The Pro-Indemnity – Anti Indemnity Statute? Construction Contracts Subject To Texas Insurance Code Ann. §§ 151.001-.151

What if that provision of the Insurance Code you thought was an anti-indemnity provision is really a pro-indemnity provision? The Texas Legislature added Chapter 151 to the Texas Insurance Code in 2011 to, in part, void risk-transferring provisions in commercial construction contracts. Many practitioners today view Chapter 151 as an across-the-board anti-indemnity and anti-additional insured statute—a statute that voids provisions in any construction contract that require a subcontractor to indemnify a general contractor or its agents for the sole negligence of the general contractor, or require a subcontractor to add a general contractor as an additional insured to the subcontractor’s insurance policy to provide the general contractor a defense, even for the sole negligence of the general contractor. But the often-overlooked statutory notes provide a revealing limitation to Chapter 151 that undermines the prevailing view.

            The statutory notes make clear that Chapter 151 applies (1) “only to a new or renewed consolidated insurance program for a construction project” and (2) only to “an original construction contract with an owner of an improvement or contemplated improvement that is entered into on or after the effective date of this Act.” Acts 2011, 82^nd Leg., ch. 1292 (H.B. 2093), §§ 3(a)-(b). The first of these limitations, if taken seriously, undermines the prevailing view that Chapter 151 applies to all construction contracts in which a general contractor requires a subcontractor to indemnify it for its sole negligence. Limited in this way, Chapter 151 would apply only in limited situations, thereby preserving freedom to contract in the majority of construction contracts.  

A.   Case Law Interpreting Chapter 151

Case law interpreting Chapter 151 remains scant. At least one court looked to the statutory notes for guidance as to the scope of the Act. In United States ex rel. EJ Smith Constr., Co., LLC v. Travelers Cas. & Sur. Co., 2016 U.S. Dist. LEXIS 31076 (W.D. Tex. March 10, 2016), the court held that Chapter 151’s anti-indemnity provision did not apply to an October 2012 subcontract agreement. The subcontract agreement pertained to a September 2010 prime construction contract between an owner and general contractor. The court looked to the statutory notes, which state:

The changes in law made by this Act apply only to an original construction contract with an owner of an improvement or contemplated improvement that is entered into on or after the effective date of this Act. . . If an original construction contract with an owner of an improvement or contemplated improvement is entered into before the effective date of this Act, that original construction contract and a related subcontract, purchase order contract, personal property lease agreement, and insurance policy are governed by the law in effect immediately before the effective date of this Act, and that law is continued in effect for that purpose.

United States ex rel. EJ Smith Constr., 2016 U.S. Dist. LEXIS 31076. *14-15 (quoting Acts 2011, 82^nd Leg., ch. 1292 (H.B. 2093), § 3(b)).

Since the prime contract was the original contract and was entered into prior to January 1, 2012, the court held the anti-indemnity provision did not apply, notwithstanding the fact that the subcontract agreement was dated after the Act’s effective date. United States ex rel. EJ Smith Constr., 2016 U.S. Dist. LEXIS 31076. *15-16. The court noted that the statutory notes were part of the final, enrolled version, as signed by the governor, and reasoned that uncodified session law is binding law. Id. at *16-17 (citing Hawkins v. State, 2005 Tex. App. LEXIS 7444, * 3-4 (Tex. App.–Eastland September 8, 2005, no pet.)); see also In the Interest of W.G.S., 107 S.W3d 624, 628 (Tex. App.–Corpus Christi 2002, no pet.) (looking to the session law to determine whether a provision in the Texas Family Code applied to the case); Tijerina v. Tijerina, 1997 Tex. App. LEXIS 6370, *3-5 & n.1 (Tex. App.–Houston [1st Dist.] Dec. 11, 1997 (same); Ring Energy v. Trey Res. Inc., 2017 Tex. App. LEXIS 371, *19-23 (Tex. App.–El Paso Jan. 18, 2017, no pet.) (interpreting Natural Resource Code).  

The court also dismissed an argument that another district judge in the same court previously held that the Act applied, stating that the record did not show that that judge considered the scope of the Act. The related cases are United States ex rel. Ej Smith Constr. Co. v. Travelers Cas. & Sur. Co., 2015 U.S. Dist. LEXIS 183731 (W.D. Tex. June 25, 2015), and United States ex rel. Liberty Steel Erectors, Inc. v. Balfour Beatty Constr., 2015 U.S. Dist. LEXIS 182679 (W.D. Tex. May 15, 2015).  

There are no cases interpreting the scope of the act with respect to the “consolidated insurance program” limitation. See Acts 2011, 82^nd Leg., ch. 1292 (H.B. 2093), § 3(a).

The statutory language itself does not clearly limit the anti-indemnity provision to construction projects in which the owner mandates a consolidated insurance program (like an Owner Controlled Insurance Program (OCIP)) for a construction project. Section 151.102 of the Act states:

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 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, or 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.

            Trial courts have treated the anti-indemnity provision as generally applicable to all construction contracts, not as limited to projects on which an owner controlled insurance program is in place. If one were to press the express limitation, it is not clear how a trial court would respond. There is scant legislative history with respect to Chapter 151 and even less case law interpreting the provision.

B.   The Limited Reading And Some Counter-Arguments

Considering that the Act was designed, in part, to protect insurance companies from covering risks they did not agree to underwrite and to protect subcontractors who are forced, due to inferior bargaining power, to accept all risks associated with the construction project, one might argue that the Act should not be read as limited to only projects on which there is a consolidated insurance program. See Taylor R. Beaver, Recent Development: The Texas Anti-Indemnity Act, 45 St. Mary’s L. J. 535, 538 (2014).

A competing view would be to read the statute in a limiting way to preserve freedom to contract. Under this lens, the Act does not allow an owner and general contractor to force a subcontractor to pay for two policies covering the project—pay a premium for the OCIP and pay the subcontractor’s personal insurance premium. The OCIP underwrites the risks associated with the project and the subcontractor may voluntarily purchase its own liability coverage for risks that attend the project, but the general contractor and owner cannot rely on their subcontractors’ policies to cover their own liabilities. In all other contexts, the Act would not apply, thus preserving freedom to contract in most construction contracts.

One might argue a limited reading of the anti-indemnity statute here is unwarranted because the statutory language states, “this subchapter applies to a construction contract for a construction project for which an indemnitor is provided or procures insurance subject to: (1) this chapter; or Title 10.” Tex. Ins. Code Ann. §151.101(a)(1)-(2). Chapter 151 is entitled, “Consolidated Insurance Programs,” which falls under Title II, Subtitle C, “Programs Affecting Multiple Lines of Insurance.” Title 10 regulates property and casualty insurance, including commercial liability and workers’ compensation, and is generally applicable, so Chapter 151, too, is generally applicable to all construction contracts, not simply those under which a consolidated insurance program exists.

The problem with this counter-argument is that it ignores the fact that Chapter 151 would have absolutely no bite if it did not also apply to the generally applicable property and casualty insurance under Title 10. Consolidated insurance programs are designed to cover property and casualty risks, commercial liability, and workers’ compensation. This counter-argument also ignores the statutory note provision that limits the subchapter to new or renewed consolidated insurance programs for a construction project. Section 151.101 simply expresses how the Act applies; the statutory notes express how the Act is limited. Read this way, the Act 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, but is limited to new or renewed consolidated insurance programs for such construction project.

The limited reading of Chapter 151 is buttressed by considering Chapter 151 for what it is: a pro-consolidated insurance program Act, not an anti-indemnity Act—in fact, the anti-indemnity section was not originally a part of Chapter 151. Chapter 151 is designed to make sure consolidated insurance programs work to cover risks associated with a construction project without spreading the cost of that risk to other insurers. The anti-indemnity provision and anti-additional insured provisions limit the costs associated with risks on a construction project covered by a consolidated insurance program by placing the cost solely on the contractors to the project, not on outside carriers who cover individual contractors.

The anti-additional insured provision ensures that consolidated insurance programs work overall by excepting from the anti-additional insured provision “an insurance policy, or an endorsement to an insurance policy, issued under a consolidated insurance program to the extent that the provision or endorsement lists, adds, or deletes named insureds to the policy.” Tex. Ins. Code § 151.104(a)-(b). To understand this exception, consider that a consolidated insurance policy is a contract that relates to a construction contract and itself clearly falls under the Act if all other conditions obtain. A consolidated insurance program is designed to cover all subcontractors on the project, so the policy must necessarily add insureds. But the anti-additional insured provision not only prohibits a construction contract from mandating the purchase of additional insured coverage, it also prohibits an insurance policy from providing additional insured coverage. The exception for consolidated insurance policies was necessary to allow a consolidated insurance policy to work, i.e., to add additional subcontractors as insureds on the construction project(s).

Had the legislature wished to create an across-the-board anti-indemnity provision, it should have done so by adding another anti-indemnity provision in the Texas Civil Practice & Remedies Code.