March 16, 2009
JDTP Alert: Law Regarding Indemnity Agreements Amended Again
For the third time in three years, the California legislature has amended the law governing indemnity provisions in residential construction contracts. The legislature has once again amended Civil Code Section 2782 to provide additional protection to subcontractors at the expense of builders and general contractors. All residential construction contracts entered into after January 1, 2009, as well as amendments of existing residential construction contracts entered into after that date, are required to comply with this new law.
Under subdivision (c) of the newly amended Section 2782, a contractual indemnity provision is unenforceable to the extent it purports to require a subcontractor to indemnify a builder or general contractor against claims for construction defects to the extent the claims arise out of the negligence of the builder or general contractor, or for defects in design not furnished by the subcontractor.
Subdivision (d) of the newly amended Section 2782 provides that a subcontractor may still be obliged to provide an immediate defense to a builder or general contractor, subject to certain conditions. A subcontractor cannot be obligated to defend or indemnify a builder or general contractor unless the claim is tendered to the subcontractor in the manner required by subdivision (d). The subcontractor may then elect, at its choice, to fulfill its defense obligation in one of two ways: either defend the claim with counsel of the subcontractor's choice, or pay a "reasonable allocated share" of the builder's or general contractor's defense fees and costs, subject to reallocation at the conclusion of the case. This subdivision requires that a subcontractor who elects the latter alternative must pay such an allocated share within 30 days of receipt of an invoice from the builder or general contractor.
The legislature also created a new statute, Civil Code Section 2782.9, which applies to indemnity provisions in contracts entered into after January 1, 2009, for residential construction projects for which a "wrap-up insurance policy" is applicable. This new statute provides that an indemnity provision in such a contract is unenforceable to the extent it requires a subcontractor enrolled in the wrap-up policy to indemnify a builder or general contractor for any claim that is covered by the wrap-up policy. This new statute also sets forth limits on when a general contractor or builder may require a subcontractor to pay a portion of the self-insured retention or deductible in a wrap-up policy, and what portion of the self-insured retention or deductible a general contractor or builder may require a subcontractor to pay.
Finally, the legislature created two new statutes, Civil Code Sections 2782.95 and 2782.96, which require a builder or general contractor to make specified disclosures regarding wrap-up insurance to subcontractors for residential and non-residential construction projects, respectively, commenced after January 1, 2009. The required disclosures include, among other things, the builder's or general contractor's method of calculation of any credit for the wrap-up policy premium to be paid by a subcontractor, and the wrap-up policy limits.
Owners and general contractors will therefore need to review their agreements with subcontractors for all new residential projects, as well as amendments to existing agreements, to ensure compliance with these new laws.
Please contact Edward Galloway 949.851.7461 for more information.
