Normally, a general contractor performs little or none of the work on a construction project with its own forces. Instead, subcontractors perform the majority, if not all, of the work. However, the general contractor obviously remains liable to the owner and potentially others for the acts of its subcontractors.
To shield themselves from potential liability for the acts of its subcontractors, general contractors rely on the indemnity provisions of the contracts between the general contractor and the subcontractor. The broadest of these provisions and the one that is most favorable to the general contractor is commonly referred to as a “Type I” indemnity provision. Type I indemnity provisions provide for the express indemnity of the general contractor by the subcontractor even if the active negligence of the general contractor/indemnitee contributed to the problem.
However, in California, Type I indemnity provisions are no longer enforceable in construction contracts entered into after January 1, 2013, for public works, or for private works where the owner does not serve as the contractor or construction manager. Pursuant to Senate Bill 474 (“SB 474”), which amended Civil Code Section 2782 and added Civil Code Section 2782.05, Type I indemnity provisions are void. Particularly, indemnity provisions that require a subcontractor to indemnify a general contractor for the active negligence or willful misconduct of the general contractor (or other subcontractors), or require the subcontractor to defend and indemnify the general contractor for claims that do not arise out of the subcontractor’s scope of work, are unenforceable. This limitation cannot be waived even by agreement of the parties.
Previously, these provisions were enforceable as long as they did not require the subcontractor to indemnify the general contractor for its "sole 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. Passive negligence can include a failure to discover a dangerous condition or a failure by a general contractor to identify a subcontractor’s defective work, among other things.
Therefore, contracts that currently require a subcontractor to indemnify a general contractor its active negligence or willful misconduct, or for the active negligence or willful misconduct of another subcontractor, are unenforceable and should be modified to delete this requirement. General contractors that use contracts that contain this provision after January 1, 2013, run the risk that the entirety of the express indemnity provision with the subcontractor will be held to be void. In that event, the general contractor may be limited to a claim for equitable indemnity against the subcontractor.
SB 474 also impacts the duty of a subcontractor to defend against claims asserted against the general contractor. Currently, under the Crawford line of cases, a subcontractor that is obligated to indemnify a general contractor against claims and demands is required to provide an immediate defense to the general contractor upon tender of a claim. In Crawford v. Weather Shield Mfg. Inc. (2008) 44 Cal. 4th 424, the California Supreme Court held that the duty to defend under an express indemnity provision required the subcontractor to defend the developer on request regardless of whether the subcontractor was ultimately found to be negligent. The Crawford court explained that the duty to defend is a separate obligation from the duty to indemnify and the duty to defend arose “as soon as a suit was filed … and regardless of whether it was ultimately determined that the [the subcontractor] was actually negligent.” Id. at 568.
Therefore, under Crawford, the duty to defend is owed before there is a determination of whether indemnity is actually owed with respect to the claim and regardless of whether it is ultimately determined that indemnity was actually owed. The duty to defend is typically determined by the facts regarding the claim as alleged in the complaint. In the event that a subcontractor refuses to defend a general contractor against a claim that is covered by the scope of indemnity and the general contractor is required to defend itself from the claim, the general contractor is entitled to reimbursement from the subcontractor for the defense fees and costs incurred by the general contractor.
Under SB 474, a subcontractor is not required to defend a general contractor until the general contractor presents the subcontractor with a written claim that includes all of the information set forth in the underlying claim made by the owner to the general contractor. Once presented with a claim, the subcontractor can elect to respond in one of two ways, either of which will satisfy the subcontractor’s defense obligation. The subcontractor may elect to defend the claim, with counsel of his choice, by providing the general contractor with a complete defense of the claims alleged against the general contractor resulting from the subcontractor’s scope of work, but not including claims resulting from the acts or omissions of the general contractor or any other party.
Alternatively, the subcontractor may elect to pay the general contractor a reasonable allocated share of the general contractor’s defense fees and costs incurred during the pendency of the litigation, subject to reallocation after resolution of the matter. SB 474 does not specify any mechanism to resolve whether the share of the general contractor’s fees and defense costs that is allocated to the subcontractor represents his reasonable share as required by SB 474. As a result, it appears that SB 474 may lead to disputes and lawsuits between general contractors and subcontractors regarding whether the share of the general contractor’s defense fees and costs allocated to the subcontractor represent his reasonable share. In the event that the subcontractor does not respond to a claim pursuant to either of these options and the general contractor is required to defend himself, as under current law, the subcontractor is potentially responsible for the defense fees and costs incurred by the general contractor and any resulting compensatory or consequential damages, as well as the reasonable attorney fees incurred in the action against the subcontractor.
SB 474 clearly increases the risks of general contractors on construction projects because it reduces their ability to shift risk to subcontractors. This increased risk may cause insurance premiums to increase for general contractors and thereby increase the cost of construction. Proponents of SB 474 assert that it increases fairness on construction projects by essentially ensuring that each party is responsible for its own negligence. While that might be true, it also eliminates an important risk-sharing tool for general contractors and may lead to more litigation regarding allocation of responsibility for defects in a project. It also disregards parties’ own ability to find contract value in either negotiations or insurance agreements, rather than leaving value to be determined at a later, more unpredictable stage.