In general, under the recent amendment to Civil Code § 2782, the subcontractor is now only obligated to provide indemnification for construction defect claims to the extent that such claims arise or result from the subcontractor’s scope of work. Subcontractors cannot be required to indemnify a builder or general contractor for liability or defense costs for construction defect claims which arise out of the builder’s, general contractor’s or other subcontractor’s negligence.
Regardless of what you think about Governor Arnold Schwarzenegger and the legacy he has left the State of California, during his tenure the California legislature made various revisions to California Civil Code § 2782 within the last four years which have significantly changed the impact of the section on indemnity provisions in residential construction contracts. Rather than go through the various changes made from 2005 to 2007, we will restrict our review today to those more recent revisions made back in 2008 when Governor Schwarzenegger signed into law California State Assembly Bill 2738. These revisions addressed indemnity and defense obligations in non-wrap situations. The revisions and additions to the Civil Code became effective on January 1, 2009 and only applied to those contracts and contract amendments entered into after January 1, 2009. This date is important because it rescinds prior revisions to § 2782 which would have restricted the use of Type I and Type II indemnity provisions in residential construction contracts beginning on January 1, 2006.
That’s the good news. As we all know, Governor Schwarzenegger and the State legislature were well known for providing us with a mixed bag of goods. The bad news is that the subcontractor now has defense obligations related to construction defect claims to the builder and/or general contractor pursuant to subsection (d) and (e) of Civil Code § 2782. Subsection 2782(d) requires the builder or general contractor in a residential construction setting to tender the claim to the subcontractor before any defense obligation arises. The builder or general contractor must also provide information that directly implicates the subcontractor’s scope of work. Details of the claim are set forth in Civil Code § 910 (a).
Upon receipt of the tender, the subcontractor has the option to either provide a complete defense of the builder at its cost or pay its reasonable portion of defense so long as an itemized invoice of defense fees and costs has been sent to the subcontractor (Civil Code § 2782(d)(1) and (2)). However, if the subcontractor elects to defend the builder at its own cost, then the subcontractor will be liable for any vicarious liability imposed upon the builder. (Civil Code § 2782(d)(1)). Should the subcontractor elect to pay an allocated portion, that allocation must be reasonable and is subject to reallocation upon final resolution of the claim (Civil Code § 2782(d)(2)). Subsection (f) of 2782 also provides builders, general contractors, subcontractors the right to seek equitable indemnity for any claim governed by this section.
Please note that if the subcontractor breaches its duty by failing to timely accept the tender, to adequately conduct the defense, or by failing to pay allocated attorney fees and costs, the subcontractor will be liable to the builder or general contractor for damages, potentially including attorney fees and costs.
In short, with the myriad of overlapping laws regarding Civil Code § 2782 and its application to residential construction contracts entered into after January 1, 2009, as a subcontractor you will need to be mindful of the duties and obligations required under this section. Additionally, builders and general contractors also have obligations and duties that they have to comply with in order to fully take advantage of this amended provision. Counsel who is quick to respond on your behalf and provide you guidance in regard to these rights and obligations may be needed until further clarification is received from the courts regarding the indemnification duties under this amended provision.