It's A Wrap......Or Is It?
By Jan A. Gruen
The roof leaks. The windows leak. The stucco is cracking. The house is not performing well. As between the builder and the subcontractor, who should bear responsibility for the cost of defending these claims and repairing the defects and damage? Historically, contracts for work on residential projects have required the subcontractor to assume responsibility if his/her workmanship is involved. The subcontractor was to defend the builder and hold him/her harmless from all claims arising out of, related to or deriving from the subcontractor's work, including labor and materials. Critics of these "indemnity provisions" claimed they unfairly imposed liability on subcontractors, regardless of whether their work was only partially to blame.
Builder/subcontractor contracts also required subcontractors to obtain insurance coverage during the course of construction and after, with the builder to be named as an additional insured under the subcontractor's insurance policy. Thus, builders who hired others to perform work on a project were protected from defect claims by way of indemnity provisions and subcontractor insurance. Not actually having performed the work, this seemed only fair, since the builder was exposed to potential liability for the negligence of the subcontractors who actually performed the work.
Over the course of time, two seemingly unrelated issues arose that would forever alter the builder/subcontractor relationship. First, subcontractors began to resist the imposition of broad-based indemnity clauses, claiming such clauses were costly and unfair. The result?
Civil Code section 2782 was amended to limit the permissible scope of indemnity by making it against public policy to contractually impose liability on a subcontractor for (1) damage or expenses arising out of the sole negligence or willful misconduct of the builder (not new), and (2) claims that arise out of, pertain to or relate to the negligence of individuals other than the subcontractor and to the extent the claims do not pertain to the scope of work in the written agreement between the developer and the subcontractor.
In roughly this same time frame, insurance companies stopped offering coverage after the past completion of work at a project, and the cost of insurance skyrocketed, making it impossible for subcontractors to buy coverage. The goal of making adequate coverage available for all while presenting a united defense to construction defect claims seemed laudable and appropriate. The result?
The concept of builder-purchased insurance policies that "wrapped" builders and their subcontractors together into one single policy of insurance for residential construction projects was born.
Although the builder pays for the majority or all of the costs of wrap insurance, the number of developer-versus-subcontractor lawsuits has been reduced where wrap insurance applies, and one policy providing coverage for all has reduced finger-pointing and made for prompter resolution at significantly less legal expense. It appears that certain subcontractors object to paying any share of the wrap deductible and have, in certain instances, become unhappy with the scope of wrap insurance coverage. They claim that holes, or exclusions, in coverage are triggering individual subcontractor liability and that the scope of contractual indemnity obligations has done little to lessen their responsibility for defects and deficiencies unrelated to their work. The result?
A new proposed piece of legislation, AB 2738, introduced by Assemblyman Dave Jones, has made its debut and again highlights the divergent positions of builders and subcontractors on indemnity and insurance issues. AB 2738 seeks to further narrow the scope of indemnity owed by subcontractors to builders, further reduces defense obligations and contributions owed by subcontractors contractually and pursuant to wrap insurance, and shifts the risks of liability to the developer instead of the subcontractors who perform the work, while providing subcontractors with the exclusive ability to control the defense of the claim against them. The result?
One thing is for sure, a sequel will follow.
May 2008 Builder Architect Edition Issue