Community Association Insurance Manual

By Jay Hansen, Esq.

Epsten, APC

Copyright 1997-2017.  All rights reserved.

Community Association Insurance Manual

Table of Contents

Page # (to the right of topic)

In General 1
1. Variations on Murphy’s Law Will Apply to the Insurance You Buy 1
2. Be Sure Your Insurance Agent Asks for Your Declaration (CC&Rs), Bylaws, and Articles of Incorporation and Reviews Them for Insurance Requirements 1
3. Keep Each Year’s Policy Together in One Folder, and Keep Each Company’s Policy Together. Don’t Ever Throw Them Away 1
4. Be Sure to Carry All the Insurance Required by Law and Your Governing Documents 1
5. Inform Your Owners That They Need Their Own Insurance 2
6. When Required, Be Sure to Meet Lender Insurance Requirements – VA, FHA, FNMA (“Fannie Mae”) or GNMA (“Ginnie Mae”) 2
7. File All Claims Properly and in a Timely Manner 2
8. Find an Insurance Agent Who Knows and Deals with Association Insurance Regularly 2
9. Find the A.M. Best’s Ratings for Each Insurance Company You Use 3
10. Find Out if Each Insurance Company You Use is Admitted to Write That Insurance in California 3
Property Insurance 3
11. The Total Building Coverage Pays Just for the Cost of Rebuilding, Not the Market Value 3
12. Evaluate Whether “Special Form” or “Named Perils” (or “Fire and Extended Coverage”) is the Better Option 3
13. Buy Replacement Cost (RC), Not Actual Cash Value (ACV) 4
14. Be Sure You Know What Owner-Maintained Improvements You Want to and Need to Insure 4
15. How Large a Deductible Should You Obtain and Who Pays It? 5
16. Is Your Deductible Per Occurrence or Per Building? 5
17. Make Sure You Do Not Have Any Co-Insurance Problems 5
18. Do Not Under-Insure or Over-Insure the Replacement Cost of Your Property 6
19. Obtain a “Guaranteed Replacement Cost Endorsement” 6
20. If You Can’t Obtain a “Guaranteed Replacement Cost Endorsement,” Get an “Agreed Amount Endorsement” 7
21. Neither Forget Nor Over-Insure Personal Property 7
22. Who Pays for Relocation Costs, What Costs Are Covered, and In What Amounts? 7
23. Obtain Coverage to Pay for Building Code Changes 7
24. Optional – Coverage for Lost Rents, If Your Association Has Any Significant Rental Income 8
25. Optional – Coverage for Floods 8
26. Optional – Coverage for Glass Breakage 8
27. Optional – Coverage for Power Failure 8
28. Optional – Coverage for Earthquake 8
29. Be Careful About “Inflation Protection” Coverage 8
30. Optional – Walls, Fences, Swimming Pools, Spas, etc. 9
31. Optional – Boiler and Machinery Coverage 9
32. Optional – Valuable Papers Coverage 9
33. Check Who is Covered by the “Loss Payable Clause” 9
34. Obtain a “Waiver of Subrogation” Clause 9
35. Obtain “Primary and Non-Contributory” Coverage 9
General Liability Coverage 10
36. Obtain a “Commercial General Liability” (CGL) Policy 10
37. General Liability Coverage Typically Covers Your Association’s Liability to Others 10
38. Look for “Combined Single Limit” Coverage for General Liability 11
39. Be Sure the Policy Has a “Separation of Insureds” Clause 11
40. Avoid a Cross-Liability Endorsement 12
41. Remember that the Dollar Limits are Typically the Maximum Payout Per Year, Not Per Claim 12
42. Does Your Policy Obligate the Carrier to Defend? 12
43. Who Has the Right to Settle and to Select Defense Counsel? 12
44. Are Defense Costs Deducted from the Total Amount of Coverage? 12
45. Is There a General Liability Deductible? 12
46. Name the Management Company as an “Additional Insured” 12
47. Know the Limits of Coverage for an “Additional Insured” 12
48. Obtain Medical Payments Coverage 13
49. Obtain “Products Liability” Coverage 13
50. Obtain “Completed Operations” Coverage 13
51. Obtain Non-Owned Vehicles Coverage 13
52. Obtain Contractual Liability Coverage 13
53. Optional – Host Liquor Liability/Dram Shop Insurance 14
54. Optional – Garage Keeper’s Liability 14
55. Optional – Umbrella and Excess Liability Coverage 14
56. Optional – Security Guard Liability Coverage 14
57. Obtain Sufficient CGL Coverage to Qualify for Statutory Limitations of Liability 14
Directors and Officers (D&O) Liability Coverage 15
58. Don’t “Cheap Out” on Your Own Coverage 15
59. Know Who is a “Named Insured” 15
60. Look For “First Dollar Defense” Rather Than a “Reimbursement Policy” 15
61. Know the Amount of the Deductibles 15
62. Ask if There is Any Co-Insurance, and Avoid It 15
63. Understand the Impact of a “Claims-Made” Versus an “Occurrences” Policy 15
64. Know the Exclusions from D&O Coverage 16
65. Find Out Whether Any Prior Acts Are Covered 16
66. Look for a Policy That Covers Non-Monetary Claims 17
67. Look for a Policy That Covers the Manager as a Named Insured 17
68. Look for a Policy That Covers at Least the Defense of Discrimination Claims 17
69. Look for a Policy That Covers Failure to Obtain the Proper Types or Amounts of Insurance 17
70. Who has the Right to Select Defense Counsel? 17
71. Who has the Right to Agree to Settle the Case? 17
72. Are Defense Costs Deducted From the Total Amount of Coverage? 17
73. Do You Need to Obtain an Extended Reporting Period or Overlapping Coverage? 17
74. Obtain Sufficient D&O Coverage to Qualify for Statutory Limitations of Liability 18
Fidelity Bond/Dishonesty Coverage/Crime Coverage 18
75. Obtain a Fidelity Bond or Dishonesty or Crime Coverage 18
76. Scope of Fidelity Policy Coverage 18
77. Does the Manager’s Fidelity Coverage Provide HOA Protection? 19
78. Time of Loss or Discovery of Loss and its Effect on Fidelity Coverage? 19
79. Other Pitfalls of Fidelity Coverage 19
Special Types 19
80. Obtain “Owned Vehicles” Coverage, Where Applicable 19
81. Is Worker’s Compensation Coverage Needed? 20
82. Should You Consider Employment Practices Liability (EPL) Coverage? 20
83. Builder’s Risk Insurance or Course of Construction (“COC”) Insurance? 20
Acknowledgments 20
Glossary 21

Community Association Insurance Check List

In General

1.                  Variations on Murphy’s Law Will Apply to the Insurance You Buy

.  Below are some tongue-in-cheek comments, but there is an element of truth in all of them:

(a)……… Your policy will be written so there is no coverage for your claim.

(b)……… If your policy is written so there is coverage for your claim this year, it will be changed next year.

(c)…….. Even if the company defends you on a claim, they probably won’t pay to indemnify you if you lose, and it may require you to repay the defense costs.

(d)…….. The big print tells you the rights you have under the policy; the small print tells how the company takes them away.

To help minimize the impact of the above risks, observe the following rules, ask the following questions, and learn the following information about the insurance policies you examine.  However, no manual can ever include everything you may ever want or need to know.  Thus, you should check any other sources you can find for information and ask detailed questions of the insurance agents with whom you deal.

2.                  Be Sure Your Insurance Agent Asks for Your Declaration (CC&Rs), Bylaws, and Articles of Incorporation and Reviews Them for Insurance Requirements

.  If your insurance broker does not ask for your governing documents, you may have a broker who does not know Community associations or their insurance requirements.  It is far better to have the insurance you need than to look at a malpractice case against your insurance broker when you find out, too late, that your insurance is inadequate.

3.                  Keep Each Year’s Policy Together in One Folder, and Keep Each Company’s Policy Together.  Don’t Ever Throw Them Away

.  When a renewal policy comes, it will contain a declarations page with the form numbers applicable to that policy.  They will send only new forms and endorsements.  Check all the forms listed at the bottom of the declarations page.  If any are missing, copy them from the prior year’s policy and clip or staple them together in that folder.  If you have a separate policy for directors and officers liability coverage (“D&O”), keep all those forms together with that policy, but separated from the property and general liability policy or policies.

You may not need a policy until years after it has expired, so keep the policies indefinitely in a chronological manner so that you can find them.

4.                  Be Sure to Carry All the Insurance Required by Law and Your Governing Documents

.  While a board can and should purchase directors and officers (“D&O”) liability insurance to protect it against its own negligence (essentially “malpractice” claims), all D&O policies we have seen contain an exclusion stating that the insurance does not cover claims for failure to have the right insurance in sufficient amounts.  The reason for this is that if a board could obtain insurance for failure to purchase proper and adequate insurance, there would be no need to purchase the correct types of insurance or insurance in sufficient amounts.  In other words, the D&O coverage would provide the coverage for everything else.

If a board fails to have adequate insurance and is sued, the insurance may not pay to defend them, and the board members may have personal liability, not only for the cost of their own defense, but also for the full loss sustained due to the failure to have adequate insurance.

5.                  Inform Your Owners That They Need Their Own Insurance

.  Don’t advise them of what coverage they need, but tell them they do need their own policies for their own personal property, for liability inside their units, for other housing if their unit becomes uninhabitable or for lost rent if they are a landlord, and any other coverage not provided under the association’s policy.  Be sure they know the burden is on them and their agents to find out what is and isn’t covered by the association’s insurance.  In particular, owners should consider “loss assessment coverage” to help pay for large special assessments to cover uninsured claims or under-insured claims, for example, claims due to earthquake which carry a large deductible, even if the association has an earthquake policy.  (See Paragraph 35 regarding the effect of the association’s policy being “primary.”)

6.                  When Required, Be Sure to Meet Lender Insurance Requirements – VA, FHA, FNMA (“Fannie Mae”) or GNMA (“Ginnie Mae”)

. These requirements are generally set forth in the declaration, if your association has been approved to meet that lender’s requirements.  Typically, VA and FHA projects must have greater property coverage for owner-maintained components than a non-VA or non-FHA project.  (See Paragraph 14.)  Many of the suggestions in this manual are either requirements or suggestions under the guidelines of these federally insured mortgage loan programs.  Some examples of FNMA Selling Guide requirements are noted in various paragraphs below.

7.                  File All Claims Properly and in a Timely Manner

.  Be sure you have a copy of the policy.  It will tell you when and where to file claims.  Don’t assume you can file them with your agent.  File claims in writing, use certified mail, keep copies of what you send, and keep the certified mail receipts.  If you are close to a deadline, don’t hesitate to use several methods to insure on time receipt, e.g., personal delivery, messenger service, fax, certified mail, etc.

8.                  Find an Insurance Agent Who Knows and Deals with Association Insurance Regularly

Don’t assume any agent or broker will know the needs of an association.  Also, find out if the agent with whom you are dealing has the authority to bind the insurance company.  That requires written proof on original documentation, not photocopies, from the insurance company; certainly the agent’s verbal representation is not sufficient.  If the agent does not have authority to bind the company, your association cannot assume that it is covered or protected until you have something directly from the carrier.

9.                  Find the A.M. Best’s Ratings for Each Insurance Company You Use

.  This guide is available to insurance agents.  It provides a measure of a company’s financial ratings and thus its stability and ability to pay losses.  The top Best’s rating is “A++ XV,” and the lowest is “F  I.”  The letter ratings range from “superior” (A++) to “in liquidation” (F) and represent a qualitative assessment by A.M. Best on the quality of the insurance company’s operations and its financial ability to respond to insured losses.  (A comparable analogy is the bond ratings given by Moody’s or Standard & Poors for corporations and governmental bodies on their financial strength and stability and thus their ability to repay their debts.)  The Roman numeral is a quantitative rating of financial size, specifically the capital, surplus and conditional reserve funds of the company.  A Roman numeral “I” rating is less than $1 million, while a Roman numeral “XV” rating is more than $2 billion.  FNMA looks for at least an “A VIII” rating in a condominium or planned development.  See FNMA Selling Guide §701.01.

10.              Find Out if Each Insurance Company You Use is Admitted to Write That Insurance in California

.  With the Internet, this is much simpler.  Check the home page for the California Department of Insurance (http://www.insurance.ca.gov/docs/index.html) and, at the time this was written, the admitted companies and the types of insurance they were admitted to issue were accessible from (http://www.insurance.ca.gov/docs/FS-Admitted.htm).

Insurance is often an esoteric subject that confuses many associations.  Many people have said that you never find out whether your insurance is any good until you have to make a claim on it.  Of course, by then, it is too late.  From some of the misunderstandings and errors various associations have made, we have developed the following manual of items to consider when evaluating a particular policy or when looking for a new policy.

Property Insurance

11.              The Total Building Coverage Pays Just for the Cost of Rebuilding, Not the Market Value

.  If a building could be rebuilt for $3 million, but the collective market value of the units is $7 million, the carrier will pay no more than $3 million for a covered loss.  If an association is in a high rise that the Coastal Commission or local codes would not allow rebuilding in its former configuration or height, the recovery will not exceed the reconstruction cost, even if the market value is much higher.

12.              Evaluate Whether “Special Form” or “Named Perils” (or “Fire and Extended Coverage”) is the Better Option

.  “Special Form” coverage (the term now used in place of “All Risk” coverage that is no longer available) insures against a broad spectrum of risks except those that are specifically excluded.  While no coverage is truly all risk, “special form” coverage covers more types of risk than “named perils” coverage (also known as “basic form” or “fire and extended coverage”).  Be sure you ask about and understand what risks are excluded.  Named perils policies or fire and extended coverage policies typically cover only losses due to specified perils, such as fire, lightning, wind, hail, aircraft, riot, vehicles, explosion, smoke, vandalism and malicious mischief.  If a peril isn’t specifically named in such policies, then the loss isn’t covered.  There are also “broad form” policies, which are “beefed-up” named perils policies that include some additional covered causes of loss, such as burglary, theft or collapse and possibly even water damage.  As an example of what concerns lenders, the FNMA Selling Guide §701.02 wants an association’s master policy to be either “all risk” or at least a “broad form” covered causes of loss.

NOTE:  Due to events over the last several years, there is now a caveat about whether a Special Form (formerly “All Risk”) policy is the most desirable.  Starting around 2000, many associations have seen their claims histories skyrocket, their premiums increase dramatically, and some have been told that their insurance company will not renew them because of significant increases in claims.  This has arisen, in large part, from owners’ HO6 carriers (see Paragraph 35) insisting that the association’s master policy must evaluate any claim first, because the HO6 policy is excess, or secondary, to any amounts recovered under the master policy.  This factor led to a significant increase in interior damage claims, usually caused by water, and due in many cases to such things as pipe leaks, ice-maker line leaks, water heater leaks, washing machine hose failures, sink and toilet overflows and other damage due to failures in owner-maintained components.

If the association obtains an all risk policy, it will cover damage claims from a larger group of causes, but it may also increase the number of non-catastrophic claims involving owners’ personal property and fixtures.  Thus, the association may wish to consider either a named perils policy, or a broad form policy, if FNMA or other lender requirements allow it.

There are variations on what is meant by basic form (aka “named perils” or “fire and extended coverage”), broad form (typically basic form plus items such as broken windows and other structural glass, breakage of glass that is part of a building or structure, weight of snow or ice falling objects and water damage), special form (replacing what was formerly called “all risk”) and other fire and property coverages.  A search on www.google.com will probably show some of the variations you may encounter.  The descriptions typically apply whether you are looking at a homeowners or business and commercial policy.

13.              Buy Replacement Cost (RC), Not Actual Cash Value (ACV)

.  ACV pays only for depreciated value (effectively garage-sale value).  Most documents require full replacement cost, usually subject to a reasonable deductible.  See FNMA Selling Guide §701.03.

14.              Be Sure You Know What Owner-Maintained Improvements You Want to and Need to Insure

.  VA- and FHA-approved developments and others may require your association to insure many owner-maintained components, such as cabinets and other fixtures, wall and floor coverings, built-in and maybe free-standing appliances.  If your documents do not require this, be sure you weigh (1) the generally lower cost of insuring these items through the association and (2) the size of your deductible against (3) the increased number of claims you may get if the owner’s property is insured, and (4) what your documents and rules say about who must pay the deductible for a loss.

Note that many commercial master insurance policies that cover the residential structures in condominium and Community associations automatically insure most of the attached components or “fixtures” that the owners normally maintain, such as floor and wall coverings, cabinets, plumbing and toilet fixtures, and built-in appliances, including furnaces and water heaters  Some policies may not do this automatically, but they may state that these fixtures are covered to the extent the association’s governing documents require the fixtures to be insured.  However, most governing documents do require an association to insure these owner-maintained components.  The reason for this is that lenders are issuing mortgages for the value of the unit or home at the time of initial occupancy, and those components are included in the selling price and provide part of the security for the mortgage loan.  Lenders do not want to have an owner walk away from a disaster in which the lender gets stuck paying for items that provided part of the security for the mortgage loan.  They want the insurance to cover it.  As an example, see FNMA Selling Guide §701.02 which recites this justification for insuring the fixtures.

15.              How Large a Deductible Should You Obtain and Who Pays It?

Higher deductibles generally mean fewer claims and lower premiums.  Be sure you adopt a policy that specifies under what conditions the owners must pay the deductible.  If you amend your covenants, include the policy in the amendment.  Note that there may be a maximum limit to what your deductible can be without triggering problems with lenders.  For example, the FNMA Selling Guide §701.03 states that the maximum deductible in a planned development with a master policy or in a condominium is $10,000 or 1% of the policy face amount, whichever is lower.

16.              Is Your Deductible Per Occurrence or Per Building?

This applies only in policies covering multiple buildings.  A per-occurrence loss is generally better and simpler.  With per- building deductibles, if multiple buildings incur a loss, there will be no payment on a given building until the loss for that building exceeds the deductible, even if there is a huge loss, vastly exceeding the deductible on another building.  A per-occurrence deductible simplifies adjusting the claim, as the only issue is the total damage, not the damage incurred on each building.

17.              Make Sure You Do Not Have Any Co-Insurance Problems

.  Co-insurance means that your association is sharing a percentage of each loss with the insurance company.  The insurance company will pay part of the loss, and your association will pay the rest.  There are two ways co-insurance problems can arise:  the first is by contracting for it, and the second is by under-insuring the property.

Probably no association should ever contract for co-insurance.  Most governing documents state something like the following:

“The Association [or the Board] shall obtain fire and extended coverage for the full insurable replacement cost of the common area and the units.”

If you contract for co-insurance, you will be agreeing to pay 10% or 20% or some other percentage of each loss rather than having the insurance company pay it all.  In other words, if your association incurred a $500,000 loss, and if it contracted for 10% co-insurance, you would be self-insuring for, and would have to come up with, $50,000 out of the association’s or the owners’ pockets.  Probably most owners and the board will be shocked if this occurs.  Furthermore, if the documents require full replacement coverage, the owners may sue the board for failure to carry the required insurance.  If that occurs, the board will probably have no liability coverage to protect it against suit.  (See the discussion of inadequate insurance below and in Paragraph 4 above.)

The second type of co-insurance problem occurs from failing to have property insurance in an amount sufficient to cover the replacement cost to cover all the association’s property.  As an example, assume an association carries $5 million in property coverage, but the replacement cost for the entire property is really $10 million.  What happens if the association has a $500,000 loss?  An initial reaction might be to assume that, as long as the loss is less than $5 million, the association is protected.  Wrong!  The insurance company will say that, since the association carried only $5 million in coverage when it needed $10 million total, the association was co-insuring 50% of all losses, not just the losses exceeding $5 million.  Thus, the insurance company will pay only 50% of the $500,000 loss (i.e., $250,000), and the association and its members will have to come up with the other 50%.  Ouch!  To avoid co-insurance problems based on under-insuring, see Paragraph 18 below.

18.              Do Not Under-Insure or Over-Insure the Replacement Cost of Your Property

.  However, if you are going to err, it is better to err on the side of over-insuring.  The only problem with over-insuring is that you are paying for more than you need, and thus that money is wasted.  It is far more serious to be under-insured, because of co-insurance problems, as discussed in Paragraph 17.

How can the Board be sure its property insurance will cover full replacement cost?  One option is to have a professional determine what the replacement cost will be.  Such computations are generally based on the type of construction you have and the cost per square foot to reconstruct that type of building.

Some other options involve obtaining a “guaranteed replacement cost endorsement” (see Paragraph 19) or an “agreed amount endorsement” (see Paragraph 20).

19.              Obtain a “Guaranteed Replacement Cost Endorsement”

.  Guaranteed replacement cost guarantees that the carrier will replace the property without regard to the dollar limit purchased.  In other words, if there is a total loss on a single building whose replacement cost is $6 million but it was insured for only $5 million, the guaranteed replacement cost will pay the full $6 million.  (If this isn’t available, see Paragraph 20.)  See FNMA Selling Guide §701.03.

20.              If You Can’t Obtain a “Guaranteed Replacement Cost Endorsement,” Get an “Agreed Amount Endorsement”

.  Under a typical “agreed amount endorsement,” the insurance company agrees that the total amount of property coverage purchased is sufficient to replace the property, and it will not reduce the pay-out as long as the insured loss amount turns out to be lower than the full replacement cost.  Thus, an agreed amount endorsement effectively removes the co-insurance clause.  (See Paragraph 17.)  However, if there is a total loss, an agreed amount endorsement will not make up the difference between the maximum amount payable under the policy and a higher total cost of repair.  So, if there is a total loss on a single building whose replacement cost is $6 million, but it was insured for only $5 million, the carrier will pay out only $5 million.  Thus a guaranteed replacement cost endorsement is better.  (See Paragraph 19.)

21.              Neither Forget Nor Over-Insure Personal Property

.  If your association has any significant pool furniture, office equipment, cleaning equipment, or other personal property, be sure you have sufficient coverage for it.  Although this coverage is generally inexpensive, don’t carry more than you need.  Check to see if there is a separate deductible for personal property losses; frequently there is.

22.              Who Pays for Relocation Costs, What Costs Are Covered, and In What Amounts?

If there is a major property loss, and owners’ units are condemned, they must move out.  Is any of the relocation cost, rental of temporary lodging, etc., covered under your association’s policy, and if so, for how long and how much?  If not, this is another reason owners need to have their own coverage for such losses.  It is worth notifying owners in your annual insurance disclosures that most association master policies do not cover owners for alternate housing, moving and storage expenses, or loss of their personal property from fire and other losses.  They need their own coverage for that.

23.              Obtain Coverage to Pay for Building Code Changes

.  This is sometimes called “ordinance and law” coverage.  Most property policies cover only the cost of rebuilding the property as it existed before the loss, but that is usually the way it was built 10, 20 or 30 years ago.  However, buildings have to be rebuilt to meet current building codes and that makes reconstruction more expensive.  Coverage for those increased costs can be purchased as additional coverage, but not every company offers it, so look for a company that does.  This coverage becomes increasingly more important as the community ages.  Be sure that you obtain coverage for the following:  (1) ”contingent liability,” which may require tearing down the undamaged portion of a building, if more than a certain percentage of the building was destroyed thus turning a partial loss into a total loss; (2) ”increased cost of construction” due to building code changes that have been implemented since the property was new; and (3) ”demolition costs” for removing the damaged property and portions of the building so that reconstruction can begin.  See FNMA Selling Guide §701.04.  For example, you may need to install fire sprinklers or even an elevator for second story units to provide access for persons with disabilities.

24.              Optional – Coverage for Lost Rents, If Your Association Has Any Significant Rental Income

.  This is normally excluded.  It is important if your association has any significant rental income from laundry rooms or any other property.  Absentee owners who are landlords should obtain their own coverage for their lost rents under their individual policies.

25.              Optional – Coverage for Floods

.  This is invariably excluded and generally available only through FEMA (Federal Emergency Management Agency).  Flood coverage is certainly important in flood plains and other areas subject to flooding.  It has been required for VA- and FHA-approved projects in flood hazard areas and similar projects in which other federally guaranteed mortgages are issued.  However, absent at least a customized or special endorsement on the property policy for floods, there would be no coverage for mud slides, plumbing leakage, sewer backups, excess surface water run-off, etc.

26.              Optional – Coverage for Glass Breakage

.  Glass breakage coverage is often excluded or significantly limited under most property policies.  If your association has any significant glass windows and doors, it is probably important.  If there is a limit of $1,000 per occurrence and many plate glass windows are damaged or destroyed in a storm, your association could be seriously impacted.

27.              Optional – Coverage for Power Failure

.  If your association has a restaurant including refrigerated or frozen supplies that may spoil, or other facilities that must have a continuous or nearly continuous supply of power to avoid a loss, you will probably need a special endorsement to cover these losses.

28.              Optional – Coverage for Earthquake

.  This always requires a costly endorsement or separate policy that is subject to large deductibles.  The cost is generally significant enough that owners must vote on it, because it likely will require an increase in assessments.  If all or most owners purchase “loss assessment” coverage through their individual policies, that may go a long way toward paying for large special assessments for substantial damage, but it may only cover up to about a 30% to 40% loss.  In a condominium, co-op, or community apartment project, if the association doesn’t buy the policy, the individual owners probably will be unable to obtain earthquake coverage for anything other than their personal property.  Note that most earthquake deductibles are a percentage, but it is usually a percentage of the total coverage, not a percentage of the loss.  If there is a 10% deductible, it could mean either that no coverage will kick in until 10% of the total insured value has been exceeded (e.g., until there is $2.5 million in damage on a $25 million policy) or until there is damage equal to 10% of the replacement cost per unit, if it is a per unit deductible (e.g., if it would cost $150,000 to rebuild a unit, there is no coverage until there is at least $15,000 damage per unit).

29.              Be Careful About “Inflation Protection” Coverage

.  This is helpful, especially in periods of high inflation, to make sure your property coverage limits increase as building costs skyrocket.  However, it may provide too much coverage in periods of low inflation.  If your buildings can be rebuilt for $3 million, and you have $5 million in coverage, the carrier will never pay out more than $3 million, so you are paying for $2 million more in coverage than you could ever use.  (See Paragraph 18.)  Note that an inflation guard endorsement is required by FNMA, if it can be obtained.  See FNMA Selling Guide §701.04.

30.              Optional – Walls, Fences, Swimming Pools, Spas, etc.

Coverage for walls, fences, swimming pools, spas, retaining walls, ponds, piers, golf courses, or other unique property is often excluded or has limited coverage.  Be sure to obtain sufficient coverage, if you have any significant components in these categories.  Pools and spas may not be damaged by fire, but they could be significantly damaged from earthquake, vandalism, or some other occurrence, and wooden fences and even steel fences can be damaged or destroyed by fire or even storms.  It may also require special care to develop a proper valuation of the potential losses.

31.              Optional – Boiler and Machinery Coverage

.  You may not need to have a boiler to need this coverage, and it will usually require a separate endorsement.  If you have pumps, fans, or other mechanical equipment that breaks down, damage caused to the equipment itself by the failure is excluded.  Associations with large air-conditioning systems should consider it.  Ask your agent what this coverage will and will not provide if you obtain it.  FNMA requires this, if an association has central heating or cooling.  See FNMA Selling Guide §701.04.

32.              Optional – Valuable Papers Coverage

.  You should consider this endorsement to cover the labor cost of reconstructing valuable information, such as financial data, lost in a fire or other cause of loss.

33.              Check Who is Covered by the “Loss Payable Clause”

.  When there is a loss, the policy should pay the funds just to your association or an insurance trustee based on a governing document requirement to rebuild the damaged property.  However, the owners and their lenders should also be named as insured under the policy.

34.              Obtain a “Waiver of Subrogation” Clause

.  Most governing documents require this.  Because the owners are also considered named insureds (or “also insureds”), the insurance is designed for their protection as well as the association.  Just as vehicle owners have property insurance to repair their cars, even if they are damaged by the owner’s own negligence, your association’s policy should pay to repair the property damaged by an owner’s negligence.  Under most policies, a carrier will seek to enforce its “subrogation rights” to recover the loss they had to pay from the party responsible for the loss.  However, in the association context, there should be a “waiver of subrogation.”  This should apply at least to owners and their families, but some clauses extend to the tenants and guests of owners as well.  See FNMA Selling Guide §701.04.

35.              Obtain “Primary and Non-Contributory” Coverage

.  The “primary” language treats your association’s policy as the primary policy, if owners and your association have overlapping coverage.  The “non-contributory” language means that the primary policy will pay until it exhausts itself.  Only when it is exhausted for all covered claims will the secondary and overlapping coverage be required to make any contribution toward the loss.  This simplifies adjusting a claim when there is damage both to association-insured property and to owner-insured property causing multiple carriers to become involved in the adjusting process.  The owners’ adjusters only need to deal with the portion of each owner’s claim not covered by your association’s policy, and your association’s carrier pays the maximum covered claim less any deductible.

Note that making the association’s policy primary is a requirement of most federally-guaranteed loan programs, such as the Federal National Mortgage Association (a.k.a. FNMA or “Fannie Mae”).  See e.g., FNMA Selling Guide §701.04.  The downside of the association’s policy being primary is that the association may find that owners’ insurers will have the right to require the association to file any owner’s loss with the association’s carrier and to make the association’s carrier pay whatever is covered under the master policy before the owner’s carrier has to pay anything.  However, because most federally guaranteed loan programs want this, if you try to amend out such a requirement, it is likely to activate mandatory lender approval of the amendment.  Even if there is no mandatory requirement for the master policy to be primary, it may end up being primary anyway.  This is due to the typical language found in most owners’ policies.  The owners’ policies are often called an “HO6” policy in a condominium or other association in which the association carries a master property damage policy.  A common HO6 policy states that, if the association carries insurance on the same property covered under the HO6 policy, then “this [HO6] insurance will be excess over the amount recoverable under such other insurance.”  In other words, the association policy is effectively primary, and the owner’s policy is secondary.

General Liability Coverage

36.              Obtain a “Commercial General Liability” (CGL) Policy

.  Most carriers offer a CGL policy which includes not only a “general liability” policy (see Paragraph 37) but additional types of liability coverage for protection against other claims.  The additional liability coverage may include coverage for Medical Payments (see Paragraph 48), Products Liability (see Paragraph 49), Non-Owned Vehicles (see Paragraph 51), etc.

37.              General Liability Coverage Typically Covers Your Association’s Liability to Others

.  It is typically limited to claims of bodily injury (“BI”) and property damage (“PD”) caused by the acts or omissions of your association and its agents.  Look for a policy that also covers claims for advertising injury and personal injury (“PI”) which often are sold together.  Personal injury includes non-bodily injuries such as humiliation and mental anguish.  These categories of insurance cover claims such as slander; libel; false arrest, detention or imprisonment; wrongful entry, eviction, or invasion of right of private occupancy; invasion of privacy, etc.  In a broadly worded policy it may include a civil rights or discrimination claim, where insurance against such offenses is not prohibited by law.  It is worth notifying owners in your annual insurance disclosures that most association general liability policies typically will not protect owners against claims from other people injured on or in their property.  They need their own coverage for that.

38.              Look for “Combined Single Limit” Coverage for General Liability

.  If a policy has $2 million “combined single limit,” the carrier will pay up to $2 million for any individual loss that occurs during the policy period but will pay out no more than a maximum of $2 million for losses occurring in that year, regardless of the number of losses or the total amount of those losses.  This compares with a policy that may be $1 million “per occurrence” and $2 million “in the aggregate.”  If there were a $1.3 million dollar loss and a separate $300,000 loss in the same policy period, the carrier would pay both claims under the combined single limit coverage, but if the policy is a “Per Occurrence/Aggregate” policy, the carrier will pay out just $1 million maximum on the $1.3 million occurrence and the full $300,000 on the $300,000 occurrence, even though the total loss is less than the $2 million aggregate for the year.  If there were four separate losses of $1 million, $500,000, $400,000 and $300,000 for a total of $2.2 million, each occurrence is small enough to be covered under either the combined single limit or the occurrence/aggregate policies, but neither one would pay out more than $2 million in losses for the year, so both would be $200,000 short of the total needed.

39.              Be Sure the Policy Has a “Separation of Insureds” Clause

.  The term “separation of insureds” is a newer term for what used to be called “severability of interest.”  This concept deals with the issue of what happens to the insurance coverage, if one insured party sues another insured party.  For example, automobile insurance carriers do not want a daughter who is injured by the negligent driving of her father to be able to sue the father for her auto accident injuries and also require the automobile insurance carrier to defend the claim and pay any damages for negligence.  Instead, the carriers want the parents to carry medical insurance rather than initiating lawsuits to pay for medical expenses.  The chances for fraud and collusion are high when related parties are both plaintiffs and defendants in such cases.

In an HOA general liability policy, typically both the HOA and the homeowners are insured against liability claims due to negligence involving the common area, and most primary insurance policy forms contain this provision, but you need to check.  On the other hand, excess or umbrella policies (see Paragraph 55) may not, so if you have an excess or umbrella policy, you need to check that too.  But what if a homeowner is injured due to the negligence of the association?  Will the carrier say that it has no obligation to defend and indemnify the association against the owner’s lawsuit because both are insured under the same policy?  If there is a “separation of insureds” clause in the HOA general liability policy, then the policy will cover the party against whom the claim is made as if a separate policy had been issued to each insured party.  Thus, if the “separation of insureds” clause exists, the HOA would be defended, even though the suing party is also insured under the same policy.

Many governing documents, and many secondary mortgage market lenders, like Fannie Mae, VA and FHA, require this in HOA policies, so be sure to obtain it, or at least obtain assurances that there is not a clause in the policy that prohibits one insured party from suing another insured party.  Note that the beneficial effects of a separation of insureds provision can be negated by a “cross-liability endorsement.”  (See Paragraph 40 below.)

40.              Avoid a Cross-Liability Endorsement

.  A Cross-Liability Endorsement effectively negates the effect of a Separation of Insureds (aka Severability of Interest) clause.  (See Paragraph 39 above.)  Most HOA general liability policies do not contain this endorsement, which would enable a carrier to deny defense and indemnity to an HOA, if the HOA is sued by a homeowner whose injuries were caused by the HOA’s negligence.  We understand that there are some carriers that provide HOA insurance that include this endorsement, so WATCH OUT for that.  An HOA could find itself paying for its own defense and have a very expensive damage claim in addition, if this provision exists in its policy.

41.              Remember that the Dollar Limits are Typically the Maximum Payout Per Year, Not Per Claim

.  If you are unfortunate enough to have several large claims or multiple persons seriously injured by one claim, you could exhaust your coverage.

42.              Does Your Policy Obligate the Carrier to Defend?

The carrier should be obligated to defend, even if the claim is fraudulent, false, or has no basis in fact.  However, this duty often goes hand in hand with the right to settle Paragraph 44) and the right to select legal counsel (see Paragraph 43).

43.              Who Has the Right to Settle and to Select Defense Counsel?

Typically, the carrier has the right to settle and to select defense counsel on general liability claims.

44.              Are Defense Costs Deducted from the Total Amount of Coverage?

If they are, each dollar spent on defense is one dollar less available for settlement or to pay claims.  This question applies both to general liability and D&O claims.  These are sometimes called “burning balance” policies.  Look for a policy where the defense costs are paid in addition to (outside of) the limits of liability or purchase higher limits of liability.

45.              Is There a General Liability Deductible?

Usually there isn’t a deductible, and look for policies without a deductible.  However, find out if there is one and whether it applies for every claim or just once per year.

46.              Name the Management Company as an “Additional Insured”

.  Most policies will do this for no additional charge, if you ask.  When the manager is an additional insured, the carrier will defend the manager, if the manager is sued for any claim covered under the general liability policy.  If the manager can be a “named insured” or “also insured,” that would be preferable.  (See Paragraph 47.)

47.              Know the Limits of Coverage for an “Additional Insured”

.  A “named insured” (also called an “also insured”) is preferable to an “additional insured.”  A “named insured” will be covered for a claim (falling within the policy coverage), even for the named insured’s own wrongful act or omission.  However, an additional insured endorsement will defend only the innocent additional insured.  It will not pay a claim, and may require repayment of defense costs, if the additional insured is found to be independently liable.  In other words, an additional insured still must have its own coverage for its own wrongful acts or omissions.  A typical additional insured endorsement says:  “This extension of coverage does not apply to liability arising out of the negligence of the additional insured, its agents or employees, unless the agent or employee is the named insured.”  Also, these endorsements may not be renewed automatically when the named insured renews the policy.  Thus, it is important for the additional insured to request a new additional insured certificate, when the original policy expires.

48.              Obtain Medical Payments Coverage

.  This is frequently included in a package policy.  It enables an association to pay the medical expenses of someone injured on the property, whether due to association negligence or not, and it may help to avoid litigation.

49.              Obtain “Products Liability” Coverage

.  Although most associations are not in the business of providing products, they can be liable for products liability if people were to become ill from eating contaminated food at an association function, whether the association made the food or bought the food.  This coverage is frequently included, but be sure that it is.  It may be part of a CGL policy or package endorsement that includes “Completed Operations” coverage.  (See Paragraph 50.)

50.              Obtain “Completed Operations” Coverage

.  Completed operations coverage provides protection for your association for any injuries or property damage arising out of any operations, products or materials resulting from activities conducted by the association, whether inside or outside the association’s development.  This coverage may be part of a CGL policy or package endorsement that includes “Products Liability” coverage.  (See Paragraph 49.)

51.              Obtain Non-Owned Vehicles Coverage

.  This coverage protects your association if a director, committee member, or other volunteer drives a vehicle not owned by your association on association business, such as an errand to a hardware store, and is at fault for causing an accident.  An association can have liability for the wrongful act of its agent and a deeper pocket, if the owner’s automobile insurance is minimal and the injuries are significant.  This is often included, but it is important to make sure it exists.

52.              Obtain Contractual Liability Coverage

.  If your association enters into any indemnification or hold harmless agreements with contractors or other parties with whom it deals, you should obtain this coverage.  This should cover you if a party you have agreed to indemnify is sued and then demands that you indemnify that party.  However, this will probably be a coverage under or endorsement under the general liability policy only.  Thus, it may be limited solely to bodily injury and property damage claims, so it will not apply to non-monetary claims or breach of contract claims.  Check the language for what is and is not insured, and ask for examples of what is and is not insured.

53.              Optional – Host Liquor Liability/Dram Shop Insurance

.  If your association serves alcohol on site or alcohol is served at private functions on site, be sure there is coverage for this in the policy.

54.              Optional – Garage Keeper’s Liability

.  If your association provides any type of valet parking and takes “care, custody or control” of owner’s or guest’s vehicles such that they take the keys, drive the cars or park the cars, or if you charge owners or guests a fee for parking, talk to your insurance professional about the need for a garage keeper’s liability policy or endorsement.  If you have an outside firm hired to act as the valets, you might be able to be covered through that firm’s insurance, but you should bring this aspect of your insurance needs to your insurance professional’s attention.

55.              Optional – Umbrella and Excess Liability Coverage

.  These are two types of coverage that provides additional coverage above primary liability coverage.  Excess coverage applies only to increase the maximum limit of the general liability policy.  An umbrella policy typically adds a higher limit of liability to all liability policies (i.e., general liability, D&O, automobile, etc.).  An umbrella policy sometimes is provided through a different carrier, and it may have its own separate coverage language, or it may state that it will track the coverage (or “follows the form”) of the underlying policy.  You should know which one applies.  Be sure there is no gap between where the underlying policy limit ends and the umbrella takes over.  There are relatively inexpensive umbrella policies available that can provide up to $15 million in total liability coverage.

56.              Optional – Security Guard Liability Coverage

.  If your association has any security service, this coverage can remove the exclusion for assault and battery, i.e., intentional acts that normally wouldn’t be covered under a general liability policy.

57.              Obtain Sufficient CGL Coverage to Qualify for Statutory Limitations of Liability

.  Where the owners own the common area as tenants-in-common, e.g., in a condominium development or community apartment project, they are eligible for a limitation of liability to protect all owners against liability for injuries arising out of their shared ownership of common area property.  However, the association must carry enough general liability (or CGL) insurance.  To qualify, Civil Code section 5805 requires an association with 100 or fewer separate interests to carry at least $2 million in general liability coverage, and an association with more than 100 separate interests to carry at least $3 million in general liability coverage.  Civil Code section 5800 also provides a limitation of liability to protect the association’s officers and directors against liability for damages arising out of the acts or omissions of unpaid (volunteer) directors in exclusively residential developments.  While insurance is just one of the requirements for obtaining the protection, an association with 100 or fewer separate interests must carry at least at least $500,000 in general liability coverage, and an association with more than 100 separate interests to carry at least $1 million in general liability coverage.  To protect the directors and officers, an association must also carry at least the same minimum dollar limits of directors and officers liability coverage.  (See Paragraph 74.)

Directors and Officers (D&O) Liability Coverage

58.              Don’t “Cheap Out” on Your Own Coverage

.  Look for and purchase the best D&O policy you can find.  If you are going to be an officer or director and volunteer your time and effort for the good of the association, the least you can do for yourself, your fellow board members, and for the association as well, is to get the best D&O policy you can find.  You won’t feel so good about the money you saved on the association’s insurance, if you end up as a defendant in a lawsuit and the carrier you selected denies the claim.  Will your neighbors complain about paying more for a good D&O policy?  Maybe, but they will complain even louder, if their assessments must be increased to defend you, because the insurance you bought failed to do so.

59.              Know Who is a “Named Insured”

.  Try to obtain coverage for the broadest group possible:  current directors, former directors, committee members, etc.  The best policies also will add your association’s manager as a “named insured” or “also insured.”  (See Paragraph 47.)  While adding the manager may cost an additional premium, it will more than pay for itself if you have even one lawsuit that names the manager.  If the manager is not a named insured, your management contract may require your association to obtain and pay for an attorney to defend the manager.  That cost could easily exceed decades of premiums.  Good D&O insurance is cheaper.

60.              Look For “First Dollar Defense” Rather Than a “Reimbursement Policy”

.  Under a first dollar defense policy, the carrier pays the attorneys’ fees and defense costs during the case (except for any deductible).  A reimbursement policy may not be obvious to the casual reader, and most carriers won’t tell you it is a reimbursement policy.  Under a reimbursement policy, your association must hire and pay the attorneys’ fees and costs of the defense, your association will probably need the insurance company’s written approval to settle, and the carrier will determine whether and how much to pay when the case is over.

61.              Know the Amount of the Deductibles

.  Most are $1,000 or so per claim, but some are higher.

62.              Ask if There is Any Co-Insurance, and Avoid It

.  If there is any co-insurance, it will operate like a health insurance policy in which the carrier pays a percentage of the judgment or settlement, and possibly defense costs as they go, except there is no cap after which the carrier pays 100%.  This can become very expensive for associations whose budgets aren’t designed to pay such costs.

63.              Understand the Impact of a “Claims-Made” Versus an “Occurrences” Policy

.  Almost all D&O coverage is “claims-made,” though some may be “occurrences.”  Understanding the differences can be confusing, but they are very important.  An automobile liability policy is typical of an occurrences policy.  If you have the policy today, and you’re in an accident, you’re covered.  If your policy expires today, and you’re in an accident tomorrow with no policy in effect, you’re not covered.  If you’re driving today without a policy, but you buy one tomorrow and then you get in an accident, you’re covered.  An occurrences policy protects you if it is in effect when the accident (i.e., “the occurrence”) happens.

Claims-made policies are more complicated.  If you ever once have a claims-made policy, never switch to an occurrences policy.  Claims-made policies can vary, but invariably the policy must be in effect when the claim is made.  Some policies may require that the policy is in effect when suit is filed.  Others may require that suit be filed within some time period after the policy expires even if the claim is made during the policy period.  Some policies describe a claim as being a verbal threat or demand, while others require a written threat or demand.  Sometimes the policy must also have been in effect when the incident (or “occurrence”) took place.  However, some policies will cover an occurrence that took place before the policy was in effect, so long as your association had no knowledge of the facts or circumstances giving rise to the claim prior to the policy period.

First, you must ask if it is a claims-made policy.  If so, find out what it will cover if a claim is made after the effective date of the policy but the occurrence took place before the effective date of the policy.  Also, find out if the policy will cover any suits that are filed after the policy period, if the claim is made during the policy period.

Probably the best suggestion is to get a very good D&O policy and stick with it year after year, even if you change property and general liability carriers.  The differences in policies and the risk of not being covered, even though you always had a D&O policy in effect, are not worth the dollars you might save by switching carriers.

64.              Know the Exclusions from D&O Coverage

.  D&O insurance is essentially malpractice insurance for directors and officers.  However, there are many things that it will not cover if your association or its directors are sued.  Examples include coverage for non-monetary claims like suits for declaratory or injunctive relief which are very common.  Other exclusions include improper payments, profits or advantages to directors; violations of ERISA (Employee Retirement Income Security Act – federal retirement statute), failure to obtain proper types and amounts of insurance (although some of the best D&O policies will limit this exclusion only to failure to obtain earthquake and/or flood insurance), violations of environmental laws, and claims by one director against another director.  Know what exclusions apply, and look for policies that have fewer exclusions.

65.              Find Out Whether Any Prior Acts Are Covered

.  Some D&O policies require not only that the claim must be made during the policy period (or some extended reporting period after the policy expires), but also that the allegedly wrongful act or “occurrence” took place during the policy period as well.  Others will cover prior acts as long as the association was not aware of any of the “facts or circumstances” giving rise to the claim.  However, look for the best option, namely a policy that will cover all prior acts, as long as they did not result in a claim being made before the policy period began.

66.              Look for a Policy That Covers Non-Monetary Claims

.  If an owner sues seeking a court’s interpretation of who is required to repair or maintain a particular component, or seeking to order the board or association to stay off the owner’s property when an association is trying to make repairs, these are non-monetary claims.  Many policies do not cover non-monetary claims, yet these may be the most common types of claim against an association.

67.              Look for a Policy That Covers the Manager as a Named Insured

.  (See Paragraph 59.)  If the manager is a named insured, this should provide the indemnification required by law and/or the management contract even if the manager has legal liability, at least to the extent the claim is one that is covered under the terms of the policy.

68.              Look for a Policy That Covers at Least the Defense of Discrimination Claims

.  Because unlawful discrimination violates public policy, some states prohibit insurance that would pay for a proven discrimination loss.  However, you should at least look for a policy that will provide a defense against such claims.  There is a possibility that some general liability policies may cover discrimination claims.  (See Paragraph 37.)

69.              Look for a Policy That Covers Failure to Obtain the Proper Types or Amounts of Insurance

.  Most D&O policies exclude this coverage.  However, the better policies will provide coverage, though some may exclude coverage, if the allegation is a failure to obtain earthquake and/or flood insurance. (See Paragraph 64.)

70.              Who has the Right to Select Defense Counsel?

It is nice if your association is authorized to choose, but it rarely occurs, except in a reimbursement policy, and reimbursement policies are not desirable.  (See Paragraph 60.)

71.              Who has the Right to Agree to Settle the Case?

Is this entirely in the hands of the carrier, or does it need the Board’s permission.

72.              Are Defense Costs Deducted From the Total Amount of Coverage?

This question applies to both D&O claims and general liability claims.  (See Paragraph 44.)  If they are deducted, each dollar spent on defense is one dollar less available for settlement or to pay claims.  These are sometimes called “burning balance” policies.  Look for a policy where the defense costs are paid in addition to (outside of) the limits of liability or purchase higher limits of liability.

73.              Do You Need to Obtain an Extended Reporting Period or Overlapping Coverage?

If you switch policies, you need to know how much the new and the old policy will cover of claims that do not arise or do not become lawsuits until the new policy period.  You should strive to obtain written confirmation of this information.  If there are circumstances that occurred under the prior policy that haven’t given rise to a claim, or if there is a claim that hasn’t resulted in litigation, you must know if the new policy will cover it.  If it will not, you need to try to obtain or purchase an extended reporting period (aka “tail coverage”).  This doesn’t provide new coverage, but allows you to have the old policy cover claims or lawsuits in which the occurrence took place in the prior policy, but the claim or lawsuit does not arise until the new policy period.  Some carriers will not offer it, even for a fee.  If so, you may need to consider not switching, or carrying duplicate policies for some period of time during the transition.

74.              Obtain Sufficient D&O Coverage to Qualify for Statutory Limitations of Liability

.  Civil Code section 5800 provides a limitation of liability to protect an association’s officers and directors against liability for damages arising out of the acts or omissions of unpaid (volunteer) directors in exclusively residential developments.  While insurance is just one of the requirements for obtaining the protection, an association with 100 or fewer separate interests must carry at least $500,000 in directors and officers liability coverage, and an association with more than 100 separate interests must carry at least $1 million in directors and officers coverage.  An association must also carry at least the same minimum dollar limits of general liability (or CGL) coverage.  (See Paragraph 57.)

Fidelity Bond/Dishonesty Coverage/Crime Coverage

75.              Obtain a Fidelity Bond or Dishonesty or Crime Coverage

.  Most governing documents require fidelity coverage in a specified amount.  While the documents may call for a “fidelity bond,” it is almost always provided by an insurance policy, not a bond in the normal sense.  Often it is included in a package policy with property and general liability coverage, though it can be a stand-alone policy, but be sure to obtain it and in the required amounts.  Since the amount required by the governing documents is often based on your association’s reserves and annual assessments, be sure to increase the coverage periodically as needed.  The typical governing document requirement is three times the amount of monthly assessments (or an estimate of the maximum amount of operating cash on hand) plus the amount of your reserve fund, but some documents may vary.

76.              Scope of Fidelity Policy Coverage

.  The typical fidelity policy protects the HOA (1) against the loss of cash and other items of value, (2) due to criminal or dishonest acts, (3) by an employee, where “employee,” is typically defined as someone compensated by wages, salary or commissions.  Board members are typically uncompensated volunteers, and off-site management companies are usually independent contractors, so if the policy covers only “employees” as defined above, there is no coverage for losses due to the acts of board members or non-employee managers.  The HOA should have a policy that defines officers, directors and managers as “employees” for purposes of fidelity coverage or have an endorsement to that effect, or losses due to their dishonest acts are not covered.  Sometimes to get the coverage for the people who should be covered, the HOA and the management company may need to show that it has adequate financial controls in place to reduce the risk of loss.

77.              Does the Manager’s Fidelity Coverage Provide HOA Protection?

Probably not for several reasons.  The manager’s fidelity coverage protects the management company from theft of the manager’s own funds.  It does not even protect the management company against loss of the HOA’s funds, unless the manager’s policy directly covers or has an endorsement protecting against the loss of third party funds.  Even where there is coverage for the loss of the HOA’s funds, the protection runs to the management company itself; it does not directly protect the HOA.  If the manager’s policy covers loss of HOA funds, but the coverage amount is small in relation to the funds that someone embezzles, the fidelity policy may not cover all the losses.  Also, unless the owners of the management company are compensated by wages, salary or commissions, such as payment from profits or a partnership draw, the owners are not employees, and their own dishonesty losses would not be covered under the company’s policy.  For all these reasons, it is a good idea to have the management company added as an additional insured on the Association’s policy.  It is better to have coverage under the HOA’s policy, even if someone in the management company is responsible for the loss, than to rely on the management company’s fidelity coverage and find that it is too small or does not cover the person responsible for the loss.

78.              Time of Loss or Discovery of Loss and its Effect on Fidelity Coverage?

Fidelity policies may be “Loss Sustained,” “Loss Discovered,” or a “Loss Sustained / Loss Discovered” Combination.”  A Loss Sustained policy covers only if a policy was in effect at the time of the loss.  The problem is proving when that loss actually occurred, especially if there is no paper trail to show the time of loss.  A Loss Discovered policy covers only if a policy was in effect at the time the loss was discovered or within some period of time after the policy period, such as one year prior to the date of the policy.  A Loss Sustained/Loss Discovered policy includes both types, usually with a caveat that there must have been some form of fidelity coverage in effect from the time of the loss to the time of its discovery.

79.              Other Pitfalls of Fidelity Coverage

.  (1) Once an HOA (or management company) discovers a theft by an employee (or any other person whose dishonest acts are covered by the policy), that person is no longer considered “covered” by the policy from any later theft by the same person.  Only the thefts up to the time of discovery are covered.  If you suspect theft, immediately contact your insurance agent or broker and your legal counsel for advice on what to do.  (2) If the fidelity policy is contained within a standard property loss policy, there is probably a smaller specified maximum coverage that the fidelity policy will provide compared to the total coverage under the policy.  There may be $10 million in coverage if there were a fire and significantly less than that for the fidelity portion of the policy.  Be sure to check the declarations page for the amount of fidelity protection.

Special Types

80.              Obtain “Owned Vehicles” Coverage, Where Applicable

.  If your association owns any vehicles (cars, trucks, motorized carts, motorcycles, boats, etc.), you will need a separate vehicle owner’s policy, just like any other motor vehicle owner.

81.              Is Worker’s Compensation Coverage Needed?

If an association has any employees, it is mandatory to have such coverage.  Also, if your association hires contractors who have employees, and a contractor fails to carry worker’s compensation insurance, the association may need such coverage in case there is a claim that determines that your association is the employer.  Finally, even if your association doesn’t need such coverage for employees, it may wish to consider carrying it to cover volunteers who are injured while providing services, even running errands, on behalf of your association.  To do this, they need to inform the worker’s compensation carrier that they have adopted a resolution similar to the following:

“Resolved, that each member of the Board of Directors, and each person performing voluntary service at the express request of the Board, shall be deemed an employee under Section 3363.6 of the Labor Code.”

You should discuss these options with a worker’s compensation carrier.  Only certain carriers offer worker’s compensation insurance.

82.              Should You Consider Employment Practices Liability (EPL) Coverage?

Most general liability (CGL) insurance and directors and officers (D&O) liability insurance exclude coverage for claims by employees that arise out of the employment relationship.  Such claims may include claims for wrongful termination, age or sex discrimination, sexual harassment, etc.  If your association has employees and wants coverage for employee claims (other than for bodily injuries on the job that must be covered under worker’s compensation), you can consider purchasing EPL insurance.  The primary drawbacks are that, like many other types of coverage, the employer may have no right to pick its own attorney, and the defense counsel appointed by the insurance company, may have little knowledge or experience in employment law.  Note that some of the better D&O policies include EPL coverage as part of the D&O policy.

83.              Builder’s Risk Insurance or Course of Construction (“COC”) Insurance?

These terms are synonymous.  This is a not a policy that an association typically would buy for itself, but rather would be a policy that an association would require a contractor to obtain that is building new improvements or reconstructing buildings.  These are property policies intended to insure that portion of the contractor’s work that has been completed at any given point in time.  The policies are intended to cover 0% of the construction or reconstruction cost at the beginning and 100% at the conclusion.

Acknowledgments

The author appreciates the assistance of Dick Parrent of Driver Alliant Insurance Services, an independent insurance broker in San Diego, for providing information and input on this manual.

Glossary

For other definitions of insurance terminology, see internet-based insurance glossaries such as: www.ambest.com/resource/glossary.html or www.coverageglossary.com or do a web search for “Insurance Glossary.”

A.M. Best:  A company which rates insurance companies based on financial strength, i.e., its ability to pay claims, and its financial size.  See www.ambest.com.

Actual Cash Value (ACV) Coverage:  ACV pays the insured only for depreciated value (effectively the garage-sale value of personal property or the value of real property improvements after depreciation for age).

Additional Insured:  An endorsement to one party’s insurance policy that provides coverage to a party who is not the primary or “named insured” on the policy.  Often the additional insured endorsement will not protect the additional insured, if the additional insured has any actual negligence or liability to the party asserting the claim.  There is often confusion about this term, and there does not seem to be a consensus about what it really provides.  Be sure to read the actual additional insured endorsement carefully.

Admitted Carrier:  A carrier who is authorized to issue insurance in the State of California and whose clients will be covered by the California Insurance Guarantee Fund, if the carrier becomes insolvent.

Advertising Injury:  Advertising injury is a statement that causes another person or business to incur a loss due to defamation (i.e., libel or slander), some violation of privacy rights, and the like.  It is often provided as part of a general liability form.

Agreed Amount Endorsement:  An endorsement in which the carrier agrees that it will not exercise the “co-insurance” clause.  In other words, the carrier will not penalize the insured party, if the insured party does not insure in an amount equal to 100% of the value (actual cash value or replacement cost) of the insured property.

All Risk Coverage:  A policy insuring against property damage caused by every type of loss imaginable, unless the type of loss is excluded.  Typical exclusions include construction defects, earthquakes and floods.

Bodily Injury (BI):  Coverage typically provided under a general liability policy for physical injuries to the body of someone other than the insured party caused by the acts or omissions of the insured party and its agents.

Boiler and Machinery Coverage:  Coverage for the repairs of boilers, HVAC systems, pumps, fans, or other mechanical equipment that is damaged due to a failure in the equipment itself.  This usually is a special endorsement that must be purchased separately in additional to a standard property policy.

Builder’s Risk Insurance:  They are policies that an association might require a contractor to obtain who is building new improvements or reconstructing buildings.  It is a special type of property coverage intended to insure that portion of the contractor’s work that has been completed at any given point in time.

Building Code Upgrade Coverage:  See “Ordinance and Law Coverage.”

Burning Balance Policy:  A policy in which the legal fees and costs incurred to defend the insured party are deducted from the total amount of coverage.  Thus, the amount available to pay claims is reduced for every dollar expended in defense costs.

Claims-Made Policy:  A policy which defends the insured party only if the claim is made and tendered to the carrier during the policy period (or an extended reporting period), sometimes even if the occurrence giving rise to the claim occurred before the policy period began.  This is in contrast to an “occurrences” policy.

Co-Insurance:  A sharing of the risk between the carrier and the insured party (often unintentionally), so that each bears some percentage of each loss.

Combined Single Limit Coverage:  A liability policy in which bodily injury to one person, bodily injury to multiple persons and property damage all have the same dollar limits of coverage.

Commercial General Liability:  A liability policy for a commercial entity, including a community association.  It is often abbreviated as “CGL.”

Completed Operations Coverage:  Coverage for claims that arise out of work performed on behalf of the insured party by subcontractors.

Contractual Liability Coverage:  Coverage to protect the insured party against “hold harmless” agreements that the insured party has entered.  A standard commercial general liability policy usually covers such risks, but it is usually subject to certain exclusions.  Also called “contractually assumed liability” coverage.

Course of Construction Insurance:  See Builder’s Risk Insurance.

Cross-Liability Endorsement or the Equivalent:  Most HOA policies normally do not contain this endorsement which would have the effect of denying coverage to one insured party (like an association) if it is sued by another insured party (like a homeowner) for injuries allegedly due to the acts or omissions of the association.

D&O Policy:  See “Directors and Officers Liability Policy.”

Defense Policy:  A policy that will not only indemnify the insured party, but will provide a defense as well.  This is in contrast to a “reimbursement” policy.  Also see “First Dollar Defense.”

Directors and Officers Liability Policy:  Essentially a “malpractice” policy for the directors and officers as well as the association.  It is needed to cover claims other than bodily injury or property damage.

Employment Practices Liability (EPL) Coverage:  Coverage for a community association or other employer for claims alleging wrongful acts by the employer, such as sexual harassment, wrongful discharge, discrimination, etc.

Extended Reporting Period:  A time period, usually no more than a month or two, after the expiration of a claims-made policy period during time when a claim can still be made and accepted as if it had been made while the policy was still in effect.  When the policy is not renewed, it is sometime possible to purchase an even longer extended reporting period, referred to as “Tail Coverage.”  In either case, the right to report a claim applies only if the facts and circumstances that gave rise to the claim occurred before the claims-made policy expired, not during the extended reporting period.

Fire and Extended Coverage:  See “Named Perils Coverage.”

First Dollar Defense:  A policy in which the carrier hires an attorney to defend the insured party and which pays all defense costs from the date the claim is tendered to the carrier.  This is in contrast to a reimbursement policy.

Fixture:  An item of moveable property that becomes attached to a building, such as cabinets, carpeting, floor coverings, plumbing fixtures, built-in appliances, attached lighting, etc.

Guaranteed Replacement Cost Endorsement:  An endorsement in which the carrier guarantees that it will replace the property damaged, even if it exceeds the limit of coverage purchased.  Compare with “agreed amount endorsement.”

Host Liquor Liability:  Coverage protecting the insured party against claims for bodily injury or property damage arising out of a social host who serves alcoholic beverages to social guests, as opposed to a vendor who sells alcoholic beverages as part of the vendor’s business.

Indemnity Policy:  A liability policy that will pay out damages on behalf of an insured party up to the maximum limits of the policy per person or per occurrence.

Inflation Protection Coverage:  Coverage in a property policy that automatically boosts the coverage limits annually to adjust for the effects of inflation and increased cost of construction.

Loss Assessment Coverage:  Coverage in an owner’s policy that will pay an owner’s proportionate share of an association assessment that is levied to pay for a loss for which there is insufficient insurance to pay the entire claim.  Some policies include $1,000 of coverage automatically for a peril that is insured under the owner’s policy, such as fire, but may not cover for an uninsured peril like earthquake or flood.  Loss assessment coverage for earthquake or flood may require a special endorsement.  Some owner’s carriers allow loss assessment coverage to be increased to as much as $50,000 for that owner at an extra cost, although the extra cost is generally not expensive.

Loss Payable Clause:  When there is a loss, the policy should pay the funds just to your association or an insurance trustee based on a governing document requirement to rebuild the damaged property.  However, the owners and their lenders should also be named as insured parties under the property portion of the policy.

Medical Payments Coverage:  Coverage in a commercial general liability policy that will reimburse a party who is injured on the insured party’s property for the injured party’s medical expenses without regard to whether the insured party had any fault or liability for the injury.  The belief is that by paying such claims, a lawsuit and larger claims might be avoided.

Named Perils Coverage:  A policy insuring against property damage caused only by the perils that are specifically named, such as fire, lightning, wind, hail, aircraft, riot, vehicles, explosion, smoke, vandalism and malicious mischief.  If the cause of loss isn’t specifically named, the loss isn’t covered.

Named Insured:  Each person or entity that is identified as the insured party on any policy.  For example, on a good directors and officers liability policy, the “named insured” may include the association, current officers and directors, former officers and directors, the community manager, committee members, and other volunteers.

Non-Monetary Claims:  Claims that seek relief other than money.  Typically these are either an injunction to order another party to take or refrain from taking certain actions, or for declaratory relief in which the court interprets the rights of the parties under a contract, covenant or other written document.

Non-Owned Vehicles Coverage:  Coverage that insures a party for injuries that are caused by the driver of a vehicle that the insured party does not own, but which was being used to conduct business on behalf of an insured party.  For example, if an association president drives his or her own car to the hardware store to pick up something for the association and causes injury to another person or property, the non-owned vehicle coverage will protect the association if it is sued.

Occurrences Policy:  An insurance policy that provides coverage only if the event (“occurrence”) triggering a liability occurs during the policy period.  This is in contrast to a “claim-made” policy.

Ordinance and Law Coverage.  Also called “Building Ordinance coverage,” this coverage is in addition to the coverage provided by a standard property policy.  A standard property policy will usually not cover certain types of losses that were not due to the original cause of loss.  These additional losses may occur if there is an ordinance or law that requires tearing down the undamaged portion of a building, if the loss exceeds a certain percentage of the cost of rebuilding the entire building (often 50%).  The typical property policy will not pay for either (1) the loss due to demolishing the undamaged portion of the building or (2) the cost incurred to demolish the undamaged portion.  The standard policy also will not pay for the cost of rebuilding either the undamaged or the damaged portion of the building in a manner that will meet current building codes that were not required when the building was originally constructed or any subsequent modifications.  Ordinance and Law coverage is needed to pay those additional costs.

Per Building Deductible:  The deductible is applied to each building that is damaged, so if five buildings are damaged by fire, the association will effectively have to pay five times the deductible amount.

Per Occurrence Deductible:  Just one deductible is subtracted from the total insured loss regardless of how many buildings are damaged.  However, there may be a separate deductible for the real property and any personal (moveable property not attached to a building).

Personal Injury (PI) Coverage:  Coverage that is typically provided under many, but not all, most general liability policies.  These indemnify the insured party against claims that the insured party caused a personal injury to someone.  Personal injury coverage is not the same as bodily injury coverage.  Personal injuries may include wrongful acts such as slander, libel, false imprisonment, advertising injury, wrongful eviction, trespass, and invasion of the right of privacy.

Personal Property:  Property that is individually owned and usually moveable.  It ceases to be personal property when it is attached to a building or to land.

Products and Completed Operations Coverage:  This coverage insures a commercial policyholder against liability for property damage or bodily injury due to negligence caused by a business entity that occurs somewhere other than on the business’s own property and that arises from its own activities or the products it makes or sells.  HOAs often request this coverage from building contractors who construct or reconstruct portions of the HOA property to provide protection against property damage or bodily injury that occurs after the construction has been completed due to the construction itself or a defect or failure in the construction.

Property Damage (PD) Coverage:  Coverage typically provided under a general liability policy for physical damage to the real or personal property of someone other than the insured party caused by the acts or omissions of the insured party and its agents.

Primary and Non-Contributory Coverage:  This is language that is often found in the “other insurance” clause of an insurance contract.  The “other insurance” clause specifies how another policy with overlapping coverage will be treated in terms of a duty to pay all or part of a claim.  The “primary” language treats an association’s policy as the primary policy, and it must pay first, if owners and the association have overlapping coverage.  The “non-contributory” language means that the primary policy will not look to an owner’s overlapping policy to contribute anything toward payment on the loss, and that the primary must pay in full to the maximum covered under the policy before any overlapping coverage will be required to pay.

Prior Acts Coverage:  Coverage that may be included under a “claims made” policy that will protect the insured party, not only against claims that are made during the policy period, but also against claims in which the wrongful conduct giving rise to the injury occurred prior to the policy period.  However, such coverage is generally available only where the insured party was not aware of any “facts or circumstances that might give rise to the claim.”

Products Liability Coverage:  Coverage that protects an insured party against injuries to third parties that arise out of the use or consumption of a product.  In the community association context, perhaps the most likely use for products liability coverage would be to illness, incapacity or death arising out of serving tainted food at an association function.

Real Property:  Land and any improvements to land such as buildings, and any fixtures attached to the building.

Reimbursement Policy:  A policy in which the insured party, rather than the carrier, hires and pays for its own attorney to defend itself.  The policy will reimburse the insured party for all defense costs determined to be covered only when the case is over.  This is in contrast to a first dollar defense policy.

Replacement Cost (RC) Coverage:  Coverage that pays full replacement cost, even if the property was worth less due to age or depreciation.

Severability of Interest Clause:  When there are multiple parties who are named insureds on a policy, this is a provision that each one will be treated as if each were the only insured party and as if each were separately insured.  It prevents the insurance company from denying a claim, for example, if the association were sued for the negligence by an owner who is also insured against liability on the policy, but is injured or damaged due to the alleged negligence of the Association.  Contrast this with “Cross-liability Endorsement” which has the opposite effect.

Subrogation Clause:  An insurance contract provision that entitles the insurance company to step into the shoes of the party it insures after it has paid out on a property damage or bodily injury claim.  It allows the insurance company to sue the party who was responsible for causing the property damage or bodily injury.

Surplus Lines:  A carrier that is not an “Admitted Carrier” in the state.  They are generally used on higher risks that an Admitted Carrier is unwilling to write.  Also, if the Surplus Lines carrier becomes bankrupt, the California Insurance Guarantee fund will not pay any claims.

Umbrella and Excess Liability Coverage:  These are two types of coverage that provides additional coverage above primary liability coverage.  Excess coverage applies only to increase the maximum limit of the general liability policy.  An umbrella policy typically adds a higher limit of liability to all liability policies (i.e., general liability, D&O, automobile, etc.).

Worker’s Compensation Coverage:  Coverage that California and other states require any employer to carry to cover the medical expenses of employees and compensation payments to employees who are temporarily or permanently disabled due to an illness or injury that occurs on the job.

DISCLAIMER: The contents provided herein are the suggestions and opinions of Epsten, APC on general legal issues involving California community associations and common interest developments. This content is for educational purposes only, is not intended for commercial use and may not be relied upon in addressing any specific legal issues. Specific policies and procedures that your association, management company and/or law firm have developed may differ and may fully satisfy all applicable laws. Copyright 2023 by EPSTEN, APC, unless otherwise indicated. These materials may not be reproduced or distributed without express permission of Epsten, APC.

115 Cal.Rptr.2d 868 (2002)
27 Cal.4th 219
38 P.3d 1094

Brian McKOWN, Plaintiff and Respondent,
v.
WAL-MART STORES, INC., Defendant and Appellant.

No. S091097.
Supreme Court of California.

January 31, 2002.

Snyder & Strozier, Snyder, Strozier, Maho & Tomlinson, Barry Clifford Snyder and Will Tomlinson, Santa Barbara, for Defendant and Appellant.

Fred J. Hiestand, Sacramento, for the Civil Justice Association of California as Amicus Curiae on behalf of Defendant and Appellant.

Garza, Garza & Pacheco, John M. Pacheco; Law Offices of Robert H. Pourvali and Robert H. Pourvali, Calabasas, for Plaintiff and Respondent.

Ian Herzog, Santa Monica; William L. Veen; James C. Sturdevant, San Francisco; Brian C. Unitt, Riverside; Dennis M. Elber, Long Beach; David A. Rosen, Los Angeles; The Arns Law Firm, Morgan C. Smith and Robert S. Arns, San Francisco, for the Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Respondent.

BROWN, J.

This is the third in a series of recent cases in which we have been called upon to consider the reach of our decisions in Privette v. Superior Court (1993) 5 Cal.4th 689, 21 Cal.Rptr.2d 72, 854 P.2d 721 (Privette ) and Toland v. Sunland Housing Group, Inc. (1998) 18 Cal.4th 253, 74 Cal. Rptr.2d 878, 955 P.2d 504 (Toland). In Privette and Toland, we held that an employee of a contractor may not sue the hirer of the contractor under either of the alternative versions of the peculiar risk doctrine set forth in sections 413 and 416 of the Restatement Second of Torts (hereafter Restatement),[1] but is restricted instead 870*870 to a claim against the contractor under the workers’ compensation insurance system. The two prior cases, respectively, raise the question whether, under the rationale of Privette and Toland, an employee of an independent contractor is barred from suing the hirer of the contractor under the tort theories of (1) negligent hiring, and (2) negligent exercise of retained control. In Camargo v. Tjaarda Dairy (2001) 25 Cal.4th 1235, 108 Cal. Rptr.2d 617, 25 P.3d 1096 (Camargo), we held that an employee of an independent contractor is barred from suing the hirer of the contractor for the tort of negligent hiring. In Hooker v. Department of Transportation (2002) 27 Cal.4th 198, 115 Cal.Rptr.2d 853, 38 P.3d 1081 (Hooker), a companion to this case, we held that a hirer of an independent contractor is not liable to an employee of the contractor merely because the hirer retained control over safety conditions at a work site, but that a hirer is liable to an employee of a contractor insofar as a hirer’s exercise of retained control affirmatively contributed to the employee’s injuries. In this case, we hold that a hirer is liable to an employee of an independent contractor insofar as the hirer’s provision of unsafe equipment affirmatively contributes to the employee’s injury.[2]

FACTUAL AND PROCEDURAL BACKGROUND

Brian McKown was the employee of an independent contractor hired by defendant Wal-Mart Stores, Inc. (Wal-Mart) to install sound systems in its stores, including the store in Chino where this accident occurred. Installation of the sound systems involved running wires and installing speakers in the store ceilings. Wal-Mart requested that the contractor use Wal-Mart’s forklifts whenever possible in performing the work. The request was understood not to be a directive. The forklift that Wal-Mart employees furnished McKown had equipment for overhead work, consisting of a work platform along with a four-foot extension to raise the platform. For safety, the extension was supposed to be chained to the forklift, and the platform chained to the forklift or to the extension. However, only one chain, securing the extension to the forklift, was provided by Wal-Mart. After discussing the advisability of using the forklift without a chain securing the platform to the extension or the forklift, McKown and his colleague decided to do so. While his colleague was driving the forklift and McKown was working on the platform, the platform hit a ceiling pipe, disengaged from the extension, and fell about 12 to 15 feet to the floor with McKown on it.

A jury found that Wal-Mart was negligent in providing unsafe equipment and allocated 55 percent of the responsibility for the accident to McKown’s employer, 23 percent to Wal-Mart, 15 percent to the manufacturer of the equipment, and 7 percent to McKown. The Court of Appeal affirmed the judgment, concluding that “plaintiffs claim that Wal-Mart negligently 871*871 supplied unsafe equipment was viable notwithstanding Privette and Toland.” We granted review, and limited the issue to be briefed and argued to the question whether, under our decisions in Privette and Toland, an employee of an independent contractor is barred from pursuing a lawsuit against the hirer of the independent contractor on the theory the hirer negligently provided unsafe equipment. After review was granted, we issued our decision in Camargo, extending Privette and Toland to the tort of negligent hiring, and we then requested counsel to file supplemental letter briefs exploring the significance of Camargo for the question whether an employee of an independent contractor may bring an action for the tort of negligent provision of unsafe equipment against the hirer of the contractor. The judgment of the Court of Appeal, which affirmed the judgment of the trial court in favor of plaintiff McKown, is affirmed.

DISCUSSION

The line of cases bearing on the question presented here is discussed in the companion to this case, Hooker, supra, 27 Cal.4th 198, 115 Cal.Rptr.2d 853, 38 P.3d 1081, so that discussion need not be repeated at length here. To summarize: In Privette and Toland, we held that an employee of a contractor may not sue the hirer of the contractor under either of the alternative versions of the peculiar risk doctrine set forth in sections 413 and 416 of the Restatement. Under section 413, a person who hires an independent contractor to do inherently dangerous work, but who fails to provide in the contract or in some other manner that special precautions be taken to avert the peculiar risks of that work, can be liable if the contractor’s negligent performance of the work causes injury to others. Under section 416, even if the hirer has provided for special precautions in the contract or otherwise, the hirer can nevertheless be liable if the contractor fails to exercise reasonable care to take such precautions and the contractor’s performance of the work causes injury to others. In Toland, we rejected the argument that Privette did not bar recovery for direct liability under section 413, but only for vicarious liability under section 416. “[P]eculiar risk liability is not a traditional theory of direct liability for the risks created by one’s own conduct: Liability under both sections is in essence `vicarious’ or ‘derivative’ in the sense that it derives from the `act or omission’ of the hired contractor, because it is the hired contractor who has caused the injury by failing to use reasonable care in performing the work.” (Toland, supra, 18 Cal.4th at p. 265, 74 Cal.Rptr.2d 878, 955 P.2d 504.)

In Camargo, supra, 25 Cal.4th 1235, 108 Cal.Rptr.2d 617, 25 P.3d 1096, we held that an employee of a contractor may not sue the hirer of the contractor under the negligent hiring theory set forth in section 411. Under section 411, a hirer is liable for physical harm to third persons caused by the hirer’s failure to exercise reasonable care to employ a competent contractor to perform work that will involve a risk of physical harm unless it is skillfully and carefully done, or to perform any duty the hirer owes to third persons. In Camargo, we rejected the argument that Privette and Toland were distinguishable on the ground that in a negligent hiring case the hirer is, in a sense, being taxed with his own negligence, making his liability direct. “[T]he same could be said with regard to an action brought under the peculiar risk theory set forth in section 413. More importantly, under both sections 411 and 413, the liability of the hirer is `in essence “vicarious” or “derivative” in the sense that it derives from the “act or omission” of the hired contractor, because it is the hired contractor who caused the injury by 872*872 failing to use reasonable care in performing the work.’ (Toland, supra, 18 Cal.4th at p. 265, 74 Cal.Rptr.2d 878, 955 P.2d 504.) Therefore, in a negligent hiring case under the theory set forth in section 411, just as in peculiar risk cases under the theories set forth in sections 413 and 416, ‘it would be unfair to impose liability on the hiring person when the liability of the contractor, the one primarily responsible for the worker’s on-the-job injuries, is limited to providing workers’ compensation coverage.’ (Toland, supra, 18 Cal.4th at p. 267, 74 Cal.Rptr.2d 878, 955 P.2d 504.)” (Camargo, supra, 25 Cal.4th at p. 1244, 108 Cal.Rptr.2d 617, 25 P.3d 1096.)

In Hooker, we held that a hirer of an independent contractor is not liable to an employee of the contractor merely because the hirer retained control over safety conditions at a worksite, but that a hirer is liable to an employee of a contractor insofar as a hirer’s exercise of retained control affirmatively contributed to the employee’s injuries. Imposing tort liability on a hirer of an independent contractor when the hirer’s conduct has affirmatively contributed to the injuries of the contractor’s employee is consistent with the rationale of our decisions in Privette, Toland and Camargo, because the liability of the hirer in such a case is not in essence vicarious or derivativ e in the sense that it derives from the act or omission of the hired contractor. “To the contrary, the liability of the hirer in such a case is direct in a much stronger sense of that term.” (Hooker, supra, 27 Cal.4th at p. 212, 115 Cal.Rptr.2d 853, 38 P.3d 1081.)

For the same reason, when a hirer of an independent contractor, by negligently furnishing unsafe equipment to the contractor, affirmatively contributes to the injury of an employee of the contractor, the hirer should be liable to the employee for the consequences of the hirer’s own negligence. “The general supervisory right to control the work so as to insure its satisfactory completion in accordance with the terms of the contract does not make the hirer of the independent contractor liable for the latter’s negligent acts in performing the details of the work. [Citation.] An owner is not liable for injuries resulting from defective appliances unless he has supplied them or has the privilege of selecting them or the materials out of which they are made [citation] or unless he exercises active control over the men employed or the operations of the equipment used by the independent contractor. [Citation.]” (McDonald v. Shell Oil Co. (1955) 44 Cal.2d 785, 788-789, 285 P.2d 902, italics added.) McDonald predates Privette, but as the Court of Appeal here observed, it serves to underline the fact that, “where the hiring party actively contributes to the injury by supplying defective equipment, it is the hiring party’s own negligence that renders it liable, not that of the contractor.” Indeed, the jury in this case clearly distinguished between the liability of the contractor and that of the hirer, allocating 55 percent of the responsibility to the contractor and 23 percent to the hirer, Wal-Mart.

Wal-Mart contends it should not be held liable for provision of the unsafe equipment because it merely requested, and did not insist, the contractor use its forklift. To the contrary: The contractor had several contracts with Wal-Mart for the installation of sound systems in Wal-Mart stores, and Wal-Mart, the world’s largest retailer, was a customer the contractor was presumably loathe to displease. (The chief executive officer of the contractor testified that Wal-Mart had requested that the contractor use Wal-Mart’s forklifts whenever possible, and “[a]s a businessman I found that if a customer has a legitimate request, it’s 873*873 usually best to do what the customer asks.”) Wal-Mart presumably believed the forklift it provided was safe, and plaintiff may well have believed that refusal to use it would have generated ill will. The extra expense of renting a forklift would have been chargeable to Wal-Mart. Moreover, renting a forklift would have entailed delaying the installation project for at least 24 hours for the following reasons: The installation work was to occur at night when the store was closed. Wal-Mart provided the forklift to the contractor’s employees around midnight. At that time of night rental yards, where substitute equipment might have been obtained, were closed. Admittedly, Wal-Mart was not the only one at fault, but then the jury’s verdict reflected that.

With regard to the jury’s verdict, Wal-Mart contends it should not be held liable for its negligence because the jury found the contractor was primarily (55 percent) at fault. We have stated that “`it would be unfair to impose liability on the hiring person when the liability of the contractor, the one primarily responsible for the worker’s on-the-job injuries, is limited to providing workers’ compensation coverage.'” (Camargo, supra, 25 Cal.4th at p. 1244, 108 Cal.Rptr.2d 617, 25 P.3d 1096, quoting Toland, supra, 18 Cal.4th at p. 267, 74 Cal.Rptr.2d 878, 955 P.2d 504.) However, in this case, as well as in Hooker, the hirer’s affirmative contribution to the employee’s injuries eliminates the unfairness in imposing liability where the contractor is primarily at fault.

Finally, Wal-Mart contends that, in a suit for negligent provision of unsafe equipment, imposition of liability on a hirer for injuries to an employee of an independent contractor would violate the spirit of the workers’ compensation exclusivity rule and give the employee an unwarranted windfall. For the reasons stated in Hooker, these contentions should be rejected. (See Hooker, supra, 27 Cal.4th at pp. 213-214, 115 Cal.Rptr.2d 853, 38 P.3d 1081.)

The judgment of the Court of Appeal is affirmed.

WE CONCUR: GEORGE, C.J., KENNARD, BAXTER, CHIN and MORENO, JJ.

Concurring Opinion by WERDEGAR, J.

I concur in the result. But as in the companion case, Hooker v. Department of Transportation (2002) 27 Cal.4th 198, 115 Cal.Rptr.2d 853, 38 P.3d 1081 (Hooker), I disagree with the majority’s rule limiting a hirer’s liability for its own negligence to acts that “affirmatively’ contribute” to the injury of a contractor’s employee (maj. opn., ante, 115 Cal.Rptr.2d at p. 870, 38 P.3d at p. 1095). That limitation is an unwarranted intrusion into the jury’s role in finding facts and allocating fault.

In the present case, Wal-Mart Stores, Inc. (Wal-Mart) argues it should not be liable because the jury found it only 23 percent at fault, while finding the 1227Contractor 55 percent at fault, arguably making the contractor the party “primarily” at fault. Wal-Mart’s position is in obvious conflict with the principles of comparative fault. That one party is deemed less responsible than another, or that the more responsible party is assigned more than 50 percent of the fault, does not exonerate or immunize the less responsible party, though it may reduce that party’s ultimate liability. The majority is therefore correct to reject Wal-Mart’s position, but in substituting its own “affirmatively contribute” test (maj. opn., ante, 115 Cal. Rptr.2d at pp. 872-873, 38 P.3d at p. 1097), the majority makes essentially the same error as Wal-Mart. As I explain in my 874*874 dissent in Hooker, supra, 27 Cal.4th 198, 215, 115 Cal.Rptr.2d 853, 38 P.3d 1081, that one party is deemed to have negligently contributed to an accident only by omission, or that another party contributed to the accident by affirmative act, does not exonerate or immunize the party contributing by omission, though it may well reduce that party’s ultimate liability.

The distinction between act and omission, or activity and passivity, is likely to be important to a jury in allocating fault, but it does not properly play a role in a court’s decision whether a hirer may be liable at all for injuries to a contractor’s employee. (See Hooker, supra, 27 Cal.4th at pp. 216, 217, 115 Cal.Rptr.2d 853, 38 P.3d 1081 (dis. opn. of Werdegar, J.).) Just as the majority in this case accepts the jury’s allocation of fault even though Wal-Mart “requested,” rather than “insisted,” that its own forklift be used (maj. opn, ante, 115 Cal.Rptr.2d at p. 872, 38 P.3d at p. 1097), so should it accept a jury’s allocation of fault (if supported by all the evidence) without imposing a rule of complete immunity for hirers who contribute to an accident by negligent omission rather than affirmative act.

[1] Unless otherwise indicated, all section references are to the Restatement Second of Torts.

[2] In Camargo, we noted we were not reaching this question. “Today we have concluded that the rationale of our decisions in Privette and Toland, which involved tort liability under the peculiar risk doctrine, also applies to the tort of negligent hiring. Review has been granted in cases that present related questions—whether the Privette /Toland rationale should apply as well to the tort of negligent exercise of retained control (Hooker v. Depart of Transportation, review granted Nov. 1, 2000, S091601) or the tort of negligent provision of unsafe equipment (McKown v. Wal-Mart Stores, Inc. (2000) 82 Cal.App.4th 562, 98 Cal.Rptr.2d 214, review granted Oct. 18, 2000, S091097)—and our opinion today should not be read as having prejudged those questions.” (Camargo, supra, 25 Cal.4th at p. 1245, fn. 2, 108 Cal.Rptr.2d 617, 25 P.3d 1096.)

115 Cal.Rptr.2d 853 (2002)
27 Cal.4th 198
38 P.3d 1081

Roseanne HOOKER, Plaintiff and Appellant,
v.
DEPARTMENT OF TRANSPORTATION, Defendant and Respondent.

No. S091601.
Supreme Court of California.

January 31, 2002.Rehearing Denied March 27, 2002.

Paul & Janofsky, Gary M. Paul, John S. Janofsky, Santa Monica; Lewis, Goldberg & Ball, Michael L. Goldberg, McLean, Va, and Michael D. Hutchinson, for Plaintiff and Appellant.

Ian Herzog, Santa Monica; William L. Veen; James C. Sturdevant, San Francisco; Brian C. Unitt, Riverside; Dennis M. Elber, Long Beach; David A. Rosen, Los Angeles; The Arns Law Firm, Morgan C. Smith and Robert S. Arns, San Francisco, for the Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiff and Appellant.

Neumeyer & Boyd, Carol Boyd, Katherine A. Tatikian, Los Angeles; Seifert, Henderson & Farricker and Edward Wm. Farricker, Pasadena, for Defendant and Respondent.

Sedgwick, Detert, Moran & Arnold and Frederick D. Baker, San Francisco, for the American Chemistry Council as Amicus Curiae on behalf of Defendant and Respondent.

John P. Carpenter, Salt Lake City, UT, for Associated General Contractors of California as Amicus Curiae on behalf of Defendant and Respondent.

Fred J. Hiestand, Sacramento, for the Civil Justice Association of California as Amicus Curiae on behalf of Defendant and Respondent.

Radoslovich Law Office, Frank M. Radoslovich and Brad J. Stephens, for Production Framing Systems, Inc., as Amicus Curiae on behalf of Defendant and Respondent.

BROWN, J.

This is the latest in a series of cases in which we have considered whether an employee of an independent contractor may sue the hirer of the contractor under tort theories covered in chapter 15 of the Restatement Second of Torts (hereafter Restatement).[1] In Privette v. Superior Court (1993) 5 Cal.4th 689, 21 Cal.Rptr.2d 72, 854 P.2d 721 (Privette) and Toland v. Sunland Housing Group, Inc. (1998) 18 Cal.4th 253, 74 Cal.Rptr.2d 878, 955 P.2d 504 (Toland), we held that an employee of a contractor may not sue the hirer of the contractor under either of the alternative versions of the peculiar risk doctrine set forth in sections 413 and 416. Under section 413, a person who hires an independent contractor to do inherently dangerous work, but who fails to provide in the contract or in some other manner that special precautions be taken to avert the peculiar risks of that work, can be liable if the 855*855 contractor’s negligent performance of the work causes injury to others. Under section 416, even if the hirer has provided for special precautions in the contract or otherwise, the hirer can nevertheless be liable if the contractor fails to exercise reasonable care to take such precautions and the contractor’s performance of the work causes injury to others. Most recently, in Camargo v. Tjaarda Dairy (2001) 25 Cal.4th 1235, 108 Cal.Rptr.2d 617, 25 P.3d 1096 (Camargo), we held that an employee of a contractor may not sue the hirer of the contractor under the negligent hiring theory set forth in section 411. Under section 411, a hirer is liable for physical harm to third persons caused by the hirer’s failure to exercise reasonable care to employ a competent contractor to perform work which will involve a risk of physical harm unless it is skillfully and carefully done, or to perform any duty which the hirer owes to third persons.

The question presented in this case is whether an employee of a contractor may sue the hirer of a contractor for the tort of negligent exercise of retained control set forth in section 414.[2] Section 414 provides: “One who entrusts work to an independent contractor, but who retains the control of any part of the work, is subject to liability for physical harm to others for whose safety the employer owes a duty to exercise reasonable care, which is caused by his failure to exercise his control with reasonable care.”

We conclude that a hirer of an independent contractor is not liable to an employee of the contractor merely because the hirer retained control over safety conditions at a worksite, but that a hirer is liable to an employee of a contractor insofar as a hirer’s exercise of retained control affirmatively contributed to the employee’s injuries. In this case, although plaintiff raised triable issues of material fact as to whether defendant retained control over safety conditions at the worksite, plaintiff failed to raise triable issues of material fact as to whether defendant actually exercised the retained control so as to affirmatively contribute to the death of plaintiffs husband. Therefore, the trial court properly granted summary judgment in favor of defendant, and the Court of Appeal erred in reversing that judgment.

Factual and Procedural Background

Paul Hooker was a crane operator. He was employed by a general contractor hired by the California Department of Transportation (Caltrans) to construct an 856*856 overpass. The overpass was 25 feet wide and the crane with the outriggers extended was 18 feet wide, so Hooker would retract the outriggers to allow other construction vehicles or Caltrans vehicles to pass. Shortly before the fatal accident, Hooker retracted the outriggers and left the crane. When Hooker returned, he attempted, without first reextending the outriggers, to swing the boom. Because the outriggers were retracted, the weight of the boom caused the crane to tip over. Hooker was thrown to the pavement and killed.

With regard to the question whether Caltrans had negligently exercised the control it had retained over safety at the jobsite, plaintiff relied on the safety chapter of the Caltrans construction manual and the testimony of Caltrans officials responsible for supervising the jobsite. The safety chapter of the Caltrans construction manual provided in pertinent part: “[C]altrans is responsible for obtaining the Contractor’s compliance with all safety laws and regulations…. [¶] The construction safety coordinator must be familiar with highway construction procedures and equipment, construction zone traffic management and be able to recognize and anticipate unsafe conditions created by a Contractor’s operation…. [¶] The Construction Safety Coordinator shall visit contracts [sic] periodically to observe the Contractor’s operation and traffic conditions affected by the construction.” (Italics added.) The manual further gave the Caltrans resident engineer authority to set compliance schedules for the correction of dangerous conditions and to shut down affected operations until the dangerous conditions were corrected.

The senior Caltrans representative on the jobsite, whose responsibilities included safety, had previously observed the crane operators on this project retract their outriggers to let other vehicles pass; he knew they did so “from time to time[ ] or frequently”; and he realized that a crane would be unstable if its boom were extended over its side when its outriggers were retracted. The resident Caltrans engineer on the project had the power to shut the project down because of safety conditions and to remove employees of the contractor for failing to comply with safety regulations. He answered “probably” to the following two questions: (1) “Do you agree that if [the crane operator] had been given priority in the area he was working in and the [overpass] was flagged off, that he wouldn’t have had to retract his outriggers to permit vehicles to pass?” and (2) “And if he hadn’t retracted his outriggers, the crane wouldn’t have become unstable and tipped over, correct?” A Caltrans transportation engineer on the project, whose responsibilities included bringing unsafe conditions to the attention of the resident engineer or the general contractor, conceded that if he had seen a crane operator retract the outriggers to permit vehicles to pass, he would have felt “odd” because the more the outriggers are extended, “the better the stability. That’s simple physics.”

Plaintiff, Hooker’s widow, received workers’ compensation benefits for his death from the contractor’s insurer. Plaintiff also sued Caltrans on the theory Caltrans had negligently exercised control it had retained over safety conditions at the jobsite. Caltrans moved for summary judgment. The motion was based on the ground, among others, that a suit against a hirer of an independent contractor by an employee of the contractor for negligent exercise of retained control was barred by our decisions in Privette and Toland. The trial court granted Caltrans’s summary judgment motion, but the Court of Appeal reversed. We granted review and limited the issue to be briefed and argued to the 857*857 question whether, under our decisions in Privette and Toland, an employee of an independent contractor is barred from pursuing a lawsuit against the hirer of the independent contractor on the theory the hirer negligently exercised control it had retained. After review was granted, we issued our decision in Camargo, extending Privette and Toland to the tort of negligent hiring, and we then requested counsel to file supplemental letter briefs exploring the significance of Camargo for the question whether an employee of an independent contractor may bring an action for the tort of negligent exercise of retained control against the hirer of the contractor.

Discussion

I. The Rationale of Privette, Toland, and Camargo

In Toland, we summarized the peculiar risk doctrine and explained why we had concluded in Privette that under the doctrine a hirer’s liability does not extend to the hired contractor’s employees. “Under the doctrine of peculiar risk, a person who hires an independent contractor to do inherently dangerous work can be held liable for tort damages when the contractor causes injury to others by negligently performing the work. The doctrine serves to ensure that innocent bystanders or neighboring landowners injured by the hired contractor’s negligence will have a source of compensation even if the contractor turns out to be insolvent. As we explained in Privette [, supra, 5 Cal.4th at page] 694 [21 Cal.Rptr.2d 72, 854 P.2d 721], courts created the peculiar risk doctrine in the belief that `as between two parties innocent of any personal wrongdoing—the person who contracted for the work and the hapless victim of the contractor’s negligence—the risk of loss occasioned by the contracted work was more fairly allocated to the person for whose benefit the job was undertaken.’ [¶] In Privette …, we unanimously held that under the peculiar risk doctrine the hiring person’s liability does not extend to the hired contractor’s employees. Because the Workers’ Compensation Act (Lab.Code, § 3200 et seq.) shields an independent contractor from tort liability to its employees, applying the peculiar risk doctrine to the independent contractor’s employees would illogically and unfairly subject the hiring person, who did nothing to create the risk that caused the injury, to greater liability than that faced by the independent contractor whose negligence caused the employee’s injury. (5 Cal.4th at pp. 698-700 [21 Cal.Rptr.2d 72, 854 P.2d 721].) As we concluded: `[T]he property owner should not have to pay for injuries caused by the contractor’s negligent performance of the work when workers’ compensation statutes already cover those injuries.’ (Id. at p. 699 [21 Cal.Rptr.2d 72, 854 P.2d 721].)” (Toland, supra, 18 Cal.4th at p. 256, 74 Cal.Rptr.2d 878, 955 P.2d 504.)

As we have indicated, the doctrine of peculiar risk, insofar as it was relevant in Privette and Toland, is described in sections 413 and 416. Under section 413, a person who hires an independent contractor to do inherently dangerous work, but who fails to provide in the contract or in some other manner that special precautions be taken to avert the peculiar risks of that work, can be liable if the contractor’s negligent performance of the work causes injury to others. “Because section 413 rests the liability of the hiring person on his or her omission to provide for special precautions in the contract or in some other manner, it is sometimes described as a rule of `direct liability.'” (Toland, supra, 18 Cal.4th at p. 259, 74 Cal.Rptr.2d 878, 955 P.2d 504.) Under section 416, even if the hiring person has provided for special precautions in the contract or otherwise, 858*858 the hiring person can nevertheless be liable if the contractor fails to exercise reasonable care to take such precautions and the contractor’s performance of the work causes injury to others. “Because the hiring person’s liability under section 416 .. . flows from the independent contractor’s negligent failure to take special precautions in performing the inherently dangerous work, as required by `the contract or otherwise,’ the hiring person’s liability is often referred to as `vicarious liability.’ [Citations.]” (Toland, supra, 18 Cal.4th at p. 260, 74 Cal.Rptr .2d 878, 955 P.2d 504, fn. omitted.)

In Toland, a subcontractor’s employee sued the general contractor for on-the-job injuries, asserting that Privette did not bar recovery for direct liability under section 413, but only for vicarious liability under section 416. We rejected the argument, noting that the distinction between the two sorts of liability was not that neat under peculiar risk theory. “[P]eculiar risk liability is not a traditional theory of direct liability for the risks created by one’s own conduct: Liability under both sections is in essence `vicarious’ or `derivative’ in the sense that it derives from the `act or omission’ of the hired contractor, because it is the hired contractor who has caused the injury by failing to use reasonable care in performing the work.” (Toland, supra, 18 Cal.4th at p. 265, 74 Cal.Rptr.2d 878, 955 P.2d 504.) Accordingly, we held that, “contrary to plaintiff Toland’s assertion, our decision in Privette, supra, 5 Cal.4th 689, 21 Cal.Rptr.2d 72, 854 P.2d 721, bars employees of a hired contractor who are injured by the contractor’s negligence from seeking recovery against the hiring person, irrespective of whether recovery is sought under the theory of peculiar risk set forth in section 416 or section 413 of the Restatement Second of Torts. In either situation, it would be unfair to impose liability on the hiring person when the liability of the contractor, the one primarily responsible for the worker’s on-the-job injuries, is limited to providing workers’ compensation coverage.” (Toland, supra, 18 Cal.4th at p. 267, 74 Cal.Rptr.2d 878, 955 P.2d 504.)

In Camargo, we held that an employee of a contractor is barred from suing the hirer of the contractor under the negligent hiring theory set forth in section 411. Under section 411, a hirer is liable for physical harm to third persons caused by the hirer’s failure to exercise reasonable care to employ a competent contractor to perform work that will involve a risk of physical harm unless it is skillfully and carefully done, or to perform any duty the hirer owes to third persons. We rejected the argument that Privette and Toland were distinguishable on the ground that in a negligent hiring case the hirer is, in a sense, being taxed with his own negligence, making his liability direct. “[T]he same could be said with regard to an action brought under the peculiar risk theory set forth in section 413. More importantly, under both sections 411 and 413, the liability of the hirer is `in essence “vicarious” or “derivative” in the sense that it derives from the “act or omission” of the hired contractor, because it is the hired contractor who caused the injury by failing to use reasonable care in performing the work.’ (Toland, supra, 18 Cal.4th at p. 265, 74 Cal.Rptr.2d 878, 955 P.2d 504.) Therefore, in a negligent hiring case under the theory set forth in section 411, just as in peculiar risk cases under the theories set forth in sections 413 and 416, `it would be unfair to impose liability on the hiring person when the liability of the contractor, the one primarily responsible for the worker’s on-the-job injuries, is limited to providing workers’ compensation coverage.’ (Toland, supra, 18 Cal.4th at p. 267, 74 Cal.Rptr.2d 878, 955 P.2d 504.)” (Camargo, 859*859 supra, 25 Cal.4th at p. 1244, 108 Cal.Rptr.2d 617, 25 P.3d 1096.)

II. Applying the Rationale of Privette, Toland and Camargo to the Doctrine of Negligent Exercise of Retained Control

Again, section 414 provides: “One who entrusts work to an independent contractor, but who retains the control of any part of the work, is subject to liability for physical harm to others for whose safety the employer owes a duty to exercise reasonable care, which is caused by his failure to exercise his control with reasonable care.” (Italics added.)

Defendant Caltrans contends that employees of a contractor are not others for the purposes of section 414. There are no illustrations to section 414, and the comments to section 414 cast no light on this question. (See § 414, corns, a-c, pp. 387-388.) However, section 414—like sections 413 and 416, which set out the peculiar risk doctrine at issue in Privette and Toland, and section 411, which sets out the negligent hiring doctrine at issue in Camargo— appears in chapter 15 of the Restatement. And as we noted in Toland, and reiterated in Camargo, “a tentative draft to the Restatement ‘stated that “when the Sections in this Chapter speak of liability to `another,’ or `others,’ or to `third persons,’ it is to be understood that the employees of the contractor, as well as those of the defendant himself, are not included.” (Rest.2d Torts (Tent. Draft No. 7, Apr. 16, 1962) ch. 15, special note, p. 18, italics added.)’ (Toland, supra, 18 Cal.4th at pp. 266-267, 74 Cal.Rptr.2d 878, 955 P.2d 504.)” (Camargo, supra, 25 Cal.4th at p. 1241, 108 Cal. Rptr.2d 617, 25 P.3d 1096.)

In Camargo, we noted that “[t]he overwhelming majority of the courts of other jurisdictions that have addressed the question have concluded that an employee of a contractor is not a third person for the purposes of section 411. [Citations.]” (Camargo, supra, 25 Cal.4th at p. 1241, 108 Cal.Rptr.2d 617, 25 P.3d 1096.) Unfortunately, the courts of our sister states have not developed a similar consensus, nor have they spoken with anything like the same clarity, with regard to the question whether employees of contractors are others for the purposes of section 414.

The courts of a number of states have assumed, without directly addressing the question, that an employee of a contractor may sue the hirer of the contractor for negligent exercise of retained control, and these courts have focused, instead, on whether a triable issue was presented as to retention of control or on whether a judgment in favor of the plaintiff was supported by sufficient evidence as to retention of control. (See Alabama Power Co. v. Beam (Ala.1985) 472 So.2d 619, 622-625; Elkins v. Arkla, Inc. (1993) 312 Ark. 280, 849 S.W.2d 489, 490-492; Corsetti v. Stone Co. (1985) 396 Mass. 1, 483 N.E.2d 793, 799; Clausen v. Aberdeen Grain Inspection (S.D.1999) 594 N.W.2d 718, 721-723; Hittel v. WOTCO, Inc. (Wyo.2000) 996 P.2d 673, 676-678.)

The courts of states that have directly addressed it are evenly split on the question whether an employee of a contractor may sue the hirer of the contractor for negligent exercise of retained control.

Answering the question in the affirmative, the Supreme Court of North Dakota has stated the rule broadly. “Employees of an independent contractor fall within the protection of Section 414, and an employer of an independent contractor owes a duty to the independent contractor’s employees to exercise the retained control with reasonable care.” (Fleck v. ANG Coal Gasification Co. (N.D.1994) 522 N.W.2d 445, 447.)

860*860 Taking a more nuanced position, the Supreme Court of Utah has held that a hirer is not liable to an employee of an independent contractor for negligent exercise of retained control, unless the hirer’s conduct meets the active participation standard. (Thompson v. Jess (Utah 1999) 979 P.2d 322, 326-328 (Thompson).) “Under the ‘active participation’ standard, a principal employer is subject to liability for injuries arising out of its independent contractor’s work if the employer is actively involved in, or asserts control over, the manner of performance of the contracted work. [Citation.] Such an assertion of control occurs, for example, when the principal employer directs that the contracted work be done by use of a certain mode or otherwise interferes with the means and methods by which the work is to be accomplished. [Citations.]” (Id. at p. 327.) Therefore, retained control is somewhat of a misnomer for the doctrine as the Utah Supreme Court applies it. “Under the standards announced herein, a duty of care is imposed if the principal employer asserts affirmative control over or actually participates actively in the manner of performing the contracted work. `Retained,’ to the extent the word implies passivity or nonaction, is inapt.” (Id at p. 328, fn. 3.)

Like the North Dakota Supreme Court in Fleck, supra, 522 N.W.2d 445, the Supreme Court of New Mexico has voiced a broad theory of liability. “If [an employer of an independent contractor] has the right to, and does, retain control of the work performed by the independent contractor, he owes the duty of care to the independent contractor’s employee which, if breached, can result in liability to the employee. [Citation.]” (Valdez v. Cillessen & Son, Inc. (1987) 105 N.M. 575, 734 P.2d 1258, 1262.) However, the New Mexico Supreme Court announced this broad rule in a case in which the hirer’s conduct would have more than satisfied the active participation standard announced by the Utah Supreme Court in Thompson, supra, 979 P.2d 322. An employee of a lathing and plastering subcontractor was injured in the collapse of scaffolding. A grant of summary judgment in favor of the hirer was reversed by the New Mexico Supreme Court because there was evidence in the record that the hirer had issued detailed directions to the subcontractor concerning virtually every aspect of the job, including the manner in which the scaffolding was to be erected, and that the hirer, through its superintendent at the jobsite, had “fired the employees of subcontractors, instructed employees on how, when, and where to do their jobs, and assigned employees to tasks other than those which they had been hired to do.” (Valdez, at pp. 1262-1263.)

On the other hand, the courts of other states have concluded that an employee of an independent contractor is barred from suing the hirer of the contractor for negligent exercise of retained control. The Court of Appeals of Kentucky concluded that “[n]othing in the discussions of Sections 413, 414, 416, and 427 of the Restatement, Torts 2d, indicates that an employee of an independent contractor is within the class of `others’ protected by those sections.” (King v. Shelby Rural Electric Cooperative Corp. (Ky.1974) 502 S.W.2d 659, 662, italics added.) In Parker v. Neighborhood Theatres (Ct.Spec.App.1988) 76 Md.App. 590, 547 A.2d 1080, the Court of Special Appeals of Maryland, after concluding the plaintiff had failed to establish retention of control, added that the plaintiff had also failed to provide the court “with any authority that an employee of an independent contractor injured by the negligence of his own master is a person intended to be included among the class of persons to whom the owner owes a nondelegable duty of reasonable care…. No 861*861 matter how appellant phrases it, what he is unsuccessfully attempting is an end run on the Worker’s Compensation Law.” (Id. at p. 1085.) In Sutherland v. Barton (Minn. 1997) 570 N.W.2d 1, the Supreme Court of Minnesota found that no triable issue had been presented as to retained control, and so it reinstated the summary judgment in favor of the hirer, which had been reversed by the intermediate appellate court. In the course of reaching that conclusion, the court noted that “when applying the Restatement [Second of Torts] sections that impose liability on companies hiring independent contractors, we have held that ‘others’ does not include the employees of an independent contractor. [Citation.] This limitation also applies to § 414.” (Id. at p. 5, fn. omitted.)

Recently, the Courts of Appeal of California that have addressed the question have agreed that a hirer may, under certain circumstances, be liable to an employee of a contractor under a retained control theory. However, they have disagreed as to whether mere retention of control is sufficient, or whether something more, something like the Utah Supreme Court’s concept of active participation, must be shown. (Compare Grahn v. Tosco Corp. (1997) 58 Cal.App.4th 1373, 68 Cal.Rptr.2d 806 (Grahn) with Kinney v. CSB Construction, Inc. (2001) 87 Cal.App.4th 28, 103 Cal.Rptr.2d 594 (Kinney).) Under Grahn, “the hirer may be held liable to the independent contractor’s employee where the hirer retains sufficient control over the work of an independent contractor to be able to prevent or eliminate through the exercise of reasonable care the dangerous condition causing injury to the independent contractor’s employee. [Citations.]” (Grahn, at p. 1393, 68 Cal.Rptr.2d 806, italics added.) Under Kinney, on the other hand, mere retention of the ability to control safety conditions is not enough. “[A] general contractor owes no duty of care to an employee of a subcontractor to prevent or correct unsafe procedures or practices to which the contractor did not contribute by direction, induced reliance, or other affirmative conduct. The mere failure to exercise a power to compel the subcontractor to adopt safer procedures does not, without more, violate any duty owed to the plaintiff. Insofar as section 414 might permit the imposition of liability on a general contractor for mere failure to intervene in a subcontractor’s working methods or procedures, without evidence that the general contractor affirmatively contributed to the employment of those methods or procedures, that section is inapplicable to claims by subcontractors’ employees against the general contractor.” (Kinney, at p. 39, 103 Cal.Rptr.2d 594.)

The Kinney court, we conclude, correctly applied the principles of our decisions in Privette and Toland, whereas the Grahn court made much the same mistake in applying Privette to section 414 as it did in applying that case to section 411 (see Camargo, supra, 25 Cal.4th at pp. 1242-1245, 108 Cal.Rptr.2d 617, 25 P.3d 1096, disapproving Grahn, supra, 58 Cal.App.4th 1373, 68 Cal.Rptr.2d 806, insofar as it was inconsistent with that opinion).

In Grahn, an employee of an independent contractor sued the hirer of the contractor under three theories of negligence, including negligent hiring (§ 411) and negligent exercise of retained control (§ 414). (Grahn, supra, 58 Cal.App.4th at pp. 1389-1396, 68 Cal.Rptr.2d 806.) Grahn was decided after Privette but before Toland, and without the benefit of the gloss provided by Toland the Court of Appeal in Grahn misunderstood Privette to have been bottomed on the ground that the hirer in a peculiar risk case is not directly negligent. “In Privette, the court had before it only the issue of whether a peculiar risk theory could be used to hold a nonnegligent hirer 862*862 liable under vicarious liability for the negligence of the independent contractor.” (Grata, at p. 1384, 68 Cal.Rptr.2d 806.) To the contrary, as we explained in Toland and reiterated in Camargo, “the rationale of our decision in Privette extends to cases where the hirer is directly negligent in the sense of having failed to take precautions against the peculiar risks involved in the work entrusted to the contractor. To repeat: In Toland, we rejected the plaintiffs argument that Privette did not bar recovery for direct liability under section 413, but only for vicarious liability under section 416.” (Camargo, supra, 25 Cal.4th at pp. 1243-1244, 108 Cal.Rptr.2d 617, 25 P.3d 1096.)

The Grahn court repeated its mistake in applying Privette to the doctrine of retained control. “Having retained control of the independent contractor’s work, the hirer has a direct and nonimputed obligation to see that reasonable precautions are taken to eliminate or reduce the risk of harm to the employees of its independent contractors.” (Grahn, supra, 58 Cal. App.4th at p. 1394, 68 Cal.Rptr.2d 806, italics added.) Again, the conclusion that a hirer’s liability can be characterized as direct does not end the inquiry into whether the hirer should be held liable for injuries to a contractor’s employees, as we explained in Camargo. “Admittedly, as the Grahn court observed, under section 411, the hirer is, in a sense, being taxed with his own negligence under a theory of direct liability. (Grahn, at p. 1385, 68 Cal.Rptr.2d 806.) However, the same could be said with regard to an action brought under the peculiar risk theory set forth in section 413. More importantly, under both sections 411 and 413, the liability of the hirer is `in essence “vicarious” or “derivative” in the sense that it derives from the “act or omission” of the hired contractor, because it is the hired contractor who caused the injury by failing to use reasonable care in performing the work.’ (Toland, supra, 18 Cal.4th at p. 265, 74 Cal.Rptr.2d 878, 955 P.2d 504.) Therefore, in a negligent hiring case under the theory set forth in section 411, just as in peculiar risk cases under the theories set forth in sections 413 and 416, `it would be unfair to impose liability on the hiring person when the liability of the contractor, the one primarily responsible for the worker’s on-the-job injuries, is limited to providing workers’ compensation coverage.’ (Toland, supra, 18 Cal.4th at p. 267, 74 Cal.Rptr.2d 878, 955 P.2d 504.)” (Camargo, supra, 25 Cal.4th at p. 1244, 108 Cal.Rptr.2d 617, 25 P.3d 1096.)

Similarly, because the liability of the contractor, the person primarily responsible for the worker’s on-the-job injuries, is limited to providing workers’ compensation coverage, it would be unfair to impose tort liability on the hirer of the contractor merely because the hirer retained the ability to exercise control over safety at the worksite. In fairness, as the Kinney court recognized, the imposition of tort liability on a hirer should depend on whether the hirer exercised the control that was retained in a manner that affirmatively contributed to the injury of the contractor’s employee. “We are persuaded that the holdings of Privette and Toland should also apply to employees’ claims under section 414 at least where, as here, (1) the sole factual basis for the claim is that the hirer failed to exercise a general supervisory power to require the contractor to correct an unsafe procedure or condition of the contractor’s own making, and (2) there is no evidence that the hirer’s conduct contributed in any way to the contractor’s negligent performance by, e.g., inducing injurious action or inaction through actual direction, reliance on the hirer, or otherwise. The fairness rationale at the core of Privette and Toland applies 863*863 equally to preclude imposition of liability on a hirer for mere failure to exercise a general supervisory power to prevent the creation or continuation of a hazardous practice, where such liability would exceed that imposed on the injured plaintiffs immediate employer, who created the hazard.” (Kinney, supra, 87 Cal.App.4th at p. 36, 103 Cal.Rptr .2d 594.)

In Kinney, an employee of a subcontractor (PBE) was injured in a fall from scaffolding, and he sued the general contractor, CSB Construction, Inc. (CSB), for negligent exercise of retained control. Kinney is strikingly similar to the present case in that, although the hirer in theory retained a high degree of control over safety conditions at the jobsite, there was no indication the hirer contributed to the accident by an affirmative exercise of that control. “The parties agreed for purposes of the summary judgment motion that during the performance of the subcontract, CSB `had the right to order any safety means or measures that it felt were appropriate’ on the jobsite…. [According to the testimony of CSB’s site superintendent], [i]f he saw an unsafe condition, he ‘had a right to do whatever [he thought was] appropriate.’ … Specifically, `[i]f a subcontractor was working without adequate fall protection and [he] felt that fall protection was required, [he] would … tell them that they needed fall protection’ and `would … stop the work until they had good fall protection.’ … However, he did not recall an instance in which he actually directed PBE or any of the other subcontractors on the job to alleviate an unsafe condition.” (Kinney, supra, 87 Cal. App.4th at p. 31, 103 Cal.Rptr.2d 594.)

The question, as the Kinney court framed it, was “whether a general contractor who claims the power to control all safety procedures on the worksite may be liable to the injured employee of a subcontractor for failing to direct the subcontractor to take safety precautions where there is no evidence that any conduct by the general contractor contributed affirmatively to the injuries.” (Kinney, supra, 87 Cal.App.4th at p. 30, 103 Cal.Rptr.2d 594.) Kinney answered that question in the negative. “We hold that in light of recent California Supreme Court holdings limiting the liability of general contractors for injuries to employees of subcontractors, liability cannot be imposed on the general contractor based upon a mere failure to require the subcontractor to take safety precautions, where the general contractor’s failure is not shown to have affirmatively contributed to the creation or persistence of the hazard causing the plaintiffs injuries. Accordingly, we affirm the judgment for defendant.” (Ibid.)

The Kinney court correctly applied our prior decisions. Imposing tort liability on a hirer of an independent contractor when the hirer’s conduct has affirmatively contributed[3] to the injuries of the contractor’s employee is consistent with the rationale of our decisions in Privette, Toland and Camargo because the liability of the hirer in such a case is not “`in essence “vicarious” or “derivative” in the sense that it derives from the “act or omission” of the hired contractor.'” (Camargo, supra, 25 Cal.4th at p. 1244, 108 Cal.Rptr.2d 617, 25 P.3d 1096, quoting Toland, supra, 18 Cal.4th at p. 265, 74 Cal.Rptr.2d 878, 955 P.2d 504.) To the contrary, the liability 864*864 of the hirer in such a case is direct in a much stronger sense of that term.

Unlike the rule announced in Grahn, the rule announced in Kinney is not susceptible to the objection raised by Caltrans that a defendant will never be able to prevail on a motion for summary judgment in an action for negligent exercise of retained control. To the contrary, where, as here, the plaintiff fails to present a triable issue as to whether the defendant’s exercise of retained control affirmatively contributed to the employee’s injuries, summary judgment is appropriate.

Caltrans also objects that two policy considerations that we have relied upon in barring employees of independent contractors from bringing tort actions against the hirers of the contractors under the peculiar risk doctrine or the negligent hiring doctrine also apply to actions brought under the retained control doctrine.

Caltrans finds support in the following passage from Camargo: “Two of the related policy considerations we relied upon in Privette also support our conclusion here that an employee of an independent contractor should not be permitted to bring a negligent hiring action against the hirer of the contractor: (1) The rule of workers’ compensation exclusivity, which shields an independent contractor who pays workers’ compensation insurance premiums from further liability to its employees, should equally apply to the person hiring the contractor because the hirer has indirectly paid the cost of such coverage inasmuch as it was presumably calculated into the contract price (Privette, supra, 5 Cal.4th at p. 699, 21 Cal.Rptr.2d 72, 854 P.2d 721); and (2) permitting such a recovery would give employees of independent contractors an unwarranted windfall, something that is denied other workers—the right to recover tort damages for industrial injuries caused by their employer’s failure to provide a safe working environment (id. at pp. 699-700, 21 Cal.Rptr.2d 72, 854 P.2d 721).” (Camargo, supra, 25 Cal.4th at pp. 1244 1245, 108 Cal.Rptr.2d 617, 25 P.3d 1096, fn. omitted.)

Caltrans’s reliance is misplaced. While it is true that the cost of workers’ compensation insurance coverage is as likely to have been calculated into the contract price paid by the hirer in a retained control case as it is in peculiar risk or negligent hiring cases, the contract price could not have reflected the cost of injuries that are attributable to the hirer’s affirmative conduct. The contractor has no way of calculating an increase in the costs of coverage that are attributable to the conduct of third parties, which is why the employee, despite the existence of the workers’ compensation system, is not barred from suing a third party who proximately causes the employee’s injury. (See Lab.Code, § 3852.)

Moreover, a close reading of our opinion in Privette reveals another ground for distinguishing between peculiar risk and negligent hiring cases, on the one hand, and negligent exercise of retained control cases, on the other, in this regard. “At common law, a person who hired an independent contractor generally was not liable to third parties for injuries caused by the contractor’s negligence in performing the work. [Citations.] Central to this rule of nonliability was the recognition that a person who hired an independent contractor had `”no right of control as to the mode of doing the work contracted for”` (Green v. Soule (1904) 145 Cal. 96, 99, 78 P. 337; accord, McDonald v. Shell Oil Co. (1955) 44 Cal.2d 785, 788, 285 P.2d 902.)[4] The reasoning was that the work 865*865 performed was the enterprise of the contractor, who, as a matter of business convenience, would be better able than the person employing the contractor to absorb accident losses incurred in the course of the contracted work. This could be done, for instance, by indirectly including the cost of safety precautions and insurance coverage in the contract price. [Citations.]” (Privette, supra, 5 Cal.4th at p. 693, 21 Cal.Rptr.2d 72, 854 P.2d 721, italics added.) On the other hand, if a hirer does retain control over safety conditions at a worksite and negligently exercises that control in a manner that affirmatively contributes to an employee’s injuries, it is only fair to impose liability on the hirer.

Similarly, if an employee of an independent contractor can show that the hirer of the contractor affirmatively contributed to the employee’s injuries, then permitting the employee to sue the hirer for negligent exercise of retained control cannot be said to give the employee an unwarranted windfall. The tort liability of the hirer is warranted by the hirer’s own affirmative conduct. The rule of workers’ compensation exclusivity “does not preclude the employee from suing anyone else whose conduct was a proximate cause of the injury” (Privette, supra, 5 Cal.4th at p. 697, 21 Cal.Rptr.2d 72, 854 P.2d 721), and when affirmative conduct by the hirer of a con tractor is a proximate cause contributing to the injuries of an employee of a contractor, the employee should not be precluded from suing the hirer.

Grahn v. Tosco Corp., supra, 58 Cal. App.4th 1373, 68 Cal.Rptr.2d 806, is disapproved insofar as it is inconsistent with this opinion.

III. By Merely Permitting Traffic to Use the Overpass, Caltrans Did Not Affirmatively Contribute to Mr. Hooker’s Death

In oral argument before this court, a question was raised as to whether Caltrans required, in the sense of ordered, the crane operator to retract his outriggers to permit vehicles to pass. The record does not reflect that any such order was issued by Caltrans. Indeed, in response to a question from the bench, counsel for the plaintiff admitted: “The honest answer to your question … is [Caltrans] permitted it to happen. They permitted this traffic to happen on the overpass. They didn’t direct it to happen.”

Confusion in this regard was generated by an earlier statement made by plaintiffs counsel. In arguing that Caltrans’s exercise of retained control affirmatively contributed to Mr. Hooker’s death, plaintiffs counsel stated, “I think it’s an affirmative act when Caltrans’s own engineer specifically 866*866 comes up and requires the operator to retract the outriggers.” He later explained what he meant by this: “There was evidence in the record that the Caltrans Senior Engineer himself used the overpass as a shortcut to traverse the construction and had to wait until the operator retracted the outriggers.” This narrower statement is supported by the record.

Perhaps the clearest way to put it is this: Caltrans permitted construction vehicles, as well as vehicles owned and operated by Caltrans, to use the overpass while the crane was being operated, and because the overpass was narrow, the crane operator was required to retract the outriggers in order to let the traffic pass. That is what plaintiff asserted below: “Given the narrow width of the portion of the [high occupancy vehicle] lane where he was working, Mr. Hooker was regularly required to retract his extended outriggers to permit construction vehicles, including vehicles owned and operated by Defendant State of California, to pass.”

We are not persuaded that Caltrans, by permitting traffic to use the overpass while the crane was being operated, affirmatively contributed to Mr. Hooker’s death. Interestingly, when pressed for a standard, plaintiffs counsel referred to a passage in the Thompson opinion of the Utah Supreme Court quoted above: “Under the `active participation’ standard, a principal employer is subject to liability for injuries arising out of its independent contractor’s work if the employer is actively involved in, or asserts control over, the manner of performance of the contracted work. [Citation.] Such an assertion of control occurs, for example, when the principal employer directs that the contracted work be done by use of a certain mode or otherwise interferes with the means and methods by which the work is to be accomplished. [Citations.]” (Thompson, supra, 979 P.2d at p. 327, italics added.) To repeat, Caltrans did not direct the crane operator to retract his outriggers to permit traffic to pass.

Accordingly, under the standard we announce today, summary judgment was appropriate here. Plaintiff raised triable issues of material fact as to whether defendant retained control over safety conditions at the worksite. However, plaintiff failed to raise triable issues of material fact as to whether defendant actually exercised the retained control so as to affirmatively contribute to the death of plaintiffs husband. While the evidence suggests that the crane tipped over because the crane operator swung the boom while the outriggers were retracted, and that the crane operator had a practice of retracting the outriggers to permit construction traffic to pass the crane on the overpass, there was no evidence Caltrans’s exercise of retained control over safety conditions at the worksite affirmatively contributed to the adoption of that practice by the crane operator. There was, at most, evidence that Caltrans’s safety personnel were aware of an unsafe practice and failed to exercise the authority they retained to correct it.

Disposition

The judgment of the Court of Appeal is reversed and the matter remanded for further proceedings consistent with this opinion.

WE CONCUR: GEORGE, C.J., KENNARD, J., BAXTER, J., CHIN, J. and MORENO, J.

Dissenting Opinion by WERDEGAR, J.

I respectfully dissent. While I agree with the majority that a party hiring an 867*867 independent contractor may be liable in tort to employees of the contractor for negligent exercise of control the hirer has retained over any part of the work, I disagree that such liability may exist only when the hirer’s exercise of control “affirmatively contributed to the injury of the contractor’s employee” (maj. opn., ante, 115 Cal.Rptr.2d at p. 862, 38 P.3d at p. 1089, italics in original). The majority’s analysis, and the result it reaches in this case, usurp the factfinding and fault allocation functions assigned to the jury under our comparative fault system.

The evidence produced on summary judgment showed that California Department of Transportation (Caltrans) employees had permitted construction traffic on the overpass where plaintiffs decedent was working, and had driven Caltrans’s own vehicles on the overpass. The Caltrans construction manual required the construction safety coordinator to know proper “construction zone traffic management,” implying that Caltrans bore responsibility for exercising such management. A reasonable trier of fact could infer that Caltrans retained control over construction zone traffic management and that, in exercising this retained control, Caltrans used, and permitted other vehicles to use, the overpass. The resulting traffic frequently required the decedent to retract the outriggers of his crane, a practice that led proximately to his fatal accident. Evidence showed as well that Caltrans representatives had observed the outriggers being repeatedly retracted, knew the crane was unstable in that state, and knew that if they were to “flag off the overpass the crane operator would not have to retract the outriggers. This complex of evidence raises at least a triable issue of fact (Code Civ. Proc, § 437c) as to whether Caltrans negligently exercised its retained control over construction zone traffic, contributing to the decedent’s death.

To be sure, the evidence suggests that Caltrans did not bear sole fault in the accident. Caltrans apparently did not order the decedent to retract the outriggers for passing traffic; nor, apparently, did Caltrans direct the decedent to attempt operating the crane before reextending the outriggers. It may be that a jury, hearing all the evidence, would find the decedent largely at fault for his own death and assign to Caltrans only a small share of the fault, based on its having permitted and contributed to the overpass traffic. In that case, Caltrans’s liability would be reduced; the comparative fault system operates to reduce the liability of a negligent hirer in the same manner it reduces the liability of other third parties for employee injuries. (See Toland v. Sunland Housing Group, Inc. (1998) 18 Cal.4th 253, 280, 74 Cal.Rptr.2d 878, 955 P.2d 504 (cone. & dis. opn. of Werdegar, J.).) No special judicial test of negligence is required in order to achieve a fair allocation of fault.

The majority’s “affirmatively contribute” test of negligence liability reflects the notion that a person who actually performs a dangerous act, or directs its performance, is likely to be more at fault for the resulting accident than a person who merely fails to correct the conditions creating the danger. One might expect that generalization to be reflected, as well, in a jury verdict on liability: to the extent the hirer’s fault is seen as resting solely on inaction, the jury is likely to assign the hirer a low share of fault in comparison to those who contributed to the injury by their actual participation in the operation. But the determination of comparative fault in this manner, like any negligence determination, rests on the specific facts of the case: to whom was the danger apparent; who had the ability to alleviate the danger, 868*868 and by what means and at what costs? From the distinctions between activity and passivity, act and omission, which a jury might properly use to measure and compare fault, the majority fashions a purported bright-line rule for courts to apply.[1] Its effort is both unnecessary and inimical to the jury system.

I do not suggest every retained-control claim must go to a jury. The mere fact that a contract gives the hiring party general control over the project and the authority to stop work should not create liability if, in practice, the hirer’s supervision and control did not actually extend to any part of the operation contributing to the hazard. As the Restatement Second of Torts cautions: “It is not enough that [the hirer] has merely a general right to order the work stopped or resumed, to inspect its progress or to receive reports, to make suggestions or recommendations which need not necessarily be followed, or to prescribe alterations and deviations…. There must be such a retention of a right of supervision that the contractor is not entirely free to do the work in his own way.” (Rest.2d Torts, § 414, com. c, p. 388; see also Hobbs v. Mobil Oil Corporation (Alaska 1968) 445 P.2d 933, 936 [hirer not liable to a contractor’s employee if “under the contract and in actual practice” the hirer’s control does not affect the contractor’s “methods of work” or the “operative detail” of the work].)

The present case, however, is not merely one of contractual or formal control. Plaintiff has produced evidence from which one can infer that Caltrans’s actual exercise of control over traffic on the site affected the manner in which the crane operations were conducted; the contractor, consequently, was not “entirely free to do the work in his own way.” (Rest.2d Torts, § 414, com. c, p. 388.) Whether after full discovery and trial a jury would agree with plaintiff that Caltrans’s management of traffic at the site was partly responsible for the crane’s unsafe operation and the resulting accident is not at issue at this point in the proceedings. To properly obtain summary judgment, defendant must show that plaintiff “has not established, and cannot reasonably expect to establish, a prima facie case” of negligent exercise of retained control. (Saelzler v. Advanced Group WO (2001) 25 Cal.4th 763, 768, 107 Cal.Rptr.2d 617, 23 P.3d 1143, italics added.) Defendant has not made that showing.

I would affirm the judgment of the Court of Appeal.

[1] Unless otherwise indicated, all section references are to the Restatement Second of Torts.

[2] In both Toland and Camargo, we noted we were not reaching this question. “Our grant of review did not extend to, and therefore we do not decide, a second issue raised by Toland: whether Privette, supra, 5 Cal.4th 689, 21 Cal.Rptr.2d 72, 854 P.2d 721, would preclude an employee of an independent contractor from seeking tort recovery for workplace injuries under the theory of section 414 of the Restatement Second of Torts that the general contractor or landowner `retained control’ over the operative details of the hired work. As the Court of Appeal unanimously concluded, the facts Toland offered in opposing summary judgment were insufficient to raise a triable issue on that question.” (Toland, supra, 18 Cal.4th at p. 264, fn. 2, 74 Cal.Rptr.2d 878, 955 P.2d 504.) “Today we have concluded that the rationale of our decisions in Privette and Toland, which involved tort liability under the peculiar risk doctrine, also applies to the tort of negligent hiring. Review has been granted in cases that present related questions—whether the Privette/Toland rationale should apply as well to the tort of negligent exercise of retained control (Hooker v. Department of Transportation, review granted Nov. 1, 2000, S091601) or the tort of negligent provision of unsafe equipment (McKown v. Wal-Mart Stores, Inc. (2000) 82 Cal.App.4th 562, 98 Cal.Rptr.2d 214, review granted Oct. 18, 2000, S091097)—and our opinion today should not be read as having prejudged those questions.” (Camargo, supra, 25 Cal.4th at p. 1245, fn. 2, 108 Cal.Rptr.2d 617, 25 P.3d 1096.)

[3] Such affirmative contribution need not always be in the form of actively directing a contractor or contractor’s employee. There will be times when a hirer will be liable for its omissions. For example, if the hirer promises to undertake a particular safety measure, then the hirer’s negligent failure to do so should result in liability if such negligence leads to an employee injury.

[4] In McDonald v. Shell Oil Co., supra, 44 Cal.2d 785, 285 P.2d 902, we did not have occasion to grapple with the question presented by this case—whether an employee of a contractor may sue the hirer of a contractor for the tort of negligent exercise of retained control. McDonald did involve a negligence suit by an employee of a contractor against the hirer of the contractor. And our discussion did begin with a recitation of the following general principles: “The general supervisory right to control the work so as to insure its satisfactory completion in accordance with the terms of the contract does not make the hirer of the independent contractor liable for the latter’s negligent acts in performing the details of the work. [Citation.] An owner is not liable for injuries resulting from defective appliances unless he has supplied them or has the privilege of selecting them or the materials out of which they are made [citation] or unless he exercises active control over the men employed or the operations of the equipment used by the independent contractor. [Citation.]” (Id. at pp. 788-789, 285 P.2d 902, italics added.) However, in McDonald we found the hirer of the contractor had retained no more than the general supervisory right to control the work so as to insure its satisfactory completion in accordance with the terms of the contract. (See id. at p. 790, 285 P.2d 902.) Moreover, of course, McDonald long predated Privette.

[1] The line drawn is actually rather fuzzy in light of the majority’s suggestion that some “omissions” may be deemed “affirmative” contributions to an injury. (Maj. opn., ante, 115 Cal.Rptr.2d at p. 863, fn. 3, 38 P.3d at p. 1089, fn. 3.) The majority further fails to explain why a hirer’s “promise[ ]” (ibid.) to exercise control allows for possible liability while the contractual retention of control is held insufficient as a matter of law, even, as in this case, where the hirer’s retention of control could reasonably have led the contractor and its employees to expect that the hirer would in fact exercise its control when necessary.

FRANKLIN PRIVETTE, Petitioner,
v.
THE SUPERIOR COURT OF SANTA CLARA COUNTY, Respondent; JESUS CONTRERAS, Real Party in Interest.

691*691 COUNSEL

Ropers, Majeski, Kohn, Bentley, Wagner & Kane, Mark G. Bonino and Justice C. McPherson for Petitioner.

Horvitz & Levy, David M. Axelrad, Christine T. Hoeffner, Sedgwick, Detert, Moran & Arnold and Frederick D. Baker as Amici Curiae on behalf of Petitioner.

No appearance for Respondent.

Seltzer & Cody, Christopher T. Cody and Richard Seltzer for Real Party in Interest.

OPINION

KENNARD, J.

(1a) Under the peculiar risk doctrine, a person who hires an independent contractor to perform work that is inherently dangerous can be held liable for tort damages when the contractor’s negligent performance of the work causes injuries to others. By imposing such liability without fault on the person who hires the independent contractor, the doctrine seeks to ensure that injuries caused by inherently dangerous work will be compensated, that the person for whose benefit the contracted work is done bears responsibility for any risks of injury to others, and that adequate safeguards are taken to prevent such injuries. Courts differ, however, on the propriety of extending the doctrine to the contractor’s own employees. A minority of jurisdictions, including California, have permitted such employees to seek recovery from the person who hired the contractor. But the decisions of this court by which the minority rule has become established in California have never addressed the potential conflict between the peculiar risk doctrine, as applied in favor of the contractor’s employees, and the system of workers’ compensation. Today, this court for the first time directly confronts this issue.

692*692 When an employee of the independent contractor hired to do dangerous work suffers a work-related injury, the employee is entitled to recovery under the state’s workers’ compensation system. That statutory scheme, which affords compensation regardless of fault, advances the same policies that underlie the doctrine of peculiar risk. Thus, when the contractor’s failure to provide safe working conditions results in injury to the contractor’s employee, additional recovery from the person who hired the contractor — a nonnegligent party — advances no societal interest that is not already served by the workers’ compensation system. Accordingly, we join the majority of jurisdictions in precluding such recovery under the doctrine of peculiar risk.

I

Franklin Privette hired Jim Krause Roofing, Inc. (hereafter Krause) to install a new tar and gravel roof on his duplex. Using a kettle and pumping device parked in a driveway next to the duplex, the roofing crew transported hot tar to the roof. When the gravel truck arrived, the crew moved the kettle and pumping device to make room for the truck.

After the gravel was deposited on the roof, crew members realized they needed 50 more gallons of tar to complete the job. The foreman then directed employee Jesus Contreras to carry 10 five-gallon buckets of hot tar up a ladder to the roof. While performing this task, Contreras fell off the ladder and was burned by hot tar.

Contreras sought workers’ compensation benefits for his injuries. He also sued Privette, the owner of the duplex, alleging two theories of recovery: that Privette had been negligent in selecting Krause as a roofer; and that, because of the inherent danger of working with hot tar, Privette should, under the doctrine of peculiar risk, be liable for injuries to Contreras that resulted from Krause’s negligence.

In a pretrial motion for summary judgment (Code Civ. Proc., § 437c), Privette sought termination of Contreras’s action. Among the arguments Privette made was that the availability of workers’ compensation to Contreras for injuries resulting from his employer’s conduct should bar him from any recovery from Privette under the doctrine of peculiar risk.^[1] In support of his motion, Privette presented these undisputed facts: Privette, a school teacher, owned some rental properties, including the duplex where roofing employee Contreras was injured. Privette had hired the Krause roofing firm 693*693 to reroof his duplex only after checking references and determining that Krause was licensed and carried workers’ compensation insurance for its employees. Privette was not present when Contreras was injured during the roofing process, nor did he participate in the foreman’s decision to have Contreras carry buckets of hot tar up a ladder to the roof.

The trial court denied Privette’s motion for summary judgment. Following Privette’s unsuccessful attempt to obtain relief from the Court of Appeal, we granted his petition for review and issued an alternative writ to determine the applicability of the peculiar risk doctrine in this case.

II

At common law, a person who hired an independent contractor generally was not liable to third parties for injuries caused by the contractor’s negligence in performing the work. (Prosser & Keeton on Torts (5th ed. 1984) § 71, p. 509 [hereafter Prosser]; see S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 350 [256 Cal. Rptr. 543, 769 P.2d 399].) Central to this rule of nonliability was the recognition that a person who hired an independent contractor had “`no right of control as to the mode of doing the work contracted for.'” (Greene v. Soule (1904) 145 Cal. 96, 99 [78 P. 337]; accord, McDonald v. Shell Oil Co. (1955) 44 Cal.2d 785, 788 [285 P.2d 902].) The reasoning was that the work performed was the enterprise of the contractor, who, as a matter of business convenience, would be better able than the person employing the contractor to absorb accident losses incurred in the course of the contracted work. This could be done, for instance, by indirectly including the cost of safety precautions and insurance coverage in the contract price. (Fleming, An Introduction to the Law of Torts (1967) pp. 172-173 [hereafter Fleming]; Prosser, supra, § 71, at p. 509; Van Arsdale v. Hollinger (1968) 68 Cal.2d 245, 250 [66 Cal. Rptr. 20, 437 P.2d 508].)

Over time, the courts have, for policy reasons, created so many exceptions to this general rule of nonliability that “`”the rule is now primarily important as a preamble to the catalog of its exceptions.”‘” (Van Arsdale v. Hollinger, supra, 68 Cal.2d at p. 252, quoting Pacific Fire Ins. Co. v. Kenny Boiler & Mfg. Co. (1937) 201 Minn. 500 [277 N.W. 226]; Rest.2d Torts, §§ 410-429 and § 409, com. b, at p. 370 [describing the nonliability rule as “`general’ only in the sense that it is applied where no good reason is found for departing from it”].) One of these exceptions pertains to contracted work that poses some inherent risk of injury to others. This exception is commonly referred to as the doctrine of peculiar risk.

The origins of this doctrine can be traced to roughly the latter half of the nineteenth century, when a growing recognition developed in the courts that 694*694 a landowner who chose to undertake inherently dangerous activity on his land should not escape liability for injuries to others simply by hiring an independent contractor to do the work. As a leading English decision from 1876 put it: “[A] man who orders a work to be executed, from which, in the natural course of things, injurious consequences to his neighbor must be expected to arise… cannot relieve himself of his responsibility by employing some one else….” (Bower v. Peate (1876) 1 Q.B.D. 321, 326.) In that case, the English court held a landowner liable for damages to his neighbor’s property when an independent contractor hired by the landowner to tear down an old house on his land and to build a new one on the same site, but with a deeper foundation, undermined the ground supporting the neighbor’s house. (Id. at pp. 323, 324-327.)

Interestingly, 14 years earlier, in 1862, the United States Supreme Court had articulated similar reasoning in imposing liability on a landowner. (Chicago v. Robbins (1862) 67 U.S. (2 Black) 418, 426-427 [17 L.Ed. 298, 303-304].) In that case, a landowner had a contractor construct a building on his land. In the course of the work, the contractor excavated the adjoining city sidewalk and left the hole uncovered. A passerby fell into the hole, and sought recovery from the landowner for the resulting injuries. In holding the owner liable for the contractor’s negligence, the high court reasoned that the injury had been caused “by the very nuisance which [the landowner] ha[d] created for his own benefit.” (Id. at p. 427.)

The courts adopted the peculiar risk exception to the general rule of nonliability to ensure that innocent third parties injured by the negligence of an independent contractor hired by a landowner to do inherently dangerous work on the land would not have to depend on the contractor’s solvency in order to receive compensation for the injuries. (See Note, Liability to Employees of Independent Contractors Engaged in Inherently Dangerous Work: A Workable Workers’ Compensation Proposal (1980) 48 Fordham L.Rev. 1165, 1176-1178 [hereafter A Workable Proposal]; see also Comment, The Peculiar Risk Doctrine: A Criticism of Its Application in California (1988) 22 U.C. Davis L.Rev. 215, 222 [hereafter Comment].) It was believed that as between two parties innocent of any personal wrongdoing — the person who contracted for the work and the hapless victim of the contractor’s negligence — the risk of loss occasioned by the contracted work was more fairly allocated to the person for whose benefit the job was undertaken. (Fleming, supra, p. 173.) Also, by spreading the risk of loss to the person who primarily benefited from the hired work, the courts sought to promote workplace safety, a concern of great significance to the public. (Aceves v. Regal Pale Brewing Co. (1979) 24 Cal.3d 502, 508 [156 Cal. Rptr. 41, 595 P.2d 619].)

695*695 (2) A person held liable under the doctrine of peculiar risk is entitled to equitable indemnity from the independent contractor at fault for the injury. (Fleming, supra, p. 173; Aceves v. Regal Pale Brewing Co., supra, 24 Cal.3d at p. 508; see Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 628 [119 Cal. Rptr. 449, 532 P.2d 97] [distinguishing the right to indemnity based on principles of equity from contractually based indemnity]; Pearson Ford Co. v. Ford Motor Co. (1969) 273 Cal. App.2d 269, 272 [78 Cal. Rptr. 279] [describing the principle underlying equitable indemnity as the idea “`that everyone is responsible for the consequences of his [or her] own wrong, and if others have been compelled to pay damages which ought to have been paid by the wrongdoer, they may recover from him [or her]'”].) Thus, although peculiar risk is sometimes described as a “nondelegable duty” rule (see Comment, The Peculiar Risk Doctrine: High Rise Benefits for California Construction Workers (1986) 19 Loy. L.A.L.Rev. 1495, 1498 [hereafter High Rise Benefits]; Comment, supra, 22 U.C. Davis L.Rev. 215, 219), it is in effect a form of vicarious liability. (Prosser, supra, § 71, at p. 511; Fleming, supra, at pp. 172-173; see also A Workable Proposal, supra, 48 Fordham L.Rev. 1165, 1171.)^[2]

(3) A critical inquiry in determining the applicability of the doctrine of peculiar risk is whether the work for which the contractor was hired involves a risk that is “peculiar to the work to be done,” arising either from the nature or the location of the work and “`against which a reasonable person would recognize the necessity of taking special precautions.'” (Aceves v. Regal Pale Brewing Co., supra, 24 Cal.3d 502, 509, quoting Griesel v. Dart Industries, supra, 23 Cal.3d 578, 586; Rest.2d Torts, § 413, com. b.; id., § 416, com. b.) The term “peculiar risk” means neither a risk that is abnormal to the type of work done, nor a risk that is abnormally great; it simply means “`a special, recognizable danger arising out of the work itself.'” (Aceves v. Regal Pale Brewing Co., supra, at p. 509, quoting Rest.2d Torts, § 413, com. b.) For that reason, as this court has pointed out, the term “special risk” is probably a more accurate description than “peculiar risk,” which is the terminology used in the Restatement. (Aceves v. Regal Pale Brewing Co., supra, at p. 509, fn. 2.)

696*696 (4) Even when work performed by an independent contractor poses a special or peculiar risk of harm, however, the person who hired the contractor will not be liable for injury to others if the injury results from the contractor’s “collateral” or “casual” negligence. (Aceves v. Regal Pale Brewing Co., supra, 24 Cal.3d at p. 510; Prosser, supra, § 71, at pp. 515-516; Rest. 2d Torts, § 426.) An independent contractor’s negligence is collateral, we have said, when the negligence involves an “operative detail of the work, as distinguished from the general plan or method to be followed.” (Aceves v. Regal Pale Brewing Co., supra, at p. 510.) But, as we have also acknowledged, it is often difficult to distinguish those risks that are inherent in the work from those that are collateral, and the line to be drawn between the two types of risks is “shadowy.” (Van Arsdale v. Hollinger, supra, 68 Cal.2d 245, 252, quoting Harper, Law of Torts (1933) § 292.)

III

(1b) As we have seen, in its original form the doctrine of peculiar risk made a landowner liable to innocent bystanders or neighboring property owners who were injured by the negligent acts of an independent contractor hired by the landowner to perform dangerous work on his or her land. In turn, the landowner could sue the contractor for equitable indemnity.

Gradually, the peculiar risk doctrine was expanded to allow the hired contractor’s employees to seek recovery from the nonnegligent property owner for injuries caused by the negligent contractor. California is among the minority of jurisdictions that has adopted this view. We applied this expansion of the doctrine for the first time in Woolen v. Aerojet General Corp. (1962) 57 Cal.2d 407, 410-411 [20 Cal. Rptr. 12, 369 P.2d 708], seeing “no reason to hold otherwise.” Since Woolen, we have approved peculiar risk liability in favor of an independent contractor’s employee in several decisions. (See, e.g., Ferrel v. Safway Steel Scaffolds (1962) 57 Cal.2d 651 [21 Cal. Rptr. 575, 371 P.2d 311]; Van Arsdale v. Hollinger, supra, 68 Cal.2d 245; Griesel v. Dart Industries, Inc., supra, 23 Cal.3d 578; Aceves v. Regal Pale Brewing Co., supra, 24 Cal.3d 502.) Privette, the property owner sued here, recognizes this. He urges us, however, to reconsider Woolen and its progeny. He argues that when the person injured by negligently performed contracted work is one of the contractor’s own employees, the injury is already compensable under the workers’ compensation scheme and therefore the doctrine of peculiar risk should provide no tort remedy, for those same injuries, against the person who hired the independent contractor. We agree, for reasons that follow.

IV

Under the Workers’ Compensation Act (hereafter the Act), all employees are automatically entitled to recover benefits for injuries “arising out of and 697*697 in the course of the employment.” (Lab. Code, § 3600, subd. (a);^[3] see also § 3716 [setting up an uninsured employers fund to provide benefits for employees not covered by workers’ compensation insurance].) The workers’ compensation system was created to provide, in the words of our state Constitution, “for the comfort, health and safety and general welfare of any and all workers and those dependent upon them for support to the extent of relieving from the consequences of any injury or death incurred or sustained by workers in the course of their employment….” (Cal. Const., art. XIV, § 4.)

In S.G. Borello & Sons, Inc. v. Department of Industrial Relations, supra, 48 Cal.3d 341, 354, we articulated four distinct objectives of the Act: “(1) to ensure that the cost of industrial injuries will be part of the cost of goods rather than a burden on society, (2) to guarantee prompt, limited compensation for an employee’s work injuries, regardless of fault, as an inevitable cost of production, (3) to spur increased industrial safety, and (4) in return, to insulate the employer from tort liability for his employees’ injuries. [Citations.]”

When the conditions of compensation exist, recovery under the workers’ compensation scheme “is the exclusive remedy against an employer for injury or death of an employee.” (Johns-Manville Products Corp. v. Superior Court (1980) 27 Cal.3d 465, 468 [165 Cal. Rptr. 858, 612 P.2d 948, 9 A.L.R.4th 758], citing § 3602.) The purpose of this exclusivity provision is to give efficacy to the theoretical “compensation bargain” between the employer and employee. (Shoemaker v. Myers (1990) 52 Cal.3d 1, 16 [276 Cal. Rptr. 303, 801 P.2d 1054].) In Shoemaker, we described that bargain as follows: “[T]he employer assumes liability for industrial personal injury or death without regard to fault in exchange for limitations in the amount of that liability. The employee is afforded relatively swift and certain payment of benefits to cure or relieve the effects of industrial injury without having to prove fault but, in exchange, gives up the wider range of damages potentially available in tort. [Citations.]” (Ibid.) The Act’s exclusivity clause applies to work-related injuries regardless of fault, including those attributable to the employer’s negligence or misconduct (Cole v. Fair Oaks Fire Protection Dist. (1987) 43 Cal.3d 148, 160 [233 Cal. Rptr. 308, 729 P.2d 743]), as well as the employer’s failure to provide a safe workplace (Royster v. Montanez (1982) 134 Cal. App.3d 362, 371 [184 Cal. Rptr. 560]). But the exclusivity clause does not preclude the employee from suing anyone else whose conduct was a proximate cause of the injury. (§ 3852; Dafonte v. Up-Right, Inc. (1992) 2 Cal.4th 593, 598 [7 Cal. Rptr.2d 238, 828 P.2d 140]; County of San Diego v. Sanfax Corp. (1977) 19 Cal.3d 862, 873 [140 Cal. Rptr. 638, 568 P.2d 363].)

698*698 To encourage employers to obtain workers’ compensation insurance for their employees, the Act’s “exclusive remedy” clause does not apply in favor of employers that fail to obtain such insurance, and consequently they are not immune from tort liability for such injuries. (§ 3706.) Conversely, an employer that provides compensation coverage has no further liability for workplace injuries to an employee. Therefore, if a nonnegligent third party pays damages for an employee’s injuries that are attributable in whole or in part to the negligence of the employer, the Act’s limitations on employer liability preclude the third party from obtaining equitable indemnity from the employer. (§ 3864; see generally, Alameda Tank Co., Inc. v. Starkist Foods, Inc. (1980) 103 Cal. App.3d 428, 433 [162 Cal. Rptr. 924].)

V

When an independent contractor causes injury to the contractor’s own employee, the Act’s “exclusive remedy” provision shields the contractor from further liability for the injury. Yet, under the expansive view of the peculiar risk doctrine that has been adopted in California and a minority of other jurisdictions, the person who hired the independent contractor can, for the same injury-causing conduct of the contractor, be held liable in a tort action for the injuries to the contractor’s employee. Because this expansive view produces the anomalous result that a nonnegligent person’s liability for an injury is greater than that of the person whose negligence actually caused the injury, it has been widely criticized. (See generally, Comment, supra, 22 U.C. Davis L.Rev. at pp. 231-235; id. at p. 218, fn. 18 [and cases cited therein]; High Rise Benefits, supra, 19 Loyola L.A.L.Rev. 1495; A Workable Proposal, supra, 48 Fordham L.Rev. 1165.) Indeed, most courts that have considered the issue have refused to extend the peculiar risk doctrine to allow such an employee to recover tort damages from the person who hired the contractor. (Wagner v. Continental Cas. Co. (1988) 143 Wis.2d 379 [421 N.W.2d 835]; Peone v. Regulas Stud Mills (1987) 113 Idaho 374 [744 P.2d 102, 106]; Jones v. Chevron U.S.A., Inc. (Wyo. 1986) 718 P.2d 890; Vertentes v. Barletta Co., Inc. (1984) 392 Mass. 165 [466 N.E.2d 500]; Johns v. New York Blower Co. (Ind. Ct. App. 1982) 442 N.E.2d 382 [34 A.L.R.4th 904]; Tauscher v. Puget Sound Power and Light Co. (1981) 96 Wn.2d 274 [635 P.2d 426]; Cooper v. Metropolitan Government of Nashville and Davidson County (Tenn. Ct. App. 1981) 628 S.W.2d 30; Conover v. Northern States Power Co. (Minn. 1981) 313 N.W.2d 397; Jackson v. Petit Jean Electric Co-op (1980) 279 Ark. 506 [606 S.W.2d 66]; Donch v. Delta Inspection Services, Inc. (1979) 165 N.J. Super. 567 [398 A.2d 925]; Vagle v. Pickands Mather & Co. (8th Cir.1979) 611 F.2d 1212, 1218 [interpreting Minn. law]; Sloan v. Atlantic Richfield Co. (Alaska 1976) 552 P.2d 157; King v. Shelby Rural Electric Cooperative Corp. (Ky. Ct. App. 1973) 502 S.W.2d 659; Olson 699*699 v. Kilstofte and Vosejpka, Inc. (D.Minn. 1971) 327 F. Supp. 583, 587; Welker v. Kennecott Copper Co. (1965) 1 Ariz. App. 395 [403 P.2d 330]; but see Elliott v. Public Service Co. of N.H. (1986) 128 N.H. 676 [517 A.2d 1185].)

As one court observed, the “principal” who hires an independent contractor should be subject to no greater liability “than its [independent contractor] agent,” whose exposure for injury to an employee is limited to providing workers’ compensation insurance. (Olson v. Kilstofte and Vosejpka, Inc., supra, 327 F. Supp. 583, 587.) Other courts have reasoned that the rule of workers’ compensation exclusivity, which shields an independent contractor who pays workers’ compensation insurance premiums from further liability to its employees for on-the-job injuries, should equally protect the property owner who, in hiring the contractor, is indirectly paying for the cost of such coverage, which the contractor presumably has calculated into the contract price. Therefore, these courts have concluded, the property owner should not have to pay for injuries caused by the contractor’s negligent performance of the work when workers’ compensation statutes already cover those injuries. (Jones v. Chevron U.S.A., Inc., supra, 718 P.2d at p. 899; Johns v. New York Blower Co., supra, 442 N.E.2d at p. 388; Vertentes v. Barletta Co., Inc., supra, 466 N.E.2d at p. 503; Welker v. Kennecott Copper Co., supra, 403 P.2d 330, 338-339; Tauscher v. Puget Sound Power and Light Co., supra, 635 P.2d at p. 430; Jackson v. Petit Jean Elec. Co-op., supra, 606 S.W.2d at p. 69; Wagner v. Continental Cas. Co., supra, 421 N.W.2d at pp. 842-843; Donch v. Delta Inspection Services, Inc., supra, 398 A.2d at p. 929; Peone v. Regulas Stud Mills, supra, 744 P.2d at p. 106; see also A Workable Proposal, supra, 48 Fordham L.Rev. at p. 1180.)

Similar reasoning appears in a tentative draft of the Restatement Second of Torts; it too concludes that a hiring party’s liability should not extend to an independent contractor’s employees who are injured as a result of the negligently performed contracted work. (Rest.2d Torts (Tent. Draft. No. 7, Apr. 16, 1962) ch. 15, special note, pp. 17-18 [recognizing that workplace injuries incurred by an independent contractor’s employees are covered by workers’ compensation insurance, the cost of which is “included by the contractor in his contract price” and “ultimately … borne by the defendant who hires him”].) The tentative draft’s proposed limitation on liability was not included in the Restatement itself, however, because of the lack of uniformity in the workers’ compensation statutes that have been adopted throughout the United States. (See Proceedings of ALI (39th Ann. Meeting, 1962) pp. 244-246; see also High Rise Benefits, supra, 19 Loyola L.A. L.Rev. 1496, 1505.)

Courts and legal commentators have expressed concern that to allow an independent contractor’s employees who incur work-related injuries compensable under the workers’ compensation system to also seek damages 700*700 under the doctrine of peculiar risk from the person who hired the contractor would give those employees an unwarranted windfall. As these authorities point out, to permit such recovery would give these employees something that is denied to other workers: the right to recover tort damages for industrial injuries caused by their employer’s failure to provide a safe working environment. This, in effect, would exempt a single class of employees, those who work for independent contractors, from the statutorily mandated limits of workers’ compensation. (Vagle v. Pickands Mather & Co., supra, 611 F.2d 1212, 1218; High Rise Benefits, supra, 19 Loyola L.A. L.Rev. 1495, 1499; A Workable Proposal, supra, 48 Fordham L.Rev. at p. 1180; see also West v. Guy F. Atkinson Construction Co. (1967) 251 Cal. App.2d 296, 301 [59 Cal. Rptr. 286].) Moreover, to impose vicarious liability for tort damages on a person who hires an independent contractor for specialized work would penalize those individuals who hire experts to perform dangerous work rather than assigning such activity to their own inexperienced employees. (Wagner v. Continental Cas. Co., supra, 421 N.W.2d at p. 842; King v. Shelby Rural Electric Cooperative Corp., supra, 502 S.W.2d at p. 663.)

VI

As mentioned earlier, we have, since our decision in Woolen v. Aerojet General Corp., supra, 57 Cal.2d 407, adhered to the view that under the doctrine of peculiar risk an employee of an independent contractor injured on the job may seek tort damages from the person who hired the contractor. Until today, we have had no occasion to attempt to reconcile our decision in Woolen with the provision of the workers’ compensation scheme limiting employer liability for an employee’s work-related injury to providing workers’ compensation coverage.

Our most recent application of the peculiar risk doctrine occurred in Aceves v. Regal Pale Brewing Co., supra, 24 Cal.3d 502, a case in which an employee of a wrecking firm hired by a brewery to demolish some of its buildings was awarded tort damages against the brewery owner for on-the-job injuries. In discussing the issue of the workers’ compensation insurance carrier’s entitlement to reimbursement from the brewery for benefits paid to the employee, we made only a passing reference to the employee’s receipt of workers’ compensation. We did not address the propriety of imposing vicarious liability on the brewery owner for a workplace injury that was subject to workers’ compensation coverage. To justify imposition of liability on the brewery owner for injuries to the independent contractor’s employee, we merely reiterated policy reasons supporting peculiar risk liability generally, including the ability of persons held liable under the peculiar risk 701*701 doctrine to seek indemnification from the negligent contractor. (Aceves v. Regal Pale Brewing Co., supra, at p. 508.) Not considered in Aceves, however, was the unavailability of equitable indemnity from a negligent employer whose employee is covered by workers’ compensation, an issue we address here.

When a property owner or general contractor who hires an independent contractor for work presenting a peculiar risk of harm to others is held liable under the doctrine of peculiar risk for injuries to an innocent bystander or an owner of neighboring land, the property owner or general contractor can, for the damages paid the injured party, obtain equitable indemnity from the independent contractor responsible for the injuries. This ensures that the ultimate responsibility for the harm caused by the peculiar risk of the work done is borne by the individual or entity at fault for the injury. But when the person injured is an employee of the independent contractor, the exclusivity provisions of the workers’ compensation scheme shield the negligent contractor from an action seeking equitable indemnity. (§ 3864.) Not present in such a case is a significant policy justification for imposing peculiar risk liability on a nonnegligent party: the ability of the person held liable on a peculiar risk theory to be made whole by the party responsible for the injury. As one California Court of Appeal has recognized, affixing liability without indemnification places an onerous burden on someone who is “fault-free.” (Anderson v. Chancellor Western Oil Dev. Corp. (1975) 53 Cal. App.3d 235, 242-243, fn. 2 [125 Cal. Rptr. 640].)

The availability of equitable indemnity, as mentioned earlier, is but one of several policy reasons that generally support the imposition of peculiar risk liability. In addition, the peculiar risk doctrine seeks to ensure that injuries caused by contracted work will not go uncompensated, that the risk of loss for such injuries is spread to the person who contracted for and thus primarily benefited from the contracted work, and that adequate safety measures are taken to prevent injuries resulting from such work. (Aceves v. Regal Pale Brewing Co., supra, 24 Cal.3d at p. 508.) But in the case of on-the-job injury to an employee of an independent contractor, the workers’ compensation system of recovery regardless of fault achieves the identical purposes that underlie recovery under the doctrine of peculiar risk: It ensures compensation for injury by providing swift and sure compensation to employees for any workplace injury; it spreads the risk created by the performance of dangerous work to those who contract for and thus benefit from such work, by including the cost of workers’ compensation insurance in the price for the contracted work; and it encourages industrial safety.

Therefore, when considered in light of the various goals that the workers’ compensation statutes seek to achieve, our conclusion in Woolen v. Aerojet 702*702 General Corp., supra, 57 Cal.2d 407, that peculiar risk liability should extend to the employees of the independent contractor, does not withstand scrutiny.^[4] Moreover, such a broad extension of the doctrine of peculiar risk is inconsistent with the approach taken by a majority of jurisdictions, and with the view expressed by the drafters of the Restatement Second of Torts.

VII

In his complaint against Privette (the owner of the duplex where roofing employee Contreras was injured while installing a roof), Contreras asserted Privette’s liability under the doctrine of peculiar risk for the injuries suffered. Without question, Contreras’s injuries arose “out of and in the course of … employment,” and thus are subject to workers’ compensation coverage. (§ 3600.) Thus, the doctrine of peculiar risk affords Contreras no basis for seeking damages from Privette for the same injuries compensable under the workers’ compensation scheme.

The complaint also alleged as a separate cause of action that Privette was negligent in his hiring of the Krause roofing firm, which employed Contreras. But, as mentioned at the outset, Contreras abandoned that theory of recovery.

Throughout this litigation, Privette has asserted that the injury-causing conduct, transporting hot tar up a ladder in a bucket, was a “collateral” as opposed to a “peculiar” risk of tar and gravel roofing. We need not address this contention in view of our conclusion that because workplace injuries are covered by workers’ compensation, liability under the doctrine of peculiar risk does not extend to the employees of an independent contractor hired to do dangerous work.

CONCLUSION

When, as here, the injuries resulting from an independent contractor’s performance of inherently dangerous work are to an employee of the contractor, and thus subject to workers’ compensation coverage, the doctrine of peculiar risk affords no basis for the employee to seek recovery of tort damages from the person who hired the contractor but did not cause the injuries. Thus, in this case, roofing employee Contreras is precluded from suing duplex owner Privette for injuries compensable under the workers’ compensation system.

Accordingly, the judgment of the Court of Appeal is reversed with directions to grant the petition for writ of mandate ordering respondent court to enter judgment for defendant. The alternative writ is discharged.

703*703 Lucas, C.J., Mosk, J., Panelli, J., Arabian, J., Baxter, J., and George, J., concurred.

The petition of real party in interest for a rehearing was denied September 16, 1993, and the opinion was modified to read as printed above.

[1] At the time of the summary judgment motion, it was uncontested that Contreras, in response to interrogatories, had abandoned his theory that Privette was negligent in hiring Krause.

[2] The conclusion that peculiar risk is a form of vicarious liability is unaffected by the characterization of the doctrine as “direct” liability in situations when the person hiring an independent contractor “fails to provide in the contract that the contractor shall take [special] precautions.” (Rest.2d Torts, § 413; see Aceves v. Regal Pale Brewing Co., supra, 24 Cal.3d at p. 509; Griesel v. Dart Industries, Inc. (1979) 23 Cal.3d 578, 585-586 [153 Cal. Rptr. 213, 591 P.2d 503].) Irrespective of whether a contract of hire provides that special precautions be taken, a person who employs an independent contractor to perform dangerous work is subject to liability under the doctrine of peculiar risk. (Rest.2d Torts, § 416.) Thus, peculiar risk liability is normally premised on the broader rule of vicarious liability for the contractor’s negligence. (See A Workable Proposal, supra, 48 Fordham L.Rev. 1165, 1171; Bower v. Peate, supra, 1 Q.B.D. at p. 326 [the contractor’s default is attributable to the person who authorized the work].)

[3] Further statutory references are to the Labor Code.

[4] To the extent that they hold to the contrary, Woolen v. Aerojet General Corp., supra, 57 Cal.2d 407, and its progeny are overruled.