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LEGAL NEWS


New Design Professional Defense and Indemnity Law May Leave Contractors Holding the Bag


By Garret D. Murai Wendel, Rosen, Black & Dean LLP


O


n April 28, 2017, Governor Brown signed Senate Bill 496 as part of a compromise


package that saw the passage (and subsequent signing) of the Governor’s gas tax bill which will raise the state’s gas tax and vehicle fees by $5.2 billion annually to pay for road and bridge repairs and mass transit expansion. Te bill, which takes effect January 1, 2018, amends Civil Code section 2782.8 pertaining to the defense and indemnity obligations of design professionals. So why should contractors care? Because amended Section 2782.8


may leave contractors and their insurers on the hook for paying the full costs of defense in construction/design disputes where a contractor has agreed to defend and indemnify another party. Te new law makes the following changes to Section 2782.8:


 Section 2782.8 is broadened to apply to all “indemnitee[s]” (i.e., the party being indemnified) not just to public entities as was the case provided prior to the amendment. However, state agencies continue to be excluded from its application.


 As amended, Section 2782.8 applies to “all contracts, and amendments thereto, entered into on or after January 1, 2018, for design professional services.” It is unclear how broadly the term “amendments” will be construed and if it will include minor changes to a design professional agreement.


www.AGC-CA.org


 Under the new law the defense obligation of design professionals is limited to their “proportionate percentage of fault,” but requires design professionals to “meet and confer with other parties regarding unpaid defense costs” should a defendant be unable to pay its share of defense costs due to bankruptcy or dissolution. It is unclear in what manner this “meet and confer” process is to take place, what happens if the parties are unable to reach an agreement following the “meet and confer” process, and what happens in situations where a defendant does not file for bankruptcy or dissolve but simply refuses to pay its contractually obligated defense costs.


 Te limitation to a design profes- sional’s defense obligation does not apply to: (1) contracts where there is “a project-specific general liability policy” which “insures all project participants for general liability exposures” including design professionals (e.g., wrap insurance projects); and (2) design- build projects where a design professional is a party to a design- build joint venture agreement.


So why is it that contractors and


their insurers may be left holding the bag on defense costs? It comes down to the specific


language of the statute. As amended, Section 2782.8 states that “[i]n no event shall the cost to defend charged to the design professional exceed the design professional’s proportionate percentage of fault.” Tere are two ways this


sentence can be read – either that design professionals have no up-front obligation to pay defense costs and can only be required to reimburse defense costs once liability is determined and then only for the design professional’s proportionate percentage of fault, or that design professionals can be required to pay defense costs up-front and that the design professional will be reimbursed if and when the design professional’s proportionate percentage of fault is determined. Tis distinction between up-front


payment by a design professional or back-end reimbursement to a design professional is extremely important since most civil cases, which the vast majority of construction/design cases are, never go to trial. According to the Judicial Council of California’s 2016 Court Statistics Report: Statewide Caseload Trends: 2005-2006 through 2014-2015, only 21.7 percent of civil cases go to trial with the remaining being disposed of by other means such as settlement, dismissal, motion practice, or otherwise. Tus, if design professional are


not obligated to pay for defense costs up-front then that leaves contractors and their insurers in mixed construction/design lawsuits to pay for all defense costs1 unless and until a design professional’s proportionate percentage of fault is determined at trial, which as discussed, is unlikely. But that might change. Because if contractors and their insurers need to “play out their hand” in order to determine what if anything the design


Continued on page 20 Associated General Contractors of California 19


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