Amendments to Civil Code § 2782 and Addition of §§ 2782.9, 2782.95 and 2782.96 Relating to Indemnity

The California Legislature has enacted legislation which amends Civil Code § 2782 and adds Civil Code §§ 2782.9, 2782.95 and 2782.96.

First, with respect to Civil Code § 2782, existing law provides that any provision in a residential construction contract is unenforceable if it purports to indemnify a general contractor or contractor not affiliated with the builder, by a subcontractor, against liability for claims of construction defect or other injury to property arising out of the negligence of the general contractor or contractor, or for defects in design furnished by those persons, or for claims unrelated to the scope of work in the agreement. This provision applied to all such contracts entered into after January 1, 2008. A similar provision applied with respect to construction contracts for residential construction entered into after January 1, 2006, which purported to indemnify builders by subcontractors. The amendment deletes the provisions applicable to contracts entered into after January 1, 2008, and revises the provisions applicable to contracts entered into after January 1, 2006 to apply to contracts entered into after January 1, 2009. The amendment also includes agreements purporting to insure or indemnify a builder, general contractor or contractor not affiliated with the builder.

In addition, provisions have been added to the code section to provide that subcontractors owe no defense or indemnity unless and until the builder or general contractor provides a written tender of the claim which includes all information provided to the builder or general contractor by the claimant relating to claims caused by the subcontractor’s work. The written tender has the same affect as a notice of commencement of legal proceeding. Upon tender, the subcontractor must elect one of two options. First, it may defend the claim with counsel of its choice, maintaining control of the defense for any claim or portion of claim to which the defense obligation applies. If the subcontractor elects to defend in this manner, it must provide written notice of the election to the builder or general contractor within a reasonable time following receipt of written tender and in no event later than 90 days following receipt. The defense must be a complete defense of the builder or general contractor with respect to claims or portions of claims, including vicarious liability claims, resulting from the subcontractor’s work, but does not include claims resulting from work of others. Second, the subcontractor may choose the option of paying, within 30 days of receipt of invoice from the builder or general contractor, a reasonable allocated share of the builder’s or general contractor’s defense fees and costs on an ongoing basis, subject to reallocation.

If the subcontractor fails to act timely and to adequately perform its obligations, the builder or general contractor has a right to pursue a claim for any resulting compensatory and consequential damages. It is the builder’s or general contractor’s burden to prove the subcontractor’s failure to perform and any resulting damages. If a builder or general contractor fails to reallocate defense fees within 30 days upon request of a subcontractor following final resolution of the claim, the subcontractor has a right to pursue a claim against the builder or general contractor for any resulting compensatory and consequential damages, interest and reasonable attorneys fees. The subcontractor bears the burden of proving the failure to reallocate and any resulting damages. Nothing in § 2782 prohibits parties from mutually agreeing to reasonable contractual provisions for damages on account of a failure to perform the stated obligations. The builder, general contractor or subcontractor has the right to seek equitable indemnity for any claim governed by § 2782 and it does not limit the right of the builder, general contractor or subcontractor to seek equitable indemnity against suppliers, design professionals or product manufacturers.

In addition to the foregoing, the Legislature has added § 2782.9 to the Civil Code. This section deals with wrap-up insurance policies and applies to contracts for residential construction entered into after January 1, 2009. This section provides that residential construction contracts entered into after January 1, 2009, on which a wrap-up insurance policy is applicable and which require a participating subcontractor or other participant to indemnify, hold harmless or defend another for a claim or action covered by the program and arising out of the project, are unenforceable. This section specifically does not prohibit builders or general contractors from requiring a reasonably allocated contribution from subcontractors or other participants to a self-insured retention or deductible required under the wrap-up policy or consolidated insurance program, so long as the maximum amount and method of collection of the participant’s contribution is disclosed in the contract and is reasonably limited so that each participant has some financial obligation in the event of a claim alleged to be caused by that participant’s work. Such contribution is to be collected when any such SIR or deductible is incurred and in an amount bearing a reasonable and proportionate relationship to the alleged liability arising from the claims allegedly caused by the participant’s scope of work when viewed in the context of the entirety of the claims.

Section 2782.95 is also being added to the Civil Code and deals with wrap-up policies or consolidated insurance programs insuring a private residential work of improvement which first commences construction after January 1, 2009. This section requires that the owner, builder or general contractor obtaining a wrap-up policy or other consolidated insurance program must disclose the total amount or method of calculation of any credit or compensation for premium required from a subcontractor or participant for the wrap-up policy in the contract documents. The contract documents must disclose specified information about the policy.

Section 2782.96 has also been added to the Civil Code. Under this provision, if an owner, builder or general contractor obtains a wrap-up policy or other consolidated insurance program for a public work or any other project other than residential construction that is put out for bid after January 1, 2009, the total amount or method of calculation of any credit or compensation for premium required from the subcontractor or other participant must be clearly delineated in the bid documents. Specific information regarding the policy must also be disclosed.