Legislature(2007 - 2008)BELTZ 211

01/21/2008 01:30 PM Senate JUDICIARY


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01:34:42 PM Start
01:35:05 PM HB151
02:08:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 151 INDEMNITY CLAUSE IN PUBLIC CONTRACTS TELECONFERENCED
Heard & Held
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE JUDICIARY STANDING COMMITTEE                                                                             
                        January 21, 2008                                                                                        
                           1:34 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Hollis French, Chair                                                                                                    
Senator Charlie Huggins, Vice Chair                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator Gene Therriault                                                                                                         
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Lesil McGuire                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
CS FOR HOUSE BILL NO. 151(JUD)                                                                                                  
"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."                                                                                    
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 151                                                                                                                  
SHORT TITLE: INDEMNITY CLAUSE IN PUBLIC CONTRACTS                                                                               
SPONSOR(s): REPRESENTATIVE(s) JOHNSON BY REQUEST                                                                                
                                                                                                                                
02/22/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/22/07       (H)       STA, JUD                                                                                               
03/20/07       (H)       STA AT 8:00 AM CAPITOL 106                                                                             
03/20/07       (H)       Heard & Held                                                                                           
03/20/07       (H)       MINUTE(STA)                                                                                            
03/24/07       (H)       STA AT 10:00 AM CAPITOL 106                                                                            
03/24/07       (H)       Moved CSHB 151(STA) Out of Committee                                                                   
03/24/07       (H)       MINUTE(STA)                                                                                            
03/26/07       (H)       STA RPT CS(STA) NT 6DP                                                                                 
03/26/07       (H)       DP: JOHANSEN, JOHNSON, COGHILL, DOLL,                                                                  
                        GRUENBERG, LYNN                                                                                         
04/02/07       (H)       JUD AT 1:00 PM CAPITOL 120                                                                             
04/02/07       (H)       Heard & Held                                                                                           
04/02/07       (H)       MINUTE(JUD)                                                                                            
04/30/07       (H)       JUD AT 1:00 PM CAPITOL 120                                                                             
04/30/07       (H)       Moved CSHB 151(JUD) Out of Committee                                                                   
04/30/07       (H)       MINUTE(JUD)                                                                                            
05/01/07       (H)       JUD RPT CS(JUD) NT 3DP 4NR                                                                             
05/01/07       (H)       DP: GRUENBERG, LYNN, RAMRAS                                                                            
05/01/07       (H)       NR: COGHILL, DAHLSTROM, HOLMES, SAMUELS                                                                
05/09/07       (H)       TRANSMITTED TO (S)                                                                                     
05/09/07       (H)       VERSION: CSHB 151(JUD)                                                                                 
05/09/07       (S)       READ THE FIRST TIME - REFERRALS                                                                        
05/09/07       (S)       STA, JUD                                                                                               
05/12/07       (S)       STA RPT  2DP 2NR                                                                                       
05/12/07       (S)       DP: MCGUIRE, GREEN                                                                                     
05/12/07       (S)       NR: FRENCH, BUNDE                                                                                      
05/12/07       (S)       STA AT 1:00 PM BELTZ 211                                                                               
05/12/07       (S)       Moved CSHB 151(JUD) Out of Committee                                                                   
05/12/07       (S)       MINUTE(STA)                                                                                            
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
REPRESENTATIVE CRAIG JOHNSON                                                                                                    
Alaska State Capitol                                                                                                            
Juneau, AK                                                                                                                      
POSITION STATEMENT: Sponsor of HB 151.                                                                                        
                                                                                                                                
BRAD THOMPSON, Director                                                                                                         
Division of Risk Management                                                                                                     
Department of Administration                                                                                                    
Juneau, AK                                                                                                                      
POSITION STATEMENT: Supported HB 151.                                                                                         
                                                                                                                                
BOYD MORGENTHALER, Chair                                                                                                        
PE Contracts Committee                                                                                                          
Alaska Professional Design Council                                                                                              
Anchorage, AK                                                                                                                   
POSITION STATEMENT: Supported HB 151.                                                                                         
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  HOLLIS   FRENCH  called  the  Senate   Judiciary  Standing                                                             
Committee meeting to order at 1:34:42  PM. Present at the call to                                                             
order were Senators Huggins,  Wielechowski, Therriault, and Chair                                                               
French                                                                                                                          
                                                                                                                                
          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.                                                                                          
                                                                                                                                
There being no further business to come before the committee,                                                                   
Chair French adjourned the meeting at 2:08:37 PM.                                                                             
                                                                                                                                

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