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Publications
2009 Amendment to Civil Code Section 2782: Limitations on Type I Indemnity in Residential Construction Projects
Construction Practices Newsletter
Spring 2009
In 2006 and 2008, the California Legislature amended Civil Code section 2782 in attempt to limit the applicability of Type I indemnity for construction defects claims in residential construction projects. Type I indemnity provisions provide for indemnity of the indemnitee even if the indemnitee is 99 percent at fault. Those previous amendments inadvertently contained loopholes and left important issues unaddressed. In effort to correct the deficiencies, the Legislature has amended Section 2782 yet again. The amendments became effective on January 1, 2009.
What the 2009 Amendment Does
The new amendment is lengthy and complex. Stated simply, it provides as follows:
• For contracts entered into on or after January 1, 2009, it invalidates provisions that purport to require subcontractors to indemnify certain indemnitees (including builders, developers, general contractors, contractors, and specified others) against liability for construction defect claims on residential projects to the extent that such claims arise out of, pertain to, or relate to the negligence of such purported indemnitee(s). This means that each party will be held liable to the respective degree to which it is found to be at fault.
• If an indemnitee tenders a claim to a subcontractor, the subcontractor must, within specified deadlines, agree to defend the claim except to the extent it results from the scope of work, actions, or omissions of the indemnitee or any other party. Alternatively, the subcontractor must pay "on an ongoing basis" during the pendency of the claim "no more than a reasonable allocated share" of the indemnitee's defense fees and costs. Such payments are subject to later reallocation, and all parties' rights to seek equitable indemnity are preserved.
• If the subcontractor fails to "timely and adequately" defend the claim on behalf of the indemnitee or "timely and adequately" pay its defense costs, the indemnitee may pursue a claim against the subcontractor for any resulting compensatory damages, consequential damages, reasonable attorney's fees, and interest on defense and indemnity costs incurred.
• If, upon the subcontractor's request, the indemnitee does not reallocate defense fees to subcontractors within 30 days after final resolution of the claim, the subcontractor may pursue a claim against the indemnitee for any resulting compensatory and consequential damages, as well as interest on the fees.
• The amendment expressly provides that it does not affect the law governing an insurer's duty to defend as discussed in Presley Homes, Inc. v. American States Ins. Co., 90 Cal.App.4th 571 (2001). Presley Homes held that where an insurer has a duty to defend, the obligation generally applies to the entire action even if the suit involves both covered and uncovered claims or a single claim only partially covered under the policy. ( In addition to amending Section 2872, the Legislature also added new Sections 2782.9 and 2782.95, also effective January 1, 2009, which apply similar limitations on Type I indemnity for residential construction, as well as various disclosure requirements, in the context of wrap-up insurance on both private and public projects.)
The Amendment's Limitations
The 2009 amendment (like the 2006 and 2008 amendments) is limited in scope and does not invalidate Type I indemnity for every claim or on every project.
First, the amendment applies only to construction defects claims. This means that a Type I indemnity provision is not invalid with respect to a bodily injury or wrongful death claim. Consequently, a subcontractor could still find itself required to foot the bill for the owner, general contractor, or other indemnitee for defense and indemnity for an expensive bodily injury or wrongful death case, even if the indemnitee was 99 percent negligent.
Second, the amendment applies only in the context of residential construction contracts. This means that Type I indemnity is alive and well in California with respect to construction defect actions in projects other than "residential construction." Unfortunately, we are left without guidance as to what "residential construction" means; the statute does not define that term, nor has the California courts. At minimum, however, the definition appears to include all residential dwellings, including single-family homes, attached dwellings, and common interest developments.
Anticipated Issues Regarding the 2009 Amendment
The 2009 amendment may increase litigation between co-defendants in construction defect actions relating to residential projects. Although the amendment requires subcontractors to either defend its indemnitees or pay their defense costs, it also has subcontractors deciding the extent to which they must do so. Then, the amendment gives the indemnitees the right to bring claims for the subcontractors' failure to timely "or adequately" defend or pay, with the added incentive of recoverable attorney's fees. The potential result will be increased litigation costs and disharmony between co-defendants, which may hinder their ability to present a "unified front" in defect actions.
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