Lockton Companies, the official GCCA Insurance Service Partner, explains how SB 474 tightens anti-indemnity restrictions.
Contractors operating in California will soon face new and tighter anti-indemnity restrictions that will affect their contracts and additional insured coverage. This will mean many contractors may not be able to recover damages through typical risk transfer tools-including insurance agreements-when losses occur. This new law will mean contractors operating in California should conduct a careful review of their contract language and insurance programs as the state moves to a “comparative indemnity” approach.
The New Law
The new law- SB 474 impacts all non-residential construction contracts entered into on or after January 1, 2013. It specifically limits the type of indemnity agreements that can be used between parties. In particular, the bill voids indemnity agreements that attempt to transfer risk on the following basis:
Agreements which require defense or indemnity obligations for a contractor’s “active” negligence or “willful” misconduct.
“Type II” indemnity agreements, which allow a party to be indemnified for another party’s passive, as opposed to active, negligence are still legal and enforceable.
Indemnity obligations for claims arising out of design defects provided by the contractor seeking indemnity.
Indemnity claims arising from losses that result outside the subcontractor’s scope of work.
Agreements from public agencies or private owners that attempt to transfer liability to a contractor resulting from the agencies’ or owners’ own active negligence.
The anti-indemnity provisions also contain the following key components:
If the property on which the construction is performed is located in California, then California law will apply regardless if the parties have a contrary choice of law provision in their contract.
The anti-indemnity restriction does not apply to design professionals.
The restrictions have no effect on additional insured obligations.
SB 474 expands the definition of “construction contract” to include agreements for renovations and such subjects as utility, water, sewer, oil, and gas lines.
It does not apply to Controlled Insurance Programs.
The law allows contractors to request that a subcontractor either provide a separate defense or pay for a reasonable share of the contractor’s defense through existing counsel. The law also specifically upholds insurance carriers’ “duty to defend” obligations to additional insureds resulting from Presley Homes, Inc. v. American State Insurance Company (2001) 90 Cal.App.4th 571 and maintains the insurers’ reimbursement rights from a general contractor or other subcontractors as outlined in Buss v. Superior Court (1997) 16 Cal.4th 35.
What Should You Do?
Contractors will need to review and amend their contracts and additional insured endorsements, so that they adhere to these new standards. Contractors should also evaluate the use of wrap-up style coverages as potential workable solutions to these indemnity changes. Please contact a member of your local construction team to evaluate your unique situation and consider an appropriate response to these required changes. Acting and preparing now can help avoid unpleasant surprises in the wake of claims that arise in 2013 and beyond.
Originally published by the Lockton Companies in November 2012. Learn more about insurance through the Lockton Companies.