California law governing indemnification in the construction industry has recently undergone a major overhaul. Previously, a broad indemnity provision that effectively transferred the risk of loss down the chain from the owner or general contractor to the downstream contractor or subcontractor could be enforceable so long as the provision did not require the downstream contractor or subcontractor to indemnify an owner or upstream contractor against liability caused by the indemnitee’s “sole negligence or willful misconduct.” In other words, under the previous law, as long as the indemnitor was at least partially responsible for the loss, then the indemnity provision could be enforceable. Thus, for example, a subcontractor who had only five percent responsibility for a loss could be required to indemnify a general contractor who had 95% responsibility for the loss.
Under current law, this type of broad indemnity provision is no longer enforceable in most situations. Under California Civil Code Sections 2782 and 2782.05, indemnity clauses in favor of owners, contractors, construction managers and subcontractors are generally unenforceable to the extent the clause requires indemnity for the “active negligence” of the indemnitee. Exactly what constitutes “active negligence” is not entirely clear, and we expect this issue to be clarified by the courts over the next several years. But at a minimum, this should eliminate the ability of a party, who is primarily responsible for a loss, to be indemnified from a party who had only a minor, non-active role in the loss.
The intent of California’s new anti-indemnity law is to “ensure that every construction business in the state is responsible for losses that it, as a business, may cause.” It applies to most construction contracts, and the parties cannot opt out of these provisions by using a non-California choice of law provision in their contract.
That said, there is an exception to California’s anti-indemnity law as it applies to agreements to “insure or indemnify, including the cost to defend, a general contractor, construction manager, or subcontractor.” The exception excludes from the law’s application any “provision in a construction contract that requires the promisor to purchase or maintain insurance covering the acts or omissions of the promisor, including additional insurance endorsements covering the acts or omissions of the promisor during ongoing and completed operations.” These type of “additional insured” provisions typically require the downstream party to purchase liability insurance naming the upstream party as an additional insured. Based upon this exception, it is arguable that a well-drafted “additional insured” provision can be used to partially circumvent California’s anti-indemnity law. This exception is peculiar because it seems to conflict with the broad scope and mandate of California’s anti-indemnity law. Much like the undefined use of the term “active negligence,” we expect this conflict to be clarified by the courts over the next several years.