May 30, 2012 Articles

Construction Anti-Indemnification Law Changes Indemnity and Additional Insurance Landscape

On January 1, 2012, Texas joined a handful of states in declaring construction contract indemnity provisions and additional insured requirements void and unenforceable

by Leslie C. Thorne

Historically, Texas has permitted indemnification provisions covering the indemnitee’s sole negligence or fault as long as the agreement was “unambiguously stated.” XL Specialty Ins. Co. v. Kiewitt Offshore Servs., Ltd., 513 F.3d 146 (5th Cir. 2008). But on January 1, 2012, Texas joined a handful of states in declaring construction contract indemnity provisions and additional insured requirements void and unenforceable if they require a person to indemnify, defend, or hold harmless another party for a claim caused by that party’s own negligence or fault. See Tex. Ins. Code § 151.102. Under the new law, owners and general contractors can, except under limited circumstances, no longer require subcontractors to indemnify them for the owner or general contractor’s own negligence or purchase insurance coverage for the owner or general contractor’s own negligence.

The Statute’s Scope

The new provision applies to most Texas “construction contracts.” The term “construction contract” is defined very broadly in Section 151.001(5):

‘Construction contract’ means a contract, subcontract, or agreement, or a performance bond assuring the performance of any of the foregoing, entered into or made by an owner, architect, engineer, contractor, construction manager, subcontractor, supplier, or material or equipment lessor for the design, construction, alteration, renovation, remodeling, repair, or maintenance of, or for the furnishing of material or equipment for, a building, structure, appurtenance, or other improvement to or on public or private real property, including moving, demolition, and excavation connected with the real property. The term includes an agreement to which an architect, engineer, or contractor and an owner’s lender are parties regarding an assignment of the construction contract or other modifications thereto.

The statute therefore appears to apply not only to traditional construction contracts, but also to remodeling, repair, maintenance, design, engineering, lending, demolition, and excavation contracts. Some commentators have expressed concern that such a broad and imprecise provision might encompass contracts having nothing to do with construction, such as window-washing or elevator maintenance. Given the broad and arguably ambiguous definition, courts surely will have ample opportunity to clarify the statute’s scope in the coming months and years.

How Is Coverage for “Additional Insureds” Affected?

Historically, construction project indemnitees have required that the indemnitor both execute an indemnity agreement, usually as part of the main construction documents; and name the indemnitee as an additional insured on its insurance policy. Such additional insured provisions often require that the additional insured/indemnitee be covered for its own sole negligence. The new statute voids such additional insured endorsements to the extent that they would provide a scope of coverage prohibited by the provisions concerning indemnity. See Tex. Ins. Code § 151.104. Notably, however, additional insured provisions are not automatically void if their scope exceeds that allowed under the statute. Unlike the statute’s strict application to indemnity agreements, overbroad additional insured provisions are merely void “to the extent” their scope exceeds that permitted under the statute. Thus, a fair reading indicates would-be indemnitees would not sacrifice all additional insured coverage simply because the clause as written exceeds the permissible scope.

Nevertheless, the Insurance Services Office (ISO) has promulgated a standard additional insured endorsement intended to comply with Chapter 151:

Section II – Who Is an Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ caused, in whole or in party, by:
  • Your acts or omissions; or
  • The acts or omissions of those acting on your behalf;
In the performance of your ongoing operations for the additional insured(s) at the location(s) designated above.
However, if you have entered into a construction contract subject to Subchapter C of Chapter 151 of Subtitle C of Title 2 of the Texas Insurance Code with the additional insured shown in the Schedule, the insurance afforded to such person(s) or organization(s) only applies to the extent permitted by Subchapter C of Chapter 151 of Subtitle C of Title 2 of the Texas Insurance Code.

See ISO Form CG 33 95 05 12. Strangely, this new form actually appears to provide less coverage than that permitted under the statute. The first half of the endorsement only provides coverage where the indemnitor is at least partially responsible, and the second half appears to further limit coverage to that permitted under the new anti-indemnity law. But even under the new statute, indemnification for sole negligence is still permitted in certain circumstances, as discussed below. The new ISO endorsement, which does not account for these exceptions, therefore, appears to provide less protection than the law allows.

Exceptions to the Statute

The statute does contain some key exceptions. Among them:

Injury or death.Parties may provide indemnification against claims for bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier. See Tex. Ins. Code § 151.103.
Residential projects. The statute does not apply to construction contracts for single family homes, townhouses, duplexes, or residential land development related. Tex. Ins. Code § 151.105(10)(A).
Municipal public works projects.The statute does not apply to municipal public works construction contracts. Tex. Ins. Code § 151.105(10)(B).
Wrap-up policies. The statute’s indemnity provisions generally do not apply to insurance policies issued under a Consolidated Insurance Program (CIP). Tex. Ins. Code § 151.105(1). However, the additional insured provision appears to apply to policies issued under a CIP, except to the extent that the provision lists, adds, or deletes named insureds to the policy. Tex. Ins. Code § 151.104.
Breach of contract. The statute does not apply to actions for breach of contract or warranty, as long as the claims exist independently of an indemnity obligation, including an indemnity obligation. Tex. Ins. Code § 151.105(2).
Workers’ compensation. The statute does not apply to any benefits or protections under Texas’ workers’ compensation statutes. Tex. Ins. Code § 151.105(5).
Governmental immunity. The statute does not apply to any benefits or protections under governmental immunity laws. Tex. Ins. Code § 151.105(6).
Certain financing requirements. The statute does not apply to financing documents other than “construction contracts” to which the owner’s lender are parties. Tex. Ins. Code § 151.105(3).
Surety bond requirements. The statute does not apply to general indemnity agreements sureties require as a condition to issue of surety bonds. Tex. Ins. Code § 151.105(4).
Agreements with railroads. The statute does not apply to certain license agreements with railroads. Tex. Ins. Code § 151.105(8).
Indemnity for copyright infringement. The statute does not apply to copyright infringement claims. Tex. Ins. Code § 151.105(9).
Oilfield indemnity. The statute does not apply to clauses that are separately, but similarly, regulated under the Oilfield Anti-Indemnity Act, Texas Civil Practice and Remedies Code, Chapter 127. Tex. Ins. Code § 151.105(7).
Joint defense agreements. The statute does not apply to joint defense agreements, as long as the agreement is executed after a claim is made. Tex. Ins. Code § 151.105(11).

Can the Law Be Avoided Through Contractual Choice of Law Provisions?

Parties will find it difficult to contract around the new provision. The statute specifically provides that none of its provisions may be waived by contract or otherwise. Tex. Ins. Code § 151.151. Further, Texas courts have generally refused to allow parties to contract around certain statutes by inserting a choice of law provision where that statute reflects a state’s fundamental public policy. Courts could reach the same result here because the statute declares the anti-indemnity provisions at issue void “as against public policy.” Tex. Ins. Code § 151.102.

What Risk Transfer Strategies Are Indemnitees Using In Light of the New Statute?

The new statute creates significant additional exposure for project owners and developers in Texas. As time goes by, courts will certainly clarify the scope of the statute. With the current absence of judicial guidance, however, the future remains unclear. In the meantime, upstream parties (would-be indemnitees) in Texas have dealt with the statute in a number of ways. For instance:

  • Many Texas developers rushed to execute construction contracts before the statute took effect on January 1, 2012. Because the statute only applies to projects where the “original construction contract” with the owner is dated on or after January 1, 2012, owners and developers could execute main contracts just before the deadline, thus avoiding the statute’s application to any subsequent subcontracts purchase orders, etc. See Acts 2011, 82nd Leg., Ch. 1292 (H.B. 2093), § 3(b).
  • Some upstream parties have required downstream parties to pay an amount equal to the upstream party’s cost to obtain a policy to insure against its own negligence.
  • Upstream parties have been careful to clearly and conspicuously require indemnity obligations for employee bodily injury and specify additional insured coverage for such injury.
  • Contracts have included bifurcated indemnity clauses and additional insured specifications which include separate provisions dealing with (1) disputes between the parties vs. claims by third parties, and (2) property vs. employee bodily injury claims.
  • Parties have negotiated release provisions to further limit liability as between the parties.

Conclusion

Application of the new Texas anti-indemnity statute will remain a hot topic for the foreseeable future, with courts sure to weigh in.

Keywords: insurance, coverage, litigation, Texas, anti-indemnity statute, construction contracts, construction defects, additional insured, negligence

Leslie C. Thorne, Haynes and Boone, LLP, Austin, Texas

 

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