Construction Insurance: Challenges Posed By the Texas Anti-Indemnity Act
Prior to the passage of the Texas Anti-Indemnity Act back in 2011, the parties most active in the state’s construction industry could still readily determine the degree of insurance coverage and indemnity they were securing regarding various projects. However, since that law went into effect on January 1, 2012, significant confusion over such issues has been introduced into the field of Texas construction law -- and it’s unlikely to dissipate anytime soon.
Balancing Constitutional Rights Against Insurance Industry Concerns
Today, many in the Texas construction industry might argue that this law has had a chilling effect on their constitutional right to contract with others. As one scholar has put it, referencing a long-standing legal principle cited in numerous U.S. Supreme Court cases, “Parties should be allowed to create contracts however they wish, as long as they do not violate the State’s police power or public policy.” Unfortunately, the Texas Anti-Indemnity Act “binds parties’ hands and prevents them from contracting as they wish.”
While many in the insurance industry pushed hard to pass this legislation, especially since the Act was designed to “protect insurance companies from exposure to liability for claims which they did not agree to underwrite” -- major questions remain unanswered. One of the Act’s most glaring deficiencies is its failure to provide clear definitions of critical terms. These could have provided guidance to the courts that are now handling pending lawsuits. Many of these specific deficits are clearly pointed out in a well-researched 2014 article published in St. Mary’s Law Journal.
Types of Questions the Courts Must Now Specifically Address
Exactly which types of indemnity (risk-transferring) agreements are strictly forbidden under the Texas Anti-Indemnity Act? Jurists will soon be asking their sharpest law clerks to help them interpret Texas Insurance Code Section 151.101 where this vague statute is located. They will also need to spend considerable time reviewing Title 10 of the same code which addresses property and casualty insurance contracts – among many others;
Are most of the standard builder’s risk insurance policies common available now void? For many years, these policies have been among the first negotiated by most parties to construction projects since they help cover losses tied to the damages many new buildings incur while under construction;
Are policies which include a “duty to defend” now void under the Act? Strong arguments can be made that this is a very distinct provision apart from the broader duty to indemnify;
How can insurance companies legally offset possible losses caused by the Texas Anti-Indemnity Act, without penalizes customers with higher rates? As one scholar has pointed out, “If [insurance] companies interpret the statute broadly, they risk losing business, as they can no longer offer additional insured status or obtain indemnity agreements from other insurance companies;”
Which uncontroverted facts support the claim that the Texas Anti-Indemnity Act was passed due to the troubling “unequal bargaining positions between owners, general contractors, and subcontractors”? Hasn’t capitalism always encouraged parties with the most money to fully insulate themselves from as much litigation as possible? As the Mary Law Journal article notes, if this was one of the true motives for passing this legislation, why did the legislature completely exclude residential construction from the Act, given the common belief that there is probably more unequal bargaining power within that specific field of construction than most others?
Which specific and compelling state rights are being upheld by this Act, at the apparent expense of citizens’ constitutional right to contract with one another as they choose?
Until significant case law is decided regarding the proper scope of this Act, those most active in the Texas construction industry may need to spend far more time conferring with their attorneys about the best possible ways to protect themselves against excessive litigation caused by this questionable law.