This article was published in the San Diego Association of General Contractor’s Monday Morning Quarterback on October 30, 2017.
Senate Bill 496 (SB 496) will become law effective January 1, 2018, and for general contractors (GCs)this new law restricts the contractual indemnity which GCs can require of design professionals.
The typical contractual indemnity requirement consists of two components: (1) a duty by the design professional to indemnify the GC for any settlement/judgment; and (2) a separate and immediate duty to defend – pay the GC’s attorney’s fees. The first component is not triggered until the GC pays a settlement/judgment, but the second component, the duty to defend, is triggered as soon as the GC sends the design professional a letter and there are consequences if the design professional is non-committal.
Under current law, when a construction claim arises involving the design professional’s work, this immediate duty to defend provides a GC with a substantial bargaining chip. The most important aspect of SB 496 is it significantly alters this second, duty to defend, component as it almost certainly will have the effect of precluding the design professional’s immediate duty to defend. This means the design professional can refuse to commit any resources towards the GC’s immediate demand for a defense, probably without any negative consequence to the design professional.
SB 496 also places new limits on the scope of the duty to defend as the design professional can, under SB 496, only be required to pay the GC’s defense expenses attributed to the design professional’s negligence. Under current law, the duty to defend can encompass all of a GC’s legal expenses.
SB 496 also newly limits the scope of component one, the duty to indemnify the GC for any settlement/judgment, to claims which arise out of the design professional’s negligence. Current law permits indemnity for claims arising out of a design professional’s work without a showing of negligence. While this is theoretically a significant change, the practical effect is the law will now match standard construction industry practices as design professionals routinely limit their indemnity obligation to claims resulting from their negligence.
SB 496 will apply to all contracts entered into after January 1, 2018. In the context of a construction claim the effect will be to reduce the leverage which a GC has against a design professional. SB 496 should not be a “gotcha” type of surprise to GCs because design professionals have long been reluctant to agree to indemnity/defense duties which are not directly tied to their negligence. This reluctance stems from the fact that professional liability policies do not cover indemnity/defense obligations which are not tied to the negligence of the design professional. SB 496 brings the scope of a design professional’s duty to indemnify and duty to defend in line with the insurance coverage which professional liability policies provide.