Tuesday, September 20, 2011

Texas Legislature Passes Anti-Indemnification Law

Indemnification is a topic that has for years been a sore spot for subcontractors. In a nutshell, upstream parties, such as owners and general contractors, frequently require indemnification from downstream parties on a project, such as the mechanical contractors. While this does not sound so bad in principle, the reality has not been so rosy for downstream contractors.

For an indemnification agreement to be legally enforceable under Texas law, it needed to satisfy the “express negligence doctrine.” The express negligence doctrine provides that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms (and be specifically stated within the four corners of the contract).

In other words, if a general contractor required a sub to indemnify it, the sub would have to indemnify the general contractor not just for the sub’s negligence, but also for the general contractor’s own negligence. This is a huge shifting of risk, but since owners and general contractors held the purse strings of a project, they usually were able to negotiate these heavy-handed indemnity provisions into their contracts.

One of the biggest complaints against these indemnity provisions was that they were a disproportionate shifting of risk. For instance, a subcontract may be worth $50,000, but by providing indemnification to the GC or owner on a large project for their own mistakes, the potential liability could easily be in the millions (example–GC’s negligence causes an accident that catastrophically injured or killed someone). For smaller subcontractors, that potential liability could easily have exceed the limits of their general liability insurance.

Subcontractor groups have been fighting against these indemnity provisions through the Texas legislature for years, with limited success. But things may have just drastically changed. This most recent legislative session brought the enactment of HB 2093. This bill, which creates what will become the new “Chapter 151" of the Texas Insurance Code, essentially voids any contract that requires the indemnitor to indemnify the indemnitee against the indemnitee’s own negligence.

Translating that into plain English, a general contractor should no longer be able to require the HVAC contractor to indemnify the GC for the GC’s own negligence. Even if it is in the contract, the provision would be unenforceable. Additionally, HB 2093 states that the parties to a contract cannot waive this anti-indemnity provision.

It will take some time for the nuances of this new law to be worked out, and it does not go into effect until January 1, 2012. All contractors--not just subs--would be wise to become familiar with this new law well in advance of its effective date and take head of it in negotiating future contracts.

21 comments:

Adam said...

Today doing a research on contractors raleigh I have skimmed through various posts and found one of your's to best of my interest.
And I didn't have any idea about this anti-indmnification law, but at the moment I have so much.

Howard said...

The thing that would be most fair for everyone would be for each party to be responsible for their own negligence.

Howard said...

The new law seems to make a lot of sense,- especially if you're the little guy on the project. Why should a small sub have to indemnify a large gc for the gc's own negligence?
Stay safe on the job site by wearing a high visibility safety vest.

0s0-Pa said...

Whatever will help stimulate small businesses has got my vote. Thanks for sharing!
-Jackie @ Construction Site Safety

siva said...

Thanks for your information. By Building constructions in Chennai

Howard said...

This new anti-indemnification provision corrects a huge problem. Now subs won't have to pay for the extra insurance needed to indemnify contractors further up the chain. Hi Vis

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Suzy Frame said...

Thanks for sharing this information. I have a friend who is just getting into construction law and they were telling me all about it. I was surprised at all the various situations they deal with. Can you tell me where I might be able to find more details just like this? Thanks!
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Chester Jones said...

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JoeyWalden87 said...

Very interesting article. This is why it's always good to have insurance on these kinds of things. I didn't know that contractors could hire a stand-in sub contractor for the job.

http://www.acumeninsurance.com/buildersrisk.html

Ronny McNamara said...

This is a very nice move by Texas legislature to give subcontractors a lot of relief from the unfair exploitation inflicted on them by the greedy and callous GCs.

Ronny McNamara,
LienProfessor.com

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