It remains to be seen how the parties, and likely the courts, will
address and resolve the disputes that will almost certainly arise
out of the new laws. In the meantime, construction participants
should be careful to consider the impact of the new anti-indemnity
laws, and consult legal counsel as appropriate, when negotiating or
modifying their construction contracts after January 1, 2013.
Footnotes
1 Section 911 defines a "builder" as "any entity or individual, including but not limited to a builder, developer, general contractor, contractor, or original seller, who, at the time of sale, was also in the business of selling residential units to the public for the property that is the subject of the homeowner's claim or was in the business of building, developing, or constructing residential units for public purchase for the property that is the subject of the homeowner's claim."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.