Reading and interpreting contracts can be frustrating, but it’s important to understand how each contract your company signs affects your company’s risk and insurance coverage. The industry and state in which you operate could make this process even more frustrating because many states have enacted anti-indemnity laws that limit the amount of risk that can be transferred between parties to a contract, and some are industry-specific.
Texas is a good example of a state with industry-specific anti-indemnity laws.
The Lone Star State has specific anti-indemnity laws for the commercial construction, energy and common carrier transportation industries. Each law limits the amount of risk that can be transferred between parties to a contract, based on the work that will be performed.
Before we dig into the specific laws affecting Texas construction contracts, it’s a good idea to review some vocabulary.
There are three basic types of indemnity:
- Limited form – Indemnitor indemnifies Indemnitee only for the amount of the loss directly attributable to the Indemnitor’s negligence.
- Intermediate form – Indemnitor indemnifies Indemnitee for the entire loss arising from the project if responsibility for some of the loss can be placed on the Indemnitor.
- Broad form – Indemnitor indemnifies Indemnitee for any loss arising from the project even if the loss is caused by the Indemnitee’s own negligence.
The Texas Anti-Indemnity Act
In 2011, Texas passed a law limiting broad form indemnities in construction contracts. The Texas Anti-Indemnity Act says commercial construction contracts not part of a Consolidated Insurance Program (CIP) in Texas cannot require indemnity agreements with broad form or intermediate form indemnities, except for action-over claims. An example of an action-over claim is when an employee of a downstream contractor attempts to sue the upstream project owner or contractor for a workplace injury, arguing that the injury occurred because of the upstream party’s negligence.
The law also prohibits additional insured requirements that would circumvent the broad form limitation, such as requiring an additional insured endorsement that includes coverage for the indemnitee’s own negligence. And perhaps most importantly, the law cannot be waived, which means parties to a contract cannot agree to a broad form or intermediate form indemnity in an effort to circumvent the law.
Following the restrictions in the law results in a type of hybrid indemnity: a mix between a limited form and a broad form indemnity, in which the Indemnitor can be required to indemnify an Indemnitee for its own negligence in action-over claims (broad form), but the Indemnitor can only be required to indemnify the Indemnitee for other damages to the extent the Indemnitor was at fault (limited form).
Defining a Construction Contract
According to the law, a “construction contract” in Texas (and many other states) means much more than the stereotypical construction contract. A construction contract could be almost anything; the only limitations are whether there’s some connection to real property and whether the parties to the contract are among those listed in the statute, namely “an owner, architect, engineer, contractor, construction manager, subcontractor, supplier or material or equipment lessor.” But the current laundry list of “contract, subcontract, agreement or performance bond” suggests that the Act's reach is far more reaching than perhaps intended. The complete lack of clarity in drafting the statute and lack of legislative intent leaves courts to decipher what the law in fact covers.
Notably, the Act does not apply to residential (single family house, townhouse, duplex and the land development involved) or public works construction projects. This means a contract for either of those types of projects can require an intermediate or broad form indemnity from a party.
Navigating the Complexities
Being unaware of the industry and state-specific statues affecting your contracts can lead to unexpected costs and litigation in the event of a claim. When you partner with the experts at Higginbotham for your contract review process, you’ll get the tools you need to make smart decisions about managing your contractual risks. We can help you avoid the pitfalls so your Texas business thrives.