Orange County Branch Newsletter

October 2017

Law and CE News

California Duty to Defend Rests on Fault


Substantial efforts by professional associations in the Golden State have resulted in a new law blocking immediate duty-to-defend requirements for design professionals in private-sector and most public-sector contracts.

In April 2017, California Gov. Jerry Brown signed into law Senate Bill 496 (S.B. 496), which modifies existing Civil Code Section 2782.8, adding protections for private contracts entered into by design professionals on or after Jan. 1, 2018. The law limits design professionals' and their carriers' defense obligation to the comparative fault of the professional in private and certain public contracts. Section 2782.8 previously applied only to contracts between local public agencies and design professionals, excluding state agencies. S.B. 496 places private contracts and public contracts with non-state agencies on equal footing.

The enactment of this legislation follows many years of efforts by the design professional community through their professional associations to secure more equitable footing in contracts where indemnity clauses generally included an immediate duty to defend, which was an uninsurable risk for design professionals under their professional liability policies.

The efforts began shortly after the Crawford v. Weather Shield Mfg. Inc. (2008) 44 Cal.4th 541 case. In Crawford, the California Supreme Court held that the contractual duty to defend was immediate even when not specifically called out in the contract. The Crawford court held that a subcontractor, by virtue of an indemnity clause in its contract with the general contractor, had an immediate duty to defend and was ordered to pay all of the general contractor's attorneys fees and costs even though it was ultimately found by the jury to be fault free.

Thereafter, in UDC v. CH2M Hill (2010) 181 Cal.App.4th. 10, the California Court of Appeal made it explicitly clear that the holding in Crawford concerning an immediate duty to defend extended to design professionals. In that case, a jury also found the design professional to be fault free, but the professional was still ordered to pay all of its client's attorneys fees and costs by virtue of a contractual indemnity provision.

Importantly, S.B. 496 does not affect situations where the design professional is a party to a joint venture design-build agreement. The exact parameters of just what this means and how it will be handled will have to be sorted out in the courts.

The practical implications of S.B. 496 are extremely beneficial to design professionals, especially those working primarily in the private sector. For all private construction contracts entered into by a design professional before Jan. 1, 2018 (contracts without the protections of S.B. 496) containing a provision requiring the professional to indemnify the design professional's client, the professional could have to pay for all of a client's attorneys fees and costs, even if the professional were ultimately to be found by a court to be fault free.

For private contracts and contracts with local public agencies entered into after Jan. 1,2018, with the protections of S.B. 496, any contract that attempts to include an immediate duty to defend will be unenforceable. For instance, if the matter is litigated and the design professional is determined to be 25% at fault, then the law provides that the professional would be responsible for only 25% of the attorneys fees and costs of the party seeking contractual indemnity. If found 0% at fault, the professional would not be responsible for any attorneys fees or costs. This result would be the opposite of what occurred in the Crawford/CH2M-Hill cases and has been applauded by not only the design professional community but also the professional liability insurance industry that provides coverage to these professionals.  

In addition to making the law of indemnity more equitable, it will also substantially reduce problems that insurance carriers have been having with contractual indemnity clauses, as payment for an immediate defense to the owner was generally not covered by professional liability policies. Generally speaking, professional liability covers the professional negligence of parties, not the signing of bad contracts. The immediate duty to defend that came out of Crawford was a contractually assumed liability and was not tied to any finding of negligence. This meant that the attorneys fees and other defense costs of a party that tendered its defense to the design professional under a contract would not be covered. The new law appears to have fixed this problem.

Importantly, S.B. 496 does not affect situations where the design professional is a party to a joint venture design-build agreement.  The exact parameters of just what this means and how it will be handled will have to be sorted out in the courts. Given that the new law will apply only to contracts entered into on or after Jan. 1, 2018, it will take many years for judicial interpretations to work through the system.

S.B. 496 also provides that, when any defendant is unable to pay its share of defense costs due to bankruptcy or dissolution of the business, the parties shall "meet and confer" with the other parties regarding unpaid defense costs. Exactly how this "meet and confer" requirement will work will have to play out in practice.

While some have suggested that this new law will drive up defense/insurance costs to others on the project team, such as contractors, owners and subs. the reality is that the new law simply presents a fairer and more equitable way of allocating risk. If the design professional is found to be 25% at fault, then that same professional will be obligated to reimburse its contractual partner for 25% of the reasonable defense costs expended by the party tendering its defense. Put another way, it is not equitable for a party to pay 100% of the defense costs when it is found fault free as happened under the Crawford/CH2M-Hill cases.

This new law is a Significant step forward, making design professional contracts in California both fair and insurable. By enacting S.B. 496, California has joined other states such as Texas, Colorado, Minnesota and Arizona, which have enacted legislation providing greater indemnity protection for design professionals. This legislation will allow for more equitable risk sharing in construction projects concerning the built environment in 2018 and beyond.
Contact us to discuss further:
 

Justin D. Witzmann | [email protected]
Brian Stewart | [email protected]

Nothing contained in this article should be considered legal advice. Anyone who reads this article should consult with an attorney before acting on anything contained in this or any other article on legal matters, as facts and circumstances will vary from case to case.

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