September 20, 2012 Articles

New Texas Anti-Indemnity Law May Affect More Than the Obvious

Under the new law, construction contracts are prohibited from requiring a subcontractor to defend or indemnify an owner or general contractor for the latter's own negligence.

By Kara Stauffer Philbin

Indemnity provisions frequently play a key role in managing the risks inherent in construction contracts, including those in the energy industry. In reality, the amount of protection provided by an indemnity provision is a function not only of the provision itself, but also the law under which the provision will be interpreted. Under the new Texas Anti-Indemnity Law, effective January 1, 2012, construction contracts are prohibited from requiring a subcontractor to defend or indemnify an owner or general contractor for the latter’s own negligence.


Indemnity Prior to 2012
Until January 1, 2012, owners and general contractors in Texas were generally free to shift risks and responsibilities to their subcontractors. The subcontractors could be contractually required to defend and indemnify the owner or general contractor for the owner’s or general contractor’s own negligence. In practice, when a claim was asserted against a general contractor, the general contractor would tender the claim to the subcontractor or the subcontractor’s insurance company, who would then be responsible for defending and paying on the claim. General contractors justified this risk-shifting structure based on their supervisory role under a theory that the subcontractor performing the work should pay for claims resulting from the work. Subcontractors criticized the prior indemnity laws as disproportionate. Texas courts, however, enforced such indemnity provisions as long as (1) the indemnity language was conspicuous; and (2) the contract expressly stated that the owner or general contractor was seeking indemnity for its own negligence (often referred to as the express-negligence doctrine). Together, the conspicuousness and express-negligence requirements are intended to provide fair notice to one assuming the burden of indemnifying another for the other’s own negligence.

A New Era in Indemnity: Passage of HB 2093 
Due to a major shift in indemnity law, however, Texas is now in the minority in prohibiting both indemnity and additional-insured status for owners and general contractors in construction contracts for their own negligence. The passage of HB 2093—the Texas Anti-Indemnity Law—revamped Texas’s consolidated insurance programs as incorporated into construction projects. Subcontractors can no longer be required to indemnify an owner or general contractor for the owner or general contractor’s negligence.

The Texas Anti-Indemnity Law is similar in scope to the Texas Oilfield Anti-Indemnity Act, in force since 1973. See Tex. Civ. Prac. & Rem. Code §§ 127.001–127.007. That act was intended to prevent big-oil owners and oilfield operators from requiring indemnification from their contractors for the negligence of third parties, including their own. In 1995, oil wells and mine services were made subject to the act. The construction, maintenance, or repair of pipelines was explicitly not made part of the act. See § 127.001(4)(B). However, the Anti-Indemnity Law may change the reach of anti-indemnity provisions in Texas.

HB 2093 amended section 151.102 of the Texas Insurance Code to dictate the extent to which indemnity will be permitted in construction contracts:

Sec. 151.102. AGREEMENT VOID AND UNENFORCEABLE. Except as provided by Section 151.103, a provision in a construction contract, or in an agreement collateral to or affecting a construction contract, is void and unenforceable as against public policy to the extent that it requires an indemnitor to indemnify, hold harmless, or defend a party, including a third party, against a claim caused by the negligence or fault, the breach or violation of a statute, ordinance, governmental regulation, standard, or rule, or the breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier.

In essence, section 151.102 voids an indemnity provision in a construction contract that requires an indemnitor to indemnify an indemnitee for the indemnitee’s conduct. This section has a broad stroke. The conduct covered ranges from negligence to violation of statute to breach of contract. It encompasses “construction contracts” and agreements “collateral to or affecting” construction contracts.

“Construction contract” is broadly defined to include contracts with owners, contractors, architects, engineers, subcontractors, suppliers, and material or equipment lessors. The contract can cover anything from construction to design to maintenance or renovation, including the furnishing of material or equipment for a building, appurtenance, or other improvement to or on public or private real property. This language appears to extend to pipelines.

Likewise, under section 151.104 and contrary to prior common practice in the industry, additional-insured procurement agreements are voided. This means subcontractors can no longer be required to purchase insurance coverage for the owner or general contractor’s negligence or any other act contemplated by section 151.102.

As enacted, the new anti-indemnity provisions cannot be waived by contract or otherwise. Instead of shifting the risk down to subcontractors, the new law requires property owners to maintain appropriate insurance coverage and provide a defense should an accident occur. Similarly, a general contractor will be forced to defend claims on his or her own and incur additional costs to ensure sufficient coverage to cover potential losses. The change in law has the potential to increase projects costs because the same insurance coverage will be required by the owner, general contractor, and subcontractor, and in the event an accident occurs, each will hire lawyers to defend themselves.

Exclusions to the Anti-Indemnity Law
Section 151.103 dictates that the new anti-indemnity law will not apply to on-the-job employee bodily-injury claims or the death of an employee of the indemnitor, its agent, or its subcontractor of any tier. This means that current indemnity laws shifting risk to the subcontractor still apply to bodily-injury and wrongful-death claims.

Further, section 151.105 lists 11 exceptions to the new anti-indemnity provisions. Generally speaking, the items unaffected include: (1) insurance policies; (2) causes of action for breach of contract or warranty existing independently of any indemnity obligation; (3) indemnity provisions contained in loan and financing documents; (4) general agreements of indemnity required by sureties as a condition of execution of bonds; (5) workers’ compensation benefits; (6) governmental immunity; (7) indemnity provisions in certain mineral agreements subject to the Oilfield Anti-Indemnity Act; (8) specified license agreements with railroad companies; (9) claims based on copyright infringement; (10) construction contracts pertaining to single-family homes, townhouses, duplexes, or a related land development, and public works projects of a municipality; or (11) a joint-defense agreement entered into after a claim is made.

Applicability of the Anti-Indemnity Law
The Anti-Indemnity Law went into effect on January 1, 2012, and applies to original construction contracts entered into after that date. Construction projects initiated prior to that date will be governed by the old law, as will construction contracts entered into prior to that date even if the project began after January 1, 2012.

The new law’s potential ramifications have already forced owners and general contractors alike to update and evaluate their contracts and insurance coverage. While the Anti-Indemnity Law does exclude contracts subject to the Oilfield Anti-Indemnity Act, contracts related to pipelines or fixed associated facilities may be affected by the Anti-Indemnity Law due to their exclusion from the act. No Texas court, however, has addressed the new law, so it remains to be seen what effect it will have on “construction contracts” and, in particular, those related to pipelines or fixed associated facilities.

Keywords: energy litigation, HB 2093, Anti-Indemnity Law, Texas Oilfield Anti-Indemnity Act

 

Kara Stauffer Philbin is an associate with Fernelius Alvarez PLLC in Houston, Texas.


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