California Reforms Subcontractor Defense Obligations in Residential Construction

January 26, 2009

Assembly Bill 2738, which was signed into law by Governor Schwarzenegger on September 27, 2008 and took effect on January 1, 2009, provides new protection for subcontractors with respect to their defense obligations for construction defects in residential construction. AB 2738 results in the amendment of Civil Code section 2782 and adds Civil Code sections 2782.9, 2782.95 and 2782.96. The new law applies only to residential construction contracts that are entered into after January 1, 2009 and purport to insure and indemnify the builder or general contractor on a residential construction project. According to Civil Code section 2782, the legislature has determined that indemnification by subcontractors of builders, general contractors and other subcontractors for their own negligence or willful misconduct is against public policy and any contract provisions calling for such indemnification are unenforceable. In other words, subcontractors are now responsible solely for claims that arise out of or relate to their own work. Further, the provisions of the code cannot be waived by the parties to the construction contract.

The code also establishes the following procedure for the general contractor or builder to tender defense or indemnification claims to a subcontractor. There must be a written tender of the claim to the subcontractor which includes all of the information provided to the general contractor or builder by the claimants, including but not limited to claims relating to the subcontractor’s scope of work. Once tender is made, the subcontractor may defend the claim with counsel of its choice and maintain control of the defense for any claim or portion of the claim to which the defense obligation applies (i.e. those which result from the scope of work, actions or omissions of anyone the subcontractor). Alternatively, the subcontractor may choose to pay, within 30 days of receipt of an invoice from the builder or general contractor, no more than a reasonable allocated share of the builder’s or general contractor’s defense costs related to the subcontractor’s scope of work. The builder or general contractor is required to allocate a share to itself and to any other subcontractors to the extent the claim relates to their respective scope of work, and may not collect from one subcontractor costs that are allocated to another subcontractor.

In summary, the legislature, in passing these new laws with overwhelming bipartisan support, has determined that individual subcontractors will no longer be obligated to indemnify and defend general contractors and builders for mistakes the individual subcontractors did not make.