BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 2738|
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THIRD READING
Bill No: AB 2738
Author: Jones (D)
Amended: 7/8/08 in Senate
Vote: 21
SENATE JUDICIARY COMMITTEE : 3-0, 6/24/08
AYES: Corbett, Kuehl, Steinberg
NO VOTE RECORDED: Harman, Ackerman
ASSEMBLY FLOOR : 72-0, 5/22/08 - See last page for vote
SUBJECT : Construction contracts: indemnity and defense:
wrap
insurance
SOURCE : Air Conditioning and Refrigeration Contractors
Association
California Professional Association of
Specialty Contractors
Pacific Rim Drywall Association
DIGEST : This bill provides that a subcontractor would
have no defense or indemnity obligation to a builder or
general contractor for a construction defect claim unless
and until the builder or general contractor provides a
written tender of the claim to the subcontractor which
includes all of the information provided to the builder or
general contractor by the claimant or claimants relating to
claims caused by that subcontractor's scope of work. The
written tender would have the same force and effect as a
notice of commencement of a legal proceeding. If a builder
CONTINUED
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or general contractor tenders a claim for construction
defects, or a portion thereof, to a subcontractor, as
specified, the subcontractor would be required to elect one
of two defense postures, as specified, the performance of
which would be deemed to satisfy the subcontractor's
defense obligation to the builder or general contractor.
This bill provides for the allocation of damages and
attorney's fees if the builder, general contractor, or
subcontractor fails to fulfill his or her duties under the
bill's provisions. The bill also provides that nothing in
its provisions would prohibit the parties from mutually
agreeing to reasonable contractual provisions for damages.
This bill provides that all contract provisions, clauses,
amendments, or agreements contained therein, entered into
after January 1, 2009, and relating to a residential
construction project on which a wrap-up insurance policy,
as defined, or other consolidated insurance program, is
applicable, that require a subcontractor to indemnify, hold
harmless, or defend another for any claim or action covered
by that program are unenforceable. This bill imposes
certain requirements when an owner, builder, or general
contractor obtains a wrap-up insurance policy or other
consolidated insurance program for a work of improvement
and require that any subcontractor provide a credit or
compensation for the policy to the owner or original
contractor.
ANALYSIS : Existing law, except as specified, provides
that provisions, clauses, covenants, or agreements
contained in, collateral to, or affecting any construction
contract and that purport to indemnify the promisee against
liability for damages for death or bodily injury to
persons, injury to property, or any other loss, damage, or
expense arising out of the sole negligence or willful
misconduct of the promisee or the promisee's agents,
servants, or independent contractors who are directly
responsible to such promisee, or for defects in design
furnished by such persons, are against public policy and
are void and unenforceable. However, this provision does
not affect the validity of any insurance contract, worker's
compensation, or agreement issued by an admitted insurer.
(Civil Code (CC) Section 2782(a).)
Existing law, except as specified, provides that
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provisions, clauses, covenants, or agreements contained in,
collateral to, or affecting any construction contract with
a public agency which purport to impose on the contractor,
or relieve the public agency from, liability for the active
negligence of the public agency are void and unenforceable.
(CC Section 2782(b).)
Existing law provides that, for all construction contracts
entered into after January 1, 2006, for residential
construction, as defined, all provisions, clauses,
covenants, and agreements contained in, collateral to, or
affecting any such construction contract, and amendments
thereto, that purport to indemnify, including the cost to
defend, the builder, as defined, by a subcontractor against
liability for claims of construction defects are
unenforceable to the extent the claims arise out of,
pertain to, or relate to the negligence of the builder or
the builder's other agents, other servants, or other
independent contractors who are directly responsible to the
builder, or for defects in design furnished by those
persons, or to the extent the claims do not arise out of,
pertain to, or relate to the scope of work in the written
agreement between the parties. 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 are
reserved to the agreement of the parties. (CC Section
2782(c).)
Existing law provides that Section 2782(c) does not
prohibit a subcontractor and builder from mutually agreeing
to the timing or immediacy of the defense and provisions
for reimbursement of defense fees and costs, so long as
that agreement, upon final resolution of the claims, does
not waive or modify the provisions of subdivision (c).
Subdivision (c) does not affect the obligations of an
insurance carrier under the holding of Presley Homes, Inc.
v. American States Insurance Co . (2001) 90 Cal.App.4th 571.
Subdivision (c) also does not affect the builder's or
subcontractor's obligations pursuant to Section 910 et seq.
(prelitigation procedures for construction defect actions
related to new residential units sold on or after January
1, 2003). (CC Section 2782(d).)
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This bill changes the date in Section 2782(c) from January
1, 2006, to January 1, 2009.
This bill provides that a subcontractor would have no
defense or indemnity obligation to a builder or general
contractor for a construction defect claim unless and until
the builder or general contractor provides a written tender
of the claim, or portion thereof, to the subcontractor
which includes all of the information provided to the
builder or general contractor by the claimant or claimants
relating to claims caused by that subcontractor's scope of
work. The written tender would have the same force and
effect as a notice of commencement of a legal proceeding.
If a builder or general contractor tenders a claim for
construction defects, or a portion thereof, to a
subcontractor, as specified, the subcontractor would be
required to elect to perform either of the following
options, the performance of which would be deemed to
satisfy the subcontractor's defense obligation to the
builder or general contractor:
1.Defend the claim with counsel of its choice, and the
subcontractor would maintain control of the defense for
any claim or portion of claim to which the defense
obligation applies. If the subcontractor elects to
defend the claim under this subdivision, the
subcontractor would be required to provide written notice
of the election to the builder or general contractor
within a reasonable time period following the receipt of
the written tender, and in no event, later than 90 days
following such receipt. Consistent with Section 2782(c),
as proposed to be amended, the defense by the
subcontractor would be a complete defense of the builder
or general contractor of all claims or portions thereof
to the extent alleged to be caused by the subcontractor,
including any vicarious liability claims against the
builder or general contractor resulting from the
subcontractor's scope of work, but not including claims
resulting from the scope of work, actions and or
omissions of the builder, general contractor, or any
other party. Any such vicarious liability imposed upon a
builder or general contractor for claims caused by the
subcontractor electing to defend under this provision
would be directly enforceable against the subcontractor
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by the builder, general contractor, or claimant; or
2.Pay, within 30 days of receipt of an invoice from the
builder or general contractor, no more than a reasonable
allocated share of the builder's defense fees and costs
on an ongoing basis during the pendency of the claim,
subject to reallocation consistent with subdivision (c),
as proposed to be amended, and including any amounts
reallocated upon final resolution of the claim either by
settlement or judgment. The builder or general
contractor would be required to allocate a share to
itself to the extent a claim or claims are alleged to be
caused by its work, actions, or omissions, regardless of
whether the builder or general contractor actually
tenders the claim to any particular subcontractor, and
regardless of whether that subcontractor is participating
in the defense. Any amounts not collected from any
particular subcontractor would not be allowed to be
collected from any other subcontractor.
This bill provides that, notwithstanding any other
provision of law, if a subcontractor fails to timely and
adequately perform its obligations under option a) above,
the builder or general contractor would have the right to
pursue a claim against the subcontractor for any resulting
compensatory damages, consequential damages, and reasonable
attorney's fees. If a subcontractor fails to timely
perform its obligations under option b) above, the builder
or general contractor would have the right to pursue a
claim against the subcontractor for any resulting
compensatory and consequential damages, for interest, as
defined, on defense and indemnity costs from the date
incurred, and for the builder's or general contractor's
reasonable attorney's fees. The builder or general
contractor would bear the burden of proof to establish both
the subcontractor's failure to perform under a) or b) and
any resulting damages. This bill also provides that, if,
upon request by a subcontractor, a builder or general
contractor does not reallocate defense fees to
subcontractors within 30 days following final resolution of
a claim, as described, the subcontractor would have the
right to pursue a claim against the builder or general
contractor for any resulting compensatory and consequential
damages, for interest, as defined, from the date of final
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resolution of the claim, and reasonable attorney's fees.
The subcontractor would bear the burden of proof to
establish both the failure to reallocate and any resulting
damages. This bill also provides that nothing in the
bill's provisions would prohibit the parties from mutually
agreeing to reasonable contractual provisions for damages
if any party fails to elect or perform its obligations as
stated.
This bill provides that a builder, general contractor, or
subcontractor would have the right to seek equitable
indemnity for any claim governed by the bill's provisions.
This bill provides that nothing in its provisions limits,
restricts, or prohibits the right of a builder, general
contractor, or subcontractor to seek equitable indemnity
against any supplier, design professional, or product
manufacturer.
This bill defines "construction defect" to mean a violation
of the construction standards set forth in Sections 896 and
897.
This bill provides that subdivision (c) would not affect
the builder's or subcontractor's obligations pursuant to
Section 895 et seq. (requirements for construction defect
actions).
Existing law defines wrap-up insurance to mean an insurance
policy, or series of policies, written to cover risks
associated with a work of improvement, as defined, and
covering two or more of the contractors or subcontractors
that work on that work of improvement. (Insurance Code
Section 11751.82.)
This bill provides that all contract provisions, clauses,
amendments, or agreements contained therein, entered into
after January 1, 2009 and relating to a residential
construction project on which a wrap-up insurance policy,
as defined, or other consolidated insurance program, is
applicable, that require a subcontractor to indemnify, hold
harmless, or defend another for any claim or action covered
by that program are unenforceable. This bill provides that
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this provision may not be waived or modified by contractual
agreement, act, or omission of the parties.
This bill provides that it is the intent of the Legislature
that, to the extent any contractual provision is deemed
unenforceable pursuant to the bill's provisions, any party
may pursue an equitable claim against another party. This
bill also provides that the Legislature further intends
that nothing in this section shall prohibit a builder or
general contractor from requiring a reasonably allocated
contribution from a subcontractor or other participant to a
self-insured retention or deductible, when and as any such
self-insured retention or deductible is incurred by the
builder or general contractor, as long as the contribution
of subcontractors is reasonably limited.
This bill requires that, if an owner, builder, or general
contractor obtains a wrap-up insurance policy or other
consolidated insurance program for a work of improvement
and also requires that any subcontractor provide a credit
or compensation for the policy to the owner or original
contractor then the following shall apply:
1.The credit or compensation required shall be clearly
delineated in the bid documents.
2.The coverage provided through the wrap-up insurance
policy, including the length of time the policy is in
effect, shall be clearly delineated in the bid documents,
and
3.The owner or original contractor may not require that the
insured subcontractors under the wrap-up policy credit or
compensate the owner or original contractor paid to
provide that subcontractor coverage under the wrap-up
policy.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 7/2/08)
Air Conditioning and Refrigeration Contractors Association
(co-source)
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California Professional Association of Specialty
Contractors (co-source)
Pacific Rim Drywall Association (co-source)
A-D&D Drywall, Inc.
All West Construction Co.
Alliant
Allied Farmers, Inc.
Allied North America
American Design Coatings, Inc.
American National Services, Inc.
American Subcontractors Association
Ancient Art Inc.
Aspen Insurance Brokers
Associated Builders and Contractors
B.W. Carter Painting Inc.
Barney & Barney, LLC.
Bayside Concrete
Bayside Tile and Stone Inc.
BCI Framing and Drywall
Bemus Landscape, Inc.
Ben F. Smith Inc.
Benchmark Landscape, Inc.
Bloomstine and Bloomstine
Bozzuto Insurance Agency, Inc.
Brakke Schafnitz Insurance Brokers Inc.
Cal Coast Construction
Cal Pac Sheet Metal
Calhoun Construction Inc.
California Association of Sheet Metal & Air Conditioning
Contractors'
National Association
California Fence Contractors' Association
California Landscape Contractors Association
California Precast Concrete Association
California Tile Company
Capitol City Drywall
Casa Plumbing, Inc.
Citadel Tile and Marble
City-Wide Electronic System Inc.
Coastal Concrete Inc.
Conco Companies
Concrete Contractors Association, Inc.
D.H. Smith Company, Inc.
De Pinho Roofing Inc.
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Direct Construction Co.
Dolan's
DRI Companies
Dynamic Plumbing Holding Company
E.W. Lewis Construction
Earth Forms, Inc.
Edgewater Plumbing of Benicia, Inc.
Elite Tile
Energetic Painting and Drywall Inc.
Engineering Contractors' Association
Erickson Carpentry Contracting
Exterior Buildings Systems Inc.
Farmers Insurance Group
Flasher/Barricade Association
Frederickson, Mazeika & Grant, LLP
Frontier Concrete Inc.
Frontier Plumbing
Gardemeyer Finish Carpentry
Garrett/Mosier Insurance Services Inc.
Graeber Construction
Greg Minor Construction, Inc.
Guy Evans Contractor Services
HLK Construction Inc.
Hughes Heating & Air Conditioning
Hydro-Plant, Inc.
Interwest Insurance Services Inc.
Irish Setters Inc.
ISU Insurance Services Pinnacle Brokers
Jim Edwards Construction Inc.
Johnson Air
Just-Star Construction, Inc.
Kenyon Plastering Inc.
Kiwi Star Inc.
Laurence-Hovenier, Inc.
Lucas & Mercier Construction, Inc.
Martin Roofing Co., Inc.
Masco Contractor Services of California
Master Design Drywall, Inc.
Milgard Windows
National and Electric & Cable Inc.
National Electrical Contractors Association
New Era Tile and Stone Inc.
Oldwin and Riggs Drywall, Inc.
Orange County Drywall
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Orange Pacific Plumbing, Inc.
Pacific Green Landscape Inc.
Pacific West Plumbing Inc.
Padilla Construction
Plumtree & Tran, LLP.
Ram-Mar Painting, Inc.
Rayco Electric, Inc.
Richard's Plumbing Inc.
RND Construction Inc.
Ruffco Construction
Ruffco II Commercial, Inc.
San Diego Mirror & Window
San Jose Stair Co., Inc.
Sansei Gardens Inc.
Select Finish Inc.
SelectBuild Construction, Inc.
Sheehan Construction, Inc.
Sierra West Construction Inc.
Silver Wood Landscape Construction
Southcoast Waterproofing
Southern California Contractors Association
Southwest Finish & Supply Inc.
Southwest Systems
Stucco Supply Co.
Sunrize Staging Inc.
Surecraft Supply, Inc.
Tao Ltd.
Taylor Commercial Door, Inc.
Taylor Trim & Supply, Inc.
Team Heating and Air Conditioning, Inc.
Terra Firma Landscape Co.
Terry Tuell Concrete, Inc.
The Door & Window Co.
The Presidio Group
Torres Tile, Inc.
Trimco Finish
TWR Enterprises, Inc.
Union Banc Insurance Services, Inc.
Urban Concrete, Inc.
Vanorsdale Insurance Services
Viking Plumbing Inc.
Viloria Construction Inc.
West Coast Painting
WestCor Construction of California
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Williams & Sons Masonry Inc.
Wirtz Quality Installations Inc.
OPPOSITION : (Verified 7/2/08)
Aon
California Building Industry Association
Civil Justice Association of California
Construction Employers Association
ARGUMENTS IN SUPPORT : Supporters state that:
[Assembly Bill 758 (Calderon, Chapter 394, Statutes of
2005)] was intended to ensure that residential
subcontractors are only held responsible for their
proportionate fault in any construction defect
litigation. Since that legislation went into effect,
however, builders have responded by revising their
contracts with subcontractors - all of them
collectively or any one of them individually - to
front the full cost of the builder's legal fees during
any such lawsuit, regardless of a subcontractor's
proportional fault. These legal fees can be
astronomical and subcontractors have no way to control
these costs or to obtain insurance coverage for them -
meaning they must pay out of pocket. Not only is this
tactic financially crippling for subcontractors, it is
fundamentally unfair because the subcontractor has no
relationship with the builder's lawyer or any
opportunity to control the lawyer's fees or
activities. Moreover, the builder and the
subcontractor typically have competing legal claims
and interests, meaning the subcontractor is as a
practical matter, forced to pay for the costs of a
lawsuit against itself, as well as the costs of its
own defense. Even if a subcontractor clearly has no
liability for the alleged defects, but settles a
lawsuit to avoid litigation costs, the subcontractor
can still be forced to pay the builder's legal fees.
[This bill would also address] deficiencies in the
current arrangements by which builders sometimes
extend insurance coverage to all subcontractors who
work on a project. In these "wrap-up" insurance
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arrangements, the builder creates a self-insurance
program or obtains a policy from an insurance carrier
that covers all subcontractors and requires them to
pay all or a portion of the insurance premium. In
theory and practice with some builders, this
arrangement can work well. However, many builders
skimp by establishing wrap-up policies with inadequate
coverage for subcontractors, and subcontractors have
no knowledge of or control over the amount or type of
coverage the builder has obtained. These builders
protect themselves by forcing subcontractors to
indemnify the builder for any claims not covered by
the inadequate insurance policy, and by obtaining
special supplemental insurance coverage for the
builder itself that is unavailable to the
subcontractors.
ARGUMENTS IN OPPOSITION : According to the Senate
Judiciary Committee analysis, this bill is the result of
lengthy and ongoing discussions and negotiations between
subcontractor groups and the building industry. Of the
three sections of the bill, two sections remain subject to
negotiation between the stakeholders, while issues
regarding the first section (Civil Code Sec. 2782) appear
to have been resolved.
The California Building Industry Association (CBIA),
opposed unless amended, notes:
We have had productive discussions regarding Section 2
of the bill, dealing with the interplay of contractual
indemnity provisions and claims covered by wrap-up
insurance policies?. While more work needs to be done
on this section, we are hopeful that mutual agreement
can be reached regarding language.
The author states that he "shares the confidence expressed
by CBIA that the remaining issues to be addressed in
section 2 of the bill will be resolved to the mutual
satisfaction of all the stakeholders with further
discussions, just as the initial areas of disagreement on
section 1 have been resolved." That section, Civil Code
Sec. 2782.9 (Section 2), would state that all contracts,
provisions, clauses, amendments, or agreements entered into
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after January 1, 2009 for residential construction projects
which contain a wrap-up insurance policy (or other
consolidated insurance program) that requires a
subcontractor to indemnify, hold harmless, or defend
another for any claim or action covered by that program, or
arising out of that program are unenforceable. That
section also states the intent of the Legislature for any
party to pursue an equitable indemnity claim against
another if a contractual provision is deemed unenforceable
pursuant to that section.
Aon contends that "Section 3, insofar as it pertains to
non-residential construction, is impractical and
unmanageable. " CBIA similarlly states that they are
opposed to AB 2738 "unless it is amended to make section 3
of the bill workable." Specifically, CBIA contends that
Section 3 is problematic for the following reasons:
First, the timing of insurance coverage and premium
disclosures do not match up with the time builders
receive coverage information from the insurer.
Section 3 requires these disclosures in bid documents
- a process not always followed in residential
construction. More importantly, whether the wrap
policy is a single project wrap or a rolling wrap
covering multiple projects in all 50 states, builders
do not typically get copies of the policy until 6
months to a year after the term of coverage begins.
Binders which summarize the key terms of wrap policies
are not typically available until the evening before
the initiation of coverage or construction.
Therefore, we request that Section 3 be amended to
require disclosure of the binder only, when it is
available.
Second, subdivision (c) attempts to limit the amount a
subcontractor is charged for the wrap insurance to the
amount the builder paid to provide that subcontractor
coverage under the wrap-up policy. Since the insurer
does not allocate premium to subcontractors (this
would be impossible for builders who have rolling
wraps or wrap policies applying to projects in other
states), this provision of the bill is unworkable. We
suggest that subdivision (c) be deleted.
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In response to CBIA's remaining concerns, the author
states: "As with the other sections, the discussions
regarding the wrap-up disclosure issues in section 3 have
proceeded in good faith as the parties explore the
real-world mechanics of the process by which insurance
coverage is sought and obtained and subcontractors are
hired to perform work covered by this insurance." The
author's amendments to be offered in committee do not
propose any amendments to Section 3.
ASSEMBLY FLOOR :
AYES: Adams, Aghazarian, Anderson, Arambula, Beall,
Benoit, Berg, Berryhill, Blakeslee, Brownley, Caballero,
Carter, Cook, Coto, Davis, De La Torre, De Leon,
DeSaulnier, DeVore, Emmerson, Eng, Evans, Feuer, Fuentes,
Fuller, Furutani, Gaines, Galgiani, Garcia, Garrick,
Hancock, Hayashi, Hernandez, Horton, Houston, Huffman,
Jeffries, Jones, Keene, Krekorian, La Malfa, Laird, Leno,
Levine, Lieber, Lieu, Ma, Maze, Mendoza, Mullin,
Nakanishi, Nava, Niello, Nunez, Plescia, Portantino,
Price, Sharon Runner, Ruskin, Salas, Saldana, Silva,
Smyth, Solorio, Spitzer, Strickland, Swanson, Torrico,
Tran, Villines, Wolk, Bass
NO VOTE RECORDED: Charles Calderon, Duvall, Dymally, Huff,
Karnette, Parra, Soto, Walters
RJG:nl 7/2/08 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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