New California Law Eases Indemnification Duties for Design Professionals

May 15, 2017Alerts Architecture, Engineering and Design Professional Firms Alert

California has enacted a new law limiting indemnification obligations, including the duty and cost to defend, that can be imposed on design professionals with respect to all service contracts.

The measure, which takes effect in 2018, is good news for design professionals because it extends limits that currently apply only to contracts with public agencies.

Background and Current Law

Under California Civil Code Section 2778, specified rules apply to an obligation to indemnify, unless the contracting parties express the intention that those rules will not apply. The indemnity against claims, demands or liability includes the costs of defending against them.

In addition, under those rules, the person indemnifying (indemnitor) is required, upon the request of the person being indemnified (indemnitee), to defend actions or proceedings brought against the indemnitee with respect to matters covered by the indemnity.

Existing case law provides that this duty to defend arises out of an indemnity obligation as soon as a suit is filed regardless of whether the indemnitor is ultimately found to be negligent. (Crawford v. Weather Shield (2008) 44 Cal.4th 541). The indemnitor can be required to pay the indemnitee’s costs of defense and defend the indemnitee even if no allegation of negligence is made against the indemnitor. ((UDC-Universal Development, L.P. v. CH2M Hill (2010) 181 Cal.App.4th 10).

However, this is not the situation for contracts between design professionals (defined under California Civil Code Section 2782.8 to include licensed architects, licensed landscape architects, registered professional engineers and licensed professional land surveyors) and public agencies.

Section 2782.8 currently states that in professional design service contracts (which includes amendments thereto and solicitation documents) with a public agency entered into on or after January 1, 2007, provisions requiring the design professional to indemnify, including the duty and the cost to defend, a public agency are unenforceable, except to the extent the claims arise out of, pertain to or relate to the negligence, recklessness, or willful misconduct of the design professional. For purposes of Section 2782.2, public agency does not include the State of California.

Section 2782.8 specifically states that the duty to indemnify, including the duty and the cost to defend, is limited and that this limitation cannot be waived or modified by contractual agreement, act or omission of the parties. However, the parties may agree to contractual provisions, clauses, covenants or agreements that are not expressly prohibited by Section 2782.8.

New Law Effective January 1, 2018

On April 28, 2017, California Governor Jerry Brown approved SB 496, which amends Section 2782.8 so that it applies to all professional design service contracts entered into by design professionals on or after January 1, 2018, and not just to professional design service contracts with public agencies.

Pursuant to the amendments to Section 2782.8, a design professional indemnity obligation, including the duty and the cost to defend an indemnitee, is unenforceable except to the extent the claims against the indemnitee arise out of, pertain to or relate to the negligence, recklessness or willful misconduct of the design professional.

In addition, the amendments to Section 2782.8 specifically state that: “[i]n no event shall the cost to defend charged to the design professional exceed the design professional’s proportionate percentage of fault.”

There are exceptions. If one or more of the defendants is unable to pay their share of the defense costs due to bankruptcy or dissolution, the parties are to “meet and confer.”

Although the amendment does not state that the design professional will need to pay more than his or her share, there is an implication that he or she may end up doing so in these limited circumstances.

In addition, the limitation to the duty and cost to defend does not apply (i) where there is a project-specific general liability policy insuring all project participants for general liability exposures on a primary basis and also covering design professionals for their legal liability arising out of their professional services on a primary basis; or (ii) to written design-build joint venture agreements.

The amendment of Section 2782.8 is good news for design professionals after the particularly harsh result of the CH2M Hill case.

Design professionals will no longer have unlimited liability with respect to indemnity and the duty and cost to defend. Design professionals will not have to indemnify their clients for claims that are not tied to their negligence, recklessness or misconduct and this limitation should prevent their clients from imposing broad indemnification obligations, such as indemnification for any breach of contract. Design professionals will have to pay their own defense costs, but if they are found not to be at fault, they will not have to pay their clients’ defense costs. If they are found to be only partially at fault, they will only have to pay their proportionate percentage (except where other parties at fault are bankrupt or dissolved) and any agreement requiring otherwise will not be enforceable.

Section 2782.8 continues to clearly state that the duty to indemnify, including the duty and the cost to defend, is limited as set forth in Section 2782.8 and cannot be waived or modified by contractual agreement, act or omission of the parties. However, Section 2782.8 still also allows contracting parties to agree to contractual provisions, clauses, covenants or agreements that are not expressly prohibited by Section 2782.8.

As such, design professionals should continue to avoid the inclusion of an indemnity provision in their contracts and if they cannot do so, their contracts should specifically exclude any duty to defend since professional liability insurance will not cover them for such a contractual obligation.

If design professionals cannot avoid the inclusion of an indemnity provision in their contracts and cannot specifically exclude a duty to defend, they should include a provision making it clear that the obligation to pay their proportionate share of defense costs shall not occur until there has been a final determination of the underlying matter. Otherwise, a design professional would have to pay the cost of defense and then seek reimbursement if the design professional was found to have no liability or if the design professional was found to have paid more than the design professional’s proportionate percentage of defense costs where the design professional had some liability.

If you have any questions about this alert, please contact Syvia L. Magid at 415.651.1459 or [email protected] or any member of the firm’s Architecture, Engineering and Design Professional Firms Practice.