CSHB 151(JUD)-INDEMNITY CLAUSE IN PUBLIC CONTRACTS  CHAIR FRENCH announced the consideration of HB 151. [Before the committee was CSHB 151(JUD).] He highlighted the proposed Senate Committee Substitute (CS). The only difference is that "where there is joint liability." is deleted from page 1, lines 13-14 of the current version O. 1:34:22 PM SENATOR HUGGINS moved SCS CSHB 151, version N, as the working document. SENATOR THERRIAULT asked if the prime sponsor agrees with the language change. CHAIR FRENCH said he understands that the sponsor requested the change. He and the drafter saw the language as surplus. 1:34:43 PM JEANNE OSTNES, Staff, to Representative Craig Johnson, confirmed that the sponsor agrees with the change. 1:35:08 PM SENATOR WIELECHOWSKI asked if removing the language changes the bill. MS. OSTNES replied, "Through the discussion that the committee was having and through legal, it just seemed to end some of the discussion that lawyers would have with more words." CHAIR FRENCH announced that without objection, version N is before the committee. MS. OSTNES clarified that the intent of the legislation is to address professional services contracts. Page 2, line 25, refers to professional services as defined in the definitions section of the state procurement code. She read AS 36.30.990(19) as follows: (19) "professional services" means professional, technical, or consultant's services that are predominantly intellectual in character, result in the production of a report or the completion of a task, and include analysis, evaluation, prediction, planning, or recommendation; 1:36:43 PM SENATOR McGUIRE joined the meeting. 1:37:19 PM JOHN ASHENBRENNER, Deputy Attorney, Matanuska-Susitna (MatSu) Borough, stated that the Alaska Constitution tasks municipalities with providing a myriad of services to the public. To carry that duty to fruition, they should be given maximum flexibility. He read Article X, Section 1 of the constitution to support his view. The purpose of this article is to provide for maximum local self-government with a minimum of local government units, and to prevent duplication of tax- levying jurisdictions. A liberal construction shall be given to the powers of local government units. MR. ASHENBRENNER said contract negotiations are part of the process for reaching agreement between local government and contractors, and a mandated indemnification clause runs counter to allowing local government to deliver those services. A second concern is that this clause could be applied where professional services are provided in hybrids, such as design built contracts. The definition of "professional services" in AS 36.30.990(19) and the definition of "construction" in paragraph (1) of the bill could lead to the conclusion that municipalities could not use protective indemnification clauses, which are widely used in construction contracts. If this goes forward, we would ask that the MatSu Borough be exempted from this provision, he said. Furthermore, it ought to be clear that it is not intended to apply to design built contracts because those save the public money. 1:41:55 PM MR. ASHENBRENNER expressed concern with the language that talks about comparative fault basis because it could be construed as obligating the government in a joint liability claim to indemnify the contractor. If it were construed that way, an attorney general opinion from 2005 says that an additional appropriation at the local and the state level would be necessary. That would be an additional cost for the government. 1:44:09 PM CHAIR FRENCH asked how, on a comparative fault basis, either side could indemnify the other for something they did not do. "Isn't that exactly what comparative fault's about?" MR. ASHENBRENNER said he's been struggling with the question of whether this would be cross indemnification and that may or may not be the case. However, the larger concern for the MatSu Borough is that the provision should not apply to design built or hybrid contracts. It's difficult to think that applying a mandated contractual provision for all professional related contracts is appropriate in all contexts, he said. 1:46:57 PM SENATOR WIELECHOWSKI asked if the suggested indemnification language is very different than what the borough currently uses. MR. ASHENBRENNER said yes, but stronger language has been used in some contracts. SENATOR WIELECHOWSKI asked if the bill will have a financial impact to MatSu Borough. MR. ASHENBRENNER said it could; the cost of litigation will probably go up because the contractor's obligation to indemnify and defend the local or state government won't be as broad. 1:48:44 PM NELSON PAGE, Anchorage Attorney, spoke in support of the Senate CS for HB 151. He explained that he represents a large number of design professionals statewide and indemnification is a very difficult issue for his clients. For example, the indemnification clause that the MatSu Borough and others use requires a design professional to accept all legal and financial responsibility for errors made by any party to the contract even if another party is 99 percent responsible and someone other than the design professional is responsible for the other 1 percent. Usually he recommends that his clients not sign those clauses. When the other party won't agree to amend the clause, his client has to either turn down the work or sign the contract and assume huge risk for which there is no insurance. Insurance usually covers negligence of the design professional but not contractual obligations. MR. PAGE said in some respects the CS favors the people who are contracting with the design professionals. First, the bill allocates responsibility fairly; the entity that is negligent and causes damages will be held responsible to the extent of those damages. Second, it's an advantage to state and local governments to the extent that it's easier for design professionals to bid on projects. Smarter design professionals won't bid on contracts with an onerous indemnification clause, he said. Finally, government may save money to extent that design professionals are padding their bids to cover the additional risk. 1:52:07 PM MICHAEL CARLSON, Partner, McCool Carlson Green Architects, said he supports HB 151 because it makes everyone responsible for their own mistakes and negligence. It's the right thing to do and it's good public policy. Part of the advantage of HB 151 is that when the language is consistent, it can be consistently interpreted by the court. He encouraged the committee to move the bill. 1:55:27 PM LEANNE BOLDNOW, Insurance Broker, Marsh USA, said she has been a member of the Alaska Design Professional Council and was on the contract task force. Stating support for HB 151, she said she has represented more than 30 design firms across the state and has continually reviewed poorly written contracts. Many of those contracts are uninsurable because of contract wording and the indemnification clause. She explained that a design consultant's work is intellectual property and as such design professional insurance provides defense when negligent act, errors, or omissions are tied to the intellectual property. When public entities publish contracts that reference general construction, she recommends that design professional insurance will not cover that contract. MS. BOLDNOW relayed that it was not the intent of the task force or the sponsor to allow a building contractor to morph into the design contract and thereby gain from HB 151. 1:57:56 PM CHAIR FRENCH, finding no one else who wanted to testify, closed public testimony and asked for committee discussion. SENATOR WIELECHOWSKI stated that HB 151 doesn't appear to be particularly interesting on its face, but it presents very interesting and colliding ideas. There's the concept of fairness and the fact that each party should bear the cost of their own negligence. That clashes with the free market and the ability of municipalities or agencies to negotiate contracts to their liking. But if a municipality can negotiate and get another party to accept their liability, it's not a bad thing under the free market theory. Another thing that collides is the inability of the designer to get insurance. It's been an interesting discussion, he added. CHAIR FRENCH agreed it is a lively issue, but he believes that it boils down to the issue of fairness. 1:59:41 PM SENATOR McGUIRE motioned to report Senate CS for CSHB 151, version N, from committee with individual recommendations and attached fiscal note(s). CHAIR FRENCH announced that without objection SCS CSHB 151 (JUD) moves from committee.