Following a nationwide trend of states disfavoring indemnity provisions, this spring California passed into law a measure strictly limiting the ability to require defense and indemnity from a design professional, including licensed architects and registered engineers. Effective July 1, 2018, owners will no longer be able to demand broad indemnity obligations from design professionals, but rather, will be limited to a proportionate percentage of fault standard. Given this new limitation, owners and general contractors will need to carefully scrutinize all indemnity provisions to ensure there are no gaps in indemnity and defense coverage.
As amended, under the new law, California Civil Code Section 2782.8, the professional’s defense and indemnity obligations will be enforceable only “to the extent that the claims against the indemnitee arise out of, pertain to, or relate to the negligence, recklessness or willful misconduct of the design professional.” Further, the design professional’s defense obligation may not exceed “the design professional’s proportionate percentage of fault,” with an exception if another defendant is bankrupt or the business is dissolved. Rather than a pro rata increase in defense costs in such a situation, however, the only remedy provided by the new law is that the design professional “shall meet and confer with other parties regarding unpaid defense costs.” The statute does not address the consequences of failing to agree on the apportionment after such a meet and confer.
Also unclear is whether the duty to defend may still arise at the time of tender, subject to this right of reimbursement. The author of the law states that the new law “preserves the design professional’s ‘uninsurable’ first-dollar defense indemnity obligation while no longer exposing them to unlimited liability” (SB 496, Senate Rules Committee Analysis, quoting author (2017)). Whether the courts will recognize this legislative intent or will require a determination of liability prior to the imposition of defense obligations, however, remains to be seen. Given that most professional liability policies for design professionals do not include coverage for third party up front defense costs, this remnant of the existing law may be of cold comfort in the practical aspect of contract negotiations.
The limitations of the new law will not apply to design professional contracts where: (1) a project specific general liability policy insures all project participants for general liability exposure on a primary basis and also covers all design professionals for their legal liability arising out of their professional services on a primary basis; (2) the design professional is a party to a written design-build venture agreement; or (3) the contract is with a state agency.
Given this further venture by California down the anti-indemnity path, owners and general contractors will want to review all construction related agreements prior to the new law’s effective date. Design professional master agreements should be reviewed and amended as necessary as indemnity clauses will be unenforceable except as permitted by the new law, which is “deemed to be incorporate[d] by reference” into all contracts and solicitation documents after the effective date. The other indemnity requirements of Civil Code Section 2782 (for construction contracts in general, subcontractors and general contractors) should also be evaluated in light of the new law. Owners and general contractors will want to consider these indemnity limitations in negotiations with all parties involved with a project to ensure a cohesive, yet enforceable, net of protection.