Under Construction - September 2013: Arizona Contractors and Design Professionals Receive Additional Protections Under Arizona’s Public Anti-Indemnity Statutes

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For good reason, much of the focus for Arizona contractors during the recently-concluded legislative session was on transaction privilege tax (TPT) reform.  That bill, HB 2111, was ultimately signed by the Governor, but only after an uneasy compromise was reached between contractors and various municipalities that stood to lose revenue if all prime contracting were taxed at the point of sale for materials.

Yet there was at least one bill affecting contractors, not to mention design professionals, which moved steadily through the Arizona legislature with far less controversy. In general, SB 1231 amended Arizona’s public anti-indemnity statutes by clarifying and expanding the situations under which the state, and local governments, cannot require contractors, subcontractors and design professionals to indemnify a government body for  the negligence of others. The changes to A.R.S. § 34-226 (public buildings and improvements) and § 41-2586 (state procurement code) were few in number but will have significant consequences for the construction industry.

Prior law provided that a provision in a construction contract or architect-engineer contract that required a contractor/design professional to defend or indemnify a government body from loss or damage resulting from the government’s own negligence was void and unenforceable. That law was strengthened in 1996, but since that time contractors, and especially design professionals, have felt that the anti-indemnity policy had been gradually undermined by some local governments, therefore making it more difficult to conduct business in Arizona. SB 1231 made several changes that its proponents contended would bring the public policy back into balance.

As an initial matter, various definitional changes in the law were clearly meant to benefit design professionals in Arizona. For example, the “architect-engineer professional service” contract covered under prior law was replaced with the broader concept of a “design professional services” contract, which now brings land surveying, geologist services and landscape architectural services within the protection of the statute.

The law also expands the range of activities that will fall within the public anti-indemnity statutes.   For contractors, the covered construction activities will now include “relocation” in addition to construction, alteration, repair, maintenance, moving, demolition and excavation activities already mentioned in the statute. Those activities are now covered if performed on a “structure, street, roadway, appurtenance or facility” in addition to a “development or improvement to land.”  For design professionals, who again receive the lion’s share of benefits under SB 1231, covered services now include planning, design, construction administration, study, evaluation, consulting, inspection, surveying, mapping, material sampling, testing or any other “professional, scientific or technical services.” These design services may be performed in conjunction with any “study, planning, survey, or environmental remediation” in addition to the activities applicable to contractors.  In other words, the expanded definitions mean that more contractors and design professionals, in a greater variety of situations, will be shielded from defense and indemnity obligations in public contracting. 

On the surface, SB 1231 reflects the principle that contractors and design professionals should be held accountable for their own negligence but should not be responsible to defend or indemnify a government body for losses beyond their control. 

Thus, on one hand, SB 1231 clarifies that a government body may require indemnification for negligence, recklessness or intentional wrongful conduct committed by a contractor, subcontractor or design professional or any persons “employed or used” by them.  Subcontracts or design consultant agreements may be similarly structured.  Furthermore, nothing prohibits a requirement that one be named as an additional insured under a general liability insurance policy or a designated insured under an automobile liability policy. Outside these specified exceptions, however, a government body may not otherwise require a contractor, subcontractor or design professional to indemnify, defend or insure against losses caused by others. Thus, SB 1231 not only incorporates the existing prohibition against defending or indemnifying the government for its own negligence, the new law expands this concept to include a prohibition against defending or indemnifying any others on the project who are not in contractual privity with the contractor, subcontractor or design professional.    

Importantly, SB 1231 also addresses the perception that some local governments have undermined this anti-indemnification policy in recent years. The law declares that “the regulation and use of indemnity agreements ... are of statewide concern” and therefore prohibits any further regulation by counties, cities, towns or other political subdivisions. This preemption provision will no doubt affect a handful of Arizona cities and counties that incorporate broad indemnity provisions in their standard contracts.  For example, a form City of Chandler Services Agreement recently provided that “contractor’s duty to defend, hold harmless and indemnify the City of Chandler ... shall arise in connection with any claim ... to have resulted from any acts, errors, mistakes, omissions work or services ... including anyone ... for whose acts contractor may be liable, regardless of whether it was caused in part by a party indemnified hereunder, including the City of Chandler.” That broad scope of indemnity will no longer be enforceable under the new law which was effective September 13, 2013.

The rationale for SB 1231 was simple, according to its sponsors. Contractors and design professionals were often faced with a difficult choice when presented with broad indemnity contracts: either refuse to sign the agreement and lose the business, or reluctantly sign onto an agreement knowing that their insurance will not even cover negligent acts committed by others not in privity with them. Subcontractors and design consultants were no doubt affected as well because contractors and design professionals often flowed-down these indemnity obligations via subcontract, or design consultant agreement.  Such broad indemnity provisions, in the view of the bill’s sponsors, deterred talented contractors and design professionals from doing business in Arizona. 

It remains to be seen whether SB 1231 will foster the change in public contracting its sponsors envisioned. In the meantime, contractors, subcontractors and design professionals may want to be on the lookout if asked to sign a form government contract that has yet to be updated to meet the new law. 

Topics:  Anti-Indemnification Statutes, Contractors, Financial Transaction Tax, New Legislation

Published In: General Business Updates, Construction Updates, Government Contracting Updates, Insurance Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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