Limiting the Liability of Design Professionals in Public Contracts
January 8, 2007
Holland & Knight associate Thomas Quilling authored “Limiting the Liability of Design Professionals in Public Contracts” which was featured in the January 2007 issue of Los Angeles Lawyer. This article discusses California Civil Code Section 2782.8 and its effect on design professionals'' indemnity pursuant to contracts with public agencies. Please click the following link to view this article.
http://www.lacba.org/Files/LAL/Vol29No11/2331.pdf
Reprinted with permission from Los Angeles Lawyer.
To allocate risk, indemnity agreements in public construction contracts have long been negotiated between design professionals and public agencies. The term “negotiated” is used loosely; a public agency typically holds enough power to make indemnity coverage a condition of contract. Assembly Bill 573, signed into law on September 25, 2006, prohibits public agencies from requiring design professionals to contract to indemnity clauses that hold them responsible for defects that are not the result of the designers’ negligence or willful misconduct. As a result of passage of the bill, design professionals can hope to do business with city hall without having to provide a remedy for problems that the professionals did not create.
The bill, codified at Civil Code Section 2782.8, mandates public agencies to require only what is known as Type III indemnity from design professionals for any contract or amendment to contract entered into after January 1, 2007. All contracts and amendments with a public agency for design professional services that purport to indemnify, including the cost to defend, the public agency by a design professional against liability for claims against the public agency are unenforceable except for claims that arise solely out of negligence, recklessness, or willful misconduct of the design professional. A number of public agencies opposed this statutory change, but this opposition may be described as an attempt to maintain an illusion. Most insurance policies for design professionals did not and do not provide coverage for liability beyond the design professional’s own negligence or willful misconduct. Thus, many design professionals could not meet what is called a Type I indemnity requirement through their insurance.
The three types of indemnity agreements are categorized in MacDonald & Kruse, Inc. v. San Jose Steel Co.1 Type I indemnity shifts the burden of mistake away from the public agency. For example, a Type I indemnity clause may read: “The design professional will expressly and unequivocally indemnify the public agency, regardless of whether design professional is solely negligent or concurrently negligent with the public agency.” In another form, a Type I clause may read: “The design professional shall indemnify and hold the public agency harmless as to any and all claims arising out of this Agreement, whether caused in whole or in part by the design professional, and regardless of whether or not caused by the passive or active negligence of the public agency, except for the sole negligence or willful misconduct of the public agency.”
Type II indemnity, in turn, is less strict. A typical Type II indemnity clause reads: “The design professional shall indemnify and hold the public agency harmless as to any and all claims arising out of this Agreement.” An indemnity clause that does not expressly and unequivocally address the issue as to the indemnitee’s negligence is typically considered a Type II indemnity clause, also referred to as a general indemnity clause.
The general authority allowing for indemnity clauses in construction contracts in California can be found in California Civil Code Section 2782(a). The language in this section provided public agencies with grounds to attempt to push onto the design professional as favorable an indemnity clause as possible. Essentially, Section 2782 stated that a public agency could seek indemnity from a design professional so long as the public agency did not try to obtain indemnity for damages arising from the “sole negligence or willful misconduct” of the public agency. Indemnity clauses that purport to indemnify for liability arising from the “sole negligence or willful misconduct” of a public agency or its agents, servants, or independent design professionals directly responsible to a public agency were void and unenforceable. Design professionals preferred to enter into contracts with Type III indemnity agreements, which limit the requirement for design professionals to indemnify only to claims arising out of or from the negligence or intentional act of the design professional. However, a design professional was unlikely to have the clout to negotiate a Type III indemnity agreement with a public agency.
Now, with Civil Code Section 2782.8, there will be no need for the design professionals or their attorneys to negotiate to get what they want. Civil Code Section 2782.8 reads as follows:
(a) For all contracts, and amendments thereto, entered into on or after January 1, 2007, with a public agency for design professional services, all provisions, clauses, covenants, and agreements contained in, collateral to, or affecting any such contract, and amendments thereto, that purport to indemnify, including the cost to defend, the public agency by a design professional 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. This section shall not be waived or modified by contractual agreement, act, or omission of the parties.
This statutory change appears to eliminate the obstacle of Type I and Type II indemnity for design professionals desiring to enter into contracts with public agencies. As a result, design professionals may shed their reluctance to bid on public works projects.
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1 MacDonald & Kruse, Inc. v. San Jose Steel Co., 29 Cal. App.3d 413 (1972).