Anti-Indemnity and Anti-Additional Insured Legislation

Texas Anti-Indemnity and Anti-Additional Insured Legislation Effective January 1, 2012

New Anti-Indemnity and Additional Insured legislation will make significant changes in the construction industry.  On January 1, 2012, the Anti-Indemnity Provision of Chapter 151 of the Texas Insurance Code (the new “Statute”) will take effect which will prohibit and void indemnity provisions in construction contracts that require an indemnitor (usually a subcontractor) to indemnify an indemnitee (usually a general contractor or an owner) from the indemnitee’s own negligence.  See Sec. 151.102 of the Texas Insurance Code.  In addition, the new Statute also prohibits and voids construction contract provisions requiring indemnitors (again, usually the subcontractor) to provide “additional insured” coverage for the negligent or fault conduct of the indemnitee (the general contractor or owner). Clearly the intent of the legislation is to prohibit indemnity for an indemnitee’s own negligence. 

A. Fair Notice Requirement for Indemnitee’s Sole Negligence

Previously, Texas law required indemnity provisions seeking to shift the risk of one party’s future negligence to another party, to meet the “fair notice requirement” before it enforced such agreements.  There are two parts to this fair notice: (1) the express negligence doctrine, which requires that when a party seeks indemnity for the consequences of its own future negligence that intent must be explicitly stated in clear and specific terms in the contract; and (2) the conspicuousness requirement which mandates that something must appear on the face of the contract to attract the attention of a reasonable person to the indemnity clause when he looks at it (such as larger type, all caps, bold font, contrasting color, etc.)  In January 2012, under the new legislation, construction contracts that obligate an indemnitor to indemnify an indemnitee against the indemnitee’s own negligence or fault will be unenforceable, even if they satisfy the fair notice requirements.

B. Scope of Chapter 151

Section 151.101 states that Subchapter C, the anti-indemnity Statute, applies to a construction contract for a construction project for which an indemnitor is provided or procures insurance subject to Chapter 151 or Title 10 of the Texas Insurance Code.  Chapter 151 governs Consolidated Insurance Programs (“CIPS”) which are defined as programs under which a principal provides general liability insurance coverage, workers’ compensation insurance coverage or both that are incorporated into an insurance program for a single construction project or multiple construction projects.  The definition encompasses programs sponsored by the owner, known as Owner Controlled Insurance Programs (“OCIPS”); programs sponsored by the contractor, known as Contractor Controlled Insurance Programs (“CCIPS”); as well as rolling CIPS, those which provide coverage across multiple sites on multiple construction projects.       

The term “construction project” is defined under the Statute as construction, remodeling, maintenance, or repair of improvements to real property.  The term does not include a single family house, townhouse, duplex, or land development directly related thereto. Therefore the Statute does not apply to residential CIPS. 
Title 10 sets out the regulations for Property and Casualty Insurance in Texas, including standards for Commercial General Liability (“CGL”) and workers’ compensation coverages.  In short, Section 151 applies to any construction contract where a party is required to provide liability insurance coverage, usually provided through a CGL policy which contains contractual liability coverage to cover an insured’s indemnity obligations assumed pursuant to a contract.  

A “construction contract” is broadly defined under Section 151.001(5) to include contracts, subcontracts, or agreements, or a performance bond assuring the performance of any of the foregoing, entered into or made by an owner, architect, engineer, contractor, construction manger, 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.  As such, the activities are extremely broad ranging from design to, renovation, and maintenance. 

1. Applicability to Indemnity Agreements

Section 151.102 sets out the primary provision in the new Statute which reads as follows:
Except as provided by Section 151.103, a provision in a construction contract, or in an agreement collateral to or affecting construction contracts, 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 statue, 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.
Based on this language, an owner or general contractor can no longer require a subcontractor to indemnify the owner or the general contractor for the owner or general contractor’s negligence.  However, the scope of the indemnity provision does not prohibit indemnification for the indemnitor’s proportionate share of fault.  In addition, the prohibition also applies to the defense obligation to defend the indemnitee beyond the extent of the indemnitor’s own fault.  Historically, indemnitor’s defended an entire claim even if the indemnitee’s own fault contributed to the damages.  With the language of the new Statute, it would appear that the defense obligation would have to be apportioned between the indemnitor and the indemnitee based on their proportionate share of fault.

The broad language of the new Statute covers not only construction contracts, but also agreements “collateral to or affecting” construction contracts.  We will have to wait and see how Texas courts decide which contracts are “collateral to or affecting” construction contracts. 

C. Exception for Employee Claims Applicable to both Indemnity and Additional Insured Provisions

The following is a key exception to the new Statute: 
Section 151.103 states that:

Section 151.102 does not apply to a provision in a construction contract that requires a person to indemnify, hold harmless, or defend another party to the construction contract or a third party against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier.
Based on this exception, parties may continue to provide indemnification against claims for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier.  Accordingly, it provides indemnity for the indemnitee faced with a “third party action over” in which the lower tier’s employee after recovering workers’ compensation benefits sues third parties claiming their negligence or fault contributed to their injury. 

D. Applicability to Additional Insured Coverage
Not only does the anti-indemnity Statute apply to indemnity agreements but it also applies to additional insured provisions.  Section 151.104 voids additional insured provisions to the extent it requires coverage for the additional insureds own negligence or fault. 

Section 151.104 states that:

(a) A provision in a construction contract that requires the purchase of additional insured coverage, or any coverage endorsement, or provision within an insurance policy providing additional insured coverage, is void and unenforceable to the extent that it requires or provides coverage the scope of which is prohibited under this subchapter for an agreement to indemnify, hold harmless, or defend.

* * *

Based on this language, additional insured provisions are enforceable to the extent they provide coverage to the additional insured for the named insured’s own fault or negligence.  In addition, the exception for injury to employees of the named insured applies, allowing coverage for the additional insured’s own negligence for those claims.

E. Exclusions

The new Statute does not affect:

1. Residential Construction
The new Statute does not apply to agreements in a construction contract pertaining to a single family home, townhouse, duplex, or land development related to residential projects.
2. Municipal Construction projects
Indemnity agreements in public works project of a municipality are excluded.
3. Breach of Contract or Warranty
The new Statute does not apply to an action for breach of contract or warranty that exists independently of an indemnity obligation, including an indemnity obligation in a construction contract under a construction project for which insurance is provided under a CIP (Consolidated Insurance Program).  In other words, the Statute applies only to indemnity and not direct breaches of contract or warranty.
4. Oilfield Indemnity
Indemnity clauses that are regulated under the Oilfield Anti-Indemnity Act, Chapter 127 of the Texas Civil Practice and Remedies Code, are excluded under Chapter 151.
5. General Agreements of Indemnity
The new Statute does not apply to general agreements of indemnity required by sureties as a condition of execution of bonds for construction contracts.
6. Joint Defense Agreements
The new Statute does not apply to agreements entered into after a claim is made.
7. Indemnity for copyright infringement.

8. CIP Exclusion

The anti-indemnity provisions do not apply to an insurance policy, including a policy issued under an owner-controlled or owner-sponsored consolidated insurance program or a contractor-controlled or contractor-sponsored consolidated insurance program, except as provided by Section 151.104.

F. Suggestions

In light of the fast approaching date on the inception of Chapter 151, we have made a few suggestions which follows:

1. Continue to comply with the Fair Notice Requirements under Texas law as it would still apply in the employee injury context which is excluded under the new Statute.

2. Consistent with number 1, specify additional insured coverage that includes coverage for the indemnitee’s own negligence as to the indemnitor’s employees.

3. Obtain copies of additional insured endorsements to the indemnitor’s policy to verify coverage.

4. Specify that the indemnitor provide additional insured coverage for both ongoing and completed operations coverages.

5. Obtain an OCIP or CCIP policy to cover a construction project(s) as OCIP’s and CCIPS’s are excluded under the new Statute.