The Texas Anti-Indemnity Act: Restrictions On Indemnity In Texas (Second Edition)

A. Introduction

Subchapter C of Chapter 151 of the Texas Insurance Code, the Texas Anti-Indemnity Act (the "TAIA"), went into effect on January 1, 2012. The TAIA affects not only the validity of contractual indemnity provisions, but also the availability of additional insured coverage, voiding both indemnification clauses and additional insured provisions in construction contracts that purport to indemnify the indemnitee/additional insured for its own negligence or fault.

Thirteen years later, owners, contractors, subcontractors, and their insurers have had some time to analyze and adapt to the statutory provisions and to modify their contract documents to comply with the statute. Gone are the days where an unenforceable indemnity clause was backed up by otherwise enforceable additional insured coverage. Essentially the same rules apply to both. For nearly ten years, there was virtually no law interpreting the TAIA. However, that changed beginning in 2022, with five substantive opinions issued in that year alone and three more opinions issued since that time.¹ These cases are discussed below.

This white paper will discuss not only the statute, but also significant topics related to indemnity and additional insured coverage which, though they may not directly address Chapter 151, are important for an overall understanding of indemnity and additional insured coverage in Texas.

B. Basic Indemnity Terminology

Modern construction is a dangerous business even though the means and methods of construction may have changed and improved over time. Many and varied risks are encountered and dealt with, whether through elimination or reduction through such means as safety planning, training, and best practices. Other risks are transferred between the parties delivering the project or to third parties. However, the transfer of most construction risks is usually supported by insurance, which ultimately transfers potentially huge risks to an insurer that is generally considered to be more financially capable of bearing and spreading risks.

Construction indemnity and transfer of risk. Complexity often results where several parties are alleged to have caused or contributed to a loss, and even more so, where those parties all have some contractual relationship. To sort out the various parties' obligations to each other and for the loss, consideration must be given not only to the insurance coverage for each party, but also to the contracts by which risks are transferred or allocated among the parties. The contracts between the parties on a construction project shift potential risks from one party to another, usually from an upper tier to a lower tier, such as from the project owner to the general contractor and from the general contractor to its subcontractors. This is accomplished through the use of an indemnity or hold harmless clause, which amounts to one party's agreement to assume the liability of another in the event of a claim or a loss. Note that the indemnity clause does not relieve the party receiving the indemnity from liability to an injured third party. In other words, the indemnitee will be held liable to the third party and must pay damages to the injured party whether or not the indemnitor fulfills its obligation to indemnify. If, for example, the indemnitor does not have the financial resources to respond to its obligation to indemnify, the indemnitee will still be required to pay damages to the injured party.

Terminology. Indemnity clauses are usually classified into three categories:

• "Broad form" or "sole negligence" clauses, where the indemnitor assumes an unqualified obligation to hold the indemnitee harmless from all liability regardless of which party was actually at fault, even as to the sole negligence of the indemnitee.
• "Intermediate form" indemnity clauses, where the indemnitor assumes all liabilities of the indemnitee relating to the subject matter of the agreement, except for the injury or damages caused by the indemnitee's sole negligence. Any amount of fault on the part of the indemnitor obligates the indemnitor to indemnify the indemnitee for the entire amount of damages. For example, where the indemnitee is ninety percent at fault, and the indemnitor only ten percent at fault, the indemnitor nevertheless owes one hundred percent of the indemnity.
• "Limited form" indemnity clauses, also referred to as "comparative fault" clauses, obligate the indemnitor only to the extent of its own fault in contributing to the loss.

Enforceability of indemnity clauses by Texas courts. Indemnification agreements, due to their use as risk transfer and liability apportionment devices for potentially large risks associated with construction, have been a frequent source of litigation, particularly where the agreement shifts liability for an indemnitee's own negligence to the indemnitor. Texas courts have described indemnification for an indemnitee's own negligence as an "extraordinary shifting of risk." See, e.g., Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993).

As a result, in Texas, in order to accomplish the transfer of the indemnitee's own negligence, the indemnity clause must satisfy the "fair notice" requirements, which include (1) the express negligence doctrine adopted by the Texas Supreme Court in Ethyl Corp. v. Daniel Constr. Co., 725 S.W.2d 705 (Tex. 1987); and (2) the conspicuousness requirement. See, e.g., Dresser Indus., Inc., 853 S.W.2d at 508. Under the express negligence doctrine, the indemnity clause must expressly state that the intent of the parties is for the indemnitor to indemnify the indemnitee for its own negligence. See, e.g., Dresser Indus., Inc., 853 S.W.2d at 508. The word "negligence" must be used. As to the conspicuousness requirement, the clause must be conspicuous so as to attract the attention of the indemnitor. See id. In other words, it must be in bold print, all caps, or with a conspicuous heading. It cannot simply match the other provisions of the contract. The conspicuousness requirement can be met if the indemnitee can demonstrate that the indemnitor had actual notice of the clause. After Ethyl, if these fair notice requirements were satisfied, courts would enforce the use of broad form indemnity provisions providing indemnity for even the indemnitee's sole negligence. However, the ongoing applicability of these fair notice requirements to construction contracts in the post-TAIA era is less than clear, as will be discussed below.

Additional insured coverage. Due to the uncertainty surrounding the enforceability of indemnification clauses, many indemnitees in the construction industry became uncomfortable with relying solely upon them to transfer risk. This led to the requirement by many upper tiers that they be named as additional insureds on the lower tiers' comprehensive general liability ("CGL") policies. As an additional insured, the upper tier has direct rights against the lower tier's CGL insurer so that it can theoretically bring a greater amount of pressure upon the carrier in order to obtain a defense and coverage.

Statutory regulation of indemnity clauses. Nevertheless, concerns over the fairness of such a transfer, particularly to lower tiers such as subcontractors, have been voiced with increasing frequency, leading the legislatures of most states to enact statutes that regulate indemnification clauses used in the construction industry.² Many of the more recent statutes also regulate the ability of an upper tier to obtain additional insured status on a lower tier's liability policy for claims arising out of the upper tier's own fault or negligence. At times, broad additional insured coverage for the indemnitee's independent fault has been relied upon by upper tiers to backstop an unenforceable indemnity clause, whether because of a failure to comply with the fair notice requirements, or, in other states, because of the effect of an anti-indemnity statute to prevent the transfer of an indemnitee's own negligence via an indemnity clause.

Texas regulation of construction indemnity. In May 2011, Texas joined the states that regulate the scope of permissible indemnity by statute. With an effective date of January 1, 2012, that statute also affects the availability of additional insured coverage, voiding both indemnification clauses and additional insured provisions that purport to indemnify the indemnitee/additional insured for its own negligence or fault. However, in light of the prevalence of third party over actions in Texas, there is an exception for bodily injury to the indemnitor's employees. Under those circumstances, indemnification for the indemnitee's own negligence is allowed.

C. The CIP Provisions of Texas Insurance Code Chapter 151

The anti-indemnity legislation before the Texas Legislature in 2011 was sponsored by Senator Duncan as Senate Bill 361, but was stalled in committee. It was then added as an amendment to House Bill 2093, the Consolidated Insurance Programs bill. With the amendment, both were approved, and House Bill 2093 was signed by Governor Perry on June 17, 2011, adding Chapter 151, "Consolidated Insurance Programs," to the Texas Insurance Code. The regulation of Consolidated Insurance Programs ("CIPs") emerged as a relatively minor portion of the new statute, with the TAIA in Chapter 151 getting significantly more attention than the CIP provisions.

The CIP portion of Chapter 151 applies to a "consolidated insurance program," which is defined as a program under which a principal provides general liability insurance coverage, workers' compensation insurance coverage, or both that are incorporated into an insurance program for a single construction project or multiple construction projects. TEX. INS. CODE §151.001(1). As such, the definition encompasses owner controlled insurance programs ("OCIPS") where the owner is the CIP sponsor, contractor controlled insurance programs ("CCIPS") where the contractor is the sponsor, and rolling CIPS since the definition specifically includes insurance programs for multiple construction projects.

However, the term "construction project," which includes construction, remodeling, maintenance, or repair of improvements to real property, specifically states that a construction project does not include a single family house, townhome, duplex, or land development directly related thereto. Therefore, it does not apply to residential CIPS.

Sections 151.003-009 set out bare bones requirements as to a CIP, including furnishing information and the CIP policy to participants. Section 151.051 sets out the requirement that a CIP that provides general liability insurance coverage must provide completed operations coverage for a period of not less than three years. Thus, despite the designation of the statute as "Consolidated Insurance Programs," little regulation of a CIP is provided for, and the regulation that there is, a duration of three years for completed operations, appears to be somewhat short in light of the tenyear statute of repose that applies to construction work in Texas.

D. The Anti-Indemnity Provisions of Chapter 151

Reviewing the anti-indemnity provisions of Chapter 151, it becomes somewhat clear that those sections were added on to the CIP portion, resulting in some inconsistency. The apparent inconsistencies in the statute persist. Nevertheless, the intent of the TAIA is clear, that is, to outlaw indemnity for an indemnitee's own negligence.

Section 151.101 states that Subchapter C, the TAIA, applies to a construction contract for a construction project for which an indemnitor is provided or procures insurance subject to Chapter 151 (a CIP) or Title 10 of the Texas Insurance Code. Title 10 sets out the regulations for property and casualty insurance in Texas and includes the standard commercial general liability ("CGL") and workers compensation coverages. Therefore, the section applies to any construction contract where a party is required to provide liability insurance coverage. That liability coverage, usually provided through a CGL insurance policy, includes contractual liability coverage, which is specifically included in the policy to cover the named insured's indemnity obligations assumed pursuant to contract. Therefore, the anti-indemnity provisions are of extremely broad, if not universal, application to construction contracts.

In that regard, the term "construction contract" is defined very broadly in §151.001(5) to include:

As can be seen, the scope of the statute includes contracts for public or private construction, demolition and excavation contracts, design contracts, assignment agreements with an owner's lender, and performance bonds. Note that because of the inclusion of public contracts in the statute, §2252.902 of the Texas Government Code, the anti-indemnity statute that applied to Texas state public works, was repealed. That statute provided for similar anti-indemnity provisions to those now included in Chapter 151 and that are applicable to all construction contracts.

The term "construction project" is also broadly defined in §151.001(2):

The broad definition of construction contract has been interpreted according to its plain terms, confirming the broad scope of contracts and projects to which the Act applies. See BNSF Ry. Co. v. Jones Lang Lasalle Americas, Inc., 2022 WL 562898, at *1, 4, 5 (N.D. Tex. Feb. 24, 2022) (Real Estate Management Services Agreement was a "maintenance" contract within plain terms of "construction contract" definition under New Mexico anti-indemnity statute (N.M. STAT. ANN. §56-7-1) and TEX. INS. CODE §151.001(5); under agreement, indemnitor agreed to provide "variety of real estate maintenance services" and property management services at BNSF facilities, which "range[d] from lighting and electrical maintenance to building and yard upkeep"). Collateral agreements as well as work not necessarily confined to the immediate project location itself are apparently included, and the reference to "areas incidental and necessary to the work" appears to be language that would be equally applicable to the CIP portion of the statute.

E. Scope of Indemnity and Additional Insured Coverage Prohibited/Allowed

Section 151.102 sets out the primary provision in the TAIA stating what types of indemnity or hold harmless agreements are void. This section, together with §151.104, which applies to additional insured provisions, are the statutory provisions most relevant to a construction defect claim arising out of a construction project.

In that connection, §151.102 of the TAIA provides:

As can be seen, by declaring an agreement void and unenforceable to the extent that it requires the indemnitor to indemnify the indemnitee for its own negligence, the TAIA prohibits broad form and intermediate form indemnity. The only indemnity remaining is for the negligence of the indemnitor that contributed to the loss or claim; in other words, limited or comparative form indemnity. It does not appear to prohibit indemnification for the indemnitor's fault in instances where the indemnitee's negligence may have contributed to the loss. Nevertheless, under those circumstances, the indemnitee is entitled to indemnity only for the portion of the damages attributable to the indemnitor's fault.

Section 151.104 incorporates the prohibition on broad and intermediate indemnity clauses from §151.102 into contractual additional insured requirements and additional insured coverage, providing:

Thus, under §151.104, additional insured provisions, like indemnity provisions, are enforceable only to the extent they provide coverage to the indemnitee/additional insured for the named insured's own fault or negligence. However, the exception for injury to employees of the indemnitor/named insured set out §151.103 and discussed below applies to both §151.102 and §151.104, allowing broad coverage for the indemnitee/additional insured's own negligence for those claims.

In addition, the "to the extent" language in both §151.102 and §151.104 indicates that it should be possible to obtain indemnification and additional insured coverage at least to the extent of the indemnitor's own negligence under the TAIA. Texas case law in the construction context is in accord that the words "to the extent" reflect a limited or comparative form indemnity only for the indemnitor's own negligence. See, e.g., Tri- State Ins. Co. v. Rogers-O'Brien Constr. Co., 1997 WL 211534 (Tex. App.—Dallas Apr. 30, 1997, writ denied). Therefore, giving this phrase effect, the TAIA should only limit the scope of an indemnity or additional insured provision to bring it in compliance with the TAIA; it should not wipe the provision out completely. See BNSF Ry. Co. v. Jones Lang Lasalle Americas, Inc., 2022 WL 562898, at *3, 5 (N.D. Tex. Feb. 24, 2022) (indicating that under the TAIA, indemnitor would not be required to indemnify indemnitee for indemnitee's own negligence pursuant to general indemnity provision in a maintenance contract, apparently giving effect to the "to the extent" language because the indemnity provision, as written, included indemnity for indemnitee's negligence). However, as discussed in more detail in Section F.2 below, at least two courts have not given this phrase effect and, instead, have found that a non-compliant indemnity provision negates an additional insured carrier's duty to defend.

The U.S. District Court for the Western District of Texas has indicated that even if an indemnity provision requires broader indemnity than what is permitted by the TAIA, a savings clause in the construction contract or subcontract may advance the argument as to enforceability to the extent permitted under the TAIA, allowing the court to disregard the offending clause requiring impermissible indemnity, leaving intact the rest of the indemnity provision. See United States of Am. for the Use & Benefit of EJ Smith Constr. Co. v. Travelers Cas. & Surety Co., 2015 WL 12734070, at *3 (W.D. Tex. June 25, 2015).³ However, the U.S. District Court for the Eastern District of Texas recently rejected that argument in a coverage dispute between two insurers regarding the defense obligation owed by a lower tier excavator and its CGL insurer to the upper tiers arising out of an underlying property damage lawsuit filed by a third party property owner related to the construction project. See Allied World Assurance Co. (U.S.) Inc. v. Acadia Ins. Co., 2024 WL 4728913, at *7 n.6 (E.D. Tex. Sept. 9, 2024) report and recommendation adopted by 2024 WL 4433070 (E.D. Tex. Oct. 7, 2024).⁴

Due to the lack of clarity in the case law regarding the effect of the "to the extent language" in the TAIA and regarding the effect of a savings clause in the construction contract, it is a better practice to draft indemnity and additional insured specification provisions that clearly comply with the TAIA and include their own savings clauses, in addition to a general savings clause in the contract. Model indemnity and additional insured specification provisions are provided in Sections K and L.

Nevertheless, where the underlying pleading alleges only negligence on the part of the indemnitee, the indemnity clause will not be enforced. In Union Pac. R.R. Co. v. Brown, Union Pacific, the indemnitee, made an argument based on the "to the extent" language, contending that the TAIA voided "the indemnity provision only to the extent it require[d] indemnification for Union Pacific's own negligence." 2018 WL 6624507, at *5 (Tex. App.—San Antonio Dec. 19, 2018, no pet.). The indemnity provision in the contract between Union Pacific and the indemnitor, Jay Construction, required Jay Construction to defend and indemnify Union Pacific:

Id. at *1. The provision also required Jay Construction to indemnify Union Pacific "for claims 'caused or alleged to be caused by the partial or sole negligence of [Union Pacific] and/or its employees.'" Id. Union Pacific sought a defense and indemnity from Jay Construction following an accident involving a manlift provided by a subcontractor to Jay Construction that resulted in the death and serious injury of two Union Pacific employees. Id. Union Pacific urged the court to remand the case to the trial court "for a determination of 'the extent of Jay Construction's indemnity obligations to Union Pacific, if any, for the negligence or fault of Jay Construction, [or any other party].'" Id. at *5. The court declined to do so, noting that Union Pacific did not identify any pleading in which a party asserted that Union Pacific was liable for the negligence or fault of any other party and pointing out that Union Pacific was sued for its own negligence. Because the TAIA voided Jay Construction's obligation to indemnify Union Pacific for that negligence, there were no other remaining indemnity issues for remand. Id.

Although the court in Union Pacific found that the TAIA negated the indemnitor's indemnity obligations, the implication of the court's analysis was that if there had been allegations that the indemnitee was liable for the indemnitor's negligence, there would have been a need for a determination as to the extent of the indemnitor's negligence for purposes of the enforceability of the indemnity provision under the TAIA.

This is supported by the Texas Supreme Court's explanation of permissible indemnity under the TAIA, which makes it clear that the TAIA does not prohibit a party from providing contractual indemnity for its own negligence with this explanation:

See Maxim Crane Works, L.P. v. Zurich American Ins. Co., 642 S.W.3d 551, 556 (Tex. 2022).

This is what occurred in Southwest Electrical Contracting Services, Ltd. v. Industrial Accessories Co., 2022 WL 1468384 (W.D. Tex. May 10, 2022). There, the court determined that a $2,000,000.00 credit memo issued against the general contractor/indemnitee's final billing to the project owner for work on two frac sand plant construction projects solely involved the electrical subcontractor/indemnitor's deficient work under the subcontracts. Therefore, the general contractor was not seeking indemnity from the electrical subcontractor for the consequences of the general contractor's own fault, and the indemnity provision was enforceable under the TAIA to the extent of subcontractor/indemnitor's own negligence. Id. at *38 & n.26.

Of course, downstream indemnitors have viewed §151.102 to be the primary operative provision of the TAIA, and it is obvious that it is. As the Union Pacific case demonstrates, the TAIA provides relief from an obligation to indemnify the indemnitee, or upstream tier, for its own negligence, a long-time result sought by subcontractors and their trade organizations. Therefore, clauses purporting to indemnify the indemnitee for its sole negligence, or intermediate form indemnity where the indemnitee is indemnified for its own negligence so long as the indemnitor is to any degree at fault, run afoul of §151.102 and are unenforceable, at least "to the extent" that they require the indemnitor to indemnify the indemnitee for the indemnitee's own fault. Nevertheless, lower tiers often ignore this formulation and argue for all or nothing unenforceability, which is a stance that has also been adopted by some additional insured carriers.

F. The TAIA's Effect on the Duty to Defend the Indemnitee/Additional Insured

Often, an indemnity clause obligates the indemnitor to defend the indemnitee in addition to providing indemnification for a loss. Section 151.102 applies not only the obligation to indemnify and hold harmless, but also the duty to defend, rendering void a provision to the extent it requires the indemnitor to defend the indemnitee against claims caused by the indemnitee's own negligence. In addition, the Employee Injury Exception in §151.103 applies to the defense obligation. Thus, the same rules apply to defense as well as indemnity. However, the limitations upon indemnity clauses might not mesh as well with the obligation of an insurer to defend an additional insured.

Historically, additional insured coverage was potentially broad and often did not limit the scope of coverage provided to the additional insured/indemnitee, even for its own sole negligence. The only restriction was that the claim had to arise from the named insured's work for the additional insured. Many courts, including the courts of Texas, apply a broad causation standard and uphold coverage for the indemnitee's own independent negligence if it was arguably related to the named insured's work pursuant to the contract. The additional insured coverage is viewed by the indemnitee as a backstop to an indemnity clause that has provided for a more limited scope of indemnity or that may not be enforceable under a particular state's laws. Eventually, many insurers scaled back the scope of additional insured coverage provided to the indemnitee/additional insured, sometimes limiting coverage to liability arising out of the negligence or fault of the indemnitor/named insured, which could place indemnitors in potential breach of broad contractual requirements to provide unqualified additional insured coverage.

Nevertheless, even under a more limited indemnity provision or additional insured endorsement that requires the liability of the indemnitee/additional insured to be caused, in whole or in part, by the acts or omissions of the indemnitor/named insured, Texas courts interpret and apply the duty to defend broadly.

Under Texas law, the determination as to whether an additional insured carrier owes a defense is a two-part inquiry. The first inquiry is whether the entity seeking coverage qualifies as an additional insured under the named insured's policy. See, e.g., Lyda Swinerton Builders, Inc. v. Oklahoma Surety Co., 903 F.3d 435, 445-46 (5th Cir. 2018). For ease of discussion, these materials will address a typical scenario where the general contractor is seeking additional insured coverage from the named insured/subcontractor's insurer. Absent an endorsement in the subcontractor's policy that specifically names the general contractor as an additional insured, a determination as to additional insured status typically involves an analysis of the terms of the additional insured endorsement in the subcontractor's policy and the insurance requirements in the subcontract. See id. If the general contractor qualifies as an additional insured, then the second inquiry generally involves an analysis of the pleadings and the policy under the eight-corners rule to determine whether the additional insured carrier has duty to defend under Texas law. See Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Corp., 640 S.W.3d 195, 201 (Tex. 2022) (eight-corners rule "remains the initial inquiry to be used to determine whether a duty to defend exists, and it will resolve coverage determinations in most cases" (internal citations omitted)).

Often in a construction defect lawsuit, a plaintiff will sue the general contractor for negligence, breach of contract, and breach of warranty, alleging that it defectively constructed the project, and that the general contractor hired and failed to supervise the subcontractors who performed defective work, which damaged the project. The plaintiff will also frequently list various components of the project that were allegedly defectively constructed. Texas courts have routinely found that these types of allegations are sufficient to trigger an additional insured carrier's duty to defend the general contractor under the policy of a subcontractor whose scope of work is implicated by the pleadings. See, e.g., Lyda Swinerton Builders, 903 F.3d at 447-48.

And under Texas law, "[i]f a complaint potentially includes a covered claim, the insurer must defend the entire suit." Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491 (Tex. 2008). The policy "obligates the insurer to defend its insured, not to provide a pro rata defense." MidContinent Cas. Co. v. Acad. Dev., Inc., 476 Fed. Appx. 316, 321 (5th Cir. 2012). Thus, "[e]ach insurer whose policy obligations are triggered independently owes the insured a complete defense." Colony Nat'l Ins. Co. v. United Fire & Cas. Co., 677 Fed. Appx. 941, 947 (5th Cir. 2017) (emphasis added). This logic applies to the named insured's own carriers as well as its additional insured carriers. Thus, in practice, this means that when a plaintiff's pleading contains allegations of property damage implicating the work of multiple subcontractors, the general contractor is often entitled to a defense as an additional insured from multiple additional insured carriers, each of whom owes the general contractor a complete defense, even if some of the claims are excluded.

The requirement that an insurer provide a complete defense under Texas law is more complicated in light of the TAIA's prohibitions in §151.102 and §151.104 and the realities of construction defect litigation. This is because the prohibitions in §151.102 and §151.104 apply not only to the duty to indemnify, but also to any duty to defend the indemnitee/additional insured beyond the extent of the indemnitor's own fault. This may make some indemnity clauses and additional insured endorsements very difficult to apply in order to apportion the defense obligation between the fault of the indemnitor/named insured and the indemnitee/additional insured.

However, as mentioned, because the TAIA only prohibits additional insured coverage "to the extent" that it is required for an indemnitee's own negligence or breach of contract, the TAIA does not prohibit indemnification or additional insured coverage for the indemnitor's own negligence or fault. In a typical construction dispute, a general contractor/indemnitee tenders the defense of a claim to a downstream subcontractor/indemnitor's insurer for additional insured coverage. In this scenario, where the general contractor would be liable for the negligence or defective work of its subcontractors by virtue of the prime contract with the owner, the TAIA permits additional insured coverage for that liability. Combining that with the broad duty to defend in Texas that requires an insurer to defend the entire lawsuit if there is any potential for covered liability, the additional insured carrier arguably owes the general contractor a complete defense, even where the underlying pleadings also implicate the general contractor's own negligence or breach of contract.

Based on this logic, many indemnitees seek to impose upon the additional insured carrier an obligation to defend an entire claim. However, in response to the TAIA, many insurers will decline to defend the general contractor even if the general contractor is expressly alleged to be liable for a specific subcontractor's defective work because the pleading also alleges that the general contractor was negligent and/or that other subcontractors were negligent. This argument is essentially the opposite of the eight corners rule, in that these insurers take the position that the TAIA negates the entire duty to defend if there are any potential allegations against the general contractor for its own negligence or breach of contract. In other words, the position of some additional insured carriers appears to be that even if the named insured subcontractor's work is clearly implicated by the pleadings, the plaintiff has also alleged that its damages were caused by the general contractor's own negligence or breach of contract. Therefore, by seeking a defense, the general contractor is necessarily asking the additional insured carrier to defend the general contractor, at least in part, for the general contractor's own negligence, which is prohibited by the TAIA. Moreover, these insurers instead argue that because there are allegations against both the subcontractor and the general contractor, each party (and its insurer) should bear its own defense costs.

This position ignores the "to the extent" limitation on the additional insured obligation. That language should not excuse the additional insured carrier from defending the additional insured completely. Rather, the obligation of the additional insurer should still apply to the extent of the negligence or fault of the indemnitor/named insured subcontractor.

This position is also at odds with the reality of typical construction defect litigation, where the plaintiff typically asserts negligence and breach of contract claims against the general contractor. It is unlikely that the Texas legislature intended for the Act to wipe out all additional insured defense obligations for construction defect litigation in Texas. Instead, the TAIA's prohibitions and Texas law on the duty to defend can be harmonized by treating the TAIA's prohibitions the same way that a policy limitation is treated with respect to the duty to defend: if there is a potentially covered claim, i.e., the potential that the general contractor will be held liable for the subcontractor's negligence, then the additional insured carrier has a duty to defend the entire lawsuit. For example, a petition may allege negligent conduct, but also allege punitive damages based upon intentional conduct of the insured.⁵ The insurer is nevertheless obligated to defend all allegations, even if allegations as to intentionally caused punitive damages are excluded or are not caused by an "occurrence."

It has been a mixed bag as to how these arguments have played out in litigation. The primary instruction from the Texas Supreme Court is that under TEX. INS. CODE §151.102, the proper inquiry is to be pleadings-based:

Signature Indus. Services, LLC v. Int'l Paper Co., 638 S.W.3d 179, 196 (Tex. 2022). However, there is still no definitive answer as to whether an additional insured carrier must provide a complete defense. To date, the U.S. District Courts for the Northern and Southern Districts of Texas have upheld an additional insured carrier's duty to provide a complete defense. See Phoenix Ins. Co. v. Knife River Corp. S., 2023 WL 5846803 (S.D. Tex. Sept. 11, 2023); Knife River Corp. – South v. Zurich Am. Ins. Co., 2022 WL 686625 (N.D. Tex. Mar. 8, 2022); BNSF Ry. Co. v. Jones Lang Lasalle Americas, Inc., 2022 WL 562898 (N.D. Tex. Feb. 24, 2022). On the other hand, the U.S. District Courts for the Eastern District of Texas and the Western District of Arkansas have found that the TAIA negated the additional insured carrier's duty to defend. See Allied World Assurance Co. (U.S.) Inc. v. Acadia Ins. Co., 2024 WL 4728913 (E.D. Tex. Sept. 9, 2024) report and recommendation adopted by 2024 WL 4433070 (E.D. Tex. Oct. 7, 2024); Cont'l Ins. Co. v. Cincinnati Ins. Co., 2023 WL 7199268 (W.D. Ark. Nov. 1, 2023). Each of these cases is discussed in more detail below. There are no reported state court decisions.

Footnotes

1 In chronological order, the cases are:
(1) Signature Indus. Servs., LLC v. Int'l Paper Co., 638 S.W.3d 179 (Tex. 2022);
(2) BNSF Ry. Co. v. Jones Lang Lasalle Americas, Inc., 2022 WL 562898 (N.D. Tex. Feb. 24, 2022);
(3) Maxim Crane Works, L.P. v. Zurich Am. Ins. Co., 642 S.W.3d 551 (Tex. 2022);
(4) Knife River Corp. – S. v. Zurich Am. Ins. Co., 2022 WL 686625 (N.D. Tex. Mar. 8, 2022);
(5) Sw. Elec. Contracting Servs., Ltd. v. Indus. Accessories Co., 2022 WL 1468384 (W.D. Tex. May 10, 2022);
(6) Phoenix Ins. Co. v. Knife River Corp. S., 2023 WL 5846803 (S.D. Tex. Sept. 11, 2023);
(7) Cont'l Ins. Co. v. Cincinnati Ins. Co., 2023 WL 7199268 (W.D. Ark. Nov. 1, 2023) (applying Texas law); and
(8) Allied World Assurance Co. (U.S.) Inc. v. Acadia Ins. Co., 2024 WL 4728913 (E.D. Tex. Sept. 9, 2024) report and recommendation adopted by 2024 WL 4433070 (E.D. Tex. Oct. 7, 2024).

2 At least forty-five states have enacted anti-indemnity statutes that apply in the construction context. See Philip L. Bruner & Patrick J. O'Connor, Jr., Anti-indemnity statutes: Varying approaches to limiting indemnity obligation, 3 BRUNER & O'CONNOR CONSTRUCTION LAW §10:100 n.1 (November 2024 Update) ("As of 2021, 45 states have enacted anti-indemnity laws that limit or prohibit enforcing certain indemnification agreements in construction undertakings.") (citing Matthiesen, Wickert & Lehrer, S.C., Anti-Indemnity Statutes in All 50 States (Jan. 5, 2021), available at www.mwl-law.com); see also Matthiesen, Wickert & Lehrer, S.C., Anti-Indemnity Statutes in All 50 States (last updated Aug. 29, 2024), https://www.mwl-law.com/wp-content/uploads/2018/02/Anti-IndemnityStatutes-In-All-50-States-00220865x9EBBF.pdf ("Forty-five (45) states have enacted anti-indemnity statutes that limit or prohibit enforcing indemnification agreements in construction settings."); Gordon Rees Scully Mansukhani, LLP, 50 State Legal Matrix – Anti-Indemnity Statutes for 2024, 50 STATE LEGAL MATRICES FOR 2024 3-8 (current through Feb. 2024), https://www.grsm.com/Templates/media/files/pdf/50%20State%20Legal%20Matrices% 202024_FINAL.pdf ("Forty-five (45) states have enacted anti-indemnity statutes that limit or prohibit enforcing indemnification agreements in construction settings."). In addition, though not listed in the preceding articles, Alabama enacted an anti-indemnity statute in 2021 that applies to contracts with design professionals, and the District of Columbia enacted an anti-indemnity statute in 2023 that protects subcontractors from having to indemnify contractors and owners for their sole negligence. See ALA. CODE 1975 §41-9A-3; D.C. CODE §27A-202. So, antiindemnity statutes that affect contracts related to construction are the rule in almost every state.

3 This case was ultimately reassigned to another judge in the Western District after the surety filed a motion to recuse, which was granted. See United States of Am. for the Use & Benefit of E J Smith Constr., Co., LLC v. Travelers Cas. & Sur. Co., 2016 WL 1030154, at *2 (W.D. Tex. Mar. 10, 2016). After the reassignment, the parties were invited to move for reconsideration of any prior orders. The surety moved for reconsideration of the June 25, 2015 order denying its motion to dismiss the general contractor's indemnity claim. See id. at *3. On reconsideration, the court determined that the TAIA did not apply, so the court did not reach the surety's argument that the TAIA invalidated the indemnity provision in the Original Contract despite the presence of the savings clause. See id. at *3 n.3. The March 10, 2016 opinion is discussed further in Sections J and O.2 below.

4 Allied World v. Acadia is discussed in more detail in Section F.2 below.

5 See Harken Exploration Co. v. Sphere Drake Ins. PLC, 261 F.3d 466 (5th Cir. 2001) (applying Texas law).

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