Construction law firm says home builders should move promptly to revise their subcontracts to meet the requirements of the new state law.

In an attempt to control skyrocketing subcontractor insurance costs over the past several years, a new law effective Jan. 1, 2006 (codified as §2782(c) & (d) of the Civil Code) renders unenforceable certain indemnity agreements between subcontractors and home builders. Simply stated, the new law helps to protect subcontractors from liability resulting from construction defects caused by the builder or another third party.

The following provides an overview of the new law and the scope of its coverage:

The Scope of the Amendments to Civil Code

• Effective Date: Only contracts and amendments entered into after Jan. 1, 2006 must comply with the new law. Those contracts and amendments executed prior to the effective date are exempt, even if the performance occurs after the effective date.
• Residential Construction: The new law only applies to residential construction, which includes all original construction intended to be sold as a dwelling unit. Indemnity agreements in commercial construction projects are unaffected by the changes.
• Liability for Claims of Construction Defects: The amended statute impacts subcontractor liability that arises from construction defects only. All claims for liability that do not involve construction defects, such as personal injury or delay claims, are outside the scope of the new law.
• The Impacted Parties: Subcontractors, residential builders, developers, and any general contractor affiliated with a residential builder or developer, who is constructing residential units for public purchase, will be subject to the limitations imposed by the new law.

Substantive Overview of the New Law

• Subcontractor Liability only to the Extent of Attributable Fault: Contractual assumption of liability will only be enforceable to the extent that defects are a direct result of subcontractor error. For example, if a subcontractor is only 10 percent at fault for a construction defect, contractual language cannot obligate that subcontractor to pay more than its 10 percent of the damages.
• The Limitations are Not Subject to Waiver: The statutory restrictions imposed by the new law cannot be waived or modified by the builder or subcontractor. Accordingly, freedom to contract does not prevail over the limitations imposed by the new law. Parties may, however, mutually agree to the timing or immediacy of the defense for construction defect claims and for reimbursement of defense costs, provided that certain limitations are not circumvented by such agreements.

And, insurance obligations are Not Affected: The new law does not alter the obligation of an insurance carrier to defend an insured subcontractor for the entire legal action, even if certain claims filed against the subcontractor are not likely to be covered by the insurance policy. This leaves intact the holding of a 2001 California Court of Appeals case on the subject (see Presley Homes, Inc. v. American States Insurance Co., 90 Cal. App. 4th 971 (2001)).

Conclusion

The long-term impact of this legislation will take time to be fully known. In any event, builders should move promptly to revise their subcontracts. to be consistent with this new law. Particular attention should be paid to master subcontracts that are subsequently amended by other agreements or works orders for each new project.