Civil Code §2782.8, dealing with indemnity provisions in design professionals’ contracts, was amended by SB 496. SB 496 generally extended the provisions relating to a design professional’s obligation to indemnify and defend a governmental agency to all contracts (i.e., such provisions now apply to both public and private works), as well as made some changes to those obligations. The primary provision in this amended Civil Code section, subsection (a), states:
SB 496 GENERALLY EXTENDED THE PROVISIONS RELATING TO A DESIGN PROFESSIONAL’S OBLIGATION TO INDEMNIFY AND DEFEND A GOVERNMENTAL AGENCY TO ALL CONTRACTS (I.E., SUCH PROVISIONS NOW APPLY TO BOTH PUBLIC AND PRIVATE WORKS), AS WELL AS MADE SOME CHANGES TO THOSE OBLIGATIONS.
For all contracts, and amendments thereto, entered into on or after January 1, 2018, for design professional services, all provisions, clauses, covenants, and agreements contained in, collateral to, or affecting any such contract, and amendments thereto, that purport to indemnify, including the duty and the cost to defend, the indemnitee by a design professional against liability for claims against the indemnitee, are unenforceable, except 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. In no event shall the cost to defend charged to the design professional exceed the design professional’s proportionate percentage of fault. However, notwithstanding the previous sentence, in the event one or more defendants is unable to pay its share of defense costs due to bankruptcy or dissolution of the business, the design professional shall meet and confer with other parties regarding unpaid defense costs. The duty to indemnify, including the duty and the cost to defend, is limited as provided in this section. This section shall not be waived or modified by contractual agreement, act, or omission of the parties. Contractual provisions, clauses, covenants, or agreements not expressly prohibited herein are reserved to the agreement of the parties. (Emphasis added.)
SB 496 included certain carve-outs (e.g., does not apply (1) to contracts with state agencies, (2) if an OCIP or CCIP includes design professionals [which is rare], or (3) to contracts for a design/build joint venture) so that it does not apply in limited cases. For purposes of the statute, design professionals are defined as architects, landscape architects, professional engineers, and land surveyors.
SB 496 was, in part, a response to a couple of California cases (Crawford v. Weathershield (2008) 44 Cal.4th 541 (Crawford) and UDC-Universal Development v. CH2M Hill (2010) 181 Cal.App.4th 10 (UDC)). These private works cases collectively held that a contractual indemnity provision included the duty to defend and required a design professional to immediately defend the indemnified party even if the design professional was ultimately found to be not negligent. Moreover, these cases held that the duty to defend obligation was immediate upon tender of any claim, dispute, or lawsuit, which “arises out of” the design professional’s services. Specifically, in Crawford, a supplier (Weather Shield) defeated the developer’s claims for negligence and breach of warranty claims, so it was not obligated to indemnify the developer because it was not negligent, but Weather Shield nevertheless had an independent and immediate duty to defend the developer and was liable for those defense costs (even though Weather Shield had no liability for the damages). Crawford did not involve a design professional, but its holding was later applied to design professionals. In UDC, although no finding of negligence on the part of the engineer (CH2M Hill ) was ever made in the matter, the court, relying on Crawford, found that that were sufficient claims of potential negligence to trigger a duty on the part of the engineer to defend the developer and that this duty arose prior to any determination on the issue of negligence on the part of the engineer.
Unfortunately, SB 496 left open an important question, which is how a design professional’s defense obligation would actually work in the real world under this bill. Typically, if a design professional has a defense obligation as part of its indemnity provision, then the defense obligation is triggered immediately upon tendering the claim (i.e., the defense obligation is immediate – a design professional cannot wait until its negligence has been decided, but must immediately provide a defense to the indemnitee, which is typically the owner). And, if the design professional refuses to provide a defense (e.g., because the design professional does not want to pay out of pocket for the indemnitee’s defense, which its professional liability insurance policy will not pay for until liability is established), then the indemnitee could seek a declaratory judgment which is entitled to trial preference so that it is heard quickly. This declaratory judgment procedure would permit the indemnitee to obtain a judgment that provides that the design professional must provide a defense of the underlying dispute while that underlying dispute is still playing out in the court.
However, the wording of the statute provides that a design professional cannot be required to pay more in defense costs than its proportionate share (with a limited exception in the case of other responsible party(ies) if they cannot pay due to bankruptcy or dissolution). The sentence in question states: “In no event shall the cost to defend charged to the design professional exceed the design professional’s proportionate percentage of fault.” It is easy to conceive a design professional then arguing that it does not have to provide an upfront defense; instead, the design professional will argue that it will simply reimburse the indemnitee for the design professional’s proportionate share of defense costs after there has been a determination of the design professional’s percentage of fault because the lack of a ruling on the design professional’s fault prevents the design professional from knowing how much (if any) it must pay (i.e., without such a ruling, which could find the design professional anywhere from 0-100% at fault, the design professional cannot be made to pay defense costs in excess of its actual percentage of fault). It would also make it difficult, if not impossible, to obtain a declaratory judgment against the design professional because the court hearing the declaratory judgment matter would have no way of knowing what percentage of fault, if any, will be attributable to the design professional, so the court would theoretically not be able to render a judgment that the design professional has an immediate duty to defend.
For all contracts, and amendments thereto, entered into on or after January 1, 2007, with a public agency for design professional services, all provisions, clauses, covenants, and agreements contained in, collateral to, or affecting any such contract, and amendments thereto, that purport to indemnify, including the dutyand the cost to defend, the public agency by a design professional against liability for claims against the public agency, are unenforceable, except for claims that arise out of, pertain to, or relate to the negligence, recklessness, or willful misconduct of the design professional. The duty to indemnify, including the duty and the cost to defend, is limited as provided in this section. This section shall not be waived or modified by contractual agreement, act, or omission of the parties. Contractual provisions, clauses, covenants, or agreements not expressly prohibited herein are reserved to the agreement of the parties.
In discussing the prior statute (above, applicable only to public works), the authors of the article discuss SB 972 that amended Civil Code §2782.8 into its prior version and stated in Section IV of the article:
The passage of SB 972 has sparked a wide variety of interpretations, some claiming that, in and of itself, the new language bars any obligation to defend prior to proof of negligence on the part of the design professional. Others argue that the change has little practical effect by failing to alter the requirement that a defense be provided immediately. Properly understood, the statute creates a frustrating tension for the design professional–an immediate obligation to defend any claim that might involve negligence, with the prospect of having no obligation should the design professional ultimately be found not to have been negligent. Given this awkward arrangement, the reaction was predictable–widespread confusion, combined with perhaps some deliberate obfuscation. One commentator, ignoring the continued presence of Section 2778(3) and (4) and the holding in Crawford, incorrectly analyzed the statute this way: “Under the new law, the design professional’s duty to defend and indemnify will only arise after the design professional is found to be negligent.” Others correctly noted that while the ultimate obligations of design professionals to defend and indemnify will be measured based on the existence of negligence, the duty to defend will be triggered immediately upon the tender of a claim that alleges negligence on the part of the design professional.
THE PASSAGE OF SB 972 HAS SPARKED A WIDE VARIETY OF INTERPRETATIONS, SOME CLAIMING THAT, IN AND OF ITSELF, THE NEW LANGUAGE BARS ANY OBLIGATION TO DEFEND PRIOR TO PROOF OF NEGLIGENCE ON THE PART OF THE DESIGN PROFESSIONAL.
So, while the League of California Cities adopted the interpretation that the prior statute still allowed for an immediate defense by design professionals (an interpretation that favors its members), there was an acknowledgement by the authors that others disagreed with this interpretation. The authors also recognized the real world problem (discussed above) about a design professional refusing to provide an immediate defense, stating in Section V:
Before examining specific contract terms, it is worth noting a common logistical issue— what happens when a city tenders the defense of a claim to a design professional? As has been the case even before Crawford and UDC clarified the timing of the defense obligation, many design professionals will simply ignore a tender of a defense, choosing to wait out the determination of the claim against their client, rather than risk advancing defense costs out of their pocket which they may not be able to recover. The holdings in Crawford and UDC, while clarifying the legal rule regarding the duty to defend, added no additional incentives for designers to provide a defense upon receipt of a tender, other than perhaps to be able to control the costs. Lacking a right to seek tort damages for bad faith, the only options for a city are to fund its own defense and seek later reimbursement or pursue a declaratory relief action to obtain injunctive relief to force the professional to take up the defense immediately.
The new statute (applicable in 2018) does nothing to address this issue directly, and in fact probably makes the design professional more likely to ignore a tender as argued above. One of the distinct differences between the prior version (applicable only to public works) and the 2018 version (applicable to both public and private works) is the sentence included in the 2018 version that states: “In no event shall the cost to defend charged to the design professional exceed the design professional’s percentage of fault.” This sentence (not present in the prior version) does not address whether a defense is due immediately; rather, it only limits the “cost to defend” to the design professional’s percentage of fault (effectively overruling the holdings in Crawford and UDC to the extent that those courts ruled that a design professional could be responsible for defense costs even in the absence of negligence, but not necessarily overruling the holdings that an immediate defense is owed by the design professional). However, as noted above, it makes it very difficult to force a design professional to provide an immediate defense because a court hearing a declaratory relief action (the only procedure readily available to force a design professional to provide a defense) may struggle with how a design professional can be forced to provide a complete defense when its liability has not been established.
Ultimately, this statute is going to lead to more negotiating upfront with design professionals as to what type of defense obligation the parties can agree on, with design professionals pushing hard to have no immediate defense obligation, but only an obligation to reimburse the indemnitee for a proportionate share of defense costs after liability is established. Ultimately, the courts will need to rule as whether statute allows making a design professional provide an immediate defense. In the meantime, adding language to an indemnity provision that states that the indemnity provision is limited “to the extent allowed by law” or that the provision “is intended to comply with, and will be interpreted in compliance with, Civil Code §2782.8” may help to save an otherwise overbroad provision from being held unenforceable.
Leave a Reply