Dramatic Changes in Indemnity Law in 2012

Paul Underkofler

House Bill No. 2093 amends indemnity and insurance aspects of certain contracts on public and private property entered into by owners and contractors on and after 1 January 2012. The revisions do not affect small residential projects (duplex or single family).

Statutory nullification of intermediate and broad forms of indemnity against the consequences of an indemnitee’s own negligence is the core of the new law. An understanding of the new law is easier after a quick explanation of the old law of indemnity.

First, understand that indemnity runs upstream from subs to general contractors and from general contractors to the owner. So, the advantages and disadvantages of the changes in indemnity law vary, depending on whether you are looking upstream or downstream.

Second, there are two kinds of newly prohibited indemnity, intermediate and broad form. In the intermediate form, the indemnitor protects the indemnitee against all claims arising from its performance even if caused in part by the indemnitee. In the more onerous broad form, an indemnitor would protect the indemnitee even if liability were caused in whole or in part by the indemnitee.

Moreover, § 151.151 provides that the repeal of broad and intermediate forms may not be waived by contract or otherwise. Therefore, the offensive forms will be automatically stripped from contracts if general contractors enter into original contracts with owners on or after 1 January 2012. If the general contractor “enters into” a contract with an owner before 1 January 2012, its subcontracts and purchase orders signed after that date will still be subject to the former law.

There is a huge exception for the claims against general contractors made by injured employees of subcontractors. The new prohibition does not apply to obligations to indemnify against a claim for bodily injury or death of an employee of a sub, or a sub-sub of any tier. If an employee of a sub covered by Workers’ Comp is killed or injured on the job, the sub is protected from suit by the statutory bar against suits against the subscribing employer. However, the injured employee or the estate of the deceased employee and the sub’s comp carrier would typically sue everyone else on the job, certainly, including the general contractor. This exception enables the general contractor to continue to obtain back-door indemnity by the subs against claims made by the subs’ injured employees or deceased employees’ estate, if the subcontract mandates that the general contractor shall be indemnified when it is wholly or partially at fault.

So, general contractors still need to consider whether they will reserve rights of intermediate or a broad form of indemnity against subs whose injured or deceased employees or comp carriers sue the general contractor.

The new law also prohibits as unenforceable a contract provision that requires the purchase of Additional Insured coverage of claims “to the extent that it requires or provides coverage, the scope of which is prohibited under this subchapter for an agreement to indemnify . . .” Since broad and intermediate forms of indemnity may remain enforceable against subcontractors with respect to their Workers’ Comp claims, it would seem that Additional Insured endorsements to subcontractors’ liability policies shall remain a consideration with respect to personal injury and death claims of subcontractors’ employees, as well as other exclusions from statutory nullification. It will be interesting to see how insurance agents for general contractors and their subs will react to requests for additional insured coverage for these risks falling within the various exclusions.

The foregoing abbreviated summary is not intended to serve as legal advice. If a question arises as to your company’s compliance with the new law or the many exclusions, do not hesitate to contact the construction specialists listed on our homepage.