Legislature(2007 - 2008)CAPITOL 106
03/24/2007 10:00 AM House STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB92 | |
| HB151 | |
| HB171 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 13 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 92 | TELECONFERENCED | |
| += | HB 151 | TELECONFERENCED | |
| += | HB 171 | TELECONFERENCED | |
HB 151-INDEMNITY CLAUSE IN PUBLIC CONTRACTS 11:00:21 AM CHAIR LYNN announced that the next order of business was HOUSE BILL NO. 151, "An Act requiring an indemnification and hold harmless provision in professional services contracts of state agencies, quasi-public agencies, municipalities, and political subdivisions." 11:00:34 AM REPRESENTATIVE COGHILL moved to adopt the committee substitute (CS), Version 25-LS0479\E, Bannister, 3/21/07, as a work draft. There being no objection, Version E was before the committee. 11:00:58 AM REPRESENTATIVE JOHNSON, speaking as sponsor by request, said the changes made through Version E narrowed the language, because the original bill version may have had the unintended consequence of costing "the permanent fund dividend" money. 11:02:29 AM TREVOR FULTON, Staff to Representative Craig Johnson, Alaska State Legislature, on behalf of Representative Johnson, prime sponsor by request, provided details regarding HB 151. He directed attention to the Legislative Legal and Research Services memorandum, from Theresa Bannister, dated March 23, 2007, which he said outlines the changes made in Version E. One change added the word "defense" to the bill title so that it read: "An Act requiring an indemnification, defense, and hold harmless provision in construction-related professional services contracts of state agencies, quasi-public agencies, municipalities, and political subdivisions." MR. FULTON noted that the term "construction-related professional services" was also added to the bill. 11:04:36 AM REPRESENTATIVE GRUENBERG remarked that the use of the term "consultant" invites a heightened scrutiny, not only by the legislature but also by the general public. He noted that John Walsh was sitting in the room, and he said he "represents these folks." He suggested using another, less controversial term. 11:05:35 AM REPRESENTATIVE JOHNSON noted that he has at one time worked as a consultant and during his political campaign he was reluctant to tell people about that, "because of that black eye." He stated that consultants serve an important purpose. He illustrated how consulting can be an honorable profession, noting, for example, that companies that cannot afford to hire their own people can bring in consultants for very specific purposes. He said that although he appreciates Representative Gruenberg's comments, he does not want to jump on the bandwagon of depicting consultants negatively. 11:07:25 AM BOYD MORGENTHALER, P.E., Chair, A/E-Owner Contracts Committee, Alaska Professional Design Council (APDC), told the committee that APDC is a consortium of professional societies that represents the 5,000 architects, engineers, and land surveyors registered in Alaska. He stated that APDC supports Version E of HB 151 as an important issue for all Alaskan consultants. He said the bill is about liability. When two parties enter a contract, each expects the other to be responsible for their own actions. In particular, he noted, each party is responsible for their sole liabilities. He said "indemnification" and "hold harmless" are two terms that are used frequently in contracts. He continued: Hold harmless is simply an agreement by one party to not hold the other party responsible for certain acts or under certain circumstances. And indemnification is an extension of that that says that one party will ... financially underwrite the loss of the other party under certain circumstances. The real issue here is not the sole negligence of the two parties, but who's responsible when there's a joint liability. The [Department of Transportation & Public Facilities (DOT&PF)] takes a very fair approach to this: They say that when there's joint liability, it should be shared on a comparative fault basis. And that's ... exactly what HB 151 requires. It's just common sense .... Unfortunately, not all public agencies have the same approach as [DOT&PF]. Some agencies require their consultant to take responsibility for all liability, except for the agency's sole negligence. So, if the agency is 99 percent at fault, the consultant still pays 100 percent of the cost, because there's no apportionment of cost on a comparative fault basis. In the last six months, as an industry here in Alaska, we have battled the Alaska Railroad, the University of Alaska, ... the [Matanuska-Susitna (Mat-Su)] Borough, and other public agencies on this issue. In all the cases that we've faced, these agencies have demanded that the consultant - and ... perhaps we could that "professional services consultant" - ... assume 100 percent of the joint liability. The Alaska Railroad even went so far as requiring indemnification, and I quote, "from and against all claims and actions asserted by a third party or parties resulting from the services performed." This is just an absolutely unlimited liability. 11:11:05 AM It's not the public that is demanding these liabilities. Whenever we've discussed it with the Board of Regents or ... officers, assembly people, project managers, they generally are looking for a fair indemnification. But the problem we're facing comes from contracting officers. And as contracting officers change, so do the indemnification languages. For example, in the Mat-Su Borough, they had a one- sided indemnification that we battled through 2001, and in 2002, they changed it to the [DOT&PF] format, which lasted through all of last year. But now, they have a new contracting officer; he scratched what we battled for, and now we're back to the same old one- sided language. So, you can see the problem. ... This costs the [architects, engineers, and] land surveyors in Alaska, and ultimately the public, millions of dollars in wasted time every year as we fight just to have fair contract language. 11:12:33 AM ... There are three major impacts that we experience. Number one is that the contracts become uninsurable. Our professional liability insurance only covers damages to the extent caused by our negligence, but it doesn't extend to the negligence of the other parties. So, when we are required to carry all of the middle ground, we're not insured. ... We had one insurance agency tell us that we can get insurance for anything, but we were looking at $2 million to pay for the policy and a million dollar deductible. I think that was an exaggeration, but I think you get the point. The other thing that happens is that good consultants walk away from agency work. Paradoxically, it's the consultants that really understand risk that are in the best position to help the owner with their project, and yet it's these very same consultants who won't sign in onerous languages. So, that leaves the owner with consultants who can either make themselves judgment proof - who are willing to take the risk but then oftentimes will enter into defensive design techniques to limit their risk - which causes project prices to go up. The bottom line is there's no free lunch. And finally, we're forced to raise our prices. We do this by capturing the millions of dollars of overhead that we spend each year in our hourly rates, and we also do that by increasing the prices in our contracts to compensate for the additional risk. MR. MORGENTHALER said [HB 151] follows the language successfully used by DOT&PF for decades, will standardized indemnification requirements for all public agencies, will level the playing field, and is the fair, honest, and right thing to do. 11:14:51 AM LEANNE BOLDENOW, Client Executive, Marsh USA, Inc., said that company is an insurance brokerage that has represented architects and engineers throughout Alaska for 10 years. She stated: It is very typical to have a contract presented to us for insurability, and as we review the indemnification clause, the requirements for the design professional consultant to take on all liabilities, claims, and hold harmless, we have to notify the design firm that their professional liability insurance cannot take on liabilities that are not directly connected to [negligent acts, errors], and omissions. So, ... HB 151 specifically identifies that and would alleviate this problem. So, I'm simply here today to support the APDC and the bill, and I am also a member of the APDC contract committee and do frequently witness these contracts from their aspect in supporting that these agency contracts are outside the design professionals' professional liability. 11:16:33 AM REPRESENTATIVE GRUENBERG described a situation in which the legislature is asked to repeal or amend a statute because of insurance problems - because insurance does not cover the situation. He said he would hate for the legislature to pass HB 151 and have some insurance company somewhere say the new language doesn't meet the mark. He asked Ms. Boldenow if she is certain the language of the bill is sufficient. MS. BOLDENOW responded, "The contracts that are causing the issues are outside the insurance provisions. To bring them inside, this bill does meet those requirements." 11:18:53 AM REPRESENTATIVE GRUENBERG said when an action such as HB 151 is taken, if an insurance company no longer wants to cover something, than it will change its contract so that it does not. He asked if there is anything else the legislature can do to prevent that happening. 11:19:12 AM MS. BOLDENOW replied that unfortunately insurance companies do direct how business is conducted, but that is because of the risk involved, and because those companies need to ensure they make money. She stated that although she has "watched this" for 10 years, she does not have a crystal ball to look into to predict what risk will transpire in the future. REPRESENTATIVE GRUENBERG clarified that he is not pointing fingers at anyone, and he acknowledged that everyone is doing the best they can. 11:20:30 AM CHAIR LYNN, after ascertaining that there was no one else to testify, closed public testimony. The committee took an at-ease from 11:21:17 AM to 11:21:37 AM. 11:21:42 AM REPRESENTATIVE DOLL moved to report HB 151, Version 25-LS0479\E, Bannister, 3/21/07, out of committee [with individual recommendations and the accompanying fiscal notes]. There being no objection CSHB 151(STA) was reported out of the House State Affairs Standing Committee.
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