On April 28, 2017, California Governor Jerry Brown signed into law a statute (SB 496) that will impact claims against design professionals, including architects and engineers, and their obligations to provide a defense to their clients. Under Senate Bill 496, in any type of contract entered into on or after January 1, 2018, architects and engineers are liable to pay only a proportionate percentage of attorney’s fees and costs if they are found at fault.
Background
As a result of a 2010 California Court of Appeal ruling, a design professional who contracts to defend and indemnify its client for negligence is responsible for that defense, regardless of whether he or she is found liable for the underlying claims involving private contracts. This already applied to public contracts with non-state/non-public agencies. Under that ruling, a design professional could be responsible for 100% of its client's attorney’s fees. While existing law provided that contracts with a public agency for design professional services that required indemnity to include the cost to defend 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 had not been applied in the private contract arena.
What Does the New Law Provide?
Section 2782.8(a) provides that contractual obligations to indemnify, including the duty and the cost to defend, 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." It is clearly stated again that the proportionate share of fault is what applies: "In no event shall the cost to defend charged to the design professional exceed the design professional’s proportionate percentage of fault." (Civ. Code §2782.8(a).) This limitation is not waivable by contract or negotiation of the parties. Moreover, any and all contracts, agreements, or solicitation documents for design professional services are deemed to incorporate by reference the terms of §2782.8.
The new law provides an exception when one or more defendants is unable to pay its share of defense costs due to bankruptcy or dissolution of the business. Under those circumstances, the design professional is to meet and confer with other parties regarding unpaid defense costs. Design professionals for this provision include licensed architects, landscape architects, registered professional engineers, and licensed professional land surveyors.
However, §2782.8 does not apply to contracts for design professional services where (1) a project-specific general liability insurance policy insures all project participants, including all design professionals, on a primary basis, and (2) the contract is a written, design-build joint venture agreement.
Impact of SB 496
Senate Bill 496, codified at California Civil Code Section 2782.8, essentially creates a requirement that there be a determination of the proportional liability of the design professionals first, before any payment or reimbursement of attorney’s fees and costs under an indemnity agreement is triggered.
One key issue from SB 496 is the insurability of the defense obligations of a design professional. Generally, defense costs are not insurable, as professional liability coverage provides only for coverage for the professional negligence of the design professional and cannot therefore extend to covering fees and costs to defend another party. Furthermore, with SB 496, there is less of a debate on what is covered under a claim and may improve parties' ability to reach resolution of claims.