February 1, 2013
California is the latest state to enact a law stating that in all construction contracts for private commercial projects, any indemnity obligations arising out of active negligence or willful misconduct are void and unenforceable.
This is noteworthy for developers and contractors, because it essentially nullifies the power of hold-harmless and indemnification clauses in contracts for construction defects as well as for ongoing work; such agreements had been standard practice in construction for years.
California Senate Bill 474, which went into effect Jan. 1, eliminates an effective risk-control tool for developers and general contractors. Proponents suggested the new rule will be fairer than existing practices because each party would be liable for its own negligence. However, we believe the likely result will be increased litigation and costs associated with determining actual liability.
Indaco Risk Advisors will monitor the implementation of this law in California as well as similar legislation in other states, should it arise. In the meantime, we recommend developers and general contractors meet with their attorneys to review their standard contracts, especially if they do work in California or one of the other 16 states with similar laws in place.
Among other things, the new California law:
- Dictates that if a construction project is located in California, then California law applies, even if the parties’ contract elects a different jurisdiction for contract enforcement
- Does not apply explicitly to design professionals
- Has no effect on “additional insured” obligations
- Expands the definition of “construction contract” to include renovation agreements and infrastructure (e.g., utility, water, sewer, oil and gas lines)
- Does not apply to owner-controlled insurance programs (OCIPS), which are sometimes also known as WRAPs