Legislature(2007 - 2008)BELTZ 211
01/21/2008 01:30 PM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| HB151 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 151 | TELECONFERENCED | |
HB 151-INDEMNITY CLAUSE IN PUBLIC CONTRACTS
CHAIR FRENCH announced the consideration of HB 151. Before the
committee was CSHB 151(JUD).
1:35:05 PM
REPRESENTATIVE CRAIG JOHNSON, sponsor by request, explained that
HB 151 will require that uniform indemnification and hold
harmless provisions be included in professional services
contracts for all public agencies within the state. He suggested
that the proposed changes are sound public policy and will
constitute fair business practices between the public and
private sector. It will ensure accountability for all parties
involved in professional services contracts and it will save
money. Currently, in some contracts that are signed by the state
- specifically construction and engineering - the design
consultant is required to hold state agencies harmless
regardless of who is responsible for a negligent act. The
problem is that the design consultant is unable to buy insurance
for that assumed responsibility. This places a company at risk
each time it submits a bid. As a result very highly qualified
companies are electing not to bid on projects or they are
building in a contingency to cover the increased responsibility,
which increases costs to the state.
REPRESENTATIVE JOHNSON explained that HB 151 requires that
professional services contracts adopt the language currently
used by the Department of Transportation and Public Facilities
(DOTPF). The bill allows competitive bidding and places the
burden for mistakes where it belongs. HB 151 does not keep
design engineers from being responsible, it keeps them from
being solely responsible for things that they may not control.
1:38:41 PM
SENATOR THERRIAULT asked if the unintended consequence of
bringing in financial consultants from the Permanent Fund
Dividend group and the Alaska Retirement Management Board had
been corrected.
REPRESENTATIVE JOHNSON said that was corrected. Furthermore, he
isn't aware of anyone who opposes the bill as it is currently
drafted.
SENATOR HUGGINS asked if financial savings are anticipated.
REPRESENTATIVE JOHNSON outlined savings in two areas. First,
when designers are responsible for just their own mistakes,
contingencies won't be figured into the bid. Second, this will
attract more qualified designers and the competition will drive
costs down.
SENATOR HUGGINS questioned how prevalent the suggested language
is across the state.
REPRESENTATIVE JOHNSON relayed that the mere introduction of the
bill has caused a lot of people to adopt the DOTPF language. For
example, the University of Alaska Board of Regents has adjusted
its policy.
1:42:14 PM
SENATOR HUGGINS said the MatSu Borough may have this provision
and he'd like to hear the counter arguments.
REPRESENTATIVE JOHNSON said he believes that MatSu still has the
language, but that doesn't make it right.
CHAIR FRENCH stated his intention is to hear and hold the bill
today.
SENATOR WIELECHOWSKI opined that it's good for the state if it
can get a design firm to contract to assume liability. He asked
if the bill doesn't take away a right of the state to enter into
a free contract, and if it doesn't potentially increase future
costs when the state assumes liability it didn't have before.
REPRESENTATIVE JOHNSON agreed with the assessment, but he
doesn't think it's a bad thing to hold the responsible party
accountable for their own errors. This won't necessarily drive
costs up because the state will get a better product.
1:45:26 PM
BRAD THOMPSON, Director, Division of Risk Management, Department
of Administration, explained that the division administers the
state's self-insurance program. The division provides guidance
in the creation of policy related to contractual transfers of
risk. The terms of HB 151 is addressing and trying to apply for
construction-related contracts. Referring to Senator
Therriault's question, he explained that the bill was narrowed
to apply only to construction-related professional service
contracts.
MR. THOMPSON explained that the Division of Risk Management
guides DOTPF and other state agencies that contract for
construction projects to use what is characterized as "Appendix
D." It is a standard comparative fault allocation form. He
clarified that the division provides guidance to DOTPF and other
state agencies that might have a construction-related contract.
It does not give guidance to the Alaska Railroad, the University
of Alaska, or other local municipal agencies. However, many do
follow that standard language format. HB 151 makes that language
a uniform application throughout all public entities.
CHAIR FRENCH said his understanding of the bill is that if a
consultant makes mistake, the consultant is responsible and if
the state makes a mistake, the state is responsible, but you
can't sue the state if a consultant makes a mistake.
MR. THOMPSON said it's a comparative allocation. Typically, if
there is a third-party claim, the state and perhaps the
independent party that may have a comparative responsibility
will be named. "We may bring them in. We would tender to that
responsible party per the terms of this contractual statement to
also pay their share if there is comparative allocation by that
independent design agency," he said.
CHAIR FRENCH said if the independent party didn't make a
mistake, then they wouldn't be brought in.
MR. THOMPSON agreed.
CHAIR FRENCH added that the same would hold if the state didn't
make a mistake and the consultant had agreed to indemnify,
defend, and hold harmless the state from claims of liability for
the negligent acts, errors, or omissions of the consultant.
MR. THOMPSON said yes; the consultant is able to obtain a
professional malpractice policy that provides protection so it's
an insurable risk. One of the division's criteria for selecting
outside professionals is that they have to carry insurance to be
able to meet the obligation of the indemnity.
CHAIR FRENCH summarized that it's a fairly standard comparative
fault statute.
MR. THOMPSON agreed; the statute portrays application of the
state standard form for all public agencies within the state.
SENATOR WIELECHOWSKI read, "This language insulates public
agencies from liability for their own negligence by unfairly
transferring it to design consultant companies." He asked if the
state is unfairly transferring liability to design consultant
companies.
1:50:16 PM
MR. THOMPSON restated that state agencies generally adopt the
language currently used by DOTPF, but the university, for
example, has had consultant agreements that used language much
stronger than a comparative allocation. It transferred any and
all risk associated with the work. Because of that contractual
language, the university was able to tender the defense of any
claim.
SENATOR WIELECHOWSKI asked if in the past the university held
design consultants completely responsible if anything went
wrong, even if it was the university's fault.
MR. THOMPSON said under the language that was previously
applied, he believes there were situations where the university
was able to transfer responsibility to the design consultant.
SENATOR WIELECHOWSKI asked if he has knowledge of any lawsuit
where the liability was transferred to the design company.
MR. THOMPSON said he can't respond to the university's
situation.
1:51:14 PM
SENATOR WIELECHOWSKI highlighted a potential con to the state is
that it may have to pay increased liability and lawsuit costs.
MR. THOMPSON clarified that the language in this stipulation is
a comparative allocation. Without any contract term addressing
that allocation, under the law today it is pure comparative. If
an owner of a project is brought in for a third-party claim,
even without this contractual term, that owner would be able to
third-party in any other responsible party for their comparative
fault. This contract term is more expeditious. The owner could
present the claim and ask to be held harmless if it is only the
other party's responsibility. If it is a comparative, the owner
will share in the defense and each party will pay its share.
1:52:15 PM
CHAIR FRENCH asked if it's fair to say that this is a
codification of existing common law into statute with regard to
comparative fault.
MR. THOMPSON said yes, as it applies to professional services
within construction-related contracts.
SENATOR WIELECHOWSKI questioned the necessity of placing it in
statute.
MR. THOMPSON referenced the sponsor's statement that some public
entities are seeking protection beyond what the law would
provide without such a clause. That contractual term is onerous
to some independent professionals because it is not insurable.
CHAIR FRENCH said a professional design consultant couldn't get
insurance to cover something the state might be liable for.
MR. THOMPSON explained that a malpractice policy typically
excludes contractual liability so an independent professional
could not extend coverage for contractual liability except that
which would be applied anyway under their own comparative
responsibility. Someone can't obtain insurance if they sign a
document obligating him/her self to protect the owner.
1:54:31 PM
SENATOR WIELECHOWSKI questioned how the bill benefits the state
because if the state can get a design professional to agree to
assume the state's liability, then that's what the market will
bear and that's good for the state.
MR. THOMPSON restated that the Division of Risk Management has
used this language for a number of years. The argument is that
some design contractors won't respond to RFPs (request for
proposal) that have a complete indemnity obligation.
1:55:37 PM
BOYD MORGENTHALER, Chair, PE Contracts Committee, Alaska
Professional Design Council (APDC), described the council as a
consortium of professional societies that represents about 5,000
registered professional architects, engineers, and land
surveyors in Alaska. He explained that the bill addresses the
fact that some quasi-governmental agencies within the state
depart considerably from the common law with regard to
professional services contracts. He clarified that he's
referring to contracting officers who have the power to coerce
consultants to enter into a take it or leave it contract.
Several of those agencies have gone so far as to ask the
consultant to take on all the responsibility for liability
except for the agencies sole negligence.
1:58:57 PM
MR. MORGENTHALER explained that in a circumstance where the
agency is 99 percent at fault and the consultant has 1 percent
involvement, the consultant would still be required to pay 100
percent of the cost because there is no apportionment of cost on
a comparative fault basis in these contracts. There has been
some progress in the last several years. For example, about two
years ago an Alaska Railroad contract required the consultant to
indemnify and hold harmless the railroad from and against all
claims and actions asserted by a third-party or parties
resulting from the services performed. After considerable
discussion, the railroad realized the unfairness of the position
and they adopted the DOTPF language. The University of Alaska
had similar one-sided contact language but the Board of Regents
has since changed all contracts in the university system to
language that's essentially the same as DOTPF language.
2:01:14 PM
MR. MORGENTHALER relayed that the MatSu Borough began to use the
DOTPF language in about 2000, but about five years later a new
contracting officer opted to again use the one-sided language.
He described a circumstance where two consultants are brought
into the same lawsuit and said it can be a very unfair
situation. Most small professional services companies rely on
contracts from state and governmental agencies. and even when
the contract language one-sided, somebody will ultimately bid.
Usually it's the young engineer or architect who doesn't have
much to lose by assuming all the responsibility.
CHAIR FRENCH said his professors described such individuals as
"judgment proof."
2:03:43 PM
MR. MORGENTHALER agreed with the characterization. Companies
that are well established won't bid on projects that have bad
indemnification language, which is why HB 151 is so important to
architects and engineers. It will level the playing field on
contracts we sign with government agencies.
2:05:45 PM
SENATOR WIELECHOWSKI asked if there's a requirement to provide
proof in insurance before signing a contract to indemnify the
state.
MR. MORGANTHALER said yes, but professional liability policies
only cover a consultant's negligence, not contractual
requirements. Beyond comparative fault a company is on its own.
SENATOR WIELECHOWSKI asked if he's aware of lawsuits where
design contractors have been sued and had to pay what would
otherwise have been the state's responsibility.
MR. MORGANTHALER said no.
2:08:07 PM
CHAIR FRENCH relayed that he made contact with a former
colleague who makes a living suing the state and he thinks HB
151 is fair all the way around.
CHAIR FRENCH held HB 151 in committee.
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