1. 1 Indemnifications from Joint Powers Agencies and their Members before the Joint Powers Agency Subcommittee of the Central Valley Flood Protection Board February, 2009 Scott Shapiro Downey Brand LLP

2. 2 Issue When granting a permit to a joint powers agency, should the Board make it a condition of the permit that the member agencies of the joint powers agency must indemnify the Board for any liability that may arise from the facilities that constitute the Project? Before the Board can decide on the policy on this issue, it must understand the legal concepts that control the liability of JPA member agencies for the liabilities of the JPA itself.

3. 3 Agenda Item #4: PRESENTATION ON WHEN, AND FOR WHAT, JOINT POWERS AGENCY (JPA) MEMBER AGENCIES ARE LIABLE FOR THE DEBTS AND LIABILITIES OF THE JPA

4. 4 Rules Applicable to Torts A tort is a breach of a legal duty imposed other than by contract (e.g., negligence, nuisance, etc.). Government Code Section 895.2 provides: –Whenever any public entities enter into an agreement, they are jointly and severally liable upon any liability which is imposed by any law other than this chapter upon any one of the entities or upon any entity created by the agreement for injury caused by a negligent or wrongful act or omission occurring in the performance of such agreement. This means that all member agencies are liable for the torts committed by the JPA, and this would apply whether the JPA is still in existence or not because the liability accrues upon the existence of the tort itself.

5. 5 Rules Applicable to other Liability Beyond torts, contract liability is the most common basis of liability (e.g., a construction contract executed by the JPA). Government Code Section 6508.1 provides: –If the agency is not one or more of the parties to the agreement but is a public entity, commission, or board constituted pursuant to the agreement, the debts, liabilities, and obligations of the agency shall be debts, liabilities, and obligations of the parties to the agreement, unless the agreement specifies otherwise. This means that no member agencies are liable for the contractual liabilities of the JPA, so long as the JPA agreement provides for this (they all do). This would apply whether the JPA is still in existence or not.

6. 6 Rules Applicable to Inverse Condemnation Inverse condemnation is a constitutional cause of action. It is the flip side of the prohibition that the government may not take private property without compensation being paid. It is not clear whether the courts would find member agencies liable when a JPA was found to have inverse condemnation liability. On its face, Government Code Section 6508.1 should apply: –If the agency is not one or more of the parties to the agreement but is a public entity, commission, or board constituted pursuant to the agreement, the debts, liabilities, and obligations of the agency shall be debts, liabilities, and obligations of the parties to the agreement, unless the agreement specifies otherwise.

7. 7 Rules Applicable to Inverse Condemnation (cont.) However, Section 6508.1 is a statutory limitation, and the Legislature may not abrogate a constitutional cause of action. Further, the Courts fairly strictly ensure that there is a party liable when people are flooded as a result of unreasonable government action. Therefore, our best guess is: –If the JPA is still in existence, the Court would honor Section 6508.1 and not find the member agencies to be liable. –However, if the JPA is no longer in existence, and thus no one would otherwise be liable, the Court would ignore Section 6508.1 and find the member agencies to be liable.

8. 8 Application to the Board’s Standard Permit Conditions This example assumes that the Board does not require a separate indemnity from JPA members. The Board’s Standard Condition #10 provides: –If any claim of liability is made against the State of California, or any departments thereof, the United States of America, a local district or other maintaining agencies and the officers, agents or employees thereof, the permittee shall defend and shall hold each of them harmless from each claim. This regulatory indemnity would likely be treated by a Court as a contractual indemnity.

9. 9 Application to the Board’s permit (cont.) Because this regulatory indemnity would likely be treated as a contractual indemnity, the rules applicable to Section 6508.1 would apply. This means that if the State was found liable for flood damages (whether inverse condemnation or tort), the JPA would be contractually required to indemnity the State. Because the indemnity is contractual, under Section 6508.1, the member agencies would not be liable (would not be required to also indemnify the State).

10. 10 Application to the Board’s permit (cont.) This result can be contrasted against a situation in which a flood victim successfully sues both the State and the JPA in tort. In this case, under Standard Condition #10 the JPA would be required to indemnify the State (just as before). However, here the member agencies would also be jointly and severally liable for the liability of the JPA (other than the liability from indemnity).

11. 11 Agenda Item #5: PRESENTATION ON WHAT JPAs AND THEIR MEMBER AGENCIES CAN DO TO INSURE THEIR LOSSES (TYPES OF COVERAGE, AVAILABILITY, COVERAGE AMOUNTS, COSTS) (propose to cover after #6 below)

12. 12 Agenda Item #6: PRESENTATION ON WHAT INDEMNITIES ARE ENFORCEABLE AND INSURABLE

13. 13 Indemnity and Insurance One can only purchase insurance which protects the insured (and other additionally named parties) from liability based upon the fault of the insured. Standard language in insurance policies illustrates that insurance companies will only pay if the insured was at fault in some way: –“We will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage....” –“The Authority will reimburse the covered party for ultimate net loss in excess of the Retained Limit hereinafter stated which the covered party shall become legally obligated by reason of liability imposed by law....”

14. 14 Indemnity and Insurance (cont.) Interestingly, a promise to indemnify does not create fault: –The contractual liability coverage (which would cover an indemnity) is limited to only covering bodily injury or property damage “that the insured would have in the absence of the contract or agreement.” –In short, even with the “indemnity extension,” there must still be some legal obligation of the insured other than the indemnity promise itself, for the insurance policy to provide coverage either directly on behalf of the insured or through the contractual liability extension covering an indemnity promise. In other words, if a JPA (or its member agency) agrees to indemnify the State, but the JPA (or its member agency) is not at fault in the first place, the insurance policy of the JPA (or its member agency) will not pay on the claim.

15. 15 Indemnity and Insurance (cont.) Therefore, in order to not have an indemnity provision which is not backed by insurance coverage, the Board should consider revising its condition as follows: –To the extent allowed by State law, the permittee shall indemnify, defend, and hold harmless the State of California, or any departments thereof, the United States of America, and any local district or other maintaining agencies, and the officers, agents, or employees thereof, from and against any claims, demands, actions, losses, liabilities, damages, and costs incidental thereto arising out of this permit, including reasonable cost of defense, settlement, arbitration, and attorneys’ fees, but only to the extent caused by the negligent or wrongful act or omission of the permittee, its officers, agents, or employees or the act or omission of anyone else directly acting on behalf of the permittee for which the permittee is legally liable under law

16. 16 Indemnity and Insurance (cont.) Finally, it also appears likely that the Board’s current indemnity provision is unenforceable as a matter of law. California law precludes a party from attempting to shift liability for its own negligence when the public interest is involved: –Civil Code Section 1668 provides “All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.” –See also Tunkl v. Regents of University of California (1963) 60 Cal.2d 92, 98-101; Caza Drilling (California) Inc. v. TEG Oil & Gas U.S.A. (2006) 142 Cal.App.4th 453, 468. The statute stands for the proposition that exculpatory clauses relieving a party from the consequences of its own negligence cannot be enforced where the public interest is involved.

17. 17 Indemnity Based on Development The Board originally sought to control the behavior of Cities and Counties by obtaining indemnification to control development. AB 70 constitutes the State’s policy on when a City or County is liable for adding damageable property to the floodplain. Therefore, the approval of development by a City or County is no longer a basis for requesting indemnity from a member agency that is a City or County.

18. 18 Scopes of Indemnities Should Respect Jurisdictional Boundaries Where a JPA applies for a permit, it is reasonable to seek indemnity for O&M liability from the entity that will actually O&M the project: usually a Reclamation or Levee District. However, it is important to ensure that the Board obtains indemnification from only the proper O&M agency (sometimes more than one O&M agency is a member of the JPA; this requires making a geographic distinction).

19. 19 Reclamation District 1000MA9, City of Sacramento, & ARFCD Example of Geographic Distinction

20. 20 Agenda Item #5: PRESENTATION ON WHAT JPAs AND THEIR MEMBER AGENCIES CAN DO TO INSURE THEIR LOSSES (TYPES OF COVERAGE, AVAILABILITY, COVERAGE AMOUNTS, COSTS)

21. 21 Insurance Policies for Local Agencies Some agencies have extensive insurance (e.g., SAFCA has $35 million this year), but at what cost? Others have limited ability and budget to obtain insurance: –RD 1000: $1 million ($3 million aggregate) costs $75,000 annually, nearly 3% of budget). With Proposition 218 limitations, do we want O&M agencies spending significant portions of budget on insurance? Many insurance companies will no longer write policies to flood agencies (e.g., ACWA JPIA).

22. 22 Agenda Item #8: PRESENTATION ON THE INTERESTS OF JPAs AND THEIR MEMBER AGENCIES IN LIMITING INDEMNITIES PROVIDED TO THE STATE

23. 23 Interests of the Local Agencies To reduce liability for all, by reducing the risk of flooding. For Cities and Counties, to not take on liability for a flood control system that the Cities and Counties did not build, agree to maintain, or design. For the Cities and Counties to accept liability only where the Cities or Counties act in a manner which is unreasonable under the law. For the O&M agencies to accept liability for their failure to properly O&M the project.

24. 24 If the Board Seeks an Overbroad Indemnity JPAs might elect to dissolve, discouraging regional flood management planning. Cities and counties might withdraw from JPAs. JPAs might elect to only plan and/or fund flood protection projects, instead relying on the O&M agencies to apply for permits and construct projects. JPAs might wait for the State to improve flood protection, which will prolong potential State liability from existing facilities.

25. 25 Indemnifications from Joint Powers Agencies and their Members before the Joint Powers Agency Subcommittee of the Central Valley Flood Protection Board February, 2009 Scott Shapiro Downey Brand LLP