BILL ANALYSIS
AB 573
Page 1
Date of Hearing: August 17, 2006
ASSEMBLY COMMITTEE ON JUDICIARY
Dave Jones, Chair
AB 573 (Wolk) - As Amended: June 27, 2006
FOR CONCURRENCE
SUBJECT : DESIGN PROFESSIONALS: INDEMNITY AND DEFENSE
KEY ISSUE : SHOULD PUBLIC AGENCIES BE ALLOWED TO IMPOSE
CONTRACT PROVISIONS ON DESIGN PROFESSIONALS MAKING THEM
RESPONSIBLE FOR THE WRONGFUL ACTS OF THE PUBLIC AGENCY ITSELF OR
OTHER PERSONS, SUCH AS SUBCONTRACTORS CHOSEN BY THE PUBLIC
AGENCY, OVER WHOM THE DESIGN PROFESSIONAL HAS NO CONTROL AND IS
NOT OTHERWISE LEGALLY RESPONSIBLE?
SYNOPSIS
Some local public agencies currently require broad indemnity
agreements in contracts with design professionals, such as
architects, engineers, and land surveyors, among other
contracting parties. These agreements require the design
professional to hold the public agency harmless against the
conduct of the public agency or third persons in a public works
or similar project. Supporters of this bill complain that such
indemnity provisions are inherently unfair, and are not covered
by the insurance policies available to design professionals,
meaning that they are exposed to potentially ruinous risk for
this liability. They also note that not all local agencies
insist on such contract terms. A similar bill was enacted last
year prohibiting indemnification agreements in residential
construction contracts between builders and subcontractors that
purport to make subcontractors liable for the negligent acts of
others. The statute enacted by that bill covers design
professionals, but only with respect to residential construction
contracts. This bill would extend a similar policy to public
agencies, but only with respect to design professionals.
Opponents, representing local governments, contend that the bill
would limit the flexibility of public agencies to negotiate
professional service contracts to reflect the particular risks
of a project and the relative capacities and capabilities of
different design professions. Opponents further argue that
existing law is adequate, that the bill would encourage
protracted litigation and increase legal defense costs, and that
contracts between public agencies and design professions should
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be left to the "free-play of market forces."
SUMMARY : Regulates the use of indemnification provisions in
public agency contracts with design professionals, as defined.
Specifically, this bill :
1)Provides that, for all contracts and amendments entered into
on or after January 1, 2007, with a public agency for design
professional services, all provisions that purport to
indemnify the public agency against liability for claims
against the public agency, are unenforceable, except for
claims that arise out of, pertain to, or relate to the
negligence, recklessness, or willful misconduct of the design
professional.
2)Defines "public agency" to include any county, city, city and
county, district, school district, public authority, municipal
corporation, or other political subdivision, joint powers
authority, or public corporation, but does not include the
State of California.
3)Defines "design professional" to include licensed architects,
registered professional engineers, licensed professional land
surveyors and landscape architects, all as defined under
current law.
EXISTING LAW :
1)Establishes that, except as otherwise specifically provided,
contract terms affecting any construction contract that
purport to indemnify the promisee against liability for
damages for death or bodily injury to persons, injury to
property, or any other loss, damage or expense rising from the
sole negligence or willful misconduct of the promisee or the
promisee's agents, servants, or independent contractors who
are directly responsible to the promisee, or for defects in
design furnished by those persons, are against public policy
and are void and unenforceable. (Civil Code section 2782
(a).)
2)Establishes that, except as otherwise specifically provided,
contract terms affecting any construction contract with a
public agency that purport to impose on the contractor, or
relieve the public agency from, liability for the active
negligence of the public agency are void and unenforceable.
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(Civil Code section 2782 (b).)
3)Further provides that with respect to residential construction
contracts after January 1, 2006 all contract terms that
purport to indemnify the builder by a subcontractor against
liability for claims of construction defects are unenforceable
to the extent the claims arise out of, pertain to, or relate
to the negligence of the builder or the builder's other
agents, other servants, or other independent contractors who
are directly responsible to the builder, or for defects in
design furnished by those persons, or to the extent the claims
do not arise out of, pertain to, or relate to the scope of
work in the written agreement between the parties. (Civil
Code section 2782 (c).)
FISCAL EFFECT : None
COMMENTS : In support of the bill, the sponsor, Consulting
Engineers and Land Surveyors of California (CELSOC) writes:
AB 573 builds on AB 758 (Calderon, Chapter 394, Statutes of
2005), which provided that residential construction
contracts entered into after January 1, 2006, would make a
subcontractor liable for claims of construction defects or
other injury to property arising from the negligence of the
subcontractor, and not for defects in design furnished by
the builder. In other words, when building a home, all
parties are liable for their own work and workers.
In public agency contracts with design professionals,
"intermediate indemnity" is a risk-shifting provision that
requires the designer to protect the public agency for more
than just the consequences of the designer's own negligence
or willful misconduct.
On public works projects, many public agencies are
contractually requiring design professionals to accept
"intermediate indemnity" provisions, however no
professional liability insurance policy will cover a design
professional's liability beyond the designer's own
negligence or willful misconduct, the additional liability
this provision represents is self-insured. This exposure
is particularly disadvantageous to small- and medium-sized
design firms (including many woman- and minority-owned
companies), who could be put out of business by such a
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risk.
Many indemnity provisions are so comprehensive and all
encompassing, they can make the design professional
responsible for any liability connected with the
performance of the contract even if they did nothing wrong.
AB 573 would provide that public agency contracts would
hold design professionals liable when the design
professional (or an employee of) is negligent and/or caused
the harm, and not for the actions of others beyond their
control.
Changing unfair indemnity provisions in consultant
agreements will give the public entities a wider selection
of better qualified firms, while at the same time giving
the public agency real promises that match what the
consultants' insurance covers - not illusory promises that
provide no insured protection.
This Bill Would Prohibit Intermediate Indemnity Provisions In
Contracts Between Design Professionals and Public Agencies.
Express indemnity agreements (or "hold harmless" clauses) are
provisions in contracts in which one party to the contract (the
"indemnitor" or "promisor") agrees to pay costs incurred by the
other party to the contract ("the indemnitee" or "promisee") as
a result of that other party being held liable to, or having to
defend against a claim filed by a third party. While express
indemnity agreements are generally not prohibited, they are
regulated to some extent in the area of construction contracts.
Thus, indemnity provisions in construction contracts which
purport to indemnify a promisee from liability for his or her
sole negligence or willful misconduct are void and
unenforceable. Likewise, indemnity provisions in public agency
construction contracts requiring a contractor to relieve a
public agency from liability for the public agency's "active
negligence" (in contrast to passive negligence, such as
acceptance of a design, or negligent omission related to a
design professional's work) are also void and unenforceable.
Last year, AB 758 (Calderon) was chaptered, establishing new
rules regarding residential construction contracts. That act
provided that for all residential construction contracts entered
into after January 1, 2006 all terms purporting to indemnify the
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builder by a subcontractor against liability for claims of
construction defects are unenforceable to the extent that the
claims arise out of, pertain to, or relate to the negligence of
the builder, or for defects in design furnished by those
persons, or to the extent the claims do not arise out of,
pertain to, or relate to the scope of work in the written
agreement between the parties. As a result, parties to a
residential construction defect dispute are held legally and
financially responsible only for their respective level of
fault.
Because it was limited to residential construction agreements,
AB 758 did not address the issue raised by this bill with
respect to public agency contracts. Despite a number of
proposals in recent years, there is no comparable statutory
provision currently regulating so-called "intermediate
indemnity," as this bill would do with respect to design
professionals. The sponsor describes "intermediate indemnity"
as a "risk-shifting" provision that requires the designer to
protect the public entity for more than the designer's own
negligence, recklessness, or willful misconduct. Design
professionals further describe "intermediate indemnity" as
transferring responsibility for damages beyond a design
professional's control, except when the public agency is solely
or actively negligent, or has engaged in willful misconduct.
Supporters State That This Bill Is Necessary Because Insurance
Is Not Available To Correspond With The Scope Of The Indemnity
Agreements Design Professionals Are Required To Sign. According
to supporters, insurers of design professionals do not offer
professional liability coverage broad enough to cover the
indemnity and defense provisions that some local public agencies
require in their contracts with those professionals.
According to the bill's supporters, many public entity risk
managers and attorneys incorrectly assume that insurance
coverage for consulting engineers and architects' professional
services is similar to the coverage available to contractors and
others under a general commercial liability insurance policy.
They contend that professional liability insurance policies
cover the insured's common law liability, typically defined as
their negligent acts, errors, or omissions. These policies also
contain an exclusion for liability assumed by contract, such as
the indemnity provisions in this bill, when this liability does
not arise out of the engineer or architects' negligent acts,
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errors, or omissions. While such policies typically include
coverage for liability assumed by contract, they exclude
liability arising from professional services.
Supporters state that approximately 15 insurance companies,
which are asserted to be carriers that cover two-thirds of all
insured California consulting engineer and architecture firms,
use policy forms that provide coverage only for a consultant's
negligent acts, errors, or omissions. They also observe that
"even if an insurance company agreed to defend both the
professional and his or her client under a reservation of
rights, the fact that almost all professional liability policies
are diminishing limit policies means that the risk of being
under-insured for a loss is increased by signing such a
contract. A diminishing limit policy is one where the defense
expenses are included within the limits of liability for the
policy. Construction litigation is often very expensive. When
a design professional signs a type 1 indemnity provision
requiring him or her to defend the public agency, the risk of
liability exposure in excess of the available limits is often a
serious problem."
State Contracts Are Not Affected By This Bill. The sponsors and
supporters assert that the state has been reasonable and fair in
the indemnity and defense provisions it requires in contracts
with design professionals. They provide the following example
of an indemnification provision:
The Contractor [design professional] agrees to indemnify
and hold harmless the State, its officers, agents, and
employees from any and all claims, demands, costs, or
liability arising from or connected with the services
provided hereunder due to negligent acts, errors, or
omissions of the Contractor and its agents. The Contractor
will reimburse the State for any expenditures, including
reasonable attorney's fees, incurred by the State in
defending against claims ultimately determined to be due to
negligent acts, errors, or omissions of the Contractor.
The sponsors and supporters further assert that they have not
encountered any significant indemnity or defense problems in
their contracts with the state, and thus the state is not
included in the bill.
ARGUMENTS IN OPPOSITION: Opponents, representing various local
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government entities, make essentially four arguments. First,
opponents argue that the bill would limit the flexibility of
public agencies to negotiate professional service contracts to
reflect the particular risks of a project and the relative
capacities and capabilities of different design professions.
Second, opponents argue that existing law, which requires local
agencies to disclose indemnity and hold harmless contract
provisions in requests for proposals or invitations to bid,
fairly and reasonably addresses the issues in AB 573, because
architects receive advance notice of indemnity provisions and
can bid accordingly. Third, opponents argue that the bill would
encourage protracted litigation and increase legal defense
costs. Finally, opponents argue the terms of contracts between
public agencies and design professions should be left to the
"free-play of market forces."
Specifically, the Regional Council of Rural Counties (RCRC) and
the California State Association of Counties (CSAC) write in
opposition:
[P]ublic agencies have a fundamentally different
perspective as to the necessity for and approach of the
bill. Existing law permits public agencies to evaluate and
share project costs and risks with those private entities
that are engaged to provide professional design services.
The elements of the contractual arrangements are complex
and varied, and the existing statutory construct regarding
indemnification permits - appropriately, in our view -
needed flexibility in negotiating an agreement that offers
all parties clear expectations and protection, while
sufficiently shielding the public interest from exposure.
In our view, AB 573 would have the effect of transferring
responsibility and risk for the conduct of the design
professional to the public, which does not appear to be
promoting sound public policy.
Given the significance of this change - especially in the
face of the potential investment of billions of dollars in
local infrastructure in the coming years - we would urge
full consideration the measure's implications for public
entities and our mutual constituents before moving forward.
It is our belief that existing statute offers appropriate
flexibility, room for negotiation, and sharing of costs and
risks between public entities and private contractors. The
sponsors contend that insurance available in the market
cannot offer the coverage that is contemplated in a hold
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harmless provision; our contention is that no coverage can
protect against every risk and that the responsibility for
the design professional's conduct and performance resides
squarely and appropriately with that professional. If the
argument is that the lack of coverage effectively means
that the taxpayer would end up holding the bag should
litigation ensue, we would point out that the taxpayers
will end up absorbing the costs under the scheme put forth
in AB 573, because that risk will be transferred to the
public agency in any case.
Our counties do not, frankly, agree that a change in this
area is warranted. Existing opportunity for negotiation
between the public and private entities, in our view, has
functioned adequately without a demonstrated crisis and
without affecting the quality or availability of design
professionals to provide their services. We believe that
the changes in AB 573 simply seek to shift responsibility,
cost and risk away from private entities, placing them
instead on the public entity and the general public it
serves. Our member counties fundamentally disagree that
this approach is necessary or appropriate.
The League of California Cities (LCC) adds:
This measure would restrict the types of indemnification
clauses that may be included in a public agency contract
with a design or engineering professional or firm.
Instead, it would specify an indemnification provision that
does not allow a public agency to adequately manage its
potential liability, thus limiting the options available to
public agencies to protect their taxpayers.
AB 573 purports, according to the sponsors, to grant to
California public agencies the authority to include
indemnity provisions in their contracts with architecture
and engineering ("A/E") consultants. However, such
authority already exists. AB 573 would actually limit the
flexibility of public agencies to negotiate professional
service agreements which reflect the particular risks of
each project and the relative capacities and capabilities
of different architects and engineers. Moreover, AB 573
addresses an issue that was already fairly and reasonably
addressed through AB 994 (Sweeney) in 1997. In fact, AB
573 goes far beyond AB 994 (Sweeney), to the detriment of
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the public.
California public agencies face substantial challenges in
their efforts to maintain and expand infrastructure for
education, transportation, water, environmental protection,
and health care. In order to develop infrastructure
projects, most public agencies engage A/E consulting firms
to provide professional services, such as planning and
drafting plans and specifications. The written contract
between the public agency and the A/E consulting firm
establishes the scope of services, the fee paid to the A/E
consultant and allocates the risks associated with the
particular project through some type of indemnity or "hold
harmless" provision.
The nature, scope and magnitude of risks are unique to each
project, whether it is a school, airport, street, bridge,
city building, seaport, or hospital. The parties who are
in the optimal position to fairly allocate the unique risks
of a particular infrastructure project are the public
agency and the A/E consultants with which it negotiates.
These parties know the site conditions, the design program,
the schedule and the capabilities and capacities of each
party to effectively manage the project.
AB 573 would be detrimental to public agencies because in
the typical lawsuit, it will result in refusal by the A/E
consulting firm or its insurance carrier to provide a legal
defense for the public agency prior to a full trial.
Similarly, AB 573 could limit the public agency's benefits
under any additional insured provisions in the A/E
consulting firm's insurance policy.
AB 573 would benefit A/E consulting firms and their
insurance carriers at the expense of the public in two
ways. First, the net effect would be to shift to taxpayers
legal defense costs that should be borne to varying degrees
by A/E consulting firms and their insurance carriers.
Second, it would encourage protracted litigation because,
as a practical matter, a formal finding of negligence or
intentional misconduct will be a prerequisite for the
public agency to receive indemnity from the A/E consulting
firm or its insurance carrier.
AB 573 would give A/E consulting firms an excuse to deny
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indemnity to public agency clients where there is any
plausible contention that the public agency contributed to
the loss, even if the A/E consulting firm was primarily
responsible. Under most circumstances the public agency's
degree of responsibility for a loss is minor and passive
compared to that of the A/E consulting firm that was paid
to perform a professional service.
The negotiation of terms between public agencies and A/E
consulting firms should be left to the free-play of market
forces. AB 573 would preclude negotiation of broader
protection, even where the public agency is willing to pay
extra for such protection. The competitive market for A/E
services is robust. A/E consulting firms are experiencing
robust growth and do not need any additional protection
from the Legislature. (See, Market Returns to Prosperity,
Engineering News Record, p.54 (4/18/2005).) Public
agencies have ample choices for A/E services to deliver
their projects. Under these circumstances, it is
unnecessary for the Legislature to step in and forbid
certain types of indemnity agreements. As with any
contract terms, whether the amount of fee or indemnity, A/E
consulting firms may always choose to withhold their
agreement and do business elsewhere.
In 1997, California enacted AB 994 (Sweeney), which
mandated that public agencies include in their Requests for
Proposals for A/E services a notice regarding the indemnity
provisions that would be included in any professional
services agreement. At that time, the A/E consulting firms
argued that AB 994 "would give architects up front notice
as to
any indemnity conditions of the contract so that they can
properly recognize those costs in their bids or negotiate
with the local agency for a more mutually acceptable
indemnity provision." (See, AB 994 Assembly Bill
Analysis.) AB 994 was a fair and reasonable requirement
that was not opposed by California local governments.
Today, AB 994 works as intended so that A/E consulting
firms can choose not to submit a proposal to a public
agency if it finds the indemnity provision unacceptable.
Thus, the League does not believe that further legislation
is necessary.
In substance, AB 573 is identical to several prior bills
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that were rejected or vetoed. (See, for example, SB 1915
(Figuera 2004); AB 1839 (Campbell 2002); AB 1070 (Campbell
1997 - 1998). The sponsors may intend that AB 573 have an
appearance of fairness, but if enacted it will actually
lead to numerous unintended consequences that are
detrimental to California public agencies, including
cities. While the sponsors provided several examples of
cities that include "fair" indemnification provisions in
their contacts, our sampling of some of the cities on the
list indicates that those cities were either no longer
using those provisions, had used them in a special
situation only, or were reviewing their continued use of
those provisions.
Prior Related Legislation : AB 758 (Calderon, Chapter 394,
Statutes of 2005) provides, among other things, that for all
residential construction contracts entered into after January 1,
2006, all provisions, clauses, covenants, or agreements
contained in any such construction contract that purport to
indemnify, including cost to defend, the builder by a
subcontractor against liability for claims of construction
defects are unenforceable to the extent that the claims arise
out of, pertain to, or relate to the negligence of the builder
or the builder's other agents, other servants, or independent
contractors who are directly responsible to the builder, or for
defects in design furnished by those persons, or to the extent
the claims do not arise out of, pertain to, or relate to the
scope of work in the written agreement between the parties.
AB 1070 (Campbell, 1998) would have provided that a public
agency, including the state, could require, in an agreement or
contract with a design professional, as defined, that the design
professional defend, indemnify, and hold harmless the public
agency from liabilities, damages, losses, and costs to the
extent caused by the willful misconduct, recklessness, or
negligence of the design professional. (This bill was vetoed.)
AB 994 (Sweeney, Chapter 722, Statutes of 1997) requires, among
other things, any local agency, in the procurement of
architectural design services requiring an expenditure in excess
of $10,000, to include in any request for proposals for those
services or invitation to bid from a pre-qualified list for a
specific project, a disclosure of any contract provision that
would require the contracting architect to indemnify and hold
harmless the local agency against any and all liability, whether
or not caused by the activity of the contracting architect.
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REGISTERED SUPPORT / OPPOSITION :
Support
Consulting Engineers and Land Surveyors of California (sponsor)
Abratique and Associates
Adams Streeter Civer Engineers
Advanced Infrastructure Management, Inc.
AEI-CASC Engineering, Inc.
American Institute of Architects, California Council
Arroyo Geotechnical
Associated Transportation Engineers
Banner and Carpenter, Inc.
BIA Tulare/Kings
Biggs Cardosa Associates, Inc.
Blackburn Consulting, Inc.
Blair, Church & Flynn Consulting Engineers
Boyle Engineering Corporation
Brenton Bridge Engineering, Inc.
C&S Engineers, Inc.
C.H.J., Inc
California Council of the American Society of Landscape
Architects.
California Geotechnical Engineer's Association
California Land Surveyors Association
California Landscape Contractors Association
California Professional Association of Specialty Contractors
Carlenzoli & Associates
Carter-Burgess, Inc.
Cavignac & Associates
CH2M Hill
Chaudary & Associates, Inc.
Coast Surveying, Inc.
Construction Management Association of America
Creegan & D'Angelo
Cunningham Engineering Corporation
Dahl Taylor & Associates, Inc.
Daley Enterprises, Inc.
Diaz Yourman & Associates
DKS Associates
DMJM Harris, Inc.
Donald E. Banta & Assoc., Inc.
Dougherty & Dougherty Architects, LLP
Earth Tech, Inc.
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Engineering and Utility Contractors Association.
Fehr & Peers Associates
Flowers & Associates, Inc.
Fugro West, Inc.
Geodesign, Inc.
Geologic Associates
Geomatics Transportation Services, Inc.
Hall & Foreman, Inc.
Harris & Associates
HDR Engineering
Higgins Associates
Higginson & Cartozian Architects, Inc.
HMH Engineers
HNTB Corporation
J.P. Kapp Civil Engineers
James Winton & Assoc.
Kennedy/Jenks Consultants
Kleinfelder, Inc.
Lane Engineers, Inc.
Leighton Consulting
Liftech Consultants, Inc.
Mark Thomas & Company, Inc.
Moffatt & Nichol
Murray & Downs AIA - Architects, Inc.
Oakholm Consulting LLC
Orange County Business Council
Orange County Supervisor Bill Campbell
Orange County Water District
P.A. Arca Engineering, Inc.
Pacific Geotechnical Engineering
Parsons Brinckerhoff
PBS & J
Penfield & Smith
Peterson Architects
Pollution Prevention International
Provost & Pitchard Engineering Group, Inc. Psomas
PWNA
Quad Knopf
Quincy Engineering, Inc.
R.L. Dewitt & Associates, Inc.
RBF Consulting
RCE Consultants, Inc.
Rick Engineering Co.
RRM Design Group
Ruth and Going, Inc.
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SA Associates
Salaber Associates, Inc.
Schucard Associates, Inc.
Simon Wong Engineering
Stedman & Dyson Structural Engineers
STV Incorporated
T.Y. Lin International
The Covello Group
Toal Engineering, Inc.
Tri City Engineering
Tuolumne County Board of Supervisors
Urban Crossroads, Inc.
Vali Cooper & Associates, Inc.
Wagner Engineering & Survey, Inc.
Washington Group Int'l
Whitson Engineers
William A. Steen & Associates
Winzler & Kelly Consulting Engineers
Woodard Homes Inc.
Wright Engineering Associates
Zeiser Kling Consultants
Zumwalt Hansen & Associates
Opposition
American International Group Apple Valley
Association of California Water Agencies
California Association of Joint Powers Authorities
California Association of Port Authorities
California Association of Sanitation Agencies
California State Association of Counties
Calleguas Municipal Water District
City of Concord, Mayor
City of Glendale Public Works Dept.
City of Lakewood
City of LaVerne
City of Palo Alto
East Bay Municipal Utility District
League of California Cities
Regional Council of Rural Counties
San Diego County
San Diego County Water Authority
San Francisco City Attorney
Solano County Board of Supervisors
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Analysis Prepared by : Kevin Baker / JUD. / (916) 319-2334