Alert - Civil Code §2782 and Its Impact on Indemnity and Insurance Provisions Contained in Construction Contracts

March 29, 2013
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All owners, construction managers, contractors, subcontractors and material suppliers should be aware of the recent enactment of California Civil Code §2782.05, which changes the law with regard to insurance and indemnity provisions contained in construction contracts entered into after January 1, 2013.

 

California Civil Code §2782.05(a), enacted as part of Senate Bill 474, states that provisions "contained in, collateral to, or affecting" any construction contracts entered into on or after January 1, 2013, that require a subcontractor "to insure or indemnify, including the cost to defend, a general contractor, construction manager, or other subcontractor" are "void and unenforceable to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of that general contractor, construction manager or other subcontractor." Pursuant to Civil Code §2782.05(l), this newly enacted statute does not affect construction contracts or insurance contracts or agreements entered into on or before January 1, 2012.

 

While the statute may be clear with regard to indemnity provisions contained in construction contracts, it is not so clear with regard to additional insured requirements contained in construction contracts. The Senate Floor Analysis for SB 474 stated:

 

This bill provides that a provision in a contract that requires the purchase of additional insured coverage, or any coverage endorsement or provision within an insurance policy providing additional insured coverage, primary or noncontributing coverage or waivers, is void and unenforceable to the extent that it requires or provides coverage the scope of which is prohibited under this bill for an agreement to indemnify, hold harmless, or defend.

 

In light of the above, questions may arise about (i) whether Civil Code §2782.05 precludes additional insured coverage under a subcontractor's insurance policy for a general contractor's or construction manager's active negligence or willful misconduct; and (ii) whether an insurer has a duty to defend such claims. The Legislature appeared to address this issue in Civil Code §2782.05(a), by adding the following provision:

 

This section shall not affect the obligations of an insurance carrier under the holding of Presley Homes, Inc. v. American States Insurance Company (2001) 90 Cal.App.4th 571, nor the rights of an insurance carrier under the holding of Buss v. Superior Court (1997) 16 Cal.4th 35.

 

In Presley Homes, Inc. v American States Ins. Co. (2001) 90 Cal.App.4th 571, a developer brought an action against a subcontractor's insurer to recover the expenses of defending against a construction defects lawsuit. The developer was named as an additional insured under the subcontractor's insurance policy. The additional insured endorsement obtained by the subcontractor provided coverage for liability arising out of the subcontractor's work, however, it did not apply to ‘bodily injury' or ‘property damage' arising out of the ‘sole negligence or willful misconduct' of the developer. The issue before the court of appeal was the scope of the policy's coverage for the developer. The court of appeal held that when an insurer has a duty to defend, the obligation extends to the entire action, even if the suit involves both covered and uncovered claims, or a single claim that is only partially covered by the policy. The court of appeal held further that while the additional insured endorsement limited coverage for the developer to "liability" arising from the subcontractor's work, it did not limit the insurer's obligation to provide the developer with a defense. The court of appeal stated that the duty to provide a defense is governed by public policy, not the contract terms.

 

In Buss v Superior Court (1997) 16 Cal.4th 35, the California Supreme Court held that in a "mixed action," in which some of the claims are potentially covered and some are not, the insurer has a duty to defend the entire action. The court, however, did hold that if the insurer reserves the right to do so, it may seek reimbursement of the fees and costs incurred to defend claims that were not even potentially covered under the policy.

Thus, while Civil Code §2782.05(a) appears to address some confusion with regard to an insurer's duty to defend against construction claims, its full impact in the insurance context remains somewhat unclear. For example, Civil Code §2782.05(n) states:

Nothing in this section shall be construed to affect the obligation, if any, of either a contractor or construction manager to provide 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 pursuant to a construction contract with a public agency under subdivision (b) of Section 2782 or an owner of privately owned real property to be improved under subdivision (c) of Section 2782.































The statute, however, does not define the term "promisor."

 

Despite certain ambiguities in the statute, the statute is clear that it does not apply in the thirteen (13) specific contexts listed in Civil Code §2782.05(b). For example, it does not apply to contracts for original residential construction; direct contracts with a public agency; wrap-up insurance policies or programs; indemnity provisions in loan and financing; and contracts for design professionals.

 

A few other provisions in Civil Code §2782.05 are worth noting. Civil Code §2782.05(e) allows the parties to enter into indemnity agreements that establish the "timing or immediacy of the defense" and "provisions for reimbursement of defense fees and costs" that are not otherwise prohibited. Further, Civil Code §2782.05(f) allows a general contractor or construction manager to recover its attorneys' fees against a subcontractor who fails to satisfy its insurance and/or indemnity obligations.

While some confusion may lie with regard to the scope and application of Civil Code §2782.05, owners, contractors, construction managers, subcontractors and suppliers should review the indemnity and insurance provisions of their existing agreements in order to ensure that they comply with the limitations contained in newly enacted Civil Code §2782.05.