Honorable Robert Bunda

President of the Senate

Twenty-Third State Legislature

Regular Session of 2005

State of Hawaii

Sir:

Your Committee on Transportation and Government Operations, to which was referred S.B. No. 1843 entitled:

begs leave to report as follows:

The purpose of this measure is to amend the public procurement code to prohibit a governmental body from requiring a contractor for construction design services to indemnify the government for the government's negligence, but allows the governmental body to require the contractor to indemnify the State for the contractor's negligence.

Your Committee received testimony in support of this measure from the American Society of Civil Engineers, Finance Insurance, Ltd., Clayton J. Wong & Associates, Inc., Coalition of Hawaii Engineering and Architectural Professionals, American Council of Engineering Companies of Hawaii, The Limtiaco Consulting Group, Masa Fujioka & Associates, and Fukunaga & Associates. Comments were submitted by the State Procurement Office.

Your Committee finds that the prevailing practice in state and county contracts is to require the contractor to indemnify, defend, and hold harmless the government in the event of negligence of the employees and agents of the government. Your Committee further finds that this contracting practice is against public policy on the basis that every party to a contract should be liable for that party's own conduct.

The Hawaii Intermediate Appellate Court recognized this principle of law in Straub Clinic and Hospital, Inc. v. Chicago Insurance Co., 4 Haw.App. 268, holding that contracts of indemnity are to be strictly construed, particularly when the indemnitee claims that it should be indemnified for its own negligence. Also, the United States District Court for the District of Hawaii found that Hawaii state law requires that indemnity clauses, particularly those which purport to indemnify a party against its own negligence, be strictly construed and have a clear and unequivocal statement of intent (City and County of Honolulu v. Churchill, 167 F.Supp.2d 1143).

Your Committee further finds that indemnity clauses are fraught with litigation in the interests of interpreting a strict construction and intent of the parties.

Your Committee learned from testimony that duty to defend agreements are insurable only when the policyholder is determined to be negligent. The insurance policy does not cover the State for the State's wrongdoing.

This measure is intended to resolve the difficulties of governmental contract provisions regarding indemnification, duty to defend, and hold harmless agreements. The effect is to facilitate the bidding by contractors on government contracts and thus encourage economic growth, and to discourage costly and time consuming litigation.

As affirmed by the record of votes of the members of your Committee on Transportation and Government Operations that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 1843 and recommends that it pass Second Reading and be referred to the Committee on Ways and Means.