California Governor Arnold Schwarzenegger has recently signed legislation which prohibits builders from enforcing “Type I” indemnity provisions against subcontractors in connection with residential construction defect claims.
Background
For many years, California has allowed construction contracts to contain “Type I” indemnity provisions (i.e., provisions which allow a builder to obtain indemnification from a subcontractor for all losses except those resulting from the builder’s sole negligence or willful misconduct). As a result, builders have often been successful in requiring a subcontractor to assume liability for the builder’s own concurrent negligence, and to assume liability for all expenses the builder incurs in defending against lawsuits alleging such negligence.
Subcontractors have long complained that such Type I indemnity provisions are fundamentally unfair and unnecessarily drive up the subcontractors’ costs. This is especially true in the context of construction defect claims.
In light of this situation, over the last few years, several subcontractor trade groups have lobbied the California Legislature to limit Type I indemnity provisions. This lobbying effort has produced Assembly Bill 758 (AB 758), which Governor Schwarzenegger recently signed into law.
Overview of AB 758
AB 758 amends California Civil Code section 2782 by making certain indemnity provisions unenforceable. Some of the main features of AB 758 are as follows:
- It applies to residential construction contracts and amendments entered into after January 1, 2006. Contracts signed before 2006, even if not performed until 2006, are exempt from the new rules.
- It prohibits Type I indemnity agreements, which are defined as “indemnity agreements by a subcontractor to indemnify a builder against liability for claims that arise out of, pertain to, or relate to the negligence of the builder or the builder’s other agents, other servants, or other independent contractors who were directly responsible to the builder.” It further prohibits such agreements as to claims that do not arise out of, pertain to, or relate to the scope of work in the written agreement between the parties.
- It only applies to residential construction projects, not to commercial projects. Thus, under AB 758, it will still be permissible for a builder to pursue Type I indemnity rights against a subcontractor in connection with a commercial project.
- It only applies to construction defect claims, not to personal injury claims.
- It only applies to indemnity provisions in favor of a “builder” (statutorily defined as someone in the business of selling residential units to the public). A “builder” includes the developer itself, but apparently does not include an independent general contractor who is not affiliated with the developer. Thus, if a builder hires an independent general contractor, the general contractor should still be able to obtain Type I indemnity from its subcontractors.
- It does not limit an insurer’s potential obligations under Presley Homes, Inc. v. American States Ins. Co. (2001) 90 Cal. App. 4th 971. The Presley case holds that an insurer who issues an “additional insured” endorsement to a builder may have a duty to defend the builder against the entire action, even though most of the claims against the builder are not potentially covered.
Comment
AB 758 significantly limits the scope of indemnification that builders may obtain from subcontractors performing residential construction in California.
Note that while AB 758 prohibits Type I indemnity agreements as to construction defect claims, the bill does not prohibit additional insured endorsements for such claims. Presumably, builders will still insist upon additional insured endorsements which will cover them for their own negligence. Whether insurers will make such endorsements available to California subcontractors remains to be seen.
We anticipate that these recent statutory amendments will generate significant litigation over the next several years. Builders can be expected to attack the constitutionality of the code section as well as its application to various factual situations. Therefore, it will likely be some time before the full impact of AB 758 is understood.