The Texas Construction Anti-Indemnity Act – Some Guidance from the Texas Supreme Court
The Texas Construction Anti-Indemnity Act (“AIA”) generally voids provisions in construction contracts, entered into after January 1, 2012, that impose indemnity obligations and obligations to secure additional insured coverage for the additional insured/indemnitee’s own negligence or fault. Tex. Ins. Code §§ 151.102, 151.104. (Texts of these provisions is quoted below). We provided a brief primer on the AIA in this post from Eric Peabody on July 26, 2020.
A recent decision by the Texas Supreme Court begins to define the scope of the AIA’s prohibition and how it applies to the duty to defend. Signature Indus. Services, LLC v. Int’l Paper Co., — S.W.3d –, No. 20-0396, 2022 WL 128546 (Tex. Jan. 14, 2022). Among other things, the Court held that, at the pleadings stage of underlying litigation, Texas courts can rely solely on those allegations to determine whether the AIA applies to an indemnity agreement, without inquiring into actual underlying fault as between indemnitor and indemnitee. Signature Indus. Services, 2022 WL 128546, at *12.
In that case, International Paper (“IP”) had hired Signature Industrial Services (“SIS”) to perform construction work on property IP owned, but the work was delayed, costs overran estimates, and payment disputes arose. SIS sued IP for payment and, separately, SIS’s president, Ogden, sued IP for fraud and breach of contract. IP, in turn, asserted SIS had a duty under the contract to indemnify it for the defense costs IP incurred in defending against the president’s claim. The Supreme Court held the AIA “render[ed] the indemnity agreement ineffective to the extent it would require SIS to indemnify IP.” Id. Most significantly, IP argued the injury to SIS’s president was originally caused not by IP’s conduct, but by conduct of SIS itself – its failure to pay payroll taxes – which led to the payment disputes. Therefore, IP argued, the AIA should not apply because SIS’s indemnity obligation under those circumstances applied only to SIS’s fault, not to that of IP as the indemnitee. Id.
The court rejected this argument and began to sketch out how Texas courts address such issues at the pleadings stage. It held as follows:
IP may be correct that the true cause of [the president’s] personal liability and the follow-on harms to his credit and reputation was SIS’s failure to pay taxes. But we do not understand section 151.102 to ask who is truly at fault for the injuries complained of. Instead, it asks only whether the “claim” for which indemnity is sought was “caused by” the fault or breach of contract of the indemnitee.
Id. (noting “[t]he Insurance Code forbids certain construction contracts from requiring an indemnitor to indemnify an indemnitee for ‘a claim caused by the . . . fault . . . or the breach of contract of the indemnitee.” (emphasis in original)). The Court resolved the case before it as follows:
Here no one disputes that the “claim” is Ogden’s suit alleging fraud and breach of contract due to IP’s refusal to pay under the . . . contract. For purposes of the anti-indemnity statute, IP’s alleged breach . . . was the cause of Ogden’s claim, regardless of whether SIS’s actions were also part of what truly brought about the injuries alleged by Ogden. The statute does not require factual inquiry into the “true” cause of the plaintiff’s injuries. Absent fraud or some other unusual circumstance not present here, examining the pleadings will generally be a sufficient basis to determine whether the “claim” was “caused by” the fault or breach of contract of the party seeking indemnification.
This language indicates that even if an indemnitee can reasonably claim the damages and the indemnity obligation ultimately arose from failures of the indemnitor, the AIA nevertheless precludes such indemnity claims because the AIA “does not require factual inquiry into the ‘true’ cause of the plaintiff’s injuries” and applicability can generally be resolved by “examining the pleadings.” Id. It appears that the Court’s definition of the statute’s terms “claim” and “caused by” as referring to allegations rather than actual facts is in part to avoid mini-trials on causation at the pleadings stage merely to determine whether the AIA applies.
Claims for indemnity in cases we litigate are often more complex than those in Signature Indus. Services, which involved a single contractor and a claim against the owner. Often, claims such as these involve a property owner, a general contractor, and multiple subcontractors with multiple indemnity agreements and insuring requirements that generally provide coverage for upstream contractors. In those cases, questions about application of the AIA can raise issues about the scope of the indemnity agreements themselves – i.e., whether they apply to both indemnitor and indemnitee – rather than the underlying fault, per se. If an indemnity provision in a subcontract extends to indemnitee and indemnitor fault, the upstream contractor can argue that the AIA only voids the indemnity duty “to the extent” it indemnifies for indemnitee’s own fault, and that it does not void the contract – or additional insured coverage – entirely because it also indemnifies for indemnitor fault. This argument has not been directly addressed by Texas courts, but Signature Indus. Services provides support for the argument that, regardless of actual underlying fault or the scope of the contract, the AIA can apply where the “claim” clearly asserts indemnitee fault.
Insurance Code Sections 151.102 and 151.104 are the key provisions of the AIA. They provide as follows:
Sec. 151.102. AGREEMENT VOID AND UNENFORCEABLE.
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 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 statute, 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.
* * *
Sec. 151.104. UNENFORCEABLE ADDITIONAL INSURANCE PROVISION.
(a) Except as provided by Subsection (b), 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.
Tex. Ins. Code §§ 151.102, 151.104.