One of the key risk management tools for contractors is the use of indemnity provisions in contracts. The laws surrounding indemnity, however, are constantly evolving, most recently with the California Legislature’s enactment of Civil Code Section 2782.05.
Section 2782.05 prohibits construction contracts that require a subcontractor to indemnify a contractor for the “active negligence” of the contractor or the contractor’s agents or independent contractors. Under prior law, indemnity agreements that purported to indemnify a contractor for that contractor’s own sole negligence or willful misconduct were already void in California. In addition, since 2009, residential construction contracts could only require a subcontractor to indemnify the contractor to the extent of the subcontractor’s negligence—commonly known as Type III indemnity. Section 2782.05 effectively expands these limitations.
As a result, for all construction contracts entered into after January 1, 2013, a contractor can no longer seek indemnity from a subcontractor for any active negligence or willful misconduct of the contractor. Active negligence is not defined in the statute, and while it is often determined on a case-by-case basis, active negligence has generally been defined in case law as “an affirmative act of negligence” where a contractor “has failed to perform a precise duty for which [it] had agreed to perform.”
In addition, the statute sets forth procedures a contractor must follow to perfect a defense demand to a subcontractor. Under Section 2782.05(e), a contractor’s tender must now include an itemization of the claims caused by the subcontractor’s scope of work as well as an explanation of how defense fees and costs will be allocated. Upon receipt of this tender, the subcontractor has two options to defend the contractor: defend the claims with counsel of its choosing (and maintain control of the defense) or pay its allocated share of the contractor’s defense costs. Section 2872.05, however, does not alter any defense obligations a subcontractor’s insurer may owe to a contractor as an additional insured.
Finally, there are expanded limitations on indemnity provisions in public works contracts. Public entities cannot require contractors to provide indemnity for the public entities’ active negligence and contractors, in turn, cannot seek such indemnity from their subcontractors in public works projects.
Given the importance of having a strong, enforceable indemnity provision, it is critical to ensure continued compliance with evolving indemnity laws. If you have any questions regarding indemnity provisions in any of your existing or potential contracts, please contact Jordan Nager in LGC’s San Diego office.