Indemnification Agreements and SB 496 – What to do if your clients still insist on an unfair indemnity agreement

Jeff Cavignac, CPCU, RPLU, ARM
Senate Bill 496 was signed into law in April of 2017 and became law on January 1, 2018.  The Bill amends Section 2782.8 of the Civil Code as it pertains to a design professional’s obligation to defend an upstream party.  Most importantly, this new law limits the cost to defend an upstream party to the design professional’s proportionate percentage of fault.  To quote from the Bill, a design professional will only be on the hook for the legal fees of another if “the claims against the indemnitee arise out of, pertain to, or relate to the negligence, recklessness, or willful misconduct of the design professional. In no event shall the cost to defend charged to the design professional exceed the design professional’s proportionate percentage of fault.”

This is great news for design professionals, and while the Bill clearly states that, “This section shall not be waived or modified by contractual agreement, act, or omission of the parties”, it is still unclear how the law might be interpreted by the courts.  In addition, many upstream parties are either ignorant of the law or have consciously chosen not to amend their indemnity provisions.

The verbiage below can be sent to those upstream parties along with a copy of the Bill.  The hope is that they will amend their agreement to comply with the new law, but regardless, we feel you are in a better position having called the law to their attention than simply signing the contract.  Here is the verbiage:

I have reviewed the indemnification agreement that was part of the contract you have asked us to sign.  As written, the agreement appears to be in conflict with the recently-passed Senate Bill 496 which was effective on January 1, 2018. 

In a nutshell, this Bill amends the Civil Code (2782.8) as it pertains to a design professional’s obligation to defend an upstream party.  Most importantly, this new law limits the cost to defend an upstream party to the design professional’s proportionate percentage of fault. 

We would like to rewrite the indemnity agreement to comply with the law and are suggesting the following:

Notwithstanding any clause or provision in this Agreement or any other applicable Agreement to the contrary, Consultant agrees to indemnify and hold harmless (but not defend) the Client, its officers, directors and employees from and against damages and costs that Client is legally obligated to pay, to the extent caused by the negligent act, error or omission of the Consultant or anyone for whom the Consultant is legally responsible, subject to any limitations of liability contained in this Agreement. Consultant shall have liability for reasonable and necessary defense costs incurred by persons indemnified to the extent caused by Consultant’s negligence herein and recoverable under applicable law on account of negligence.

I look forward to discussing this with you.

If you have additional questions or if we can be of direct assistance, please let us know.

Click here to view the Bill

Note:  This document is provided for informational purposes only and does not purport to be a legal opinion. For legal assistance, please consult your attorney.