New Law Restricts Owners’ Right to Require Contractors to Indemnify

One of the most important terms of a commercial construction contract is the provision that allocates the risk of accidents on the project. For many years, it was common practice for owners to require contractors to indemnify and defend the owner against all damages and liabilities the owner might incur in connection with the construction, including damages and liabilities caused by the owner’s own negligence. Effective January 1, 2012, Texas law prohibits an owner, as a general rule, from requiring a contractor to indemnify and defend the owner against the consequences of the owner’s own negligence. (Exceptions to this rule are discussed below.) The same law provides that a contract provision requiring the purchase of “additional insured” coverage is void and unenforceable to the extent that it would require the contractor to provide coverage for the owner’s own negligence. Again, there are some exceptions to this rule.

This is great news for contractors, especially since, with a few exceptions, it was rarely–if ever–possible for a contractor to buy insurance covering the owner’s negligence. While insurers have often been willing to pay to settle claims so long as it was not completely clear that the owner was the only negligent party, they were not required to. Contractors now have the comfort of knowing that the law will not permit a contractor to agree to indemnify an owner against the consequences of the owner’s negligence. Owners, on the other hand, will need to rely on their own insurance to protect them in the event they are negligent.

Owners can still require contractors to indemnify and insure them in the following contexts, among others:
(1) owner-controlled or owner-sponsored consolidated insurance programs;
(2) breaches of contract or warranty that exist independently of an indemnity obligation;
(3) construction contracts pertaining to a single family house, townhouse, duplex, or a related land development, or a municipal public works project.
And, provisions in construction contracts that require the contractor to indemnify and defend the owner against claims for bodily injury or death of an employee of the contractor, its agents, or its subcontractors are still enforceable.

As with so many new laws, this law raises new questions. For instance, can the contract provide that it is governed by another state’s law, so that the new Texas rule doesn’t apply? And what about damages and liabilities caused by the negligence of someone who is not under the owner’s control? Would a court enforce such a contract? Such questions will be answered largely by court decisions over the next several years. In the meantime, we urge both owners and contractors to have a knowledgeable lawyer and insurance agent review their construction contracts with them, as the law in this area continues to develop.

Of course, this is not an exhaustive discussion of the law on these issues. For more information on this topic, please email Jeff Dickerson, the firm’s senior corporate lawyer, or call him at (512) 735-7801.