ASA Reports on Subcontractors’ Campaign to Limit Risk Transfer

Mon January 12, 2009 - National Edition
CEG



Policymakers’ understanding of sophisticated risk transfer issues is growing, and that’s good news for construction subcontractors, according to The ASA Report: The Policy Environment in the States, which the American Subcontractors Association released on Jan. 1, 2009.

ASA’s annual evaluation of public policies in the 50 states and the District of Columbia revealed that legislators and courts took new steps in 2008 to limit how contracts or insurance for construction/design services may allocate liabilities. This is a key public policy issue for subcontractors, which are often forced to pay for the costs of job-site injuries or damage caused by others, even though the subcontractors are faultless.

“The 2008 ASA Report shows that progress on a complex issue like indemnity is possible, especially with the enduring dedication that ASA members have shown,” said 2008-09 ASA President Bill Olmo, Fedco Construction Inc., Santa Rosa, Calif. “ASA urges subcontractors to use the results of The ASA Report to help legislators understand why reforms are needed and possible in their states.”

Legislative/judicial activities in 2008 caused the scores of eight states to change from last year’s ASA Report — Arizona, California, Iowa, Kansas, Maine, Maryland, Nevada and New York. The scores of three of these states — Kansas, New York and California — changed because, or partly because, of new restrictions on risk transfer. ASA members educated policymakers about risk transfer, and other business practices, through ASA’s chartered local chapters and state organizations.

ASA’s report scores and grades each state in seven policy areas and uses the results to calculate an overall score, grade and rank for each state. Taking into account both laws and judicial decisions, the report scores: (1) Prompt payment protections; (2) Treatment of pay-if-paid clauses; (3) Mechanic’s lien protections; (4) Payment bond protections; (5) Retainage limitations; (6) Anti-indemnity protections, including limits on “additional insured” endorsements; and (7) Anti-“bid shopping” measures.

New Mexico remains the only state to receive an overall passing grade in The ASA Report. Four states (California, Kansas, New York and South Carolina) are within five points of a passing score of more than 60 percent.

ASA is contacting the media, legislators and others across the country to share the results of The ASA Report. ASA’s campaign warns subcontractors of deficits in their state laws, provides advocacy information to help change laws, and educates subcontractors about the need to remain vigilant when negotiating contracts in a harsh public policy environment.

Anti-Indemnity

The results reflected slow but steady progress on the complex issue of indemnity since ASA kicked off its Subcontractors Transfer of Risk Action Plan (STRAP) program in 2001. In the first ASA Report released in 2004, two states — Montana and New Mexico — had perfect scores in the anti-indemnity category and 48 states and the District of Columbia had scores of 41 percent or less. In the 2008 report, seven states scored better than 41 percent in this category. The STRAP program provides ASA members with resources to educate their own companies, as well as lawmakers, courts, attorneys, construction associations and others, about the perils of unbridled risk-shifting.

ASA-Greater Kansas City successfully led an advocacy effort aimed at enacting a statutory ban on “additional insured” clauses, which raised the state’s anti-indemnity score to 100 percent from the previous year’s score of 41 percent. “Additional insured” endorsements to general liability insurance policies require the “named insureds” of the policies — the subcontractors — to provide liability coverage for other parties even when the other parties act negligently. Kansas is now the fifth state in ASA’s report to receive full marks for its public policies that limit risk transfer.

Kansas Gov. Kathleen Sebelius (D) signed S.B. 379 on March 9, 2008. This law, which took effect on Jan. 1, 2009, states that “a provision in a contract which requires a party to provide liability coverage to another party, as an additional insured, for such other party’s own negligence or intentional acts or omissions is against public policy and is void and unenforceable.” As a result, Kansas’ anti-indemnity score increased from 41 to 100 percent. Following last year’s enactment of major prompt payment reform, the anti-indemnity victory brought Kansas within two points of a passing overall score in The ASA Report.

In a major victory for ASA of California, legislators passed, and Gov. Arnold Schwarzenegger (R) signed, indemnity reform (A.B. 2739). The law gives subcontractors more power to control the costs of managing construction defect claims on residential projects. If a builder or a contractor that is not the homebuilder tenders such a claim to a subcontractor, the subcontractor can 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. Because of the new law, California’s anti-indemnity score increased six points to 18. The law also includes a provision that requires full disclosure of insurance terms to subcontractors on projects with owner- or contractor-controlled insurance programs.

A court victory led to an anti-indemnity score change in New York. In Worth Construction Company Inc. v. Admiral Insurance Company, the New York Court of Appeals declared the passing of liability to other parties through “additional insured” clauses to be against public policy except when injury arises from their actions. The change increased the state’s score in this category from 41 to 71 percent.

Alaska earned a mention, but not a score change, in The ASA Report for H.B. 151, which limited the risk that public agencies can transfer to providers of “professional services” (defined as services such as design services) for construction contracts. The law would not typically apply to subcontractors on design-bid-build contracts.

Retainage

Several states continued the major trend of retainage reform that The ASA Report uncovered in 2007. Three states — California, Iowa and Maryland — enacted laws that resulted in score changes for retainage reform.

After years of hard work by ASA of Baltimore and the D.C. Metropolitan Subcontractors Association, Maryland adopted limitations on retainage in private construction. Gov. Martin O’Malley (D) signed S.B. 313 in May, and it took effect on Oct. 1, 2008. The law prohibits construction owners from retaining more than 5 percent of undisputed payments to contractors, and prohibits contractors from retaining more from subcontractors than owners retain from them. The retainage cap applies only to contracts valued at more than $250,000 and only if contractors provide 100 percent performance and payment security. Because of this law, Maryland’s retainage score increased from 28 percent in 2007 to 43 percent in 2008.

California took a more cautious approach to retainage reform. Signed by Gov. Schwarzenegger on Sept. 26, 2008, S.B. 593 institutes a five-year trial of zero retainage on California Department of Transportation projects. ASA of California mounted a significant lobbying campaign for the law, which took effect in January 2009 and requires CalTrans to report the results of the trial to the Legislature over the trial period. California also has several new state laws that permit county and city governments to enter into design-build contracts — with limits on retainage. When the design-build contracts exceed specified dollar thresholds, they must limit retainage to 5 percent. These changes in the Golden State increased its score in the retainage category from 11 percent to 16 percent.

Iowa subcontractors celebrated retainage reform in 2008 as well. S.F. 2317, signed by Gov. Chet Culver (D) on April 2, 2008, requires retainage to be released no more than 30 days following substantial completion of a project, with an interest penalty on unpaid funds at the prime interest rate plus 1 percent.

Mechanic’s Liens

One state enacted mechanic’s lien reform resulting in a score change in The ASA Report, while two other states made lien law changes that did not impact their scores.

Arizona gained two points in the mechanic’s lien category with H.B. 2474, which made property owners liable for any amount over the penal sum of a mechanic’s lien when they supply a lien bond as a substitute payment security. This additional amount includes interest, attorneys’ fees and other fees associated with a claimant’s lien filing. Gov. Janet Napolitano (D) signed the law on April 28, 2008.

Georgia and Rhode Island clarified their lien statutes. Georgia’s S.B. 374 converted the deadlines associated with filing and perfecting liens to days rather than months to standardize the periods during which claimants have to file. Rhode Island’s new lien law, created by H. 7765 and S. 2336, increases the number of days claimants have to file liens, but decreases the number of days to file a lawsuit to enforce those liens.

Pay-if-Paid

The ASA Report measured a significant advance in one state on the important economic issue of pay-if-paid clauses. These contract clauses threaten payments to subcontractors by stating that subcontractors will be paid only if the upper-tier contractors with which they have privity of contract are paid.

Nevada’s Supreme Court declared pay-if-paid clauses unenforceable as a matter of public policy, except in very limited circumstances. The Lehrer McGovern Bovis Inc. v. Bullock Insulation Inc. decision, issued on Oct. 30, 2008, declared that a pay-if-paid clause may not interfere with a subcontractor’s right to file a mechanic’s lien. Nevada led the way in point gains in a single policy category of The ASA Report with a score of 90 percent, up from 0 (zero) percent in this category in 2007.

Payment Bonds

One state’s changes to the law governing payment bonds registered a score change in The ASA Report, while another state’s changes did not earn a score change.

Legislators in Maine passed, and Gov. John Baldacci (D) signed, L.D. 2092, which extends statutory payment bond protections to any claimant providing labor or materials to a contractor or subcontractor on public projects. The change increased the state’s score in this category three points to 68 percent.

South Carolina legislators enacted S. 282, which included clarifications to the state’s statutes governing payment bonds.

Anti-’Bid Shopping’

Two states modified laws that curb bid shopping, but the changes did not affect their scores in The ASA Report.

In New York, Gov. David Patersons (D) signed an enacted budget including reform of Wicks Law (S. 6807-C/A. 9807-C), which requires public construction projects over a certain dollar amount to execute separate contracts for plumbing, electrical and HVAC construction. The law established separate, increased dollar thresholds for projects in different parts of the state. It also included a requirement that exempt contractors must, with their bids on public projects, list the names of their plumbing, electrical and HVAC subcontractors along with the amount of the subcontractors’ bids. The law exempted public projects that employ project labor agreements from the bidding requirements of Wicks Law.

In South Carolina, the enactment of S. 282 reorganized the state’s bid listing law, making it easier to understand.

Prompt Payment

No states passed prompt payment reform legislation in 2008. Colorado came very close, falling only four votes short in its House of Representatives despite a broad coalition of support and significant lobbying efforts by ASA of Colorado. ASAC carries the momentum it gained in 2008 into the state’s new legislative session.

For more information, visit www.asaonline.com.