• California Limits Design Professional Defense Cost Exposure
  • May 24, 2017 | Author: William F. Bresee
  • Law Firm: Leech Tishman - Pasadena Office
  • On April 28, 2017, California Governor Jerry Brown signed into law Senate Bill (S.B.) 496 (‘the enactment”), which, effective January 1, 2018, amends California Civil Code Section 2782.8 in two significant ways with respect to a design professional’s obligation to provide a defense under a contractual indemnity for liability arising out of, pertaining to or related to the negligence, recklessness or willful misconduct of the design professional.

    First, the enactment broadened the scope of the provision, from application to public agency contracts only to all contracts, private and public. Second, the enactment limits the obligation of a design professional to provide a defense under contractual indemnity provisions to the design professionals’ proportionate fault.

    Under the previously-existing Section 2782.8, design professionals that entered into contracts with public agencies where there was an indemnity provision would be required to indemnify the public agency only for claims arising out of the negligence, recklessness, or willful misconduct of the design professional. However, for private works, the state of the law was as interpreted by two state court cases - Crawford v. Weather Shield Mfg. Inc. ((2008) 44 Cal.4th 541) and UDC-Universal Development v. CH2M Hill ((2010) 181 Cal.App.4th 1) - which were decided prior to the revision of the then-existing version of Section 2782.8 to overturn the two rulings as they relate to contracts with public agencies. These decisions hold that when a party agrees by contract to indemnify another, the indemnity obligation automatically includes a duty to defend, even if the agreement does not specifically say so.

    As a result of these cases, a design professional could be determined not to be negligent in performance of its services but, notwithstanding the lack of liability attaching to its performance, be required to pay for the defense of the other contracting party in the underlying complaint that gave rise to the dispute. This has resulted in a very broad interpretation of the duty to defend in California in design and construction contracts. Further, given the distinction between the indemnity obligation (which arises after a determination of liability is made) and the defense obligation (which arises before any determination is made on the merits), a design professional was exposed to defense costs which, per most professional liability insurance policies, was excluded from coverage. (The Crawford and UDC courts noted, however, that all the indemnitee must do to avoid this duty to defend is to expressly state in the contract that it will not defend the indemnitee; though this places the design professional squarely at odds with owners who demand that they be defended.)

    This inequitable and uninsured risk was at the heart of S.B. 496. As adopted and signed into law, the amended Section 2782.8 provides that the duty to defend is limited. The provisions of Section 2782.8 now may not be waived or modified by the parties.

    There are two exclusions to the applicability of the amended Section 2782.8:
    • a contract for design professional services where a project-specific general liability policy insures all project participants on a primary basis including all design professionals (which is rare) and
    • a design professional who is a party to a written design-build joint venture agreement.