Construction Indemnification after the Anti-Indemnification Statute
by Kimber Davison
On June 17, 2011, Governor Perry signed House Bill 2093 under the title “Consolidated Programs/Prohibitions on Broad Form Indemnity and Defense,” which was later codified in Chapter 151 of the Texas Insurance Code (the Statute). The Statute applies to construction contracts entered into on or after January 1, 2012, and has shifted risk in the Texas construction industry. Generally, the Statute makes certain indemnity provisions void and unenforceable as a matter of law. Specifically, the Statute prohibits indemnification of claims arising out of the indemnitor’s work if the damage is caused by the concurrent, contributing or comparative negligence of an indemnitee. In other words, a construction contract can no longer contain an indemnification clause that requires a person to indemnify, defend or hold harmless another party for a claim due to that party’s own negligence (whether solely or in part). The Statute also impacts additional insureds by providing that an indemnitor cannot be required to purchase additional insured coverage if that additional insured coverage would be prohibited when examined in light of the indemnification agreement. The provisions of the Statute cannot be waived, and any provision in a contract is void to the extent that it requires one party to indemnify another for claims arising out of the fault of the indemnitee.
As is often the case, there are exceptions to the rule. Here, the Statute provides eleven specific circumstances where the prohibition does not apply. For example,indemnification of claims for “the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier” (commonly referred to as “action over claims”) where the indemnitee is contributorily negligent is not prohibited. Additionally, the Statute exempts contracts for residential and public works projects.
In the early stages of its implementation, there was speculation as to the overall effect the Statute would have on the industry. Among other things, concerns were raised about the effect the Statute would have on pricing, construction defect litigation and the cost of insurance. There were also debates as to how the courts would interpret the Statute in light of an offending contractual provision. Could a savings clause or specifically crafted language preserve the non-violating aspects of an indemnification clause? Unfortunately, these issues have not been resolved by the courts and there has been little guidance from the courts since the Statute went into effect. Consequently, methods to effectively address and manage the prohibitions of the Statute have largely fallen to construction contract attorneys.
Among the practitioners, there are two basic schools of thought. From the perspective of the indemnitee (typically, an owner in an owner-general contractor contract or the general contractor in a general contractor-subcontractor contract), the issue is how to address the statutory restrictions and maximize the indemnification provided, without risking a violation of the Statute and therefore rendering the provision void. One school of thought is to leave the indemnification provisions in the basic form that they were pre-Statute and then add a clause modifying the provision back to the limits of the Statute to the extent an exception does not apply. An example of such a restrictive provision is as follows:
Nothing herein shall be construed to require the contractor to indemnify an indemnitee for an indemnified claim caused by or resulting solely from an indemnitee’s own negligence unless otherwise permitted by applicable provisions of Chapter 151 of the Texas Insurance Code. It is agreed that with respect to any legal limitations now or hereafter in effect and affecting the validity and enforceability of the indemnification obligation under this Section, such legal limitations are made a part of the indemnification obligation to the minimum extent necessary to bring this Section into conformity with the requirements of such limitation, and as so modified, the indemnification obligation shall continue in full force and effect.
This tactic has the upside of attempting to maximize the indemnification obtained by the indemnitee. However, the risk, which is certainly significant, is the voiding of the entire indemnity provision.
The other school of thought advocated by certain construction contract lawyers is to specify the various exceptions that may be applicable to the circumstances of the contract. This approach requires the contract attorney to be artful in drafting a provision to encompass the limits of the exceptions while being deft enough to include the right exceptions. The decision as to which path to take often depends on the risk tolerance of the client. Pending guidance from the courts, the debates as to the appropriate manner of addressing the Statute and its exceptions rage on.
Kimber Davison is a partner at Griffith Davison, P.C.She can be reached at firstname.lastname@example.org.