Legal Update: Reconstructing Defense Obligations

May 1, 2009

By: Daniel G. Pezold

According to the August 18, 2008 Assembly Analysis, California Assembly Bill 2738, signed into law September 2008:

1)  Provides that if a builder or contractor tenders a claim, or a portion thereof, to a subcontractor, the subcontractor shall be entitled to either defend the claim with counsel of its choice or 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 fees and costs. Provides that a builder, general contractor, or subcontractor has the right to seek equitable indemnity for construction defect claims pursuant to these provisions.

2)  Imposes specified requirements upon any wrap-up insurance policy or other consolidated insurance program that insures a private residential work of improvement that first commences construction after January 1, 2009. Requires an owner, builder, or general contractor obtaining the policy or program, and other, specified information regarding the policy.

3)  Imposes similar disclosure requirements if an owner, builder, or general contractor obtains a wrap-up insurance policy or other consolidated insurance program for a public work or any other porject other than residential construction that is put out for bid after January 1, 2009.

The legislative analysis of this bill in April, 8, 2008, may prove useful in seeking discovery. The April 2008 analysis states in part:

“Supporters of this bill, however, complain that builders’ defense lawyers are circumventing the clear intent of AB 758, as well as the general legal prinicple of comparative responsibility, by requiring trade contractors to sign contractual obligations to pay for defense costs that have no relation to the contractor’s work. Supporters contend that these contractual provisions may obligate a single subcontractor to pay the entire amount of the builder’s legal bills, including the cost of the builder’s suit against the subcontractor itself, without any limit or opportunity to control these legal costs or direct the defense. In fact, because there is no oversight of or constraint on the builder, the legal fees could be over-paid by multiple subcontractors. While these costs are theoretically subject to re-allocation upon final resolution of the claims, that day may never arrive in virtually every case that settles without a final determination of responsibility.”