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Subcontractors Rejoice! Legislature Bans Type 1 Indemnity Clauses

by Carlo Paciulli, Esq.

Beginning 2013 legislation takes effect that protects commercial contractors and subcontractors by eliminating Type I indemnity agreements. The bill’s sponsor, Senator Noreen Evans, said the new law “ensures construction contracts in California are consistent with our public policy of holding the responsible party liable.” Evans added, “For too long, contractors and subcontractors have been footing the bill for injuries and damages on construction sites that were not caused by them because Type I indemnity clauses required them to do so.” Under these indemnity clauses, the proponents argued, negligence and construction-defect costs are shifted from at-fault parties to non-fault parties.

Under existing law, public agencies cannot pass down their active negligence to general contractors. The new law extends this prohibition to private owner. In a construction contract 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.

Because of their negotiating leverage, developers and general contractors routinely use a Type I indemnity provision in construction contracts. Type I indemnity allows a general contractor (or owner or developer) to require a subcontractor (or supplier or other party) to indemnify the general for the general contractor’s own active negligence or fault. Active negligence generally includes a person’s negligent acts or omissions as opposed to “passive negligence,” which is a failure to do something, such as failing to inspect for safety violations, failing to notice or discover a dangerous condition, failing to identify defective work. Indemnity agreements for passive negligence, or Type II, aren’t affected by the new law.

A subcontractor who signs a contract with a Type I indemnity clause is often demanded to indemnify and defend other parties against claims and lawsuits that in any way touch the subcontractor’s work, regardless if the subcontractor was actually responsible. In an owner’s construction-defect action against the general contractor, the subcontractor’s insurer paid $20,000 to remove the subcontractor from the lawsuit, even though the subcontractor hadn’t contributed to the defect. In another instance, an HVAC subcontractor was dragged into litigation involving water leaks on the exterior of a building and paid $500,000 to settle the claim even though the subcontractor wasn’t at fault. These were a sampling of the problems created by Type I indemnity clauses reported by the bill’s sponsors.

The new law has other important aspects. If you’re a design professional, it doesn’t apply to you. The legislation doesn’t affect additional insured endorsements covering the acts or omissions of a party during ongoing and completed operations. Nor does it apply to any wrap-up insurance policy or owner-controlled insurance program. The definition of “construction contract” was expanded to include agreements respecting water lines, sewer lines, oil and gas lines, electric utility transmission lines, among other things. As for public agency contracts, the new changes apply not only to a contractor but also to a “subcontractor, or supplier of goods and services.”

“This bill, by making each party responsible for their own active negligence,” said Evans, “will promote a fair business climate and improve safety on construction sites. When subcontractors do not have to budget for damage payouts that were caused by other parties, these subcontractors will be able to increase the number of jobs bid on and increase their labor force.”

California joins sixteen other states, including New York, that have banned Type I indemnity clauses.

Carlo Paciulli is an Associate Attorney with Hunt Ortmann, a leader in California construction law. If you have any questions about this bulletin or the new laws pertaining to indemnity, please contact him at paciulli@huntortmann.com.

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