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New law favors subs on indemnity agreements

New changes to California construction indemnity agreements now favor subcontractors when it comes to legal fees.

When Senate Bill 474 went into effect Jan. 1, it made it so subcontractors would not have to pay the legal fees of a project's hiring contractor, developer and owner -- if the subcontractor was found not to be at fault on a construction defect or injury when it comes to active negligence.

Before 2013, all subcontractors on a particular job had to represent and/or pay for all attorney and legal fees of the general contractor, construction manager, developer and owner in a construction lawsuit, even if the subcontractor was found not to be liable for the accused defect or injury.

“This is a huge thing for subcontractors,” said David Blackston, vice president of American Subcontractors Association San Diego chapter and project manager with D.A. Whitacre Construction. “Now I as a subcontractor only have to indemnify a general contractor for my work.”

In construction, indemnity is insurance or protection that is written into the project’s contract between owners, developers and the hired contractor. It states subcontractors will assume the risk on a job and pay legal fees in a construction lawsuit.

Lewis S. Ensley, vice president and West region legal officer for Balfour Beatty Construction, said this new law creates a lot of uncertainty for the construction industry.

“The notion of what constitutes ‘active’ versus ‘passive’ negligence is not well-defined and could lead to additional litigation to further define this important legal distinction,” Ensley said.

Another potential issue is that the law now requires general contractors to allocate defense costs among the potential liable parties pre-litigation and prior to gathering all the facts. General contractors can set an arbitrary percentage and divide the legal fees to subcontractors as they see fit, with no real guidelines.

“So now [subcontractors] might get a letter saying you have to pay 30 percent or 40 percent of the legal fees,” said Christina Denning, partner at Higgs Fletcher & Mack LLP, who gave a seminar on indemnity laws recently. “This is only going to get more complicated, but it’s [finally] leaning toward the right direction for subs.”

Ensley anticipates that unless additional legislation is enacted soon to clarify these uncertainties created, the construction industry will have to wait for the courts to provide some clarity. This could take a number of years, Ensley said.

Legal fees start once a tender letter is written and sent by an attorney to the party accused of faulty construction work, usually the subcontractor.

Subcontractors will still be responsible for all legal fees pertaining to a lawsuit against faulty work or injury on passive negligence, according to Denning. Passive negligence comes into play when a subcontractor's work was not properly checked by the hiring general contractor or construction manager once completed.

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