New Legislation Affects Risk Shifting In Certain Construction Contracts

Governor Rick Perry signed new legislation on June 17, 2011 limiting risk shifting through indemnity agreements and additional insured coverage in the commercial construction arena. This legislation applies to construction contracts entered into on or after January 1, 2012.

Texas Insurance Code section 151.102 prohibits indemnity agreements in construction contracts (and any other agreement collateral to or affecting a construction contract) requiring an “indemnitor to indemnify, hold harmless or defend a party, including a third party, against a claim caused by the negligence or fault . . . of the indemnitee.” Section 151.102 does not apply to contracts related to the construction of single family homes, townhouses, duplexes or land developments directly related to single family homes, townhouses and duplexes.

Under section 151.104, any attempt to circumvent the anti-indemnity language in section 151.102 by requiring additional insured coverage in a construction contract or any insurance policy provisions or endorsements providing this coverage are void and unenforceable. This legislation applies to owners, architects, engineers, contractors, construction managers, subcontractors, suppliers, and material or equipment lessees.

Notably, section 151.103 states that section 151.102 does not apply to a provision in a construction contract requiring “a person to indemnify, hold harmless or defend another party to the construction contract or a third party against a claim for bodily injury or death of an employee of the indemnitor, its agent or subcontractor of any tier.” Presumably, additional insured coverage for what is often referred to as a “third-party over” action is also not prohibited by the statute.

This legislation could significantly affect the ability to transfer risk in certain areas of commercial construction, particularly disputes involving construction defects, and is likely to lead to changes in construction contracts as well as insurance underwriting and policy language.

For a full copy of HB 2093, click here.