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RISK MANAGEMENT FOR LANDLORDS, TENANTS AND CONTRACTORS:

Through Contractual Provisions for Indemnity, AdditionalInsureds, Waiver of Subrogation, Limitation, Exculpation and Relea se

Volume 1: “The Law”

William H. Locke, Jr.GRAVES, DOUGHERTY, HEARON & MOODY

515 Congress AvenueSuite 2300

Austin, Texas 78701-3587512-480-5736

[email protected]

May, 2003

Austin, Texas

A version of this article is found at www.gdhm.com\Indemnity.pdf

©Copyright 2003

RISK MANAGEMENT Page-i_____________________________________________________________________________________________

TABLE OF CONTENTS

PAGE

I. Indemnity Absent Contractual Indemnity Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3A. Common Law: Basic Principles of Apportionment of Liability between Jointly Liable Persons . . 3

1. Contribution and Indemnity Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3a. Joint and Several Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3b. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3c. Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2. Common Law E xposure to Vicarious Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3a. Employer-Employee v. Employer-Independent Contractor Relationships . . . . . . . . . . . . . . 3b. Exceptio ns to the In depend ent Co ntracto r Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

(1) Liability to Third Parties for Acts of an Independent Contractor . . . . . . . . . . . . . . . . . . 3(2) Liability for Injuries to Employees of an Independent Contractor . . . . . . . . . . . . . . . . . . 4

3. Why Contractual Indemnification? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5a. Abolition of Common Law Indemnity Except in Limited Circumstances . . . . . . . . . . . . . . . 5

(1) Areas in Which Comm on Law Indemn ity is Still Ava ilable . . . . . . . . . . . . . . . . . . . . . . . . 5(2) Strict Construction of Availability of Commo n Law Indemn ity . . . . . . . . . . . . . . . . . . . . 6(3) Unavailability of Attorney's Fees in Enforcing C ommon Law Indemnity. . . . . . . . . . . . . 7

b. Abolition of Common Law Defenses and Adoption of Statutory Comparative ApportionmentSchemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

c. Cases Prohibiting Contribution or Indemnity from a Responsible Person . . . . . . . . . . . . . . 7(1) Parental Immunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7(2) Workers' Compensation Bar to Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

4. Historical Relationship of Contribution and Ind emnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8a. Doctrine of in Pari De licto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8b. Prior to 1980, Indemnity was Granted in Texas if the Tortfeasors were not in Pari De licto

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8c. 1980 Abolition of Common Law Indemnity Except In Narrow Exceptions . . . . . . . . . . . . . . 9

(1) Legislative Enactment of Contribution and Comparative Negligence Statutes . . . . . . . . 9(2) Adoption of the Statutory Comparative Negligence and Contributio n System as

Abolishing Common Law Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10d. 1984 Judicial Adoption of Comparative Causation and Apportionment Scheme . . . . . . . . 11

(1) Setting for Judicial Intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11(2) Duncan v. Cessna Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11(3) Bonniwell v. Beech Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

5. 1987 Statute and Apportionment Under the Comparative Responsibility and ApportionmentScheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

a. Applicability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12(1) Section 33.001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12(2) Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

b. Comparative Responsibility and Apportionment Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . 13c. Tort Reform Limitation on J oint and Several Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13d. Exceptions in Which Joint and Several Liability Still Imposed . . . . . . . . . . . . . . . . . . . . . . . 13

(1) Pure Neg ligence Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13(2) Mixed Case with Strict Liability or Breach of Warranty With Threshold Levels of

Comparative R esponsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13(3) Toxic Torts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

e. Bars to Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14(1) If Only Negligence is Found, the 51% Bar Rule Applies . . . . . . . . . . . . . . . . . . . . . . . . . 14(2) If Strict Liability or Breach of Warranty is Found, the 60% Bar Rule Applies . . . . . . 14(3) If Mixed Liability is Found, the 60% Bar Rule Applies . . . . . . . . . . . . . . . . . . . . . . . . . . 14(4) Economic Loss Cases Based on Negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

6. 1995 Propo rtionate Responsibility Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14a. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

(1) Causes of Action Accruing 9/1/95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14(2) Suits Filed Beginning 9/1/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14(3) Suits Filed Before 9/1/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

b. Applicability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14(1) Inclusive Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14(2) Proportionate Respo nsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15(3) Exclusion from 1995 Statute's Limits on Joint and S everal Liability . . . . . . . . . . . . . . . 15

c. 51% B ar Rule Applicable to Cases un der 1995 Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15B. Statutory Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1. Electric Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152. Governmental Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

a. Individually as Defendant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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b. Employees of Texas Dep artment of Men tal Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163. Shipper's Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

C. Prelude to Discussion of Contractu al Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

II. Contractual Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17A. Distingu ished from Guara nty and Suretys hip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

1. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17a. "Liabilities" or "D amages" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17b. Contractual Ob ligations or Torts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

(1) Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17(2) Torts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2. Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183. Surety ship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

a. Suretyship Supported by Im plied Contract of Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . 18b. Suretyship Supported by E xpress Contract of Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

B. Indemnity Against One's Own Negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

a. Prior to 1971 Gen erally-Worded and Broad Statements of Indem nity . . . . . . . . . . . . . . . . 18(1) Not Violative of Public Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18(2) Stateme nts Sufficie ntly Br oad to In clude N egligenc e Rule . . . . . . . . . . . . . . . . . . . . . . . 18

b. 1971-1987 Clear and Unequivocal Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18(1) Broad Statements No Longer Sufficient Unless Obligation Expressed in Clear and

Unequivocal Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18(2) Exceptio ns to Ru le . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19(3) Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

2. Express Negligence Doctrine Adopted in 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20a. Ethyl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

(1) Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20(2) Effect of Ethyl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

b. Cases Applying Ethyl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21(1) Supreme Court Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21(2) Court of Appea ls Applications of Ethyl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23(3) Federal Court Interpretations of Ethyl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

C. Indemnity Against One 's Strict Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27D. Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

1. Offer and Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29a. Authority to Enter Indemnity Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29b. Failure to R ead No E xcuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29c. Conspicuous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29d. Actual Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

2. Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323. Promise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334. Statutory Limits on Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

a. Architects and Engineers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33b. DTPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33c. Oil and Gas Service Co ntracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

(1) Void Agreemen ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33(2) Excluded Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33(3) Permitted Indemnity: "Indemnity Supported by Insurance" . . . . . . . . . . . . . . . . . . . . . 34

E. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351. General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

a. Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35b. Strictissimi J uris . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

2. Elements of an Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35a. Indemnifying Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

(1) Multiple Indemnifying Persons: Rights of Contribution . . . . . . . . . . . . . . . . . . . . . . . . . 35(2) Indemnifying an Indemnifying Person: No Right of Contribution . . . . . . . . . . . . . . . . . 35

b. Indemnified Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35(1) Direct Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35(2) Third Party and Incidental Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

c. Indemnified Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(1) Strict Construction Limiting Scope of Indemnified Matters . . . . . . . . . . . . . . . . . . . . . . 36(2) Conflicting Terms: Express Duty an d Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(3) Liabilities “A rising O ut Of.” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(4) Injuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38(5) Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39(6) Contractual Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39(7) Scope of the Work Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40(8) Contemplated Time Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

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(9) Negligence of Indemnifying Persons Not Same as Negligence of Indemnified Persons . 41F. Particular Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

1. Attorn ey's Fees f or Defe nse by In demnified Person of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . 41a. Gener al Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41b. Attorney's Fees in Common Law Indemnity Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

(1) Liability for Atto rney's Fees in Defending Against Claims if Claim Not Settled; But NoLiability for Attorney's Fees for suit to Collect on Commo n Law Indemn ity . . . . . . . . 41

(2) DTPA and Co mmon Law Liability for Attorney's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 41(3) No Attorn ey's Fees f or Indem nified Per son's De fense, if Ind emnifying Person Settles

Plaintiff's C laim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42c. Contractual Indemnity Covering “Attorney’s Fees” and “Costs” as an Exception . . . . . . 42

(1) Attorn ey's Fees in Defending Against a Claim and Enforcing Indemnity as IndemnifiedLiabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

(2) No Attorney's Fees for Indemnified P erson's Defense of Negligence Claim if IndemnityFails Express N egligence Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2. Choice of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44a. No Express Choice of Laws Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

(1) General Rule: In Absence of Choice of Laws Provision, Apply Law of State with M ostSignifican t Relatio nship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

(2) Law of Place of P erformance Applicable to Serv ice Contracts . . . . . . . . . . . . . . . . . . . . 45(3) On Balance This Indemnity Contract Governed by Law Applicable to Contract Which

Contains the Indemnity Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45b. Express Choice of Laws Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

3. Assignability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464. Cumulative or Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465. Powers Granted to Indemnified Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

a. Modification of Instruments Increasing L iability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47b. Expenses Incurred in Good F aith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47c. Prior Notice Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47d. Discretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

(1) No Comm on Law Indem nity for Voluntary Settlements of Indemnified Liability . . . . . 47(2) No Equitable Right to Settle Indemnified Claim Absent C ontractual Right to Settle

Without Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47(3) Settlement Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48(4) Settlement Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

G. Settlement Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491. Effect of Settlement by Plaintiff with a Joint Tortfeasor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

a. One Recov ery Rule: Credit for Settlement Paym ents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49b. Effect of Settlement (by Release and Indemnity) by Plaintiff of a Joint Tortfeasor Which A lso

is an Indemnifying Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49c. Express Negligence Rule An d Settlement Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

(1) The Set tlement A greeme nt Itself . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49(2) Settlement Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

2. Covenants No t to Execute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503. Insurer's Duty to Insured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

H. Framework for an Indemnity Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501. Provision Protecting Indemnified Person From Sole or Concurring Negligence . . . . . . . . . . . 502. Provision for Contractua l Comparative Respo nsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

I. Environmental Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521. CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522. Interpretation under Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533. Oilfield Anti-Indemnity Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

III. Coordination with Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54A. Types of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

1. Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54a. Workers' Compensation and Employers' Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . 54

(1) Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54(2) Workers' Compensation Bar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54(3) Employer's Liability Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

b. Commercial General Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54(1) Bodily Injury and Property Damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55(2) Personal or Advertising Injury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56(3) Medical Pay ments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56(4) Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56(5) Duty to Defend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

c. Automobile Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 592. Property Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

a. Landlo rd and Tenan t Relatio nship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

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b. Ow ner and Contr actor R elationsh ip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59B. "Additional Insured" Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

1. Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602. Types of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

a. Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60b. Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

(1) Coverage For Additional Insured's Negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60(2) Exclusion if Additional Insured Has Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68(3) Express Exclusion of Additional Insured’s Negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . 68(4) Listing as Additional Insured Without Indemnity Agreement . . . . . . . . . . . . . . . . . . . . 69(5) Cause of Action A gainst Insurance Purchaser for Failure to List Other Party as

Additional Insured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69(6) Additional Insured’s "Other Insurance” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

3. Persons Listed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704. Oilfield Anti-Indemnity Statute Not Prohibitive of Additional Insureds Covenant . . . . . . . . . 70

C. Waiver of Recovery: Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 711. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

a. "Subrogation" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71b. "Waiver of Subrogation" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71c. "Waiver of Recovery" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

2. Claims for Damage o r Loss of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71a. Landlo rd and Tenan t Relatio nship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

(1) Covenant Requiring Party to Insure its Own Property Not Equivalent to Waiver ofRecovery or Waiver or Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

(2) Covenant Requiring Other Party to Pay for Insurance Equivalent to Waiver of Recoveryby Insured Against Insurance Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

(3) Rationale for Waivers of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72(4) Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

b. Ow ner and Contr actor R elationsh ip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73(1) Parties Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73(2) Scope of Liabilities Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74(3) Clarifications as to Other Contractu al Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . 74(4) Fair Notice Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

3. Bodily Injury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 744. Insurance Policy Endorseme nts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

a. Liability Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75(1) CGL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75(2) Owners and Contractors Protective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75(3) Commercial Auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

b. Property Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75D. Certificates of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

1. ACORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762. Policy C ontrols . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

IV. Exculpation and Limitation of Liability Provisions and Releases . . . . . . . . . . . . . . . . . . . . . . . . . . 77A. Distinguished from Indemnity Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77a. "Exculpation" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77b. "Releases" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77c. “Limitation of Liability” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

2. Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77a. Rights or Obligations between Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

(1) Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77(2) Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77(3) Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

b. Liabilities to Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77(1) Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77(2) Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

B. Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781. Requirement to Be Conspicuous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

a. Indemnity, Releases, Exculpations: Effect the Same . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78b. Adoption of UCC Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81c. Actual Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

2. Express Negligence Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 823. Prerequisites for Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

a. Public Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82(1) Oilfield Anti-Indemnity Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82(2) Equal Bargaining Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82(3) Unconscionability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

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(4) Minors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83(5) Gross Negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83(6) Intentional Torts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

b. Mutuality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84c. Offer and Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84d. Typical Exculpations and Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

(1) Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84(2) Construction Contra cts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85(3) Waiver of Workers’ Compensation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

e. Strict Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86(1) Scope of R elease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86(2) A Continuum of Culpable Mental States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87(3) Conflicting Provisions Nullify Exculpation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87(4) Parties Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87(5) Release of Unknown Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88(6) Inadvertently Released Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

C. "As Is" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 881. Relevant in Apportioning Liability for Third Party Injuries . . . . . . . . . . . . . . . . . . . . . . . . . . . 882. Not Effective to Escape Env ironmental Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 893. Fraud and O ral Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 894. May N ot Be Effective to Escape DT PA Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 895. DTPA W aivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

D. Limitation of Liability Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901. Distinguished from Exculpation Provisions and Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 902. Rationale fo r Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 903. Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

a. Limitation of Amount of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90b. Limitation of Type of Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

RISK MANAGEMENT Page-1_____________________________________________________________________________________________

RISK MANAGEMENT:

Through Contractual Provisions forIndemnity, A dditional Insured s,

Waiver of Subrogation, Limitationof Liability, Exculpation and Relea se

Risk shifting provisio ns are conta ined in allcontracts. They are used in an attempt to assure theintended economic objectives of the "deal." The mostcommon methods by which risk is shifted in a contractare by the use of representations and warranties,insurance covenants, expre ss assumption of liabilities,indemnity, exculpation, release and limitation ofliability provisions.

Every provision of a contract is either restating therule that would be supplied by the court in the absenceof the provisio n or is expre ssly shifting a risk from oneparty to the other.

This Article concerns provisions dealing with theshifting of "extraordinary" risk from one party to theother. Each contracting party’s risk-related goals are(1) to accept no more risk than it can reasonably bear orinsure, and (2) to transfer the balance of the risk to theother party. The following factors are involved in theultimate determinatio n as to how m uch risk a pa rtyreceives or transfers: (1) which party is in the bestposition to control the extent of the occurrence of therisk?; (2) does one party have specialized knowledge ofthe type of risks mo st likely to occur and how toprevent or identify them?; (3) custom and practice inthe particular industry (for example, sellers to buyers;landlords to tenants; own ers to contractors; contractorsto subcontractors); (4) the bargaining strength of therespective parties; and (5) statutory and common lawpublic policies.

Indemnity agreements are common in most businessrelationships involving real estate. For example, thefollowing types of agreements are indemnityagreeme nts or are in the na ture of indem nityagreements: title insurance, payment and performancebonds, and letters of cr edit. Indem nity agreemen ts arecontained in the following co ntracts: sales agreements,oil and gas leases, easements, agency agreements,construction contracts, loan agreements, notes(provisions for a ttor ney's fees), and escrow agreem ents.Attached to this Article is an Appendix of Forms ofextraordinary shifting of risks.

This Article is presented in two parts: Volume 1“The Law” and Volume 2 “The Form s.” Volume 1first addresses Texas law in the absence of anagreement. Additionally, the relationship of thestatutorily-created doctrine o f contribution to indemnityand the adoption of statutory scheme s of allocating risk(comparative responsibility and the later adoptedscheme of "prop ortionate responsibility") are explained.An approa ch to drafting a "succe ssful" indem nityprovision is explored. In the final part of Volume 1 thelaw as to exculpation, release, limitation of liability,insurance coverages, additional insured designations,and waiver of subrogation provisions as companions toindemnity provisions is analyzed. Volume 2 containsthe most common forms used in commercialconstruction projects and office leases in Texas (e.g.,AIA A201 General Conditions and the State Bar of

Texas Real Estate O ffice Lease form). Also includedare alternative indemnity, insurance, and waiverprovisions to effect a different shifting of risks than arecontained in the “standard ” forms. Accompanying eachof these forms is a commentary noting the bias (theprotected party) and a discussion of the risk allocationsand the methods by which the risk is allocated. Also,included are the insurance endorsement formscommo nly referenced in the construc tion contract andoffice lease risk management provisions and acommentary as to risk coverage and exclusio ns tocoverage addressed by these insuran ce endorsemen ts.Each of these forms has been annotated with footnotesidentifying relevant case law and containing additionalcommentary explaining the risks being addressed byeach form and certain gaps in coverage not addressed orpossibly inadvertently being misad dressed. Referencesin Volume 1 to forms in the Append ix refer to the formnumber of the form contained in Volume 2.

“Indem nity” is, “I agree to be liable for yourwrongs.” Indemnity is a shifting of the risk of a lossfrom a liable perso n to another. However, many timesscriveners use an indemnity provision when they do notknow whether the indemnified person is a p otentiallyliable person. Sometime s, an indemn ity provision is nomore than a restatem ent of existing duties, " I willindemn ify you for my wrongs;" "You will indem nify mefor your wrongs."

An example of an "exculpation" provision is, " I amnot liable to you for my wrongs." An excu lpatoryprovision is designed to exclude, as between the partiesto a contract, certain designated duties, liabilities orcosts due to the occurrence or non-occurrence ofevents.

An example of a “release” is, "You are not liable tome for your wrongs." A release is an agreem ent inwhich one party agrees to hold the other withoutresponsib ility for damag e or other lia bility arising outof the transaction involved. See Wa llerstein v. Spirt, 8S.W.3d 774 (Tex.App.-Austin [3rd Dist.] 1999, no writ )- involving an indemnity by partners bu t not a releasebetween partners.

The Texas Supreme C ourt has imp osed certa inrequirements, such as the "fair notice" principle and the"express negligence" doctrine, in order for a liable partyto be able to sh ift its liability for its negligen ce toanother person. The concept of fair notice wasintroduced into Texas indemnity law by the TexasSupreme Court in Spence & Howe Const. Co. v. GulfOil Corp., 365 S.W .2d 631 , 634 (T ex. 1963 ). The fairnotice principle focuses on the appearance andplacement of the provision as opposed to its "conten t."The supreme court in Spence reasoned that

[t]he obvious purpose of this rule is to preventinjustice. A contracting party should be upon fairnotice that under his a greement a nd through no faultof his own, a large and ruinous award of damagesmay be assessed against him so lely by reason ofnegligence attributable to the opposite contractingparty.

Spence, at 634.

Page-2 RISK MANAGEMENT_____________________________________________________________________________________________

The Texas Supreme Court expressed frustrationwith the writing style and cra ft of Texas law yers inEthyl Corp. v. Daniel Const. Co., 725 S.W.2d 705, 707(Tex. 1987). In Ethyl, the court observed

As we have moved closer to the express negligencedoctrine, the scriveners of indemnity ag reementshave devised novel ways of writing provisionswhich fail to expressly state the true intent of thoseprovisions. The intent o f the scriveners is toindemnify the indemnitee for its negligence, yet bejust ambiguous enough to conceal that true intentfrom the indemnitor. The result has been a plethoraof lawsuits to construe those ambiguous contrac ts.We hold the be tter policy is to cut through theambiguity of those provisions and ad opt the expressnegligence doctrine.

The Texas Supreme Court in Dresser Industries,Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex.1993) extended the fair notice principle and the expressnegligence doctrine to releases. Most recently, theTexas Supreme Court in Houston Lighting & PowerCo. v. Atchison, Topeka, & Santa Fe Railway Co.,890 S.W.2 d 455 (T ex. 1994) expanded the exp ressnegligence doctrine to require indemnity agreemen tsintending to cover an Indemnified Person’s strictliability to expressly state that it covers such strictliability.

The most com mon meth od of risk manag ement isthrough contractual provisions for insurance. Thesuccess of an entity’s approach to contractual risktransfer can be co nsidered su ccessful if it meets thefollowing criteria.

• Risks retained are appropriate andaffordable.

• Risk as an element of the overall transactionand nego tiation is incorp orated at the onset.

• Indemnity, insurance, an d other pe rtinentconditions are not so onerous that contact negotiationsdrag on unnecessarily delaying the transaction ornecessitating the use of second-rate service provider s toaccomplish the contract’s purpose.

• Contractual conditions allocating risk are notso onerous tha t a court disallo ws their ope ration at afuture point in time.

• Insurance requirements are clear, usingrecognized terms that can be interpreted both at thetime the contract is ne gotiated and in possible futuredisputes.

• Insurance and other support for theindemnity is in place when a loss occu rs.

• A thorough insurance monitoring p rocesskeeps the transferee in compliance with the insurancerequirements.

• The performance of the c ontract ismonitored and regularly evaluated.

Criteria quoted from CONTRACTUAL RISKTRANSFER Strategies for Contract Indemnity and

Insurance Provisions (International Risk ManagementInstitute, Inc. 2003).


I. Indemnity Absent Contractual IndemnityProvisions.

A. Common Law: Basic Principles ofApportionment of Liability betwe en Join tly LiablePersons.

1. Contr ibution and Indemn ity Defined. Thejudicial rules and statutory schemes for "contribution"and "indemnity" establish the framework forapportioning liability between persons jointly andseverally liable to third persons for negligence, strictliability and breach of warranty. For discussions ofthese rules and framework see 13 W. Dorsaneo,TEXAS LITIGATION GUIDE § 291.01 (1994) andEdgar and Sales, 4 TORTS AND REM EDIES,Chapter 102, Contribution and Indemnity (1 991). Alsosee W. P. Keeton, PROSSER AND KEETON ONTORTS § 50 (5th Ed. 198 5); Lee and Lindahl,MOD ERN TO RT LAW (1989).

a. Joint and Several Liability. Thecommon law of Texas recog nized that persons whojointly contributed to cause injur y, death or ec onomicloss by their tortious conduct to a third person would bejointly and severally liable fo r their wrongdo ing. Thisconcept is aptly stated in Landers v. East Texas SaltWater Disposal Co., 248 S.W.2d 731, 734 (Tex. 1952)as follows:

Where the tortious acts of two or more wrongdoersjoin to produce an indivisible injury, that is, aninjury which from its nature cannot be apportionedwith reasonable certainty to the individualwrongdoers, all of the wrongdoers will be heldjointly and severally liable for the entire damageand the injured party may proceed to judgmentagainst any one sep arately or aga inst all in one suit.

The joint tortfeasors, rather than the injuredplaintiff, bear the burden of apportioning damagesthrough the mechanisms of contribution and indem nity.

b. Indemnity. Indemnity is a mechanismby which all liability for a tort is shifted from onejointly liable defendant to another. B&B Auto Supply,Sand Pit, and Trucking C o. v. Central Freigh t Lines,Inc., 603 S.W.2d 814, 816 (Tex. 1 980); see Hodges,Contribution and Ind emnity Among Tortfeasors , 26TEX. L. REV . 150, 150-151 (1947).

c. Contribution. Contribution is a partialshifting from one jointly liable defendant to anotherdefendant of a proportionate share of the damages.Contribution has been defined as "the payment by eachtortfeasor of his proportionate sh are of th e pl aint iff'sdamages to any other tortfeasor who has paid more thanhis proportionate part." See Hodge s, supra .

2. Common Law Exposure to VicariousLiabilities. The common law imp osed "vicarious”liability, sometimes called "imputed negligence”, onpersons in certain circumstances through the doctrine ofrespondeat superior, under which a master (employer)is liable for the tor ts of its servants. The respondeatsuperior doctrine imposes liability on the employereven though the employer did not contribute to theservant’s negligent act. T he independent contractorrule evolved as a means to combat the harshness of the

general common law rule. Under the independentcontractor exception a person is not liable for thenegligence of its independent contractors. However,numerous exceptions evolved to the independentcontractor exception resulting in the risk of thereimposition of liability even thoug h the work isperformed by inde pendent contractors.

a. Employer-Employee v. Employer-Independent Contractor Relationships. Asdist inguished from the "e mploye r-employe e”relationship, the "employer-independent contractor”relationship exists in situations where the employerhires a third person to perform some act, but does notretain control of the means and methods used by theindependent contractor to perform the act.Additiona lly, such independent contractors aregenerally specially skilled to perform the particulartask. 44 TE X. JUR . 3d, Independent C ontractors(1996).

b. Exceptions to the IndependentContractor Rule . Numerous exceptions evolved to theindependent contractor rule to the po int that the"exceptions swallowed the rule”. W. P. Keeton,PROSSER AND KEETON ON THE LAW OFTORT S, § 71 (5th Ed. 1984).

(1) Liability to Third Parties for Actsof an Independent Contractor. As codified in theRESTATEMENT (SECOND) OF TORTS, §§410-429, a person is not liable for the acts or omissionsof the independent contractor unless such person hasbeen independ ently negligent. T he followingexceptions to this non- liability rule are recognized inTexas:

(a) Negligent Hiring. A person isliable for the negligen t hiring of the contractor. 44TEX. JUR. 3 d, independe nt contractors § 56 Ingenera l, selection o f Incom petent C ontractor p. 283(1996); Simon ton v. Perr y, 62 S.W . 1090 (T ex. Civ.App. 1901); Webb v. Justice Life Ins. Co., 563 S.W.2d347 (T ex. Civ. Ap p.--Dallas, 19 78, no writ ).

(b) Work Unlawful or CreatesNuisance. Where the performance of the workcontracted for is unlawful, or creates a nuisance, theemployer may be resp onsible for injuries to third partiescaused by the contractor. 44 TEX. JUR. 3d,Independent Contrac tors, § 56 Unlawful W ork p. 291(1996).

(c) Project Necessarily Causes Lossor Injury. The employer may not, to esc ape liability,contract for the project, the necessary or probable effectof which would be to injure others. 44 TEX. JUR. 3d,Independent Contractors § 68 Project n ecessarilycauses loss or injury 293 (1996).

(d) Duties Imposed by Statute .If the prosecution of a project involves or results in aviolation of a duty impo sed by statute on the employer,the mere fact that the work was perform ed by acontracto r will not relieve the employer from liability.44 TEX . JUR. 3 d, Independ ent Contractors (1996).So for instance the court held in Sanchez v. MBank ofEl Paso , 836 S.W.2d 151 (Tex. 1992) that the bankcould not escape liability for the breach of the peaceand wrongful repossession actions of its independent


contractor in repossess ing plaintiff’s bank financedautomob ile in violation of the requirements of TEX.BUS. & COMM. CODE § 9.503 (Vernon Supp. 200 3).

(e) Exercise of Public Franchise.Where the work of a contractor involves the exercise ofa franchise granted the employer, the latter must answerfor the torts of the contractor and see to the properexecution of the granted power. 44 TEX. JUR. 3d,Independent Contractors § 72 Exercise o f publicfranchise p. 296 (1996).

(f) Inherently Dangerous Work. Aperson employing an independent contractor to do aninherently dangero us work sho uld see to it that the workis performed with such degree of care as is approp riateto the circumstances, or that all reasona ble precautionsbe taken during its performan ce, so that third personsmay be effectually protected against injury. Theemployer cannot delegate his duty of care to anindependent contractor so as to relieve him self of hisduty and the liability for the nonperformance of theduty. Thus, the employer may be held responsib le tothird persons for injuries that are the pro ximate resultsof the inherently dangerous nature of the workcontracted for, whether the contractor’s act was donenegligently or otherwise. 44 TEX. JUR. 3d,Independent Contractors § 73 Inherently dangerouswork p. 297 (1996).

(2) Liability for Injuries to Employeesof an Independent Contractor. The most frequentlyencountered exceptions to the independent contractorrule are situations where the courts have imposedliability upon a person to the employees of anindependent contractor. The following exceptions arerecognized in Te xas:

(a) Premises Liability--Safe WorkPlace. A person is liable if it "does not provide a safework place". Actually, this statement of the rule is toobroad. More accurately phrased, the rule requires theowner or occupier to exercise ordinary car to keep thepremises in reasonably safe condition so that theemployee of the indep endent contractor will not beinjured. Redinger v. Living, Inc., 689 S.W.2d 415(Tex. 1985); 59 TEX. JUR. 3d Premises Liability § 25Duty owed business invitee 168 and § 4 3 Failure toprovide safe place to work p. 270 (1996).

See, for instance, Stablein v . Dow C hemica l Co.,885 S.W.2d 502 (T ex. App.--El Pa so 1994 , no writ )where the court found that the premises owner was notliable for injuries to an employee of a subcontractor(cafeteria worker employed by a cafeteria servicescontractor working at the Dow plant). The conditionencountered by the employee (a crate in the foodfreezer) was not a dangerous condition peculiar to thework being performed by the contractor. The contractwith the contractor recognized that Dow d id not retaincontrol over the method of the contractor performing itswork. The injury arose out of an activity conducted bythe employee in the course and scope of the employeesemployment by the contr actor. Dow’s duty to theemployee was that owed by an occupier of land to abusiness invitee--to warn the contractor and itsemployees of any hidden dangers existing on thepremises.

The court of appeals in Schley v. Structural Metals,Inc., 595 S.W.2d 572 (Tex. Civ. App.--Waco 1979,writ ref’d n.r.e.) held that the abolition o f the "no du ty”rule in occupier-invitee cases, in light of the adoption ofthe Comp arative Ne gligence and Contributio n Statutein 1973 (discussed infra), necessarily set aside the rulethat the knowledge of the independent contractorrelieved the owner or occupier of land of any duty toprotect or warn the employees of the independentcontractor of dangers on the premises (even "open andobvious dangers”).

An employer may be liable for injuries suffered bythe employee of an independent contractor as a result ofa defective ap pliance fu rnished by him. 44 TEX.JUR.3d, Independ ent Contractors, § 48 Furnishingdangerou s appliances p. 275 (1996).

Similarly, a contractor in control of the premisesowes a duty to the employees of its subcontractorsimilar to the duty owed by the owner to the contractoras to the prem ises. 44 TEX. JUR.3 d, IndependentContra ctors, § 49 General con tractors 276 (1996).

Liability is imposed upon the employer of thecontractor in cases where the indepe ndent con tractor’swork involves a da ngerous co ndition on the owner’spremises which cause s injury to the co ntractor’semployees. The exception is summarized in theRESTATEMENT (SECOND) OF T ORTS (1966) asfollows:

413. Duty to Provide for Taking ofPrecautions Against Dangers Involve d inWork Entrusted to Contractor. One whoemploys an independent contractor to do workwhich the employer should recognize as likelyto create, during its progress, a peculiar risk ofphysical harm to others unless specialprecautions are taken, is subject to liability forphysical harm caused to them by the absence ofsuch precautions if the employer:

(a) fails to provide in the contract that thecontractor shall take such precautions, or

(b) fails to exercise re asonable care to provide someother manner for the taking of such p recautions.

416. Work Dangerous in Absence ofSpecial Precautions. One who employs anindependent contractor to do work which theemployer should rec ognize is likely to c reateduring its progress a peculiar risk of physicalharm to others unle ss special pre cautions aretaken, is subject to liability for physical harmcaused to them by the failure of the contractor toexercise reasonable care to take suchprecautions, even though the employer hasprovided for such pre cautions in the contract orotherwise.

4.22. Work on Buildings and OtherStructures on Land. A possessor of land whoentrusts to an independent contractorconstruction, repair, or other work on the land,or on a building or other structure upo n it, issubject to the same liability as though he hadretained the work in his own hands to others on


or outside of the land for physical harm causedto them by the unsafe condition of the structure:

(a) While the possessor has retained possession ofthe land during the progress of the work, or

(b) After he has resumed possession of the landupon its completion.

427. Negligence as to Da nger Inh erent inthe Work . One who employs an independentcontractor to do the work involving a specialdanger to others which he contemplates or hasreason to contemplate when making thecontract, is subject to liability for physical harmcaused to such others by the contractor’s failureto take reasonable precautions against suchdanger.

The introductory comme nts to these rules offers thefollowing rationale:

The rules stated in the following §§ 416-429, unlikethose stated in the preceding §§ 410-415, do not restupon any personal negligence of the employer.They are rules of vicario us liability, making theemployer liable for the negligence of theindependent contractor, irrespective of whether theemployer has himself been at fault. They arise insituations in which, for rea sons of po licy, theemployer is not permitted to shift the respo nsibilityfor the proper conduct of the work to the contractor.The liability imposed is closely analogous to that ofa master for the negligence o f a servant.

(b) Retention of Control byEmployer. Liability is imposed on the employer of thecontractor where the employer retains control of themanner and means of the indep endent co ntractor’sperformance of its work.

Section 414 of the RESTATEMENT (SECOND)OF TORTS (1966) states the common law rule asfollows:

414. Negligence in Exercising ControlRetained by Employer. One who entrustswork to an independent contractor, but whoretains the control o f any part of the w ork, issubject to liability for physical harm to othersfor whose safety the employe r owes a duty toexercise reasonab le care, which is ca used by hisfailure to exercise control with reasonable care.

Comment c. to § 414 notes that in order to succeed in acause of action against an employer , the plaintiff mustprove: (1) the owne r- occupier retained co ntrol andsupervision of the details of the work to the extent thatthe independent contractor was no longer free to do thejob its own way, and (2) such retained controlcontributed to the inciden t.

Similarly, Comment c. states the following as to theliability of a contractor for injuries to em ployees of itssubcontractor:

It is not enough that (the employer) has merely ageneral right to order the work stopped or resumed,to inspect its progress or receive reports, to make

suggestions or recommendations which need notnecessarily be followed, to prescribe alterations ordeviations. Such a general right is usually reservedto employer s, but it does no t mean that thecontractor is controlled as to his methods of work,or as to his operative detail. There must be suchretention of a right of supervision that the contractorwas not free to work his ow n way.

(c) Borrowed Servant Doctrine.Another exception is the "borrowed servant” doctrine.Under the borrowed servant doctrine the employer ofthe independent contractor becomes the employer of theindependent contractor’s employees. Sometimes theemployer is called the "special employer” under thesecircumstances. The following factors have been usedby the courts to find a "borrowed servant” relationship:(1) the right of the special employer to control thedetails of the emplo yee’s performance USF & G v.Goodson, 568 S.W.2d 443 (Tex. Civ. App.-- Texarkana1978, writ ref’d n.r.e.), but a contractual retention ofcontrol is not necessary, if actual control is exercisedExxon Corp. v . Perez, 842 S.W.2d 62 9 (Tex. 1992);(2) if the "special employer” pays the amount of thepremiums for workers compensation insurance to theemployer Marsh al v. Toys-R -Us Ntye x, Inc., 825S.W.2d 193 (Tex. App.--Houston [4th Dist.] 1992, writdenied); (3) the right to hire and discharge, theobligation to pay wages, the carrying of the worker onthe social security and income tax withholding rolls ofthe special emp loyer; and (4 ) the furnishing of to ols tothe employee.

3. Why Contractu al Indemnification?Contractual indemnity provisions are a means ofshifting the burden of loss from o ne potentially liab leperson to another p erson. Co ntractual indemnity isused to alter the apportionment of liability provided byjudicial rules and statutory schemes for "contribution"and "indemnity." Through the use of contractualindemnity agreements, the parties are shifting the risk ofextraordinary liability arising out of a b reach of acommon law duty impo sed upon the parties; the d utyitself is not shifted. The following are examples ofwhen the law allocates liability absent contractualindemnity:

a. Abolition of Common L aw IndemnityExcept in Limited Circumstances. Prior to theabolition of comm on law indemnity, a joint tortfeasorcould obtain inde mnity from an other join t tortfeasorwhere the joint tortfeasors were not in pari delicto as toeach other, as where the injury resulted from a violationof a duty one owed the other. The legislativeComparative Apportionment Schemes relieved the rigorof the comm on law bar against contrib ution in casesinvolving joint tortfeasors who were determined to bein pari delicto .

(1) Areas in Which Common LawIndemnity is Still Availa ble. The adoption of thevarious legislative liability apportionment schemesresulted in the courts' aba ndonme nt of the doc trine ofcommon law indemnity except in the following narrowsituations: (a) cases where the joint tortfeasor's liabilityis purely vicarious, for example a principal liable for anage nt's wrongdoing under the doctrine of respondeatsuperior, or (b) cases where a retailer is merely aninnocent conduit in the sale of a defective product. In


each of these situations, the common law doctrine ofindemnity is still available in Texas as between the jointtortfeasors to shift full liability from the "inn ocent"party to the "w rongdo er."

The effect of the adoption of the variouscomparative legislative apportionment schemes, and theholdings in B&B Au to Supp ly and Duncan v. CessnaAircraft Co., 665 S.W .2d 414 (Tex. 19 84) and theirprogeny, is to limit common law indemnity to thefollowing narrow circumstance s.

In 1980 the Texas Supreme Court in B&B Au toSupply stated

We ... hold that the common law right to indemnityis no longer a vailable between joint tortfe asors innegligence cases ... . Our holding is not intended tobar indemnity in ca ses in which on e party's liabilityis purely vicarious. We express no opinion whetherthis holding would extend to a strict liability case ora case involvin g a comb ination of negligent andstrictly liable tortfeasors.

B&B Auto Su pply, Sa nd Pit, an d Truckin g Co. v.Central Freight Lines, Inc., 603 S.W.2d 814, 817 (Tex.1980).

The Texas Supreme Court in Bonn iwell v. BeechAircraft Corp., 663 S.W.2d 816 (Tex. 1984)summarized the impact of B&B Au to Supp ly andDuncan v. Cessna Aircraft on common law indemn ityas follows:

... Article 2212a has abolished the common lawdoctrine of indemnity between negligent jointtortfeasors (citations omitted). In Duncan, welikewise impliedly ab olished the common lawdoctrine of indemnity b etween join t tortfeasors instrict liability cases.

Only a vestige of co mmon law indemnityremains. In B&B Au to Supp ly, we recognized thesurvival of common law indemnity with re spect toliability of a purely vicarious nature. An analogousindemnity right survives in products liability casesto protect the innocent retailer in the chain ofdistribution. This is all that remains of the commonlaw doctrine of indemnity. (C ourt's empha sis.)

Bonn iwell v. Beech Aircraft Corp., 663 S.W.2d 816,819 (Tex. 1984).

(a) Purely Vicarious Liability.Common law indemnity is still available where a jointtort feas or's liability is purely vicarious, as in the case ofrespondent superior. Bonniwell v. Beech AircraftCorp., 663 S.W.2d 81 6, 819-20 (Tex. 1984);Knutson v. Morton Foods, Inc., 603 S.W .2d 805, 808(Tex. 1980); Cypress Creek Utility Service Co., Inc. v.Muller, 640 S.W.2d 86 0, 864 (Tex. 1982). An agentwho does not follow his agency contract has been heldliable to indemnify his principal from liabilities soresulting. Hartford Casualty Ins. Co. v. Walker CountyAgency, Inc., 808 S.W.2d 681 , 687-88 (Tex.App.--Co rpus Christi 1 991, no writ ).

(b) Innocent Retailer. A retailerwho does nothing except to serve as an innocent

conduit in the sale of a product is entitled to inde mnityfrom those upstream in the distribution ch ain. Duncanat 432; Bonn iwell at 819-82 0; General Motors Corp. v.Simmons, 558 S.W.2d 855, 860 -61 (Tex. 1977);Jackson v. Freightliner Corp., 938 F.2d 40, 42 (5th Cir.1991)--trailer manufacturer failed to prove it was apurely innocent conduit of a defectively-manufacturedtrailer. This vestige of common law indemnity includesindemnity by the product manufacturer for the innocentreta iler 's successful d efense of a prod uct's liabilityclaim. The court in Central Consolidated, Inc. v.Robertshaw Contro ls Co., 868 S.W.2d 9 10 (Tex.App.--Beaumont 1994, no writ) found that the trialcourt erred in granting a summary judgment against theretailer on its claim against the manufacturer for thereta iler 's attorney's fees after the jury found the retailerto be innocent of wrongdoing. The court held that theretailer could continue the litiga tion for the sole purposeof determining whether the manufacturer hadmanufactured a defective product and, as a result, hadto indemnify the retailer for its attorney's fees incurredin defending the products liability action.

(c) Fraud. The cou rt of appea ls, inSmith v. Herco, Inc., 900 S.W.2d 852 , 863 (Tex.App.--Corpus Christi 199 5, writ denied), permitted ajoint tortfeasor to recover by commo n law indem nityfrom the other defendant joint tortfeasor based on ajury’s finding that the second tortfeasor was guilty offraud which c aused the co mmon liab ility.

(2) Strict Construction of Availabilityof Common Law Indemnity. The narrowness w ithwhich the courts construe the availability of commonlaw indemnity is exemplified by the recent case o f LTVEnergy Produ cts Co. v. Chaparral Inspection Co., 827S.W.2d 593 (Tex. App.--Houston [lst Dist.] 199 2, writdenied). In Chaparral, LTV sought to recoverindemnity from Chaparral for $828,472 paid by LTV tosettle a claim brought against it in a Mississipp i lawsuit.LTV along with Joe Bonner, Inc. was sued by HughesEastern when pipe inspected by Chaparral for Bonner,and sold by Bonner to LTV then resold by LTV toHughes Eastern failed. After Bonner and LTV settledthe claims against them in the Mississippi suit, LTVsued Chaparral. The court held that LTV's indemnityclaim did not fall within the remaining common lawrights to indem nity. The co urt held

The case before us does not fall within any of thethree exceptions. LTV and Chaparral had nocontract providing for indemn ification. Chaparr al,as an inspector of the w ell c asin g for LT V'supstream supplier, was not a member of themarketing chain. Finally, there is no agency orsurety relationship between LTV and Chaparral thatwould allow LTV to assert a vicarious liab ilitytheory.

In American Alloy Steel v. Armco, Inc., 777 S.W.2d173 (Tex. Ap p.--Housto n [14th D ist.] 1989, nowrit), the court was faced with a quite similarsituation. American Alloy had a contract to buysteel plating from Armco. Wh en A mer ican Allo y'ssubsequent buyer alleged that the plating wasdefective, American Alloy replaced it and suedArmco for reimbursement under an ind emnitytheory. ... In reaching its dec ision, the Fou rteenthCourt of Appeals stated: "There is no contractual


provision for indemnity in the case before us.Therefore, we must determine w hether the rela tionshipbetween American Alloy and Armco is such that eitherin law or in equity, we m ay imply a right to indemnityon American Alloy's behalf. M ore specifica lly, does animplied obligation of indemnity arise out of thecontractual relationship between the two companies?"

In the case at bar, LTV and Chaparral have a farmore tenuous relationship than the parties inAmerican Alloy, where the me re fact of acontractual business relationship between the partieswas not held to give rise to an implied obligation ofindemnity. We conclude from American Alloy thata situation in which two parties have no contractualbusiness dealings--in fact, no direct businessdealings whatsoever--is an improper place to implyan obligatio n of indemn ity.

See infra IA3a(1) Indemnity Absent ContractualIndemnity Provisions - Common Law: Basic Principlesof Apportionment o f Liability Betwe en Jointly Liab lePerson - Why Contractual Indemnification - Abolitionof Common Law Indemnity Except in LimitedCircumstances - Areas in Which Common LawIndemnity is Still Availa ble for a further discussion ofthe vestiges of co mmon law indemnity.

(3) Unav ailability of Attorney's Fees inEnforcing Common Law Indemnity. Absent somestatutory grounds for obtaining attorney's fees inenforcing a commo n law indemnity, Texas co urts willnot award reimbursement to the common lawindemnitee for its attorney's fees in suing the commonlaw indemnitor to collect on the indemnity. Althoughatto rney's fees incurred in the defense o f a plaintif f'sliability claim are considered "damages" to whichcommon law indemn ity can apply, attorney's feesincurred to collect on the indemnity are notindemnified. This point can be covered in an indemnitycontract. Also, atto rney's fees incurred in the settlementof a claim can be included in the Indemnified Liabilitiescovered by a contractual indemnity which otherwise arenot embra ced in com mon law ind emnity.

b. Abolition of Common Law D efensesand Adoption of Statutory Comp arativ eApportionment Schemes. Wi th the advent of thestatutorily-enacted comparative negligence andComparative Responsibility and ApportionmentSchemes of apportioning liability among jointtortfeasors, the courts have eliminated many of thepreviously available common law defenses thatlessened the opportunity for plaintiffs to recover:doctrine of "no du ty" abolished - Parker v. HighlandPark, Inc., 565 S.W.2d 512, 517 (Tex. 1978); doctrineof "imminen t peril" abolished - Davila v. San ders, 557S.W.2d 770, 771 (Tex. 1977); doctrine of "assumptionof risk" abolished - Farley v. MM Cattle Co., 529S.W.2d 751, 758 (Tex. 1975); and the doctrine of"contributory negligence" (however slight) barredrecovery replaced with "51% Bar R ule" - TEX. CIV.PRAC. & REM. CODE ANN . § 33.001 (Vernon1997). The comparative negligence, comparativeresponsib ility and proportionate responsibility statuteshave given joint tortfeasors, which are jointly andseverally liable, contribution rights to recover, asbetween themselves, payments m ade in excess of theirassigned p ercentage o f liability.

However, the adoption of these legislative systems,the advent of products liability, and the abolition ofcommon law indemn ity, also highlight the need toconsider contractual inde mnity to shift com pleteliability between joint tortfeasors or even from onetortfeasor to another tortfeasor not held responsible atlaw.

c. Cases Prohib iting Contribution orIndemnity from a Responsible Person. In thesituations outlined below, statutes or case law maycreate bars to contribution. The existence of these barsto recovery can be addressed by contractu al indemnity.

(1) Parental Immunity. The TexasSupreme Court in Shoemake v. Fogel, Ltd., 826 S.W.2d933 (Tex. 19 92) held that a dec eased c hild 's est ate'srecovery for wrongful death could not be reduced bythe percentag e of contribu tory negligence of the mother.The child died four months later as a result of a near-drowning in an apartment project swimming pool. Thejury allocated negligence 55% to the apartment ownerand management company and 45% to the mother fornegligent supervision. The supreme court upheld thereduction of the damages on the wrongful death claimof the mother by her 45% comparative negligence, butheld that the parent's comparative negligence could notbe used to re duc e the chil d's e stat e's recovery under thesurvival statute. The do ctrine of pare ntal immunityprevented a comparative negligence claim beingimputed against the child's right of recovery on thesurvival claim. See TEX. CIV. PRAC. & REM. CODEANN. §§ 71.001-.011 (Vernon 1997) (wrongful death),§ 71.021 (Vernon 1997) (survival). The supreme courthad previously adopted restrictions on the parentalimmunity doctr ine in Felderh off v. Felde rhoff , 473S.W.2d 928 (Tex. 1971)- suits arising in the course ofthe parent's business activities, and Jilani v. Jilani, 767S.W.2d 671 (Tex. 1988)-automobile tort action, butreaffirmed its view that a parent retains immunity as to"alleged acts of ordinary negligence which involve areasonable exercise of parental discretion with respectto provisions for the care and neces sities of the child."Felderh off at 933; Jilani at 672.

The supreme court also cited for its holding thefollowing rule in Varela v. American Petrofina Co. ofTexas, Inc., 658 S.W.2d 561, 562 (Te x. 1983 )--adefend ant's claim of contribution is derivative of theplaintiff's right to recover from the joint defendantagainst whom contribution is sought: "Thus, [thecomplex's] claim of contribution depends upon whether[the girl's] estate has the right to recover damages from[the mother]." The court concluded that because thegirl's estate had no viable negligence claim against themother, the comp lex has no viable c ontribution c laimagainst the mother.

The apartmen t lease apparently did not contain acontractual indemnity provision whereby the motheragreed to indemnify the apartmen t owner aga inst (a) allliabilities (100% of damag es on the wro ngful deathclaim and the survival claim) arising out of theconcurrent negligence of the mother and the complex,and/or (b) all damages arising out of a survival action ofthe child's estate, and/or (c) an apportionment ofdamages (45%) on the survival claim due to thecomparative negligence of the mother.


(2) Worker s' Compensation Bar toContribution. In Varela v. American Petrofina Co. ofTexas, Inc., 658 S.W .2d 561 (Tex. 1983) the TexasSupreme Court held that an employer's negligencecould not be considered in a third-party negligenceaction bought by an employee arising out of anaccidental injury covered by workers' compensationinsurance. The jury had determined that the accidentwas attributable as follows: plant owner's negligence(Petrofina)-43%, emp loye r's negligence (HydrocarbonConst ruction)-42%, and employee's negligence(Varela)-15%. The sup reme cou rt reversed the trialcou rt's reduction of the damage award from $606,800to $243,924, or 43% of total damages. The supremecourt held that the Workers' Compensation Act is anexception to the Comp arative Ne gligence Statu te [thenArticle 2212a, § 2(b)] and disallowed contribution fromthe employer. The court concluded:

We hold that Article 8306, § 3 (the Texas W orkers'Compensat ion Act) is an exception toArticle 2212a, § 2(b) (the Comparative NegligenceStatute). Whe n read together th ose twoArticles indicate the intent of the Legislature thatwhere the third party d efendant's neglig ence isgreater than that of the em ployee, the employeeshall recover the total amount of damages as foundby the jury diminished only in proportion to theamount of the negligence attributed to theemployee....Further, a defenda nt's claim of contrib ution isderivative of the plaintiff's right to recover from thejoint defendant against whom contribution issought. (citing authoriti es) The Workers 'Compensation Act, Article 8306, § 3, precludes anyright by Varela to a cause of action againstHydrocarbon for common law negligence. (omittedauthority) Since Varela had no cause of actionagainst Hydrocarbon, Petrofina had no claim forcontribution from Hydrocarbon. Since Petrofinahad no claim for contribution, § 2(e) of Art. 2212ahas no application to this case.

Id. at 562-63.

The enforceability of a contractua l indemnitypassing back to the employer a third-party's negligenceover the "Workers' Compensation Bar" has beenupheld. Enserch Corp. v. Parker, 794 S.W .2d 2, 7(Tex. 1990). The Texas Workers' Compensation Actprovides that a subscribing employer has no liability toreimburse or hold another pe rson harmless for ajudgment or settlement resulting from injury or death ofan employee "unless the employer executed, before theinjury or death occurred, a written agreement with thethird party to assume the liability." Texas Workers'Compensation Act, TE X. LABOR CODE § 417.004(Vernon 1996), repealing TEX. REV. CIV. STAT.ANN. Art. 8308 -4.04 (V ernon 19 96), forme rlyArt. 8306, § 3(d) (Vernon 1986). § 417.00 4 of theTexas Labo r Code prov ides as follows:

In an action fo r damages brought by an injuredemployee, a legal beneficiary, or an insurancecarrier against a third party liable to pay damagesfor the injury or death under this Ch apter that resu ltsin a judgment against the third party or a settlementby the third party, the employer is not liable to the

third party for reimbursement or damages based onthe judgmen t or settlement unless the employerexecuted, before the injury o r death o ccurred, awritten agreement with a third party to assume theliability. (Empha sis added .)

Suits brought by the indemnitee (the IndemnifiedPerson) under an in demnity agreement against theindemnitor (the Indemnifying Person) in the context ofan employer having indemnified a third party forinjuries occurring to the employer’s em ployees du e inpart to the negligenc e of the emp loyer are co mmonlyreferred to as "third-party- over actions”. The "writtenagreeme nt” requirement in the Workers’ CompensationAct for overcoming the "Workers’ Compensation Bar”prevents oral indemnity agreements from beingenforced against an emp loyer for employee injuries.

However, as noted infra in the discussion of theTexas Supreme Court's holding in Ethyl Corp. v. DanielConst. Co., care has to be used in drafting a contractualindemnity to overcome both the "express negligence"test of the Texas Supreme Court and the W orkers'Compensation Bar. The court in Ethyl held that thecontractual indemnity in the contract between Ethyl (theproperty owner) and Daniel (the contractor/employer)requiring Daniel to indemnify Ethyl for all injuries topersons "caused by the negligence or carelessness ofContractor" was not adequa te either to inde mnify Ethylagainst an injury to Daniel's employee caused by theconcurring negligence of Ethyl (90%) and Daniel (10%)or even against the portion of the negligenceattributable to Daniel.

The indemnity provision did not exp ressly state thatit covered injuries occurring as a result of thenegligence of the indemnified person (Ethyl) and as tothe portion attributable to D aniel, it did not ex presslystate that it covered cases where Daniel wasconcurre ntly negligent. "Ethyl ne xt contend s it isentitled to comparative indemnity to the extent ofDaniel's negligence which the jury found to be 10%.However, the contract in question contains no provisionfor contractual comparative indemnity." Ethyl at 708.Also see B-F-W Const. Co., Inc. v. Garza , 748 S.W.2d611 (T ex. App.--F t. Worth 1 988, no writ ).

4. Historical Relationship of Contribution

and Indemnity .

a. Doctrine of in Pari D elicto. EarlyEnglish and American courts refused to adjust thefinancial burdens between d efendants who wereregarded by the court a s being equ ally blamewo rthy.Therefore, joint tortfeasors who were "in pari delicto "had no rights to contribution at common law. However,the courts held that they had power in equity to aid atortfeasor who was rela tively blameless by grantingindemnity. See W. P. Keeto n, PROSSER ANDKEET ON ON TORT S (5th ed. 1985).

b. Prior to 1980, Indemnity was Grantedin Texas if the Tortfeasors were not in Pari De licto.Prior to 1980, Texas courts viewed the availability ofindemnity between jointly liable defendants based onwhether: (1) the court viewed the defendants as beingequally at fault relative to the plaintiff (in pari delicto )or (2) the defen dants were n ot equally at fault (not inpari delicto) with indemnity being allowed ("an all or


nothing approa ch to indem nification"). See Phifer,C o n t r i b u ti o n and Ind emni ty , H A N D L I N GINSURANCE AND TORT CLAIMS SEMINAR(UNIV. HO U. 1991).

The courts envisioned two torts: one tort committedby the defenda nts against the pla intiff, the secondcommitted by one of the defendants against the other,which gave rise to indem nity.

For example, ind emnity was held to be availab le incases where an employer was held to be liable alongwith its employee for the emp loyee's negligentlyinflicting an injury on a third person. In such cases, thecourts held that the employer and the employee werenot in pari delicto , in other words n ot equally at fault.The employer who paid the plaintiff's damages wasentitled to indemnity from the employee. This princip lewas stated by the Texas Supreme Court in Austin RoadCo. v. Pope, 216 S.W .2d 563 , 565 (Tex. 1949) asfollows:

Thus, where the parties are not equally guilty, theprincipal delinquen t may be held responsible to acodelinquent for damages paid by reason of theoffense in which both participated in differentdegrees as perpetrators ... . In order to determinewhether the loss should be shifted from onetortfeasor to another the proper a pproac h is toconsider the one seek ing indemn ity as though hewere a plaintiff suing the other in tort, and thendetermine whether such a one as plaintiff, thoughguilty of a wrong a gainst a third pe rson, isnevertheless entitled to recover against his co-tortfeasor. Texas L. Rev., Vol. XXVI, p. 150.

c. 1980 Abolition of Common LawIndemnity Except In Narrow Exceptions. After1980, in the absenc e of a well -drafted contractualindemnity provision, common law indemnity for tortdamages is not available in Texas except under narrowexceptions.

(1) L e g i s l a ti v e E n a c t m en t o fContribution and C ompar ative Negligence Statutes.Prior to the enactment in 1987 of the current scheme ofComparative Respon sibility and Ap portionm ent, thelegislature had enacte d statutes in 1917 and 1973establishing rights of contrib ution betwe en certainjointly liable tortfeasors. Texas courts developed anelaborate body of indemnity law and coo rdinated it withthe 1917 and 1973 Statutes.

(a) 1917 Statute. In 1917, thelegislature enacted a mechanism for jointly andseverally liable defendan ts to obtain contribution fromother jointly and severally liab le defenda nts. See§§ 32.001-32.003 of the Civil Practice and RemediesCode, formerly TEX. REV. CIV. STAT. ANN.Art. 2212 (referred to herein as the "1917 Statute").

i) C o n tr ibuti o n S c h e m e:Equal Apportionm ent Ru le. The 19 17 Statuteprovides that a jointly liable tortfeasor may recoverfrom the other liable tortfeasors "an amount determinedby dividing the nu mber of all liable defendants into thetotal amount of the judgment." TEX. CIV . PRAC . &REM. CODE ANN. § 32.003(a). (Vernon 1997)

ii) Superseding Legislativ eContribution Systems. Although the 1917 S tatuteapplied to all tort actions, a separate scheme fornegligence actions was se t up in 1973. Further in 1987,an elaborate amendm ent set up a statu tory scheme of"Comparative Respon sibility" for pro ducts liabili ty,professional liability cases, negligence and mixedtheory cases. The legislature subsequently enacted a"Prop ortionate Responsibility" scheme as a part of the1995 to rt reforms. Am endmen ts to § 33.001 and theireffective date are discussed below (the "1995Proportionate Responsibility Statute").

iii) P r e r e q u i s i t e s f o rContribution. There are four prerequisites forrecovery of contribution under the 1917 Statute:

a) J u d g m e n t A g a i n stDefendant. The first prerequisite is that a court musthave rendered a judgment against the defendant seekingcontribution. TEX. CIV. PRAC. & REM. CODEANN. § 32.002 (Vernon 1997).

b) Payment of Judgment.The defendant seeking contribution must have paid thejudgment so as to disch arge all joint tor tfeasors' liabilityto the plaintiff, or at least a "disp roportio nate share" ofthe common liability. TEX. CIV. PRAC. & REM.CODE A NN. § 32.002 (V ernon 1997).

c) Joint Tortfeasor. Theone from whom contribution is sought must be a jointtortfeasor with the defendant seeking contribution.TEX. CIV. PRAC. & REM. CODE ANN. § 32.002(Vernon 1997).

d) No Other Applica bleContribution Scheme. There must be no otherstatutory or comm on law rights o f contribution,indemnity, or other recovery between the defendantseeking contribution and the ones from whomcontribution is sought. TEX. CIV. PRAC. & REM.CODE A NN. § 32.001(b) (V ernon 1997).

(b) 1973 Statute. In 1973, thelegislature adopted a Comparative Negligence andContribution Statute applicable to apportionment ofcontribution between tortfeasors whose joint andseveral liability is grounde d in negligenc e alone. Seeformer TEX. CIV. PRAC. & REM. CODE ANN.§ 33.001 , et seq. (Vernon 1997) which was originallyenacted as TEX. REV. CIV. STAT. ANN. Art. 2212a(Vernon 1973) (herein referred to as the "1973Statute").

i) Application to Contr ibutionfor Cases Involving Only Negligence between 1973and 1987. The Comparative Negligence andContribution scheme was superseded by the 1987Statute. Therefore, the 1973 Statute applies to casesarising after Septem ber 1, 19 73, and fo r which suit isfiled before Septemb er 1, 1987, who se joint and severalliability is grounded in negligence a lone. See GeneralMotors Corp. v. Simmons, 558 S.W.2d 855, 861-62(Tex. 1977) in which the Texas Supreme Courtconcluded that the 1973 Statute did not apply to amixed theory of recovery case where a manufacturerwas held liable b oth for neglige nce and in stric t liabilityand the employer of the driver of the car was he ld to be


liable in negligence. In Simmons, the Texas SupremeCourt held that this type of mixed theory case wasgoverned by the Equal Apportionment Rule under the1917 Statute. This position was subsequentlyoverturned in Duncan v. Cessna Aircraft Co., 665S.W.2d 414 (Tex. 1984) a nd after that by the 1987Statute.

ii) Contr ibutio n S c h e m e:Percentage Comparison and Allocation System. The1973 Statute substituted a percentage comparison andallocation system for the equal sharing scheme of the1917 Statute and modified the joint and several liabilityrule.

a) A b o l i t i o n o fContributory Negligence Bar . The 19 73 Statutereplaced the common law rule that any contributorynegligence (however slight) of the plaintiff com pletelybarred plaintiff's recovery w ith a system of "modified"comparative negligence. Under the ModifiedComparative Negligence system, the jury is required toassign to the plaintiff and to each defendant apercentage of the total negligence tha t proximate lycaused the p lain tiff's injuries. If the plaintiff is found tohave contributory negligence equal to or less than thecombined negligence of the defendants, then thepla intif f's damages are proportionately reduced, butrecovery is not barred. Art. 2212a, § 1 (Vernon 1973),codified as former TEX. CIV. PRAC. & REM. CODEANN. § 33.001 (b) (Vernon 1986).

b) D e f e n d a n t M o r eNegligent than Plaintiff. Each defendant who senegligence equals or exceeds the plaintiff's contributorynegligence is jointly and severally liable for the entireamount of the plaintiff's judgment, but has rights ofcontribution for amounts in excess of such defend ant'spropo rtionate share. Contribution was in propor tion tothe percentage of negligence attributable to eachdefendan t. Art. 2212a, § 2(b) and (c) (Vernon 1973),as codified as former TEX. CIV. PRAC. & REM.CODE A NN. §§ 33.012 , 33.013 (Vernon 1986 ).

c) Defendant Less Negligentthan Plaintiff. In cases where the combinednegligence of the defendants was equal to or greaterthan the contributory negligence of the plaintiff, eachdefendant whose negligence was less than the p lain tiff'scontributory negligence was liable only for that portionof the j udg men t tha t rep rese nts s uch defend ant'spercentage of negligence. Art. 2212a § 2(c) (Vernon1973), codified as former TEX. CIV. PRAC. & REM.CODE ANN. § 33.013 (Vernon 1986). If the plaintiffwas more neg ligent than the defendant, then thepla intif f's contributory negligence would still barrecovery against the defe ndant. Murff v. U.S., 785 F.2d552 (5th Cir. T ex. 1986 ), cert. denied, 479 U.S. 823(1986); Jannette v. Deprez, 701 S.W.2d 56 (Tex.App.--H ouston [5th Dist.] 198 5, writ ref'd n.r.e.).

Example: Assume that A, B, and C negligently injurePlaintiff.

In a suit filed before September 1, 1987, the juryfinds that Plaintiff's damages total $100,000 andthat the percen tages of negligence are as follows:Plaintiff-- 15%, A--45%, B--30%, C--10%. The1973 Statute pro duces the following results:

(1) Plaintiff may recover $85,000 becausehis contributory negligence reduces the $100,000 by15%.

(2) A and B ar e jointly and severally liab lefor the entire $85,000 because their percentages ofnegligence, 45% and 30% respectively, are higherthan Plaintiff's 15% contributory negligence.

(3) C is liable to Plaintiff for only $10,000because his 10% of negligence is less than Pla intif f's15% of contributory negligence.

(4) A has rights of contribution from B notto exceed $30,000 and from C not to exceed$10,000. Therefore, A's ultimate liability fordamages is $45,000.

(5) B has rights of co ntribution from A notto exceed $45,000 and from C not to exceed$10,000. Therefo re, B's ultimate liability fordamages is $30,000.

Since the 1973 Statute doe s not address theinsolvency of a liable defe ndant, in the ab ove exam pleA bears the b urd en o f B's insolvency, but C bears noneof the burd en of B's insolv ency.

The above ex ample is contained in Edgar and Sales,4 TORTS AND REMEDIES , Ch. 102 , Contributionand Ind emnity 38 (1991).

(2) Adop tion of the StatutoryComparative Negligence and Contribution Systemas Abolishing Common Law Indemnity .

(a) 1980: B&B Auto Su pply . TheTexas Supreme Court in B&B Auto Supply, S and P it,and Trucking Co. v. Central Freight Lines, Inc., 603S.W.2d 814 (T ex. 1980 ) held that there could not becommon law indemn ity due to the adoption of theComparative Negligence and Contribution Statu te in1973. The B&B Au to Supp ly case involved twodefendan ts who were h eld jointly liable for thepla intif f's injuries and the jury apportioned negligencebetween the defendan ts as being 1/3 to B&B and 2/3 toCentral Freight. The court reasoned that the commonlaw doctrine of indemnity, totally shifting liability fromone tortfeasor to another, was inconsistent with the1973 Comparative Negligenc e and Co ntribution Sta tutethat required the trier of fact to attribute a percentage ofnegligence to each tortfeasor. The supreme courtpointed out that the 1973 Contributory Negligence andContribution Statute displaced the "all or nothing"defenses of contributory negligence, n o duty, imminentperil, and assumption of the risk. The supreme courtheld:

Since the enactme nt of Art. 2212a we have soughtto abolish doctrines directed to the old choice oftotal victory and total defeat. [Citations omitted.]The policy underlying these decisions and theenactment of Art. 2212a was to abolish traditionalcommon law rules which required an all or nothingresult and to return trials of ne gligence cas es to tortconcep ts of negligence and comparative negligence.The common law doctrine of indemnity is yetanother of these common law rules which results inshifting total respon sibility for a tort from o ne party


to another. Under Art. 2212a, there is no longer anybasis for requiring one tortfeasor to indemnify anothertortfeasor when both have been found negli gent andassessed a p ercentage o f fault by the jury.

Id. at 817.

(b) Subsequent Cases. Also seethe following subsequent Texas Supreme Courtdecisions reaffirming the holding that the ComparativeNegligence and Contribution Statute abolished commonlaw indemnity even though abolition of the doctrine isnot mentioned in the statute: Aviation Office ofAmerica, Inc. v. Alexander & Alexander of Texas, Inc.,751 S.W.2 d 179, 180 (Tex. 198 8) (per curiam);Bonn iwell v. Beech Aircraft Corp., 663 S.W.2d 816,819 (Tex. 1984); Cypress C reek Utility Se rvice Co.,Inc. v. Muller, 640 S.W.2d 860 , 863 (Tex. 1982).

d. 1 9 8 4 J u d i c ia l A d o p t i o n ofComparative Causation and ApportionmentScheme.

(1) Setting for Judicial Intervention. Prior to Duncan, there were thre e separate theories forrecovery in products liability cases and each had adifferent means of handling contribution betweenjointly liable defendants. Dunc an v. Ces sna Aircra ftCo., 665 S.W.2d 414 (Tex. 1984).

(a) Mu ltiple Products LiabilityRecovery Theories. A plaintiff could recover on aproduc ts liability suit on tort theories of negligence andstrict liability and on the contract theory of breach ofwarranty. In 1967 the Texas Supreme Court hadadopted Section 402A of the RESTATEMENT(SECOND) OF THE L AW OF TOR TS (1966) as thebasis for the strict liability cause of action. McKisson v.Sales Affiliates, Inc., 416 S.W.2d 779, 783-784 (Tex.1967).

(b) Different ApportionmentSchemes Applicable to Each Theory of Recovery.

i) 1917 Statute. The 1917Statute applied to contribution claims between jointlyliable tortfeasors liable under the tort theories ofnegligence and strict liability, but not to mixed theorycases involving the statu tory contrac t action of breachof warranty.

ii) 1973 Statute. The 1973Statute and its comparative negligence and contributionscheme applied only to negligence actions. Therefore,contribution claims involving cases where thedefendan ts were held liable only on theories ofnegligence and strict liability wer e governe d by theequal apportionment contribution scheme of the 1917Statute and did not have the benefit of the comparativenegligence apportionment scheme of the 1973 Statute.In General Motors Corp. v. Simmons, the TexasSupreme Court concluded that the 1917 Statute, ratherthan the 1973 Statute, applied to cases in which one ofthe defendan ts was strictly liable. General M otorsCorp. v. Simmons, 558 S.W.2d 855 , 861-63 (Tex.1977).

iii) No Statutory Framework forMixed Theory Recovery Cases. There existed no

statutory or judicial fram ework with in which tocompare the fault or causa tion to perm it contribution inmixed theory cases where one or more of thedefendan ts were held liable on all three theories:negligence, strict liability and breach of warranty. Thelegislature failed to rectify the syste m. See Comm ent,Duncan v. Cessna Aircraft Co.: "Sooner or Later" IsNow, 36 BAYLO R L. REV. 429, 457 -59 (1984).

(2) Duncan v. Cessna Aircra ft. InDuncan v. Cessna Aircraft Co., 665 S.W.2d 41 4 (Tex.1984) the supreme court felt compelled to enact its owncomparative and contribution scheme due to thecontinued inaction of the Texas Legislature. The courtadopted the state's first common law contributionscheme.

Duncan involved a claim for contribution orindemnity by a strictly liable manufacturer against theallegedly negligent pilot fo r the dama ges suffered b y apassenger in the plane. The court overruled GeneralMotors Corp. v. Simmons and held that the 191 7 Statutedid not apply to contribution actions involv ing produ ctsliability claims and the possibility of having to comparethe negligence, strict liability and breach of warrantyactions of co- defendants. The court reasoned that thedrafters of the 1917 Statute could not have intended thatthe 1917 Statute's equal apportionment contribution rulewould apply to the multiple theories of recovery andloss allocation problems that courts had encounter ed inproduc ts liability cases. The court also found supportin the T exa s Le gisl atur e's adoption of the 1973 Statuteas favor ing a Compara tive Respo nsibi l i tyAppo rtionment S cheme. Id. 427-28.

(a) Scope of Dunca n's ComparativeResponsibility Apportionment Scheme. Thecourt-made Comparative Respon sibility ApportionmentScheme of Duncan was subsequently replaced by the1987 Statute. The Duncan Comparative Respon sibilityand Apportionment Scheme therefore applies to anyproduc ts case tried after July 13, 1983 and filed beforeSeptember 1, 1987, in which the fact finder assignsliability to one of the jointly liable defendants on atheory other than negligence.

(b) A Pure Compa rativeCausation Scheme. The Duncan scheme compares"causation" rather than fault, because strict liability andbreach of warranty actions do not involve theassessment of fault, and causation is a common elementto strict liability, breach of warranty and negligenceactions. The Duncan scheme is regarded as a "pure"Comparative Causation Scheme since it possesses theelements outlined be low. See Edgar and Sales, 4TORTS AND REMEDIES, Ch. 102, § 102.05[3][a](1991).

i) Plaintiff Able to RecoverEven Thoug h Plaintiff 's Contr ibutory Neglige nce isGreater Than 50% . Under the Duncan scheme, thepla intif f's damages are reduced by the percentage ofnegligence a ttributable to the plaintiff and the plaintiffis allowed to recover from the defendants even thoughthe plaintiff's contributory negligence exceeds thecombined causation of the defendants. [Compare to the1973 Statute which would bar recovery in the event thepla intif f's negligence exceeds the combined negligenceof all defendants; also compare to the 1987 Statute and


its Comparative Responsibility and ApportionmentScheme which bars recovery in a st rict liability orbreach of warra nty a ctio n if th e pl aint iff's percentage ofresponsib ility is 60% or more; former TEX. CIV.PRAC. & REM . CODE AN N. § 33.001(b) and the1995 Proportionate Responsibility Statute which barsrecovery if the plaintiff is 51% responsible for theharm, whether by negligent act or omission, by anydefective or unreasonably dangerous product, by otherconduct or activity that violates an applicable legalstandard, or by any co mbination o f these; § 33.003 ofthe 1995 Propo rtionate Res ponsibility Statu te.]

ii) Joint and Several Liability.Under the Duncan Comparative Causation Scheme,each defendant to whose product the jury attributes anydegree of causation is j ointly and seve rally liable for thefull amount of the plaintiff's award. [Compare to the1973 Statute which limited a defen dant's liability to saiddefen dan t's percentage of negligence in cases wheresuch defendant's liability was less th an th e pl aint iff'sshare of contributory negligence; also compare to the1987 Statute providing for a defendant's joint andseveral liability in ca ses w here the defend ant'spercentage is more than 10% and plaintiff's percentageis zero, or where defendant's percentage is more than20% and plaintiff's percentage is less than 60%; TEX.CIV. PRAC. & REM. CODE ANN. § 33.013(b),(c)(Vernon Supp. 1996); and the 1995 P roportio nateRespon sibility Statute which imposes joint and severalliability only in cases wh ere the liable d efendant isgreater than 50% re sponsible fo r the harm; § 33.013(b)of the 199 5 Prop ortionate R esponsib ility Statute.]

(3) Bonniw ell v. Beech Aircraft. InBonn iwell v. Beech Aircraft Corp., 663 S.W.2d 816,819 (Tex. 1984 ) the Texa s Suprem e Court he ld that ithad "impliedly abolished the common law doctrine ofindemnity between joint tortfeasors in strict liabilitycases" in Duncan v. Cessna Aircraft Co., 665 S.W.2d414, 432 (Tex. 1984 ).

5. 1987 Statute and Appor tionment Underthe Comparativ e Respo nsibility an d App ortionmentScheme. In 1987, the Texas Legislature enacted "tortreform" amendm ents to the Civil Practice and RemediesCode. TEX . CIV. PRAC. & REM. CODE ANN.§§ 33.001-.016 (Vernon Supp. 1996). See Parsons,Contribution and Indem nity in Texas: Seven Yearsafter Tort Reform , INSURANCE LAW SEMINAR(UNIV. HOU . 1994); T ade, Indemnification - WhoWins, Who Loses Under Texas, Louisiana andMari time Law, 20TH ANNUAL OIL, GAS &MINERAL LAW INSTITUTE (UNIV. TEX. 199 4);Zummo, Contribution, Indemnification and ComplexSettlement Issues, BUSINESS DISPUTES THROUGHCHANNELS OF DISTRIBUTION (STATE BAR OFTEXAS PDP 1994); H olman, Contribution andIndem nity, 1994 ADVANCED CIVIL TRIAL LAWSEMINAR (CORPU S CHRIST I BAR ASS'N 19 94);Sanders and Joyce , "Off to the Races": The 1980 's TortCrisis and the Law Reform Pro cess, 27 HOU L. REV.207, 263 (19 90); Phifer , Contribu tion and Indem nity,HANDLING INSURANCE AND TORT CLAIMSSEMINAR (UNIV. HOU. 1991); Watson, ComparativeRespon sibility Under the New Civil Justice Legislation,51 TEX. B.J. 688 (1988); Steenson, Recent LegislativeResponses to the Ru le of Joint an d Severa l Liability ,TORT & INS. L.J. 482, 493 (1988); Mo ntford and

Barber, 1987 Tex as Tort Reform : The Quest for aFairer and More Predictable Texas Civil JusticeSystem: Part One, 25 HOU. L. REV . 59, 60 (1988).

a. Applicability. The ComparativeRespon sibility Appor tionment Sc heme ap plies to alltort cases filed on or after September 2, 1987 (exceptfor certain enumerated actions) and prior to theeffective date of the 199 5 Prop ortionate R esponsib ilityStatute.

(1) Section 33.001. Section 33.001 ofthe 1987 S tatute provid ed that the Co mparativeRespon sibility Appor tionment Sc heme is applicab le tothe following actions:

(a) Strict Liability or Breach ofWarranty . The 1987 Statute provided that it wasapplicab le to actions for personal injury, p ropertydamage, or death and in which at least one defendant isfound liable on a basis of "strict tort liability, strictproduc ts liability, or breach of warranty underChapter 2, Business and Commerce Code." forms§ 33.001 (b) (Histor ical and Statu tory Notes Vernon1997).

(b) Negligence. The 1987 Statuteprovided that it was applicable to negligence caseswhich include cases involving

i) damages for personal injury,property damage , or death, § 33.001(a) (Historical andStatutory Notes Vernon 1997); and

ii) cases seeking damages foreconom ic loss, § 33.001(c) (Historical and StatutoryNotes Vernon 1997), including but not limited to"negligence relating to any professional servicesrendered by an architec t, attorney, certified publicaccounta nt, real estate bro ker or agen t, or engineer ... ."

(2) Exclusions. The 1987 Statute wasnot applicable to the following types o f actions:

(a) I n t e n t i o n a l T o r t s .Section 33.002(a) (Historical and Statutory NotesVernon 1997).

(b) Exemplary Damage Claims.Claims for exemplar y damage s included in a n action towhich the statute otherwise applies. TEX. CIV. PRAC.& REM . COD E ANN . § 33.00 2(a) (Histo rical andStatutory Notes Vernon 1997).

(c) W o r k e rs ' Compen sa t i o nClaims. Actions to collect workers' compensationbenefits or actions against an employer for exemplarydamages arising out of the death of an employee.§ 33.002(b)(1) (Historical and Statutory Notes Vernon1997). See Otis Elevator Co. v. Joseph, 749 S.W.2d920 (Tex. App.-- Houston [1st Dist.] 1988, nowrit)-em plo yee 's 65% n egligence no t a bar or offset torecovery for wrongful death and exemplary damages foremp loye r's gross negligence as to claims arising underWorkers' Comp ensation Ac t, TEX. LABOR CODE§ 406.033 (Vernon 19 96) repealing 8308-3.04(repealed 1993) and formerly Art. 8306, § 3(a), TEX.REV. CIV. ST AT. ANN . (Vernon 1986).


(d) DTPA. Certain actions underthe Texas DTPA (SubChapter E, Chapter 17, TexasBusiness & Commerce Cod e), except as otherwiseprovided in § 17.50 of the DTPA. TEX. CIV. PRAC.& REM . CODE ANN. former § 33.002(b) (Historicaland Statutory Notes Vernon 1997); see TEX . BUS. &COMM . CODE AN N. § 17.50(b)(1) (Vernon 19 97).

(e) Insurance Code. Actions againstinsurers for unfair practices under Chapter 21 of theTexas Insurance Code. TEX. CIV. PRAC. & REM.CODE ANN. former § 33.002 (b)(3) (Historical andStatutory Notes Vernon 1997).

b. Comparative Responsibility andApportionment Defined. Under the 1987 Statute theconduct of each claimant, each defendant, and eachsettling party is to be compared by the trier of fact whodetermines each person's "percentage of responsibility."The "percentage of responsibility" was defined asfollows:

... that percenta ge attributed by the trier of fact toeach claimant, each defendant, or each settlingperson with respect to c ausing or co ntributing tocause in any way, whether by negligent act oromission, by any defective or unre asonablydangerous product, by other co nduct or ac tivityviolative of the applicable legal standard, or by anycombination of the forego ing, the perso nal injury,property damage, death, or other harm for whichrecovery o f damages is sought.

TEX. CIV. PRAC. & REM. CODE ANN. § 33.011(Vernon Supp. 1996).

c. Tort Reform Limitation on Joint andSeveral Liability. The common law principle of jointand several liability for the damages resulting from an"indivisible wrong or to rt" was replaced under the 1987Statute with the "tort reform" concept that a defendantis generally liable "only for the percentage of thedamages found by the trier of fact equal to thatdefend ant's percentage of responsib ility with respect tothe personal injury, property damage, death, or otherharm for which the damag es are allowe d." TEX. CIV.PRAC. & REM. CODE ANN. § 33.013(a) (Vernon1997).

d. Exceptions in Which Joint and SeveralLiability Still Imposed. The 1987 Statute howeverallowed significant exceptions to the this limitation onjoint and sev eral liability.

(1) Pure Negligence C ase. In a case inwhich all defendants are liable for negligence, none forstrict liability, joint and several liability results for thedefendan ts with the following percentages ofcompa rative respo nsibility:

(a) Defendants With Greater than20% Responsibility and Greater than Claima nt'sPercentage. In cases where a defendant's percentage ofresponsib ility is more than 20% and that percentage isgreater than the percentage of responsib ility attributedto the claimant, the defendant is jointly an d severallyliable for the plaintiff 's damages. TEX. CIV. PRAC. &REM. CODE A NN. § 33.013(b ) (Historical andStatutory Notes Vernon 199 7). C&H Nationwide,

Inc. v. Thompso n, 810 S.W.2d 2 59, 275 (Tex.App.--Houston [1st Dist.] 19 91), aff'd in p art and rev'din part, 1994 WL 278167.

Example: Plaintiff sues defendant 1 and defendant 2.The jury finds both defendants liable based uponnegligence. There are no findings of strict liability orbreach of warranty. The jury finds the plaintiff is 25%responsible, defendant 1 is 50% responsible, anddefendant 2 is 25% responsible.

The case is a pure negligence case. There is no barto recovery b ecause the plaintiff is less than 51%responsible. The plaintiff's recovery will however bereduced by 25% . Defenda nt 1 is jointly and severallyliable, since defendant 1 is more responsible than theplaintiff and is over 2 0% resp onsible. D efendant 2 ismore than 20% responsib le, but is not mo re respon siblethan the plaintiff; therefore de fendant 2 is no t jointlyand severally liable.

The above ex ample and the other examplescontained in this discussion of the 1987 Statute arecontained in Watson, Comp arative R esponsib ilityUnder the New Civil Justice Legislation, 51 TEX. B.J.688 (1988).

(b) Innocent Plaintiff andDefendant Greater than 10 % R esponsib le. In caseswhere a defendant's percentage of responsibility is morethan 10% and no percentage of responsibility isattributed to the claimant, the defendant is jointly andseverally liable for the claimant's dam ages. TEX. CIV.PRAC. & REM. CODE ANN. § 33.013(c) (Historicaland Statutory Notes Vernon 1997).

Example: Plaintiff sues defendant 1 and defendant 2.The jury finds both defendan ts liable for negligence,and there are no findings of strict liability or breach ofwarranty. The jury finds the plaintiff is zero percentresponsible, defendan t 1 is 80 percent responsible, anddefendant 2 is 20% responsible.

The case is a pure negligence case. The plaintiff isnot barred from recovery, and recovery is not reduced.Defendant 1 is more responsible than plaintiff and morethan 20% respons ible; therefore d efendant 1 is jointlyand severally responsible. Defendant 2 is moreresponsib le than the plaintiff, but not "more than 20%responsib le," but is still jointly and seve rally liablebecause he is more than 10% responsible and theplaintiff is not respon sible. How ever, if defend ant 2had only been 10 % respo nsible, he wo uld not have beenjointly and severally liable.

(2) Mixed Case with Strict Liability orBreach of Warranty With Threshold Levels ofComparative Responsibility. Joint and severalliability is imposed on defendants in cases in which atleast one defendan t is found liable on a theory of stricttort liability, strict products liability, or breach ofcommercial warranty if the follow ing thresholds ofcompa rative liability exist:

(a) Defendants with Greater than20% Responsibility. Defendants with greater than20% responsib ility. TEX. CIV. PRAC. & REM. CODEANN. § 33.013(b) (Historical and Statutory NotesVernon 1997).


Example: Plaintiff sues defe ndant 1 and defendant 2.The jury finds both defendants liable based upon strictliability. The jury find s the plaintiff is 20% responsible,defendant 1 is 50% re sponsible a nd defend ant 2 is 30%responsible.

The case is a strict liability case. The plaintiff is notbarred from recovery because the plaintiff is less than60% responsib le. Howev er, the plaintiff's recovery isreduced by the 20% he is found to be responsible.Although the general ru le is "no joint and severalliability," since each defendant is over 20% liable, eachdefendant is jointly and severally liable.

(b) Innocent Claimant andDefendant Greater than 10 % R esponsib le. If thepercentage of respons ibility of the defendant is morethan 10% and the claimant's percentage ofresponsib ility is zero. TE X. CIV. PRAC. & REM.CODE ANN. § 33.013(c) (Historical and StatutoryVernon 1997).

Example: Plaintiff sues defendant 1 and defendant 2.The jury finds defendant 1 and defendant 2 liable fornegligence and strict liability. The jury finds theplaintiff is 1% responsible, defendant 1 is 79%responsible and defendant 2 is 20% responsible.

The case is a mixed case. The re is no bar torecovery and the plaintiff's recovery will be reduced by1%. The "over 20 percent" exception to the no jointand several liability rule applies to defendant 1. Neitherthe "over 20% exception" nor the "over 10% p ercent"exception apply to defendant 2.

(3) Toxic Torts. Joint and severalliability results if the death, per sonal injury, or prop ertydamage results from either (a) the disposition,discharge, or release into the environment of anyhazardous substance, or (b) a "to xic tort." TEX. CIV.PRAC. & REM. CODE ANN. §§ 33.013(c)(2)-(3)(Historical and Statutory Notes Vernon 1997). " Toxictorts" are defined in § 33 .013(c)(3) as follows:

... a cause of action in tort or for breach of impliedwarranty under Chapter 2 , Business & CommerceCode, arising out of exposure to hazardouschemicals, hazardous wast es , hazardoushydrocarbons, similarly harmful o rganic or mineralsubstances, hazardous radiation sources, and othersimilarly harmful substances (which usually, butneed not necessarily, arise in the work place), butnot including any "drug" as defined inSection 81.001 (3), Civil Practice and RemediesCode.

e. Bars to Recovery. The ComparativeRespon sibility and Apportionment Scheme of the 1987Statute provided certain bars to recovery if theclai man t's compar ative respo nsibility is greater than thefollowing statutory ceilings:

(1) If Only Ne gligence is Found, the51% Bar Rule Applies. If only negligenc e liabilitywas found between the plaintiff and all of thedefendants, the plaintiff may recover only if theplaintiff's responsibility is 50% or less. TEX. CIV.PRAC. & REM . COD E ANN . § 33.001(a) and (c)

(Historical and Statutory Notes Vernon 1997) (referredto as the "51% Bar R ule").

(2) If Strict Liability or Breach ofWarranty is Found, the 60% Bar Rule Applies. If atleast one defendant was found liable based upon strictproduct liability or strict tort liability, or breach of UCCwarranty, the plaintiff was permitted to recover o nly ifthe plaintiff's responsib ility was less than 60%. TEX.CIV. PRAC. & REM. CODE ANN. § 33.001(b)(Historical and Statutory Notes Vernon 1997).

(3) If Mixed Liability is Found, the60% Bar Rule Applies. In cases in which defen dantsare found liable on a mixed theory of negligence andeither strict tort liability or breach of UCC warranty, theplaintiff was permitted to recover o nly if the p lain tiff'sresponsibili ty was less than 60%.

(4) Economic Loss Cases Based onNegligence. Economic loss cases based uponnegligence are subject to the 51% Bar Rule. TEX.CIV. PRAC. & REM. COD E ANN. § 33.001(c)(Historical and Statutory Notes Vernon 1997).

6. 1995 Proportionate Responsibilit yStatute. The 74th Texas Legislature has enactedfurther significant "tort re form" am endmen ts toChapter 33 of the Civil Practice & Remedies Code(referred to herein as the "1995 Propo rtionateRespon sibility Statute" or the "1995 Statute").Holman, Gallagher and Bo udreaux, Contribution andIndemn ity and Complex Settlement Agreements,INSURANCE LAW SEMINAR D (UNIV. HOU.1996).

a. Effective Date .

(1) Causes of Action Accruing 9/1/95.The 1995 Statute takes effect on September 1, 1995,and applies to all causes of action that accrue on or afterSeptember 1, 1995.

(2) Suits Filed Be ginning 9/1/96. The1995 Statute app lies to all causes of action that accruedbefore the effective date and on which suit is filed on orafter September 1, 1996.

(3) Suits Filed Before 9/1/96. Suits filedprior to Se ptember 1, 1996 are govern ed by the law ineffect prior to September 1, 1995.

b. Applicability. The 19 95 Pro portionateRespon sibility Statute is applicable to any cause ofaction based on tort. § 33.002 of the 1995 Statute.

(1) Inclusive Scope. The inclusivenature of the 199 5 Statute is indic ated by § 3 3.003--"Determination of Percen tage of Resp onsibility" whichprovides that

The trier of fact, as to each cause of action asserted,shall determine the percenta ge of respo nsibility,stated in who le numbers, for the following personswith respect to each person's causing or contributingto cause in any way the harm for which recovery ofdamages is sought, whether by negligent act oromission, by any defective or unr easonab lydangerous product, by other conduct or activity that


violates an applicable legal standard, or by anycombina tion of these: ..."

Section 33.002 of the 1995 Statute deleted theprovisions of § 33.00 2 of the 19 87 Statute that excludedfrom the applicability of the statute actions broughtunder the DTPA, Chapter 17E, TEX. BUS. & COMM.CODE [§ 33.002(b)(2) exclusion eliminated] or underChapter 21 of the INSURANCE CODE [§ 33.002(b)(3)eliminated].

(2) Proportionate Responsibility. The1995 Statute continues the "tort reform" scheme of§ 33.013(a) "Amount of Liability" unchanged.Section 33.013(a) provides that

Except as provide d in Subse ction s (b) and (c), aliable defendant is liable to a claimant only for thepercentage of the damages found by the trier of factequal to that defendant's percenta ge ofresponsib ility with respect to the personal injury,property damage, death, or other harm for which thedamages are allowed.

This is the general rule apportio ning liability inaccordance with each liable defendan t's responsibility.

(3) Exclusion from 1995 Statu te'sLimits on Joint and Several Liability . The 1995Statute allows for "joint and several liability" in thefollowing limited cases:

(a) Defendants With Greater than50% Respo nsibility. Section 33.013(b) of the 1995Statute amende d the 198 7 Statute to raise the thresh oldfor the imposition of joint and several liability from10% responsibility to "greater than 50 %" resp onsibility.A liable defend ant who the trie r of fact determine s isgreater than 50% responsible for the harm, is jointlyand severally liable for the damages with other liabledefendants.

In raising the threshold for imposition of joint andseveral liability, the 1995 Statute eliminate d therequirement that the responsibility of the defend ant ina negligence action be greater than the percentage ofresponsib ility attributed to the claimant due to the 51%Bar Rule.

The 1995 Statute eliminated from the imposition ofjoint and several liability the provision in the 1987Statute in § 33.013(c)(1) which imposed joint andseveral liability in cases whe re th e de fend ant'spercentage of liability was more than 10% and theplaintiff was "innocent" (no pe rcentage o f responsibilityassessed to the plaintiff).

(b) Toxic Torts Greater than15% of the Responsibility. Section 33.013(c) of the1995 Statute impo ses joint and several liability on adefendant if the percentag e of respon sibility attributableto the defendant is "greater than 15%" and is caused bythe depositing, discharge, or release into theenvironment of any hazardous or harmful substance, orif the claimant's personal injury, property damage, dea thor other ha rm resulted fro m a toxic tort.

(c) Penal Code. The 19 95 Statutealso adds § 33.002(b), providing for joint and several

liability for a defendant who, with specific intent to doharm to others, acts in conce rt with another p erson toengage in conduct under certain listed Sections of thePenal Code (e.g., § 32.46 securing execution of adocument by deception;§ 19.02 murder).

c. 51% Bar Rule Applicable to Casesunder 1995 Statute. The 1995 Statute provides for a51% Bar Rule similar to the 1987 Statute.Section 33.001 provides that a "claima nt may notrecover damage s if his percentag e of respon sibility isgreater than 50 percent." The 1995 Statute, however,eliminates the distinction p reviously applicable tomixed theory cases which applied a 60% Bar Rule. The1987 Statute did not bar a claimant's recovery in amixed theory case where at least one defendant wasfound liable based upon strict liability or breach o f aUCC warranty, unless the claimant was at least 60%responsible.

B. Statutory Indemnity. In addition to commonlaw indemnity, the legislature has provided forstatutorily imposed indemnity in certain relationships.Following is a limited discussion of several of thesestatutorily imposed indemnities.

1. Electric Companies. TEX. HEALTH &SAFETY CODE ANN. § 752.008 (Vernon 1992)provides electric companies and municipalities whichown power lines with a statutory inde mnity.Section 752.008 provides that if a person vio lates thestatute by operating equipment (without listedprecautions) within six feet of a high-voltage line, thatperson must indem nify the owner or operator of the linefor any damages caused by such violation. SeeHernandez v. Houston Lighting & Power Co., 795S.W.2d 775 (Tex. App.--Houston [14th Dist.] 1 990, nowrit)--workers' compen sation claim barred by statutoryindemnity. The court in Olson v. Cen tral Power &Light Co., 803 S.W.2d 808 (Tex. Ap p.--Corpu s Christi1991, writ denied) held that the statutory indemnityprovided by the Texas Public Utilities Act for liabilitiesincurred by a utility due to a person contacting one ofthe utility's high voltage lines is no t overridde n by theprovisions of the Texas Workers' Comp ensation Ac t,which shields a workers' compensation subscriber fromliability to third parties for suits brought against thirdparties by the subscr iber's emplo yees. The c ourt inMartinez v. Gulf States Utility Co ., 864 S.W.2d 802(Tex. App.--Ho uston [14th Dist.] 199 3, writ denied)held that a plaintiff's release of a property owner, uponwhom § 752.008 imposed a statutory indemnity of theutility company, barred the plaintiff from recoveryagainst the utility company since a circuit of ind emnityhad been crea ted (plaintiff reco vers against utilitycompa ny, utility company recovers against propertyowner, property owner indemnified by plaintiff).

2. Governmental Employees.

a. Individu ally as Defendant. TEX. CIV.PRAC. & REM. CODE ANN . § 104.0011 (Vernon1997) provid es a statutory duty on the state toindemnify its employees for actual da mages, co urt costsand attorney's fees.

b. Employees of Texas Department ofMental Health . TEX. HEALTH & SAFETY CODEANN. § 591.024(b) (Vernon 1992) provides a statutory


indemnity by the state of emplo yees of the TexasDepartment of Mental Health and Mental Retardationfor negligence if the claim arises while the emplo yee isacting in the scope of its authorized duties.

3. Shipper 's Indemnity. TEX. BUS. & COM.CODE ANN. § 7 .301(e) (Vern on 1991) p rovides thata shipper shall indemnify a carrier against damagecaused by inaccuracies in the description, marks, labels,number, kind, quantity, condition and weight of goodsprovided by the shipper.

C. Prelude to Discussion of ContractualIndemnity. The foregoing factors have amplified theneed to bring certa inty into the risk managementdecisions of contacting parties. The prevalence ofindemnification clauses in common contractualarrangem ents between commercial parties resulted inthe develop ment of a special insurance product by theinsurance industry to provide insurance coverage for aninsured’s assumption of the liability of another person.This coverage has been a standard component ofcommercial general liability insur ance po licy formspromulgated by the Insurance Services Offices, Inc.("ISO”), since 198 6. Prior to th at time, contractualliability coverage was readily av ailable by endorsementto the 197 3 policy.


II. Contractual Indemnity .

A. Distinguished from Guaranty and Surety ship.Both guaranty and surety agreements are collateralundertakings dependent upon the existence of anothercontract or transaction. Pham v. Mongiello, 58 S.W.3d284 (Tex.App.-Austin [3rd Dist.] 200 1, no writ )- courtfound that rules governing guarantees should beanalogous to rules governing ind emnity agree ments; aguaranty of a tenant’s obliga tions should clearly set outwhat possib le charges co uld be incur red by the ten ant,for example, charges arising out of a tena nt’snegligence. Indemnification is an original undertakingbetween the Indemnifying Person and the IndemnifiedPerson. An indem nification may b e execute d inconnection with another c ontract, as in the c ase of asubcontracto r's indemnity pro tecting a contr actor inconnection with con trac tor's construction contract withthe property owner. See 14 TEX. JUR. 3d Contributionand Indemnification § 2 Distinctions 477 (1997).

1. Indemnity.

a. " L iab i l i t i e s" o r " D a m ages" .Indemnities have sometimes been classified as an"indemnity against liability." Russell v. Le mons, 205S.W.2d 629, 63 1 (Tex. C iv. App.--Am arillo 194 7, writref'd n.r.e.). In the case of a promise to indemnifyagainst liability, a cause of a ction accrues to theindemnified person only when the liability has becomefixed and certain, as by rendition of a judgment.Possibility that liability triggering indemnity will beincurred in pending action is a "future hypotheticalevent" within meaning of rule that Uniform DeclaratoryJudgme nts Acts gives court no power to pass uponhypothetical or contingent situa tions. Boorhem -Fields,Inc. v. Burling ton North ern Railro ad Co., 884 S.W.2d530 (Tex. Ap p.--Texar kana 199 4, no writ ); § 37.001TEX. CIV. PRAC. & REM. CODE ANN. (Vernon1997).

Alternatively, an indemnity may be an " indemnityagainst damages." W ith respect to a promise toindemnify against damages, a right to bring suit doesnot accrue until the indemnified person has suffereddamage or injury by being compelled to pay thejudgment or debt. Holland v. Fidelity & Deposit Co, ofMaryland, 623 S.W.2d 469, 470 (Tex. App.--CorpusChristi 198 1, no writ ).

b. Contractual Obligations or Torts.Indemnity agreements may cover contractualobligations of others or torts com mitted by others.

(1) Contractual Obligations. Forexample, it is not against pub lic policy for awithdrawing officer to indemnify a purchasingshareholder for I.R.S . penalties subsequently imposedon a corporation and its shareholde rs. Tubb v . Bartlett,862 S.W.2d 740, 751 (Tex. App.--El Paso 1 993, writdenied). Also, an indemnity can cover econom icdamages to arise in the future to third pers ons due tothe contractua l arrangeme nts between contract parties.Such indemnities are not governed by the expressnegligence or similar doctrine (if they do not involveindemnification against one’s future negligence).Transcontinental Gas Pipeline Corp. v. Texaco, 35S.W.3d 658 (Tex.App.-Hous ton [1st Dist.] 200 0, nowrit). However, shifting of risk from one contracting

party to another contracting party is neither anindemnity nor a release and need not m eet the fairnotice and express negligence tests otherwise ap plicableto “extraordinary” shifting of risk. GreenInternational v. Solis , 951 S.W.2d 384 (Tex. 1997)(“no-damages-for-d elay” provision in a constructioncontract that shifted to a su bcontrac tor the econ omicdamages arising out of the risk of a project’s delay wasenforceab le by the contractor, even though thecontractor may have caused the delay, if the potentialfor delay was co ntemplated by the parties, o r if thedelay was not for an unreasonable period of time thatwould justify the subcontractor in abandoning thecontract, or if the contractor did not engage in activeinterference or wrongful conduct).

Perhaps the result might ha ve been d ifferent inGriffin Indus. v. Foodmaker, Inc., 22 S.W.3 d 33(Tex.App.-Houston [14th Dist.] 2000, no writ) involvingan injury to an employee of Foodmaker a/k/a Jack in theBox if the indemnity had covered damages arising outof its breach of contract. In Foodmaker there was someevidence that Griffin did not respond to service ca lls tofix a grease receptacle that it furnished Foodm aker. AFoodmaker employee was injured when he slipped ona greasy ladder attempting to po ur hot french fry greaseinto a ventilator slot 6'10" above the ground. Theproper slot was broken. The court said,

Assuming, without deciding, that Griffin did notrespond to one or more service requests in atimely manner, such conduct might constitute abreach of its service contract with Foodmakerbut it is not evidence of negligence. T he duty topick up the grease stems solely from the parties’contract.

(2) Torts.

(a) Negligence. Indemnity against"one's own negligence" has long been recognized inTexas. See the discussion of the "express negligencetest" as a rule of contra ct constructio n below. Ohio O ilCo. v. Sm ith, 365 S.W .2d 621 , 624 (T ex. 1963 ); EthylCorp. v. Daniel Const. Co., 725 S.W.2d 7 05 (Tex.1987). In Atlantic R ichfield Co. v. PetroleumPerson nel, Inc., 768 S.W.2d 724 (Tex. 1989), theTexas Suprem e Court he ld that the language of thecontractual indemnity provision satisfied the expressnegligence test even though it did not differen tiatebetween "degrees of negligence." Certain "magic"words like "active," "passive," "sole," "joint," or"concur rent" to describe the degrees of negligencecovered were not ne cessary. The court determined that"any negligent act or omission of ARCO" was sufficientto define the p arties' intent. Id. at 726.

Perhaps what is more imp ortant is to determine whatdegree of negligence is excluded from the ind emnity.E.g., "but not injuries due to the sole negligence of the_____ (e.g., landlord) ."

(b) Gross Neglig ence andPunitive Damages . In Atlantic Richfield Co. v.Petroleum Personn el, Inc., 768 S.W.2d 724 (Tex.1989), the Texas Supreme Court observed, in a footnoteto the opinion, that it was not deciding whetherindemnity for one's own gross negligence or intentionalinjury may be contracted for or awarded by Texas


courts. The court stated tha t "[p]ublic policy concernsare presented by such an issue ... ." Id. at 726 n.2.Texas allows insurance coverage for punitive damagesderivative of gross neglig ence. American Home A ssur.Co. v. Safway Steel Products Co., 743 S.W.2d 693(Tex. App.--Austin 198 7, writ denied); HomeIndem nity Co. v. Tyler , 522 S.W.2d 5 94 (Tex. App.--Houston [14th Dist.] 1 975, writ ref'd n.r.e.). Recently,the San Antonio court of appeals held that an indemnityfor one’s own negligence also included all shades anddegrees of negligence, including one’s own grossnegligence. Webb v . Lawson -Avila Co nst., Inc., 911S.W.2d 457 (Tex. App.--San Antonio 1995, writ dism’dby agreement).

Also see Sieber & Ca licutt v. La G loria , 66 S.W.3d 340(Tex.App. [12th Dist.] 200 1, no writ ) where the courtassumed without discussion that negligence of theIndemnified Party included its gross negligence.

(c) Intentional Torts. The issue ofthe enforceab ility of an indemnity for an intentional tort(Te nne co's misappropriation and improper use ofconfidential information obtained in bid ding process)was raised in Tenneco Oil Co. v. Gulsby Engineering,Inc., 846 S.W.2d 599 (Tex. App.--Ho uston [14th Dist.]1993, writ denied). However, the court of appeals wasable to sustain the tr ial court's summa ry judgmen t infavor of Tenne co on the gr ounds that the indemnityprovision in the contract with Gulsby Engineeringspecifically covered patent infringement suits, andtherefore included Tenneco's and Gulsby's joint andseveral liability for having infringed the unsuccessfulbidder's pa tent.

2. Guaranty . A guaranty agreeme nt isexpressly for the benefit of the third party (the creditor).The guarantor covenants to pay the debt of the debtorin the event of the debtor's default. Indemnificationinvolves a promise to the liable party to reimburse suchperson if it is com pelled to p ay a debt.

3. Surety ship. The surety in a suretyshipagreement makes a direct promise to perform theprincipal's obligation if the principal fails to perform.

a. Surety ship Supported by ImpliedContract of Indemnity . Many sur etyship agree mentsare supported by an "imp lied contrac t of indemnity"wherein the principal impliedly indemnifies the surety.See for example Felker v. Thomas, 83 S.W.2d 1055(Tex. Civ. App.--El Paso 1935, no writ )--permitting anaccommodation maker on a vendor 's lien note torecover on an implied c ontract of ind emnity against theaccommodated party upon foreclosure of the vendor'slien; also see Navarro Oil Co. v. Cross, 200 S.W.2d616 (Tex. 1946).

b. Surety ship Supported by ExpressContract of Indemnity . Most suretyship agre ementsare accompanied b y an express in demnity agre ement.See Central Surety & Ins. Corp. v. Martin , 224 S.W.2d773 (Tex. Civ . App.--Be aumont 1 949, writ ref'd);Forms: Indemnification of Surety, 9 AM. JUR. LEGALFORM S, 2d, Indem nity § 142:23 (1985).

B. Indemnity Against One's Own Negligence.

1. Background.

a. Prior to 1971 Generally-Worded andBroad Statements of Indem nity.

(1) Not Violative of Public Policy. Asa general proposition, contractual indemnity provisionshave long b een held not to violate the public policy ofthe state of Tex as. Ohio Oil Co. v. Smith , 365 S.W.2d621, 624 (T ex. 1963). The adoption by the TexasSupreme Court of various contract interpretation rules,such as the "clear and unequivocal rule" or the " expressnegligence test," are reaffirm ations of this ba sicproposition.

(2) Statements Sufficiently Broad toInclude Neglige nce Ru le. Prior to 1971, a broadgeneral statement regarding ind emnity for any injury ordeath of any persons or damage to property resultingfrom the use of equipment was effective against theIndemnifying Person. James Stewart & Co. v. Mobley,282 S.W.2d 290 (Tex. Civ. App.--Dallas 1955, writref'd).

Under this rule, an indemnity contract wassufficiently worded to pass liability to the IndemnifyingPerson when it was sufficien tly broad as to cover thenegligence of the indemnified person and it was clearthat the intent was to d o so. Spenc e & How e Const.Co. v. Gulf Oil Corp., 365 S.W.2d 631 (Tex. 1963);Alamo Lumber Co. v. Warren Petroleum Corp.,316 F.2d 287, 290 -91 (5th Cir. 1963).

b. 1971-1987 Clear and UnequivocalStandard.

(1) Broad Statements No LongerSufficient Unless Obligation Expressed in Clear andUnequivocal Terms.

(a) McCann Construction. In 1971,the Texas Supreme Court made a significant change inindemnity contract law. Broad , general inde mnityprovisions would no longer suffice to protect anindemnified person against the consequences of its ownnegligence. In Joe Adam s & Son v. M cCann Const.Co., 475 S.W.2d 721 (Tex. 1971), the Texas SupremeCourt held that an indemnity agreement will not protectthe indemnified person against the consequ ences of hisown negligence unless the obligation was expressed inunequivocal terms. In holding that the indemnityagreement in question d id not prote ct the indemnifiedperson, the court stated:

It is not necessary for the parties to say, in so manywords, that they intend to save the indemniteeharmless from liability for his own wrongs, but it isnecessary for that intention to clearly appear whenall the provisio ns of the contra ct are consid ered inlight of the circumstances surrounding its execution.

Provision: The indemnity provision construed by thecourt is as follows:

The Contracto r (Adam s) shall effectually secure andprotect its work and sh all bear and be liable for allloss or dama ges of any kind which m ay happe n to


the work or any materials to be incorp orated ther ein atany time prior to th e final comp letion and acceptancethereof. McCann Construction ... shall not beresponsib le for any damage done to the work orproperty of the Contrac tor, unless such damage shall becaused by the direct negligence of McCannConstruction. ...

The Contractor shall protect, indemnify and saveMcCann Construction ... and Owne r harmless fromany and all claims, suits, and actions of any kind ordescription, for damage or injuries to persons orproperty received or sustained by any party orparties through or on accou nt of any act or inconnectio n with the work of the Contractor or itsagents or servants or sub contracto rs, or any defa ultor omission of the Contractor, or its agents orservants or subco ntractors in the p erformanc e of thiscontract, or through the use of improper or defectivematerials or tools or on account of injury of damageto adjacent buildings or property occasioned bywork under this contract, or through failure to givethe usual requisite and suitable notices to all parties,whose persons, esta tes or premises may be, in anyway, interested in or affected by the performance ofthis work, and at its own cost shall defend any andall suits or actions that may be brought aga instMcCann Construction... or Owner by reasonthereof, and in the event of the failure of theContractor to defend such suits McCannConstructio n... shall have the right a nd powe r todefend same and charge all costs of such d efense tothe Contractor or its Surety. (Emphasis added byauthor.)

While the "clear and unequivo cal" rule appea red tobe simple and straight forward , it was not easy in itsapplication and only a small number o f indemnityprovisions were judicially enforced to protect theindemnified person ag ainst its own con duct. SeeScheer, The Co ntractua l Indem nity Provision Effectiveto Protect an Indemnitee Against His Own Negligenceor Other F ault , 17 TEX. TECH L. REV. 845, 856-874(1986).

(b) Firema n's Fund. InFirem an's Fund Ins urance Co. v. Co mmerc ial StandardIndem nity Co., 490 S.W.2d 818 (Tex. 1972), the TexasSupreme Court estab lished the "cle ar and une quivocal"standard. The majority of the court attempted to definethis stricter standard:

(w)e have, in fact, progressed toward the so-called"express negligence" rule as near as is judiciallypossible with out adop ting it.

Id. at 822. The court, however, failed to define thestricter standard.

Provision: The indemnity provision construed by thecourt read as follows:

All Contractors sha ll be respon sible each fo r hiswork and every part thereof, and for all materials,tools, appliances and property of every descriptionused in connectio n therewith , (in case of generalcontract, General Contractor assumes entireresponsibility). They shall specifically anddistinctly assume and do so assume all risks of

damage or injury from any cause except negligenceof Owner, its officers, agents and emp loyees, toproperty or persons used or employed on or inconnection with the work, and of all damage orinjury to any persons or prop erty wherever located,resulting from any action or operation under thecontract or in connection with the work, andundertake and promise to protect and defend theOwner and Architect-Engineer ag ainst all claims onaccount of any such da mage or inj ury. (Italicizedemphasis added by court; underlining added byauthor.)

Id. at 821.

The court found that this broad language of"protec ting ... the Owner ... against all claims" did notclearly and unequivocally indicate an intent toindemnify the owner (General Motors) from its ownnegligence.

(2) Exceptions to Rule . The Firem an'sFund Court recognized three exceptions to the "clearand unequivocal rule." The court found the types ofagreeme nts outlined below did not require a provisionwhich unequivocally protected an indemnified personagainst the i nde mni fied per son 's own neglige nce. Alsosee review of the exceptions in Gulf Coast Masonry,Inc. v. Owens- Illinois, Inc., 739 S.W.2d 239 (Tex.1987).

(a) P r e m i s e s D e f e c t s o rMaintenance . Agreeme nts in which one perso n clearlyundertook to indemnify another person against liabilityfor injuries or damages resulting from defec ts in certainpremises or from the maintenance or operatio n of aspecified instrumentality. Mitchell's, Inc. v. Friedman,303 S.W.2d 775 (T ex. 1957). The supreme court laterheld that this situation was not a true exception, butmerely constituted an application of the genera l ruleand required a finding that the pr ovision sati sfied theclear and unequivocal test. Eastman Kodak Co. v.Exxon Corp., 603 S.W.2d 208 , 212 (Tex. 1980).

(b) Complete Supervision ofProperty or Persons. Agreeme nts which related tosituations in which the Indemnifying Person hadcomplete supervision over the property and employeesof the indemnified person in connection with theperformance of the Indemnifying Person's obligationsunder the contract. Spenc e & How e Const. C o. v. GulfOil Corp., 365 S.W.2d 631 (Tex. 1963). Thisexception was never applied after its recognition inFireman's Fund.

(c) C o m p l e t e I n d e m n i t yAgreement. Agreements in which there was anunequivocal provision that the Indemnifying Personwould indemnify the indemnified person fro m allliability by reason of injury to the indemnified per son 'semployees. Ohio O il Co. v. Smith , 365 S.W.2d 621(Tex. 1963). This exception was applied twice:Richmond v. Amoco Production Co., 390 F. Supp. 673,676-677 (E.D. T ex. 1975 ), aff'd without opinion, 532F.2d 1373 (5th Cir. 1976); and Eastex Inc. v. StebbinsEngineering & Mfg. Co., 436 F. Supp. 577 (E.D. Tex.1977).


(3) Cases. Amoco Chemicals Corp. v.Sutton, 551 S.W.2d 459 (Tex. Civ. App.--Eastland1977, writ ref'd n.r.e .). The supreme court held thefollowing provision met the clear and unequivo cal test:

Provision:

Contractor shall ... indemnify Company ... from andagainst any and all loss, costs, damage, expense,claims, suits and liability on account of any and alldamage to, or loss or destruction of any person ...arising directly or indirectly out of, or in connectionwith the perform ance of this C ontract whethercaused by a negligent a ct or omissio n of either par tyhereto , or their employees, or otherwise, except thatContractor assumes no liability for the solenegligent acts of Company, its agents, servants oremployee s. (Empha sis added by author.)

The "clear and unequivo cal" rule was confirmed bythe Texas S upreme C ourt as recen tly as 1986 inDorchester Gas Corp. v. American Petrofina, Inc., 710S.W.2d 541, 543 (Tex. 1986).

2. Express Neglige nce Do ctrine A dopted in1987.

a. Ethyl.

(1) Case . The T exas Supr eme Co urt inEthyl Corp. v. D aniel Const. Co., 725 S.W.2d 705(Tex. 1987) held an indemnity provision to beunenfo rceable because it did not specifically state thatthe contractor (Daniel) wo uld indem nify Ethyl forEthyl's own negligence.

In Ethyl, an employee of the contractor was injuredwhile working on a construction project for the owner.After the employee settled his claim for workers'compensation benefits, the employee sued the ownerwho, in turn, sued the contractor (employer) seekingindemnity. The jury fo und the owner 90% negligentand the contractor 10% negligent. The owner sued thecontractor for indemnification on the followingindemnity provision:

Provision:

Contractor (Daniel) shall indemnify and hold Owner(Ethyl) harmless aga inst any loss or dama ge topersons or property as a result of operationsgrowing out of the performance of this contract andcaused by the negligence or carelessness ofContractor, Contractor's employees, subcontractorsand agents or licensees. (Emphasis added byauthor.)

(a) Ethyl's Negligence Not Covered.Ethyl argued that the language "any loss" and "as aresult of operations growing out of the performance ofthis contract" expressed the con trac tor's intent to coverEthyl's negligence.

In holding that Ethyl was not entitled toindemnification by the contractor, the court stated

parties seeking to indemnify the indemnitee fromthe consequences o f its own negligence mustexpress that intent in specific terms. Under the

doctrine of express negligence, the intent of theparties must be specifically stated within the fourcorners o f the contract.

The court stated the following policy for the newstandard:

As we have moved closer to the express negligencedoctrine, the scriveners o f indemnity agree mentshave devised novel ways of writing provisionswhich fail to expressly state the true intent of thoseprovisions. The intent of the scriveners is toindemnify the indemnitee for its negligence, yet bejust ambiguous enough to conceal that intent fromthe indemnitor. The result has been a plethora oflaw suits to construe these ambiguous contracts.We hold the be tter policy is to cut through theambiguity of those provisions and adopt the expressnegligence doctrine.

Id. at 707-08.

(b) Daniel's Negligence NotCovered . The supreme court also rejected Eth yl'sinterpretation that the indemnity clause indemnifiedEthyl against Daniel's 10% concurring negligence.After the court reje cted Ethyl's claim fo rindemnification for Ethyl's 90% negligence, E thylsought contribution or indemnification for Dan iel's10%. The court termed this claim as one for"comparative indemnity ." The court held that theindemnity provision did not meet the expressnegligence test in this respect. The court stated

Indemnitees seeking inde mnity for theconsequences of their own negligence whichproxima tely causes injury jo intly and concurre ntlywith the indemnitor's negligence must also meet theexpress negligence test. ... Parties may contract forcomparative indemnity so long as they comply withthe express negligence doctrine set out herein.

Id. at 708-09 . The court of appeals had disposed of thesame argument by stating that the 1973 Statute(Art. 2212a) did not create a right of contribution orindemnity against the em ployer (inde penden t of acontractual indemnity) and cited Varela v. AmericanPetrofina Co. of Texas, Inc., 658 S.W.2d 561 (Tex.1983). Daniel C onst. Co. v . Ethyl Corp., 714 S.W.2d51, 54 (Tex. App.--Houston [14th Dist.] 1986).

(2) Effect of Ethyl. The court overruledthe clear and uneq uivocal stand ard as well as the threeexceptions to the standar d listed in Fireman's Fund.The court applied the new standard retroactivelythereby calling into que stion most pr eviously d raftedindemnity agreements. Arguably, the Ethyl provisiondid not even satisfy the " clear and u nequivoc al test"since the provision did not mention protecting theIndemnified Person, clearly and unequivocally orotherwise, from liability for the I ndemnifie d Person'sown negligence. Provisions so constructed hadpreviously been held not to satisfy the clear andunequivocal test. Delta Drilling Co. v. Cruz, 707S.W.2d 660, 668 (Tex. App.--Corpus Christi 1986, writref'd n.r.e.).


b. Cases Applying Ethyl.

(1) Supreme Court Decisions.

(a) Singleton. In Singleton v. CrownCentral Petroleum Corp., 729 S.W.2d 690 (T ex. 1987),the Texas S upreme C ourt found that the followingprovision failed the express negligence standard sincethe provision stated what was not to beindemnified--claims resulting from the sole negligenceof the premises owner--rather than expressly stating thatthe premises owner was to be indemnified from its ownnegligence.

Provision:

Contractor agrees to ... indemnify ... owner fromand against any and all claims ... of every kind andcharacter whatsoeve r, ... for or in conn ection withloss of life or personal injury ... directly orindirectly arising out of ... the activities ofcontractor ... excepting only claims arising out ofaccidents resulting from the sole negligence ofowner. (E mphasis ad ded by au thor.)

(b) Gulf Coast Ma sonry . GulfCoast Mason ry, Inc. v. O wens-Illinois, Inc., 739S.W.2d 239 (Tex. 1987 per curiam). In a per curia mopinion, and without hearing oral argument, the TexasSupreme Court upheld the trial court's grantingsummary judgment to the Indemnifying Person (thecontractor) on the basis that the indemnity provisionwas unenforceable as a matter of law. The courtfound the following provision failed expressly toindemnify the plant owner for injuries to employees ofthe contractor due to either party's negligence.

Provision:

Contractor (Gulf Coast) agrees to indemnify andsave owner (Owens-Illinois) harmless from any andall loss sustained b y owner ... from any liability orexpense on account of property damage or personalinjury ... sustained by an y person or persons,including but not limited to employees of ...contractor ... arising out of ... the performance ornon-performance of work hereunder by contractor... or by any a ct or omission of contractor, itssubcontractor(s), and their respective employeesand agents while o n owner's pre mises .... (Emp hasisadded by author.)

Although the a greeme nt sp ecif ies the c ont rac tor'sduty to indemnify the owner for claims resulting fromthe contractor 's acts, it fails to state, with equalspecificity, the obligation to indemnify for claimsresulting from acts of other parties ( i.e., owner) anddoes not expressly refer to the negligence of either theowner or the contractor as an Indemnified Matter.

(c) ARCO. Atlantic R ichfield Co. v.Petroleum Personnel, Inc., 758 S.W.2d 843, 844 (Tex.App.--Corpus Christi 198 8), rev'd , 768 S.W.2d 724(Tex. 1989). In this case, the employee of thecontractor (PPI) sued the owner (ARCO) for injuriessustained while working on the owner's drillingplatform. ARCO impleaded the contractor seekingindemnification from the contractor under theindemnification provision in the contract between

ARCO and the contractor. The Texas Supreme Courtfound the following provision met the expressnegligence standard:

Provision:

Contractor (PPI) agrees to ho ld harmless andunconditio nally indemnify company (ARCO)against and for all liability, costs, expenses, claimsand damages which (ARCO) may at any time sufferor sustain or become liable for by reason of anyaccidents, damages or injuries either to the pe rsons,or property or both of (PPI), or of the workmen ofeither party, or of any other parties, or to theproperty of (ARC O) in any matter arising from thework performed h ereunder , including but notlimited to any negligent act or omission of (ARCO),its officers, agents or employees. ... (Emphas isadded by author.)

The court held the language "any negligent act ofARCO " was sufficient to define the pa rties' intent.

(d) Enserch. In Enserch Corp. v.Parker, 794 S.W.2d 2 (Tex. 1990), the Texas SupremeCourt held the indemnity provision set out below metthe express neg ligence test and required C hristie, Inc. toindemnify Enserch for Enserch's negligent supervisionof Christie, Inc.'s work as an independent contractorhired to service Enserch's pipeline. Parker, anemployee of Christie, Inc., was asphyxiated when agasket blew out ca using a valve to leak natural gas intothe concrete m anhole vau lt where Parker was working.Par ker 's estate brought a wrongful death action againstEnserch.

The court first held that Enserch owed a duty of careto the employees of Christie, Inc., even though Christie,Inc. was an independent contractor, since Enserch hadretained control of the manner tha t Christie, Inc. was tocarry out its servicing contract. Enserch had furnisheda procedures book for Christie's employees whichoutlined the procedures to be followed while workingon the pipeline, and Enserch re presentative s frequentlyvisited the job site and supervised C hristie's employees.The supreme court followed the exception announcedin Redinger v. Living, Inc., 689 S.W.2d 415, 418 (Tex.1985) to the genera l rule of Abalos v. Oil Dev. Co., 544S.W.2d 627, 63 1 (Tex. 1 976). T he general ruleadopted in Abalos is that an owner or occupier of landdoes not have a duty to see that an independentcontractor performs work in a safe manner. However,the court in Redinger created an exception by holdingthat "one who entrusts work to an independentcontractor, but who retains the control of any part of thework, is subject to liability for physical harm to othersfor whose safety the employer ow es a duty to exercisereasonab le care, which is ca used by his failure toexercise his control with reasonable care." Id. at 418[citing RESTATEMENT (SECOND) OF TORTS§ 414 (1977)].

The court upheld the following provision asrequiring Christie, Inc. to indemnify Enserch forEnserch's negligent supervision:


Provision:

(Christie) assumes entire responsib ility and liabilityfor any claim or actions based on or arising out ofinjuries, including de ath, to persons or dama ges toor destruction o f property, sustained or alle ged tohave been sustaine d in conne ction with or to havearisen out of or incidental to the performance of thiscontract by (Christie), its agen ts and employees, andits subcontra ctors, their agents and employees,regardless of whether such claims or actions arefounded in whole or in part upon alleged negligenceof (Enserch), (Enserch's) representative, or theemployees, agents, invitees, or licensees thereof.(Christie) further agrees to inde mnify and ho ldharmless (Enserch) and its representatives, and theemployees, agents, invitees and licensee thereof inrespect of any such matters and agrees to defendany claim or suit or action brought against(Enserch), (Enserch's) representat ive, andemployees, agents, invitees, and licensees thereof .... (Court's emp hasis.)

The court found that it was clear that "any suchmatters" in the second sentence referred to the claims oractions described in the first sentence and the contractas a whole was sufficient to define the parties' intentthat Christie indem nify Enserch for the consequences ofEns erc h's own negligence. Therefore, the indem nitylanguage and the refere nce to Enserch's neg ligence didnot need to be in the same sentence.

(e) Maxus. The Texas SupremeCourt in Maxus Exploration Co. v. Moran Bros., Inc.,773 S.W.2 d 358 (T ex. App.--D allas 1989 ), aff'd 817S.W .2d 50, 56 (Tex. 1991) approved the followinglanguage as meeting the ex press neglige nce test:

Provision:

14.9 Operator's Indemnification ofContractor: Operator (Diamond Shamrockn/k/a Maxus) agrees to ... inde mnify ...Contractor (Mora n Bros.) ... from and against allclaims ... of every kind ... without limit andwithout regard to the cause or causes thereof orthe negligence o f any party or parties, arising inconnection herewith in favo r of Operato r'semployees or Operator's contractors or theiremployees... on account of bodily injury, d eathor dama ge to prop erty. ...

14.13 Indemnity Obligation: Except asotherwise expressly limited herein, it is theintent of the parties hereto that all indem nityobligations and/or liabilities assumed by suchparties under the term s of this Contra ct,including without limitation, p aragraph s 14.1 ...be without limit and without regar d to the causeor causes thereof ... strict liability, or thenegligence of any party , whether suchnegligence be sole, joint or con current, active orpassive. (U nderlining ad ded.)

The Maxus case is discussed below concerning theadvisability of having a choice of laws provision in anindemnity agreemen t. The oil we ll drilling contrac t inMaxus failed to contain a choice of laws provision.

Diamond Shamrock (n/k/a Maxus), the operator,defended Moran Bros., the contrac tor, against a cla imfiled in a Kansas court by Boyd stun, an emp loyee of acontractor of Diamond Shamrock, against Moran. TheKansas jury found that Moran Bros. was 90% liable andawarded a $3,000,000 verdict, which was thereuponreduced to $2,700,000. Diamond Shamrock then suedin Texas for a declaratory judgment to declare theindemnity invalid. In app lying the balanc ing test setforth in the RESTATEMENT (SECOND) OFCONFLICT OF LAWS § 6 (1971), the Texas SupremeCourt held that Kansas law applied and under the "clearand unequivocal language " applicab le to indemn ities inKansas, the indemnity was enforceable. However, thecourt additionally found that the indemnity provisionsconformed to the public p olicy of Te xas contain ed inthe express n egligence test.

The indemnity provisions in Maxus are from thestandard form Daywork Drilling Contract published bythe International Association of Dr illing Contractors.

(f) Fisk Electric. The TexasSupreme Court in Fisk Elec. C o. v. Con structors &Assoc., Inc., 888 S.W.2d 813 (Tex. 1994) found that thefollowing language did not meet the express negligencetest:

Provision:

...[t]o the fullest extent permitted by law, [Fisk]shall indemnify, hold harmless and defend[Constructors] ... from and ag ainst all claims,damages, losses, and expenses, including but notlimited to attorney’s fees [arising out of or resultingfrom the performance of Fisk’s work].

Constructors brought a third party cause of actionagainst Fisk seeking indemnification against the claimof Fisk’s employee against Constructors. The courtheld that Fisk had no duty to indemnify Constructors,since the indemnity did not expressly cov er Fiskindemnifying Const ructors for Constructors’negligence. The court then found that since Fisk had noduty to indemnify Constructors, Fisk had no liability forConstructors’ attorneys fees in defending against Fisk’semployee ’s suit. Id. at 815.

(g) Gulf Insurance Co. The TexasSupreme Court in The Gulf Ins. Co. v. Burns Motors,22 S.W.3d 417 (Tex. 2000) found that the expressnegligence test was not ap plicable in a c ase where th eIndemnifie d Person was seeking indemnity for theconsequence of the Indemnifying Person’s act. The actof the Indemn ified Perso n fell in the court’s judgmentclearly within the exclusio n from inde mnity. In GulfIns. suit was broug ht by the plaintiff (Burns M otors) inan earlier suit that had obtained an agreed judgmentagainst Gulf’s insurance agent (Nash). The co urt heldthat under the terms of agreed judgment the insuranceagent acknowledged that he had knowingly passed onfalse information as to the coverage of the policy to hiscustomer. Burns M otors took an assignme nt of theagent’s claim of indemnity against the insurancecompany as set out in the Agency-Company Agreementexecuted by the agent and the company. The courtfound that the knowing misrepresentation of thepolicy’s coverage by the agent fell within the exclusion


to indemnification contained in the following provisionin the agency a greement.

Provision:

Company (Gulf Insuran ce) will indemnify and holdharmless Agent against any claims or liabilitiesAgent may become obligated to pay to or in b ehalfof any insured based on actual or alleged error ofCompany in its processing or handling Direct Billedor any other business placed by Agent withComp any, except to the extent Agent has caused,contributed to or co mpoun ded such erro r.

The court noted that although the parties arguedextensively as to the application of the expressnegligence test to the indemnity provision, the expressnegligence test does not apply in a case where it is theacts or omissions of the Indemnifying Person that aresought to be recovered on as opposed to a case whereone is seeking to be indemnified against one’s ownnegligence. Here, the act of the Indemnified Person fellwithin the contra ctual exclusio n from the ind emnity.

(2) Court of Appea ls Applications ofEthyl.

(a) Beaumont Court of App eals .The Beaumont Court of Appeals, in Faulk ManagementServices v. Lufkin Ind ustries, Inc., 905 S.W.2d 476(Tex. App.--B eaumon t 1995, writ denied), upheld thefollowing provision as covering injuries to anemployer ’s employees caused by the sole negligence ofthe Indemnified Person (premises owner) even thoughinjuries to the contractor/employer’s employees was notspecifically mentioned, and the indemnity provisionwas worded in terms of injuries "caused by the(contractor/employer)” and did not expressly mentionthat it covered injuries "caused by” the IndemnifiedPerson

Provision:

By signing the below statement, the seller (meaningFaulk Manag ement as the " seller” of janitorialservices) agrees to ... indemnify ... LufkinIndustries, Inc . against loss ... caused by the seller,its employee s, agents or an y subcontra ctor aris ingout of or in consequ ence of the p erformanc e of thiscontract.

It is the intention of the Seller and/o r Contracto r toindemnify Lufkin Industries, Inc. even in the eventthat any such claims, demands, actions or liabilityarises in whole or in part from warranties, expressor implied, defects in materials, workmanship ordesign, condition of property o r its premises and/ornegligence of Lufkin Industries, Inc. or any otherfault claims as a bas is of liability for LufkinIndustries, Inc.

(b) Corpus Christi Court ofAppea ls.

i) ARCO v. McG uffin . AtlanticRichfield Oil & Gas C o. v. McG uffin, 773 S.W.2d 711(Tex. App.-- Corpus Christi 1989, writ dism 'd).McG uffin is an earlier court of appeals' decisionuphold ing the language from the Daywork Drilling

Contract later approved by the Texas Supreme Court inMaxus. In McGu ffin, ARCO sought indem nity for the$300,000 portion of a $1,000,00 0 agreed judgmen t inthe wrongfu l death action brought by the estate of thecon trac tor's deceased employee as was covered by theinsurance requirement imposed by the contract on thecontractor. The contract required the con tractor tomaintain the following insurance:

Provision:

8.1 Without limiting the indem nity obligationsor liabilities of Contracto r or its insurers, at any andall times during the term of this agreement,Contractor agrees to carry insurance of the typesand in minimum amo unts as follows:...c. Comprehensive General L iability Insurance;including contractual liability insurin g theindemnity agreement as set down in the agreementwith minimum limits of $300,000 a pplicable tobodily injury, sickness or death in any oneoccurren ce. ...

Id. at 714. T he court upheld the c ont rac tor's agreementto indemnify the owner and found that the indemnitylanguage expressly covered the owner's negligence.The court found that the insuranc e requirem ent did notexceed the limits imposed on indemnity insurancecontained in TEX. CIV. PRAC. & REM. CODE ANN.§ 127.00 5 (Vern on 199 7) in what is known as the TexasOilfield Anti-Indemnity Statute. The insurance did notexceed the limit so-impos ed o f 12 time s the Sta te'sbasic limits for personal injury as approved by the StateBoard of Insurance (1 2 x $25 ,000). [H igher limits arenow permitted; see § 127.005 (Vernon 1997).]Therefore, the contractor's indemnity was within theexception permitted by the Oilfield Anti-IndemnityStatute prohibiting indemnities in oil and gas c ontractsexcept when the indemnity is supported by liabilityinsurance up to the permitted amount. The court foundthat the indemnity was enforceable up to the permittedlevel of insurance.

ii) Getty Oil Corp. v. Duncan:Round 1. The Co rpus Christi C ourt of Ap peals inGetty Oil Corp. v. Duncan, 721 S.W.2d 475 (Tex.App.--Corpus Christi 198 6, writ ref'd n.r.e.) held thefollowing provision meant what it said, that theindemnified person was not being indem nified for itsown negligence, in a case where the jury found theindemnified person (Getty) was 100% negligent

Provision:

Seller (NL Ind ustries-the chem ical supplier) shallindemnify ... Purchaser (Getty) ... from any and alllosses .... Seller shall not be held responsible forany losses ... caused by the negligence of Purchaser.

This provision is not quoted in the 1986 opinion(Round 1) but is set forth in the 1991 opinion (Round 2)d i scussed b e l o w i n th e p o r t i o n o f thisArticle concernin g Coord inating Insuran ce WithIndemnity Provisions.

(c) Dallas Court of Appeals.Adams v. Spring Valley Const. Co., 728 S.W.2d 412(Tex. App.--Dallas 1987 , writ ref'd n.r.e.). This case


involved construction of an indemnity provision in asubcontract between the general contractor and thesubcontractor and in a certificate of insurance. Thecourt held that the contract provisions, even when takentogether with the insuranc e certificate, did not meet theexpress negligence sta ndard. B oth docu mentscontained a provision whereby the subcon tractor wou ldindemnify the contractor for all liability arising from orout of the contractor's work on the project. Theinsurance certificate contained an ind emnity as toliabilities "caused in whole or in part by a negligent actof the Subco ntractor ... regardless of whether it iscaused in part by a party, indemnified hereunder." Thecourt found that the indemnity provision did not coverliabilities in the event that the contractor was 100%negligent.

The Dallas court in Arthur’s Garage v.Racal-Chubb, 997 S.W .2d 803 (Tex.App.-Dallas 1999,no writ)[an alarm security products liability case wherethe tenant indemnified the alarm company from claimsby third parties, wh ich included the claim of thelandlord] found that the following provision clearly andspecifically covered the Indemnified Person’snegligence, breach of warranty, and strict productliability:

Provision:

When purchaser (Arthur’s Garage), in the ordinarycourt of business, ha s the prope rty of others in hiscustody, or the alarm system extends to protect theproperty of others, purchaser agrees to and shallindemnify, defend, an d hold ha rmless seller, itsemployees and agents for and against all claimsbrought by parties other than the parties to thisagreeme nt. This pro vision shall app ly to all claims,regardless of cause, including seller’s performanceor failure to perfo rm, and inclu ding defects inproducts, design, in stallation, maintenance,operation or non-operation of the system, whetherbased upon negligence, active or pa ssive, warranty ,or strict produc t liability on the part o f seller, itsemployees or agents, but this provision shall notapply to claims for loss or damage solely anddirectly caused b y an emplo yee of seller while onpurchaser’s premises.

This case is also discussed below in connection with theenforceab ility of contractual lim itations of liability.

(d) Eastland Court of Appea ls.In Banzhaf v. A DT Sec. Sys. , 28 S.W.3d 180(Tex.App.-Eastland [11th Dist.] 200 0, writ denied) thecourt of appeals upheld the following ind emnityprovision in an alarm security services contract. Thecourt rejected H erman’s arg ument that the id entificationof claims arising out of ADT’s negligence as beingcovered by the indemnity had to be in the samesentence with the word “indemnify.” ADT obtainedindemnity against its customer, Herman SportingGoods, Inc., for claims made by the estate of aHerma n’s employee who was killed in a robbery. Thealarm service purchased by Herman’s was fire alarmand after-hours unauthorized entry detection servicesand not robbery or hostage detection services. Thealarm service purchased by Herman’s was designed togo on only when no employe es were in the store.Herma n’s had declined to add the “duress code” feature

to the alarm. The decedent employee’s estate arguedthat ADT’s project was defective in not having thisfeature as a mandatory service.

Provision:

In the event any person, not a party to thisagreeme nt, shall make any claim or file any law suitagainst ADT for failure of its equipment or servicein any respect, customer [Herma n’s] agrees toindemnify, defend, and hold ADT harmless fromany and all such claims, and hold A DT harm lessfrom any and all such claims and lawsuits includingthe payment o f all damages, expenses, costs, andattorney’s fees. The customer [Herman’s] ... agreesthat ADT shall be exem pt from liabil ity for loss,damage or injury due directly or indirectly tooccurrences, or consequences therefrom, which theservice or system is des igned to de tect or avert; thatif ADT should be found liable for loss, damage orinjury due to a failure of ser vice or equ ipment inany respect, its liability shall b e limited to a sumequal to 100% of the annual service charge or$10,000, whichever is less ... as the exclusiveremedy; and that the provisions of thisparagraph shall apply if loss, damage, or injury,irrespective of cause or o rigin, results directly orindirectly to person or property from performanceor nonperformance of ob ligations impo sed by thiscontract or from negligence, active or otherwise, ofADT, its agents or employees. (emphasis added)

(e) El Paso C ourt of A ppeals. Permian Corp. v. Union Texas Petroleum Corp., 770S .W .2d 928 (T ex. App.--E l Paso 19 89, no writ ). Anemployee of a subsidiary of Permian, the contractor,sued Union T exas for neg ligently causing the employeeinjuries while the employee was performing services forUnion Texas. The El Paso Court of Appeals found thefollowing indemnity by Permian expressly indemnifiedUnion Texas against liabilities arising out of itsnegligence:

Provision:

Contractor (Permian) hereby indemnifies and agreesto protect, hold and save Un ion Texas ... harmlessfrom and against a ll claims ... including b ut notlimited to injuries to employees of Contractor ... onaccount of, arising from or resulting, directly orindirectly, from the work and/or services performedby Contractor ... and whether the same is caused orcontributed to by the negligence of Union T exas, itsagents or employees. (Emphasis added by thecourt.)

"Whether" was interpreted to mean "including,even if ... ."

(f) Fort W orth C ourt of A ppeals .

i) Linden-Alimak . Linden-Alimak, Inc. v. McDo nald , 745 S.W.2d 82 (T ex.App.--Ft. Worth 1988, writ denied). The Fo rt WorthCourt of Appe als reviewed an indemnity provision in anequipment rental agreement. An employee (McDonald)of the equipment lessee (Thomas S. Byrne, Inc.) filedsuit against the equipment lessor (Linden-Alimak) torecover damages for persona l injuries sustained while


the leased crane was being erected. The equipmentlessor filed a third party action against the lessee forindemnification. The court held that the followingindemnity provision in the equipment lease agreementsuffered the same defect as the provision in CrownCentral Petroleum. The court found the ind emnitylanguage to be inadequate to indemnify the equipmentlessor against its concurrent negligence. Theindemnity , by excluding the lesso r's sole negligenc e, didnot include a case of lessor's concurrent negligence.Situations involving lesso r's concurrent negligence werenot mentioned (i.e., "in part" not mentioned).

Provision:

It is expressly understood and agreed tha t Lessorshall not be liable for damages, losses and injuriesof any kind whatsoever, whether to persons orproperty , or for any other loss arising from theoperation, handling, use of, transportation of, or inany way conne cted with the said equipment or anypart thereof from whatsoever cause arising, exceptdirect damages, losses or injuries cau sed by L esso r'ssole negligence. Lessee shall indemnify and saveLessor harmless from any and all claims, demands,liabilities, judgments, actions or causes of action ofany nature whatsoever (except if cau sed by L esso r'ssole negligence) arising out of the selection,possession, leasing, operation, control, use,maintenance, repair, adjustment or return of theequipme nt. (Empha sis added by author.)

ii) B-F-W Construction. In B-F-W Const. Co., Inc. v. Ga rza, 748 S.W .2d 611 (Tex.App.--Ft. Worth 1988, no writ ), the Fort Worth Courtof Appea ls held that the language "regardless of anycause or of any fault or negligence of Contractor"expressly stated the intent of the parties that thesubcontra ctor would indemnify the contracto r againstthe contractor's negligence. The indemnity provisionstated

Provision:

Subcontractor (Garza C oncrete) sh all fully protect,indemnify and defend contractor (B-F-W) and holdit harmless from and against any and all claims,demands, causes of action, damages and liabilitiesfor injury to or de ath of Subcon tractor, or any oneor more of Subcontractor's employees or agents, orany subcontractor or supplier of Subcontractor, orany employee or agent of any such subcontractor orsupplier, arising in any manner, directly orindirectly, out of or in connection with or in thecourse of or incidental to any work or operations ofSubcontractor or Contractor or any other contractoror subcontractor or party, or otherwise in the courseand scope of their employment, and regardless ofcause or of any fault or negligence of Contractor.(Emph asis added by author.)

(g) Houst on Co urts of A ppeals .

i) 1st District. Monsanto Co. v.Owens- Corning Fiberglass Corp., 764 S.W.2d 293(Tex. App.--Houston [1st Dist.] 19 88, no writ ). Theemployee of the subcontractor (Owens-Corning) suedthe contractor (Monsanto) for personal injuries sufferedon the job site. The employee had already collected

workers' compensation benefits from the subcontractor.The contractor filed a third party actio n against itssubcontractor seeking con tractual indemnity. The courtheld the following p rovision in the su bcontrac t did notmeet the express negligence standard since it did notexpressly indemnify the contractor for its ownnegligence:

Provision:

(Sub)Contractor (Owens-C orning) agre es toindemnify and save Monsanto (Contractor) and itsemplo yees harmless against any and all liabilities,penalties, demands, claims, causes o f action, suits,losses, damages, costs and expenses (includingcosts of defense, se ttlement and r easonab leattorne y's fees) which any or all of them mayhereafter suffer, incur, be responsible for or pay out... as a result of bodily injuries ... to any person ordamage ... to any prope rty occurring to or caused inwhole or in part by, (Subcontractor) (or any of hisemployees), any of his (Sub)Subcontractors (or anyemployee thereof) directly or indirectly employedor engaged by either (S ubcontra ctor) or any o f his(Sub- subcontra ctors). (Em phasis and parentheticaldesignation s added by author.)

The court noted that the term "negligence" is not foundin the indemnity agreement. The indemnity did notmention indemnifying against the negligence of thecontractor. Also, it did not mention indemnifyingagainst the concurrent negligence of the subcontractor(the indemnifying party). Therefore, the court notedthat the agreement did not provide for contractualcomparative negligence. The indemnity contractneither covered the negligence of the contractor nor thesubcontractor. Id. at 295. The indemnity also does notexpressly require the employer (Indemnifying Person)to assume liability for injuries to its employees therebyovercoming the Workers' Compensation Bar.

The court in Jobs Building Services, Inc. v. Rom,Inc., 846 S.W .2d 867 (Tex. Ap p.--Housto n [1st Dist.]1992, writ denied) found that the following provision ina window wa shing subco ntract with the buildingmaintenance contractor was not specific eno ugh toindemnify the contractor for its own negligence:

Provision:

The Subcontractor agrees to indemnify and holdharmless the Contrac tor ... for (i) bodily injury,illness or death of any person; ... which ... damageis caused by the Subcontractor's negligent act oromission or by the negligent act or omission ofanyone employed by the Subcontractor or for whoseacts the Contractor or the Subcontractor may beliable or for which the Subcontractor is liable orresponsib le. (Court's italics; autho r's bold.)

Id. at 870.

Glenda le Construction Services, Inc. v. Ac curateAir Systems, Inc., 902 S.W.2d 536 (Tex. App.--Houston[1st Dist.] 199 5, writ denied). The co urt, following theTexas Supreme Court’s ruling in Fisk Electric Co. v.Constructors, Inc., 888 S.W.2d 813 (Tex. 1994)construing a similar provision, held the followingprovision did not pass the exp ress negligenc e test.


Provision:

11.11 Indemnification:

To the fullest extent permitted by law, theSubcontractor shall indemnify and hold harmlessthe Owner, the Architect and the Contrac tor and allof their agents and employe es from and a gainst allclaims, damages, losses and expenses, including butnot limited to attorn ey’s fees, arising out of orresul ting from the performance of theSubcontractor’s work under this Subcontractprovided that any such claim ... to the extent causedin whole or in part by a negligent act or omission ofthe Subcontractor or an yone dire ctly or indire ctlyemployed by him or anyone whose acts he may beliable, regardless of whether it is caused in part bya party indemnified hereunder. ...

The language re ferring to the Indemnified Person o nlyreferred to injuries "whether caused in part” by theIndemnified Person, and did not expressly state that thecause was the "negligence” of the Indemnified Person.This type of indem nity provision is the same as iscontained in the AIA for ms. See Appendix 3. Thecourt also noted that the next provision in theindemnity, the standard waiver of the workers’compensation bar (the "indemnificatio n obligation ...shall not be limited in any way by any limitation on theamount or type of damag es, comp ensation or b enefitspayable by or for the Subcontractor under workers’ orworkmen ’s compensation acts...”) was irrelevant sincethe indemnity was not otherwise enforceable.

ii) 14th District. The court inAdams Resources Exploration Corp. v. ResourceDrilling, Inc., 761 S.W.2d 63 (Tex. App.--Houston[14th Dist.] 1988, writ dism 'd) found the ind emnityprovision passed the express negligence test. Theindemnity language in this case is identical to thelanguage recently reviewed by the Texas SupremeCourt in Maxus Exploration Co. v. Moran Bros., Inc.,773 S.W.2d 358 (Tex. A pp.--Dallas 1 989), aff'd 817S.W.2 d 50 (Tex. 1991) discussed above and iscontained in the standard form Daywork DrillingContract published by the International Association ofDrilling Contractors.

In DDD Energy, Inc. v. Veritas DGC Land, Inc., 60S.W.3d 880 (Tex.App.-Houston [14th Dist.] 2001, nowrit), the court of appeals found that the followingprovision was not enforceab le to shift DD D’snegligence to Veritas, but did not prevent DDD fromrecovery from Veritas on a claim that Veritas breachedits contract to perform its services in a good andworkmanlike manner:

Provision:

Section V-Op erations:

Veritas shall indemnify, defend, ... [DDD] for allclaims, damages, causes of actions, and liabilitiesresulting from Veritas’ failure to c onduc t seismicoperations in an orderly and workma nlikemanner...

Section X -Liability Indem nity:

Veritas shall protect, indemnify, defend and save[DDD ], ... harmless from and against all claims, ...and causes of action ... asserted by third parties onaccount of ... damage to property of such thirdparties, which ... damage is the result of thenegligent act or omission, breach o f this BasicAgreement or the Sup plemental A greement, orwillful miscondu ct of Veritas . . . Likewise, [DDD]shall protect, indemnify, defend and save V eritas, ...harmless from and against all claims, ... causes ofaction ... asserted by third p arties on acc ount of ...damage to property of such third parties, w hich ...damage is the result of the negligent act or omissionor willful miscon duct of [D DD] ...

Suit was brought by Vickers, a landowne r, againstDDD, which was the lessee on an oil and gas leasecovering Vickers’ land, for property damages sustainedby Vickers d ue to the cutting down of numerous oakand mesquite trees. DDD had hired Veritas to conductseismic services on the Vickers’ land. Veritassubcontracted with Brush Cutters to conduct brushclearing operations. DD D brought suit against Veritasseeking a declarato ry judgmen t that Veritas is obligatedto defend and indemnify DDD against claims based ondamage to Vickers’ land caused by Veritas’ negligence.

The court of ap peals sustaine d the trial cour t’sgranting of summary judgm ent against enforcement ofthe indemnity provision. The court of appeals foundthat DDD’s action was an attempt to have Veritasindemnify DDD for DDD’s negligence.

However, the court reversed the trial court andremanded the matter for further proceedings regardingVeritas’ obligations under the indemnity pro visions todefend and indemnify DDD against third party claimsnot based on DDD’s negligence. Vickers had suedDDD for (1) breach of duty to manage and administerthe lease, (2) breach of contract, (3) negligence, (4)malicious trespass, (5) n egligent misrepresentations, (6)breach of fiduciary duty, (7) gross negligence, and (8)intentional tort.

(h) San Antonio Court of

Appea ls. Haring v. Bay Rock Corp., 773 S.W.2d 676(Tex. App.--San Antonio 1 989, no writ ). In this caseinvolving a wrongful death action, the San AntonioCourt of Appeals held the following provision did notmeet the express negligence test since the negligence ofthe alleged indemnified person (oil and gas lessee) isnot mentioned:

Provision:

[Operator (Bay Rock Corp.)] shall have no liabilityto owners of interests in said wells and leases(Haring) for losses sustained, or liabilities incurred,except such as may re sult from gross negligence orfrom brea ch of the pro visions of this agre ement.

The provision is worded as a disclaimer by theoperator as to any liability except for gross negligence,and not as an inde mnification by the operator for theoperator's "disclaimed" but not expressly disclaimednegligence.

(i) Texarkana Court of App eals.The Texarkana Court of Appeals in Texas Utilities


Electric Co. v. Babco ck & Wilcox, 893 S.W.2d 739(Tex. App.--T exarkana 1 995, no writ ) found thatneither of the following indemnity pro visions expr esslycovered the Indemn ified Perso n's (Texas U tilities')concurrent negligence in causing injuries to anemployee of Flour Daniel, a contractor employed byTexas Utilities.

Provisions:

[Babcock & Wilcox agree to indemnify TexasUtilities for claims against Texas Utilities fordamages arising from] p ersonal injur y or death ordamage to property of Company's [Ba bcock's]agents, servants and employees, as well as theagents, servants, and employees of Company's[Babcock 's] subcontra ctor, whether or not arisingfrom sole or con current neglig ence or fau lt ofPurchaser [TU].

[Babcock & W ilcox] shall de fend ... indem nify ...Purchaser [TU] and its ... agents ... from and againstany and all claims ... of every kind and characterwhatsoever arising in favor of any person or entity(other than the agents, servants, and employees or[sic] [of? ] Co mpa ny [B abc ock ] or of C omp any'ss u b c o n t r a c t o r , a s p r o v i d ed i n t h eparagraph immediately above), including ... claims... on account of personal in juries or death, ordamage to property arising out of or incident to thework performed hereunder .... with the onlyexception being that, as to claims arising in favor ofpersons or entities other than for injury, d eath, ordamage to the agents, servants, and employees ofCompany [Babcock] or Comp any's subcontractor,Purchaser [TU] sh all not be entitled toindemnific ation for claims, demands, expe nses,judgments, and causes of action resulting fromPurchaser's [TU] sole negligence.

The first indemnity does not cover injuries toemployees of a contrac tor of Texas Utilities. Thesecond indemnity does not cove r Texas Utilities'concurrent negligence. The exception for TexasUtilities' sole negligence from the broad ind emnity isnot equivalent to an express inclusion of Te xas Utilities'concurrent negligence.

(j) Tyler Court of App eals. In StateDepartment of Highways & Public Transportation v.Reynolds-Land, Inc., 757 S.W.2d 868, 869 (Tex.App.--Tyler 1988, no writ ), the Tyler C ourt of Ap pealsheld unenfo rceable the following indemnity provisionin a highway construction contract be tween the Sta teHighway Department and the contractor:

Provision:

The contractor (Reynolds-Land) shall save harmlessthe (Depar tment) from a ll account of any injuries ordamages sustained by a ny person o r proper ty inconsequence of any neglect in safeguarding thework by ... (Reynolds-Land); or from any claims oramounts arising or recovered under the "Work men's'Compensation Laws" or any other laws.

The amounts fo r which indem nity was sought werepaid by the Department pursuant to an agreed judgmentsetting a negligence suit brought by the injured

employee of the contractor against the De partment.The contractor's workers' compensation carrier hadintervened in the suit to seek subrogation against theDepartment for amounts it had paid to the employee.Unfortunately for the Department, the court held thatthe settlement am ounts paid by the Departm ent were inthe nature of settlement payments on the claim againstthe Department for its own negligence, rather thanamounts paid by it on a workers' compensation claim.The indemnity clause neither expressly covered theDepar tme nt's negligence nor amounts paid by theDepartment to settle claims against the Department forits own negligence. Also , even though the indemn ityclause expressly covers "any claims o ver amountsarising or recovered under the Workmen' sComp ensation Laws," the Department could only beliable at common law for its own negligence; andtherefore, the settlement agreement could not transformthe payment from a payment on account of theDepar tme nt's negligence to a claim paid by it under theWork ers' Comp ensation Ac t.

(3) Federal Court Interpretations ofEthyl.

(a) Dupont v. TXO Production.Dupont v. TXO Production Corp., 663 F. Supp. 56(E.D. Tex. 19 87). The Eastern District Court enforcedan indemnity provision where a contractor (Richards)indemnified the owner of a rig (TXO) for injuriesincurred by contractor's employees " without regard tothe cause or causes thereof or the negligence of anyparty ... ." This language is identical to the languageapproved by the Tex as Suprem e Court in MaxusExploration Co. v. Mora n Bros., Inc., 773 S.W.2d 358(Tex. App.--Dallas 1989 ), aff'd 817 S.W.2d 50 (Tex.1991).

(b) Hardy v. Gulf Oil. In Hardy v.Gulf Oil Corp., 949 F.2d 826 (5th Cir. 1992 ), the court,after exhaustively examining Texas statutory andcommon law and general maritime law, easily disposedof the offshore o il well contracto r's claim for indem nitysince, unfortunately, the Drilling Contract did notcontain an indemnity provision. See gen erally Yeates,Dye & Garc ia, Contribution and Indemnity in MaritimeLitigation, 30 S. TEX. L. REV . 215 (1989).

(c) Barnes v. Calgon Corp. Thecourt in Barnes v. Calgon Corp., 872 F. Supp. 349(E.D. Tex. 19 94) did n ot find it even neces sary todiscuss the express negligence test in upholding thefollowing provision as covering the negligence of theIndemnified Person (Calgon who had loaned itsemployee to Pacemaker Employee Leasing, Inc.):

Provision:

Southwestern Profession al Driver S ervice(Pacemaker) will indemnify ... from any claim s ... ofits employees (Barnes who was a borrowedservant/employee from Calgon) ... including:Payroll ... injury ... regardless of whether suchclaims are alleged to have been caus ed in whole orin part of any ac t of negligence of Calgon ....

C. Indemnity Against One's Strict Liability. Thefair notice doctrine has been extended to casesinvolving strict liability. The Texas Supreme Court


held in Houston Lighting & Power Co. v. Atchison,Topeka, & Santa Fe Railway Co., 890 S.W.2d 455(Tex. 1994) that an indemnity agreement will includeindemnification for strict statutory liability only if theagreement expressly states that the Indemnifying Personis to be liable for the Indemnified Person's strictliability. In Houston, Lighting & Power, the court heldthat the provision outlined below did not indemn ifyRailway Company for the strict liability imposed by theFederal Employe rs' Liability Act (FELA) for injuries toits employee. 45 U.S.C.A. §§ 51-60 (1988).

Provision:

Notwithstanding anything contained in Section 3of Article 1 of Original Contract to the contrary,[HL&P] agrees that it will at all time indemn ifyand save harmle ss Railway Co mpany aga inst allclaims, demands, actions or c auses of action,arising or growing out of loss of o r damage toproperty, including said rotary dumper andappurtenances, and injury to or death of persons,including employee s of Railway C ompan y,resulting in any manner from the construction,maintenance, use, state of repair or presence ofsaid rotary dumper and appurtenances under ofadjacent to The T rack, whether such loss,damage, injury or death be caused orcontributed to by the negligence of RailwayCompany, its agents or employ ees, or otherwise....

An employee of the Railway Company sued it forinjuries the employee sustained in uncoupling a railroadcoal car at a coa l dumping facility at HL&P's powerplant. HL&P operated a rotary coa l dumper a t its plant.A rotary coal dumper unloads a coal train by movingeach car into position inside the dumper through the u seof a mechanical arm. Rotary couplers link the coal carstogether and allow the dumper to invert the coal car andempty the coal into an underground pit. Because thecaboose does not have a rotary coupler, the last carmust be uncoupled from the caboose before beingemptied. After the employee had successfully unloadedthe cars of coal, he attempted to realign the couplers onthe caboose, which had failed to realign. The employeeinjured his back in the p rocess. T he Feder al SafetyAppliance Acts (SAA), 45 U.S.C.A. § 2 (1988)mandate that couplers on the cars and the cab ooseremain aligned so tha t they will automatic ally coupleupon impact with the preceding or following carwithout the necessity of workmen having to go betweenthe cars. FELA embraces claims of an employee basedon a violation of the SAA.

HL&P entered into the above indemnity agreementindemnifying the Railway C ompan y as to liability forinjuries to the Railway Comp any's employees. The juryfound that the employee was 45% negligent and that theRailway Co mpany wa s 55% n egligent.

The supreme court determined, however, that theindemnity provision did not cover this type of liability.The court found that the Railway's strict liability forinjuries to its employees arising out of a violation of theSAA was not a neg ligence-base d liability, but a strictstatutory liability. The Railway Company argued thatits liability for a SAA violation was negligence per se,

and therefore "negligence" within the words of theindemnity provision.

However, the supreme court determined that thecorrect view of the liability created by the SAA was thatit was a strict liability not dependent upon thenegligence of the Railway Company. It noted thatconfusion and contrary decisions had arisen in th is area,in part, because a claim based on a violation of the SAAis a non- negligence claim, which must be pursued byaction under FELA, a negligence-based statute. Thec o u r t o v e r r u l e d i t s e a r l i e r d e c i s i o n inMissouri-Kansas-Texas R.R. v. Ev ans, 250 S.W.2d 385,392 (Tex. 1952) in which the court had held "inpassing" that a violation of the SAA is negligence perse.

The court found that fairness dictate s that such an"extraordinary shifting of risk" must be clearly andspecifically expressed as to non-negligence basedstatutory strict liability in order to be enforced.

The court in passing recognize d that indem nityprovisions shifting liability arising out of strictproducts liability are similarly enforce able, if fairnotice has been giv en. Citing Rourke v. G arza, 511S.W.2d 331, 333 (Tex. Civ. App.--Ho uston [1st D ist.]1974), aff'd , 530 S.W.2d 794 (Tex. 1975)--in which theindemnity clause was held not to have been wordedsufficiently so as to include strict pro ducts liability;Dorchester Gas Corp. v. American Petrofina, Inc. 710S.W.2d 541, 543 (Tex. 1986)--also, which held that theindemnity clause in question did not clearly require theindemnitor to indemnify the indemnitee against strictproduc ts liability. See Richard L. Sc heer, ModelContra ctual Ind emnity Provisions Effective to Protectan Indemnitee Against His Own Negligence or OtherFault, 50 TEX. B.J. 602, 606 (June 1987). See Tade,Indemnification - Who Wins, Who Loses Under Tex as,Louisia na and M aritime La w, 29TH ANNUAL OIL,GAS & MINERAL LAW INSTITUTE 10 (UNIV.TEX. 1994) citing Armstrong v. Chambers & Kennedy,340 F. Supp. 1220 (S.D. Tex. 1972 ); aff'd and rev'd inpart on other grounds sub nom., In re DearbornMarine Services, Inc., 499 F.2d 263 (5th Cir. 1974),cert. dismissed , 423 U.S. 886 (1974); Dorchester GasCorp. v. Americ an Petro fina, Inc., 710 S.W.2d 541(Tex. 1986), overruled by Ethyl; K&S Oil W ellService, Inc. v. Cabo t Corp., 491 S.W.2d 73 3 (Tex.Civ. App .--Corpus C hristi 1973 , writ ref'd n.r.e.).

The Fifth Circuit has addressed indemnifications forstrict liability under environmental protection laws inFina, Inc. v. ARCO , 200 F.3D 266 (5 th Cir. 2000). InFina the court had to determine the enforceability oftwo indemnity pro visions, the first in a 1969 salescontract between ARCO and B P Oil Company (the“ARCO/BP Agreem ent”) as to a refinery located in PortArthur, Texas being acquired by BP from ARCO , andthe second in a 197 3 sales contract between BP andFina (the “BP/F ina Agr eemen t”) whereby Finaacquired the refinery from BP. Fina sued BP andARCO for $14,000,000 in investigatory and remedialresponse costs it incurred after it discoveredcontamination at the refinery in 1989. Fina soughtcontribution from BP and ARCO under CERCLA. BPcounterclaimed that the liability was covered in Fina’sindemnity of BP in the BP/Fina Agreement. ARCOcounterclaimed that the liability was covered by the


indemnity in the ARCO/BP A greement was assumed byFina by the BP/Fina Agreement. The BP/FinaAgreement contained an express choice of lawsprovision choosing Delaware law. The ARCO/BPAgreement was silent as to applicable law. Theindemnity provisions are the following:

Provisions:

ARCO/BP Agreement. BP shall indemnify, defend,and hold harmless ARCO ... against all claims,actions, demands, losse s or liabilities arising fromthe ownership or the operation of the Assets ... andaccruing from and after Closing ... except to theextent that any such claim, action, demand, loss orliability shall arise from the gross negligence ofARCO.

BP/Fina Agreement. Fina shall indemnify, defendand hold harm less BP ... ag ainst all claims, actions,demands, losses or liabilities arising from the use orthe operation of the Assets ... and accruing from andafter closing.

As to the BP/Fina Agreement the court firstdetermined that it would uphold the parties choice ofDelaware law as the court could not discern afundamental public policy of the State of Texas thatwould be violated by applying the “clear andunequivo cal” test applicable to the enforceability ofindemnity provisions cove ring the Indem nified Person’snegligence. The court then held that the “all claims”language in the BP/Fin a Agreem ent clearly coveredliabilities arising under CERCLA, even thoughCERCLA was not enacted until 1980. The court notedthat unlike Texas no Delaware case had addressed theapplicab ility of the clear and unequivoc al test to claimsbased on strict liability. The court found that the samepolicy reasons that e xisted in Te xas’ extension of theexpress negligence doctrine to strict liability cases alsoexisted in Delaware to extend the clear and unequivocaltest to strict liability claims in interpreting indemnities.

The court rejected BP’s argument that normalcontract rules of interpre tation should apply tointerpreting the indemn ity. BP argued that the clear andunequivocal test should not apply to indemnification forprior acts giving rise to potential future liability (with“past” and “future” being determined by reference tothe time at which the indemnity provision was signed).The court rejected BP’s argument that under Texas lawthe express negligence d octrine is inap plicable toindemnities for past con duct giving rise to potentialfuture liability and therefore similarly the court sho uldfind that Delaware would not apply the clear andunequivocal test to potential future liability for pastacts.

The court stated,

Even as to Texa s law, it is not at all clear tha t BP’sconclusion is correct. T he language used by theTexas courts is ambiguous: “Future negligence”might refer to future negligent conduct, but it alsomight refer to future claims based on negligence.True, the Texas rule does clearly distinguishbetween (1) indemnification for past conduct forwhich claims have already been filed at the time thei n d e m n i t y p r o v i s i o n i s s i g ne d a n d

(2) indemnification for future conduct for whichclaims could not possibly have been filed at the timethe indemnity provision was signed. Still, no Texascase has addressed the applicability of the ru le tothe rare situation in which a par ty attempts toinvoke the protection of an indemnity agreementagainst a claim filed after the indemnity was signedbut arising from conduct that occurred prior tosigning of the ind emnity.

The court held that under Delaware law theindemnity in the BP/Fina Agreement did not clearlyand unequivocally require Fina to inde mnify BP for itsstrict liability under CERCLA that arose after theindemnity agreement (the “future claim”) for conductprior to the ind emnity agree ment.

As to ARCO’s “circuitous indemnity obligation”being enforceable against Fina, the court held that theARCO/BP Agreement did not pass the fair notice testunder Texas law and would not pick u p strict liabilityclaims for ARCO’s future strict liability for its pastconduc t.

The court noted that Fina’s claims under theResource Conservation Recovery Act, 42 U.S.C.§§ 6901 et seq., and § 361.34 4 of the Texas S olidWaste Disposal Act similarly would not be barred bythe indemn ity.

D. Elements. An indemnity contract involves thesame basic elements as c ontracts gen erally.

1. Offer and Accepta nce. A contract ofindemnity requires an offer and acceptance.

a. Authority to Enter Ind emnityContract. In Rourke v. G arza , 511 S.W .2d 331 , 334(Tex. Civ. App.--Houston [1st Dist.] 19 74), aff'd530 S.W.2d 794 (T ex. 1975), the Texas Supreme Courtrefused to enforce an indemnification clause containedin a delivery rec eipt for leased equipme nt. The receiptwas signed by an employee of the contracto r who didnot have actual or apparent authority to bind thecontractor and the contractor did not have actualknowledge of the terms set forth in the rece ipt prior tosignature.

b. Failure to Read N o Excuse . It has beenheld that the failure of an owner to call the attention ofthe contractor to an indemnity provision in aconstruction contract did not excuse the contractor fromthe indemnity provision absent proof of fraud,overreaching or mutual m istake. Gulf Oil Corp. v.Spence & Howe Constr. Co., 356 S.W.2d 382 (Tex.Civ. App.--Houston 1 962, writ ref'd n.r.e.), aff'd 365S.W.2d 631 (T ex. 1963).

c. Conspicuous. See Greer and Collier,The Conspicuousness Requirement: Litigating andDrafting Contractual Indemnity Provisions in TexasAfter Dresser Industries, Inc. v. Page Petroleum, Inc.,35 SO. TEX. L.REV. 243 (1994) and the discussionbelow of the Dresser case in Article IV --Exculpationand Limitations of Liability Provisions and Releasesreviewing the application of the "conspicuou sness"requirement to exculpation provisions and releases. Anindemnity provision indemnifying the IndemnifiedPerson against his own negligence must be conspicuous


enough to give the Indemnifying Person "fair notice" ofits existence. The concept of "fair notice" wasintroduced into Texas indemnity law by the TexasSupreme Court in Spenc e & How e Const. C o. v. GulfOil Corp., 365 S.W .2d 631 , 634 (T ex. 1963 ). The fairnotice principle focuses on the appearance andplacement of the provision as oppose d to its "content."The supreme court in Spence reasoned that

[t]he obvio us purpose of this rule is to preventinjustice. A contracting party should be upon fairnotice that under his a greement a nd through no faultof his own, a large and ruinous award of damagesmay be assessed against him solely by reason ofnegligence attributable to the opposite contractingparty.

Spence, at 634.

Goodyear Tire & Rubber Co. v. Jefferson Constr. Co.,565 S.W.2d 916, 919 (Tex. 1978) upheld a provisionon reverse side of purchase order where frontsidecontained reference in large red print, partly in bold,incorporating provisions o n reverse sid e; EnserchCorp. v. Parker, 794 S.W .2d 2, 8 (T ex. 1990 ) upheldan indemnity provision contained on front of one pagecontract in separate p aragraph ; Dresser Industries v.Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993)struck down indemnity located on back of work order,in a series of uniformly numbered paragraphs, with noheading and with no contrasting type; K & S Oil W ellService, Inc. v. Cabot Corp., Inc., 491 S.W.2d 733,737-38 (Tex. Civ. App .--Corpus C hristi 1973, writ ref'dn.r.e.) struck down indemnity hidden on reverse ofcontract in paragraph headed "warranty;" Rourke v.Garza , 511 S.W.2d 331, 334 (Tex. Civ. App.--Houston[1st Dist.] 1974), aff'd 530 S.W.2d 79 4 (Tex. 1975);Safway Scaffold C o. of Hou ston, Inc. v. Safway SteelProducts, Inc., 570 S.W.2d 225 , 228 (Tex. Civ.App.--Houston [1st Dist.] 1978, writ ref'd n.r.e.);Griffin Indus. v. Foodmaker, Inc., 22 S.W.3d 33(Tex.App.-Houston [14th Dist.] 2000, writ ref’d)-indemnity not consp icuous if in same size and type asthe balance o f a 1 page d ocumen t; DouglasCablevision v. SWEPCO, 992 S.W .2d 503(Tex.App.-Texarkana 1999, writ denied)-indemnityprovision not consp icuous if in same size and type andwithout a separate heading id entifying theparagraph was an indem nity in a 22 paragraph, 13 pagedocument, also court not persuaded that theconspicuousness requirement applied only to “forms.”

The Texas Supreme Court discussed the UCC§ 1.201(10) conspicuousness requirement in the contextof warranties in Cate v. D over Co rp., 790 S.W.2d 559(Tex. 1990). In Cate , the court foun d that limitations tothe product's warranty were "buried" and were thereforenot conspicuous enough to be enforced. The courtreviewed an advertisement that exclaimed in blue,half-inch print, "YOU CAN TAKE ROTARY'S NEW5-YEAR WARRANTY AN D TE AR IT APAR T."Below this statement was bold black print touting how"solid" the warranty was, how it was superior to othercompanies' warranties, and how it did not hide thelimitations of the warran ty in "mumbo jumbo." Cate at560. The court defined the "conspicuous" standard asfollows:

We hold that, to b e enforcea ble, a written disclaimerof the implied warranty of merchantability made inconnection with a sale of goods must beconspicuous to a reasonable person. We furtherhold that such a disclaimer contained in textundistinguished in typeface, size or color within aform purporting to grant a warr anty is notconspicuous, and is unenforceable unless the buyerhas actual knowledge of the disclaimer.

Cate at 562.

In Dresser Industries, Inc. v. Page P etroleum , Inc.,853 S.W.2d 505 (Tex. 1993), the supreme courtadopted the conspicuousness standard of § 1.201(10) ofthe Texas UCC, applicable to the sale of goods, andapplied it to indemnities and releases in a caseinvolving the sale of services. Section 1.201(10) of theTexas UCC provides

A term or clause is conspicuous when it is sowritten that a reasonable person a gainst whom it isto operate ought to have noticed it. A printedheading in capitals (as: A NON-NEGOTIABLEBILL OF LA DING ) is conspic uous. Languag e inthe body of a form is "conspic uous" if its is in largeror other contrasting type or color. Bu t in a telegramany term is "co nspicuous ."

TEX. BUS. COMM. CODE § 1.201(10) (Vernon1994). Also see Banzh af v. ADT Se c. Sys., 28 S.W.3d180 (Tex.App.-Eastland [11th Dist.] 200 0, writ ref’d)finding an indemnity to be conspicuous that was setforth in “enlarged, all capital lettering. The lettering isdark, boldface type so that it contrasts with the lighter,smaller type of the remaining contractual paragraphs ...The indemnity provision ... is directly above thesignature line. A reasonable perso n’s attention isattracted to the indem nity provision when looking at thecontract... The indemnity provision is on the back page(of a 1 page document), but the contra ct itselfspecifically directs the reader’s attention to theparagrap h in which is it contained. On the front of thecontract, just above the signature line fo r Herma n’s isthe directive: “ATTENTION IS DIRECTED TOTHE WARRANTY, LIMIT OF LIABILITY ANDOTHER CONDITIONS ON REVERSE SIDE.” Anindemnity provision was held not to meet theconspicuousness requireme nt in U.S. Rentals, Inc. v.Mundy Service Corp., 901 S.W.2d 789 (Tex.App.--Houston [14th Dist.] 1 995, writ denied) when itwas buried on the back of a rental contrac t with allprovisions printed in the same respective type and sizes,and the heading did not alert the reader that it createdan indemnity obligation ("LIABILITY FOR DAMAGETO EQUIPMENT , PERSONS AND PROPERTY”). Inresponse to the claimant’s argument that due to thesophistication of the indemnito r and his exp erience inthe construction industry, he would have noticed theindemnity provision, the court stated

Contrary to U.S. Rentals’ fourth argument, we readFisk, Dresser, and other relevant decisions to directthat the conspicuousness of an indemnity agreementbe established by objective factors on the face ofthe agreem ent, rather than to vary according to the


subjective sophistication and experienc e of each p artyagainst whom the agreement may be asserted.

Id. at 792.

The Supreme Court in Littlefield v. Schaefer, 955S.W.2d 272 (Tex.1997), found that a release was notconspicuous when it was set in a type font too small toread even though the heading was in larger font(heading was 4 poin t font 4 p o i n t f o n t and the terms of therelease were in small er font); the release was outlinedin a box; the heading was all caps, in bold type and read“RELEASE AND WAIVER OF LIABILITY ANDINDEMNITY AGREEMENT” ; and above thesignature line appeared the caption in all caps,bold-faced centered and underlined type the followingstatement “I UNDERSTAND MO TORCYCLERAC ING IS DAN GER OUS . YES, I HAVE READTHIS RELEASE.” The court did not accept theargument that the release was conspicuous because ofits small contras ting type. “Wher e a party is not able toknow what the contract terms are because they areunreadable, as a matter of law the exculpatory clausewill not be enfo rced.”

See Greer an d Collier, The Conspicuou snessRequirement: Litigating and Drafting ContractualIndemnity Provisions in Texa s After Dresser Industries,Inc. v. Page Petroleum, Inc., 35 SO. TEX. L. REV. 243(1994) for an analysis of whether the Texas UCC mightallow such provisions to be enforced, even if not"consp icuous," due to custom and trade practiceprevailing in the industry in which the provision is used.Also see the Greer and Coll ier Article at page 257 foran interesting analysis of whether the Texas UCCquoted above is misquoted by placing the printedheading in "ALL CAPITALS" as opposed to "InitialCapitals." See gen erally, Baker, Special P roject:Article Two Warranties in Commercial Transactions,64 CORNE LL L. REV. 30, 182-87 (1 978); and Kistler,Note, U.C.C. Article Two Warranty D isclaimers andthe "Conspicu ousness" Requirement of Section 2-316,43 MERCER L. REV. 943, 946-55 (1992). It is arguedin White, Winding Your Way Through the TexasOilfield Anti-Indemnity Statute, the Fair NoticeRequirements and Other Indemnity Related Issues, 37S. TEX. L. REV. 161, 174-75 (1996) that the TexasSupreme Court by noting "actual notice or knowledge”as an exception to the "fair notice requirements”, whichinclude not only the conspicuousness requirement butalso the express neg ligence do ctrine, may in the futurehold that an Indem nifying Perso n is charged withconstructive knowledge that the scope of an indemn itycovers the Indemnified Person’s negligence, eventhough the indemn ity contained in the contract does notexpressly state that it includes the Ind emnified P erson’snegligence. White co mments:

It is interesting to note , however, tha t immediatelyafter stating that actual knowledge overrides thequestion of conspicuousness, the Cate court thendiscussed, by way of example, provisions of theTexas Uniform Commercial Code that allow a pa rtyto disclaim implied warranties orally or by waysother than by a conspicuous written disclaimer, suchas through 18a course of dealing, course ofperformance, or usage of trade. [Citing Cate , 790S.W .2d at 562.]. These three instances, however,are really examples of when it is reasonable to

impute constructive knowledge on a party.... If theTexas Supreme Court were to apply this sameanalysis with regard to the e xception to the "fairnotice” requirements, then usage of trade wouldcertainly be the most interesting of the examplescited. Usage of trade may allow an indemnitee toprove "actual notice or knowledge” of theindemnitor with regard to an indemnity provisionthat did not otherwise com ply with the expressnegligence doctrine and/or the con spicuousnessrequireme nt. This would not be accomplished byproving what the indemnitor subjectively knew ofthe content and the meaning of the indemnityagreeme nt, but, instead, by looking to the generalindustry practices and determining what theindemnitor should have known. Of course , the "fairnotice” requireme nts, themselves, are constructivenotice requireme nts - if the requirements arecomplied with, then the court will essen tiallydetermine that the party against whom theprovisions are being applied should have seen andunderstood such provisions, regardless of what theparty actually saw or understo od. White , at 175.

Recently, the Supreme Court has indicated that it mightlook to other factors to excuse a d rafter’s failure tomake such a provision “conspicuous”. The SupremeCourt in Green International, Inc. v. Solis , 951 S.W.2d384 (Tex. 1997) in holding that the fair noticerequirements in Dresser did not ap ply to“no-dama ges-for-delay” provisions in constructioncontracts noted that the pub lic policy beh ind the fairnotice requirement of “conspicuousness” was not asstrong in a case wher e the parties we re experie ncedcontractors familiar with the industry custom ofallocating risk for delays. The court stated

Furthermore, the concerns underlying theDresser [853 S.W.2d 50 5 (Tex. 1993)-see discussion ofreleases at Art. IV Exculpation and Limitation ofLiability Provisions and Releases] opinion are notpresent in this case. In Dresser, this Court wasconcerned with the injustice arising when a contractingparty buries a provision substantially rele asing itselffrom its own negligence in a way that is inconspicuousand does not p rovide fair notice to the other party. Inthe present case, there is no such injustice. Instead,both Green and Solis were experienced contractorsfamiliar with the industry custom of allocating risk fordelays.

The court did no t state whether the p arties actuallyknew of the presence o f the provision in the contracts.

The “no-dama ges-for-delay” type of clause,according to the Court, does not involve theextraordinary shifting of risks of the type d escribed inDresser. It is not an indemnity because it doesn’t shiftthe risk for third party claims. It is not a releasebecause it doesn’t extinguish a claim or cause of action.It is merely a shift in the economic consequences of adelay.

However, actual notice of the indemnity and riskallocation provisions cannot create a risk shiftingprovision where none exists and does not makeenforceab le an indemnity provision that does not meetthe express negligence test in the first place. DDD


Energy, Inc. v. Veritas DGC Land, In c., 60 S.W.3d 880(Tex.App.-Houston [14th Dist.]200 1, no writ ).

Drafting: The following factors have beenlisted by the above cited cases assupporti ng a finding that theprovision is not conspicuous: theprovision is hidden on the reverseside of the contract; the face of thec o n t r a c t i n c l u d e s m u lt i p leparagraphs of hundred s of words inregular size type, without color orother distinguishing characteristics;i n c o r p o r a t i n g n u m e r o u sparagraphs on the reverse side of thecontract, the reverse side of thec o n t r a c t i n c l u d e s m u l t i p leparagraphs of hundreds of words, allin regular size or reduced type,without color or other distinguishingcharacteristics, and contains theindemnity provision; the indemnityprovision is in a paragraph with aheading not indicating the nature ofthe provis ion as an indemnity; theindemnity provision is not separatedfrom the surrounding unrelatedprovisions.

Section 1.201(10) of the Texas UCC lists thefollowing as being available to make a provisionconspicuous: bold-face type, increased-size type,capital letters, and different colored type. Other statutesuse the following to make an item consp icuous:underlining--§ 35.53(b) Notice of L aw; Disp uteResolution Forum Applicable to Contract TEX. BUS &COMM. CODE (Vernon Supp. Pamphlet 2002)authorizing CAPITALIZATION or underlining as amethod to make a choice of non-Texas law provisionconsp icuous ; p u t t i n g a b o x a round th eprovision--Federal Truth-in-Lending Act, also seeSingleton v. LaCo ure, 712 S.W .2d 757, 758-59 (T ex.App.--Houston [14th Dist.] 1986, writ ref'd n.r.e.);Architectural Alumin um Co rp. v. Ma carr, Inc. 333N.Y.S.2d 818, 823 (N .Y. County Sup. Ct. 1972).

Greer and Collier recommend against the use ofitalics as the sole means of making an indemnity lookconspicuous. See Greer an d Colli er, TheConspicuousness Requirement: Litigating andDrafting Contractual Indemnity Provisions in TexasAfter Dresser Industries, Inc. v. Page Petroleum, Inc.,35 SO. TEX. L. REV. 243, 265-67 (1994) citing OfficeSupply Co. v. Basic/Four Corp., 538 F. Supp. 776, 783-84 (E.D. W is. 1982); De Lamar Motor Co. v. White,460 S.W.2d 802, 804 (Ark. 1970) and J. White & R.Summers, UNIFOR M COM MERC IAL CODE,PR ACTIT ION ER 'S EDITION 574, 575 (3d ed. 1988).

How "conspicuous" is conspicuous? For example,in an Oregon case involving a UCC disclaimer, thedisclaimer was on both the front and back of theagreement. On the front it was captioned "WarrantyDisclaime r" in "bo ld 8 point b lue type" with its tex t incontrasting 7 point type which differed from the "fineprint" (6 point type ) in the agreement--but not by much.Did that suffice? It did not. The court found the frontof the agreem ent a "hodgepodge" of various print sizesand other attention--getting devices inclu ding "bo ld

type, capital letters, red type and reverse lettering" suchthat the disclaimer language could not be said to beconspicuous, at least not in this general stew. What wasclear from the front was that the back of the agreementwas to be read. It provided "READ BOTH SIDESBEFORE SIGNING ." The disclaimer was repeated onthe back side. T he court found it failed to beconspicuous. The language on the rear was all in "thesame, faint type, with identic al headings." Anderson v.Ashland Rental, Inc., 858 P.2d 470 (Or. App. 1993); 24UCC Rep.2d 34 (199 3); also see Laudisio v. Amoc o OilCo., 437 N.Y.S.2d 502, 505- 06 (N.Y. Sup. Ct. 1981).

Greer and Collier make the following 11 draftingsuggestions:

1. Make the indemnity provision looknoticeable.

2. Avoid using italics, lighter-colored type,same-typed print or smalle r print.

3. Emphasize the entire para graph--not justportions.

4. Do not overuse conspicuousness techniques.

5. Avoid putting indemnities on the backs ofcontracts.

6. Make indemnities more conspicuous byplaceme nt at the beginn ing or end o f the contract.

7. Do not use mislead ing headings.

8. Use headings.

9. Do not surround indemnities with unrelatedterms.

10. The less formal the contract, the greater theneed for conspicuo usness.

11. Initial the indemnity paragraphs.

d. Actual Notice. The conspicuousnessrequirement is not applicable when the IndemnifiedPerson establishes that the Indemnifying Personpossesses actual notice or knowledg e of the indem nityagreeme nt. Dresser Industries, Inc. v. Page Petroleum,Inc., 853 S.W.2d 505, 508 (Tex. 19 93), citing gen erallyCate v. Dover C orp., 790 S.W.2d 55 0, 561 (Tex.1990). See Mc Gehee v. Certainte ed Corp ., 101 F.3 d1078 (5th Cir. (T ex.) 1996) remanding case for trial onactual knowledge of inclusion of an inconspicuousindemnity; Coastal Transport Co. v. Crown CentralPetroleum Corp., 20 S.W.3d 119 (Tex.App.-Houston[14th Dist.] 200 0, no writ)-admission that signing partyread the agreem ent sufficient to establish actual notice;Goodyear Tire & Rubber Co. v. Jefferson Constr. Co.,565 S.W.2d 916, 919 (Tex. 1978), overruled on othergrounds by Dresser Indu s., Inc., 853 S.W.2d at 509;Douglas Cablevision v. SWEPCO , 992 S.W. 2d 503(Tex.A pp.-Tex arkana 19 99, no writ ).

2. Consideration. For example, it has beenheld that an agreement to forbear filing a cross actionagainst the Indemn ifying Person in consideration of theIndemnifying Person's promise to hold the indemnified


person harmless and protect the indemnified personagainst judgment is adequate consideration to supportan indemnity co ntract. Russell v. Lemons, 205 S.W.2d629 (Tex. Civ . App.--Am arillo 1947, writ ref'd n.r.e.).

3. Promise . It is not necessary that the words"indemn ify" or "indemnity" be used or even that thepromise be in writing. 14 TEX. JUR. 3d Contributionand Indemnification § 14 Form (1997); 26 TEX. JUR.2d Statute of Frauds § 29.

4. Statutory Limits on Indemnity. A contractof indemnity is no t against public policy even if theIndemnified Person is indemnified against its ownnegligence, except if there is a specific statute declaringsuch a contract is void.

a. Architects and Engineers. Contractualindemnity for malpractice by architects and engineersis void. Only insurance compan ies may indem nifyarchitects and engineers for malpractic e pursuant toprofessional liability policies. T EX. CI V. PRA C. &REM. COD E ANN . §§ 130.001-.005 (Vernon Supp.2003). This statute does not prevent a negligentcontractor from indemnifying a non-negligent a rchitect.Foster, Henry, Hen ry, & Thorpe, Inc. v. J. T . Const.Co., Inc., 808 S.W .2d 139 (Tex. App.--El Paso 1991,writ denied). This Section was amended effectiveSeptemb er 1, 200 1, to also pr ovide that:

A covenan t or prom ise in, in connection with, orcollateral to a construction contract other than acontract for a single family or multifamily residenceis void and unenforceable if the covenant orpromise provides for a regis tered architect orlicensed engineer whose engineering orarchitectural design services are the subject of theconstruction contract to indemnify or hold harmlessan owner or owner’s agent or employee fromliability for damage that is caused by or results fromthe negligence of an owner or an owner’s agent oremployee.

b. DTPA. Indemnity rights are notprohibited by the Texas Deceptive Trade Practices Act.TEX. BUS. & COMM . CODE ANN. § 17.555(Vernon 1987) p rovides " [a] person against whom anaction has been brought" under the DTPA can assert allcontribution or indemn ity rights available understatutory or comm on law. Also see Plas-Tex , Inc. v .U.S. Steel Corp., 772 S.W.2d 442 (T ex. 1989);Aviation Office of America , Inc. v. Alexander &Alexander of Texas, Inc., 751 S.W .2d 179, 180 (Tex.1988) (per curiam).

c. Oil and Gas Service Co ntracts.Indemnity contracts in oil and gas service contracts arevoid as against public policy unless certain statutoryrequireme nts are met . TEX. CIV. PRAC. & REM.CODE ANN . §§ 127 .001-.00 7 (Vern on 199 7). Thisstatute is known as the Texas O ilfield Anti-Indem nityStatute; this statute, formerly TEX. REV. CIV. STAT.ANN. Art. 2212b , was originally enacted in 1973, andamended in 1979. Article 221 2b was recodified asChapter 127 of the Civil Practice and Remedies Codein 1985, a nd amend ed again in 1 989. See White ,Winding Your W ay Thro ugh the Texas O ilfieldAnti-Ind emnity Statute, the Fair No tice Requ irementsand Other Indemnity Related Issues, 37 S. TEX. L.

REV. 161 (1996); Powell, Indemnity and InsuranceProvisions in Oil and Gas Agreemen ts, Advanc ed Oil,Gas and Mineral Course (State Bar of Texas 1996);Tade, Indemnification - Who Wins, Who Loses UnderTexas, Louisiana and Maritime Law, 20TH ANNUALOIL, GAS & MINERAL LAW INSTITUTE 12-21(UNIV. TEX. 1994 ); Tade, Texas Anti-Indemnity LawUpda te, 53 TEX . B.J. 107 (1990) . Also see Transw orldDrilling Co. v. Levingston Shipbuilding, 693 S.W.2d19, 23 (Te x. App.--B eaumon t 1985, no writ ) for areview of the types of contracts governed by thisstatute. The T exas Oilfield A nti-Indemnity S tatuteprovides that an agreement pertaining to an oil and gaswell is void if it purpo rts to indemnify a party from lossor liability for damage arising out of its own negligence.

Prio r to the enactment of Article 2212b in 1973,many oil compan ies and oil we ll operators had imposed"hold harmless" a greements on oil well drilling andservice contractor s to indemn ify the oil companies andoperators for losses caused by the negligence of thedrilling contractor , and often for the negligence of theoil company, operator and third parties as well. Manybelieved that such agreements placed an undue financialburden on what were perceived to be small contractorswith less bargaining power than the oil companies andoperators with whom they were negotiating contracts. See HOUSE INTERIM STUDY COMMITTEE ONHOLD HARMLESS AGREEM ENTS, REPOR T, 63rdLeg., at 3-8 (197 3). The leg islature enacte d the OilfieldAnti-Indem nity Statute in 1973 to cure this perceivedinequity by prohibiting agreemen ts pertaining to oil andgas wells that indem nify a party for its own negligence.

(1) Void Agreements. Section 127.003TEX. CIV. PRAC. & REM. CODE ANN. (Vernon1997) provides

(a) Except as otherwise p rovided by this chapter, acovenan t, promise, agreement, or understandingcontained in, collateral to, or affecting an agreementpertaining to a well for oil, gas, or water or to amine for a mineral is void if it purpo rts toindemnify a person against loss or liability fordamage that:

(1) is caused by or results from the sole orconcurrent negligence of the indemnitee, his agentor employee , or an individ ual contractor dire ctlyresponsible to the indemnitee; and

(2) arises from:

(A) personal injury or death;(B) property damage; or(C) any other loss, damage, or

expenses that arises from perso nal injury, death, orproperty inj ury.

(2) Excluded Activities.

(a) Joint Operating Agreements.Following the ruling in Haring v. Bay Rock Corp., 773S.W.2 d 676 (T ex. App.--S an Antonio 1989, no writ ),oil operators were successful in having joint operatingagreeme nts excluded from the Oilfield Anti- IndemnityStatute and in creating a legislative exception to thec o u r t - c r e a te d e x p r e s s n e g l i g e n c e t e s t .


Section 127.002(c) adopted in 1991 (Vernon 1997)provides:

(c) The legislature finds that joint operatingagreement provisions for the sharing of costs orlosses arising from joint ac tivities, including co stsor losses attributable to the negligent acts oromissions of any party conducting the joint activity:

(1) are commo nly understoo d, accepte d, anddesired by the parties to joint operatingagreements;

(2) encourag e mineral de velopme nt;

(3) are not against the public p olicy of thisstate; and

(4) are enforceable unless those costs orlosses are expressly excluded by writtenagreeme nt.

Prior to the adoption of this amendment, greatconcern was expressed among oil operators that thestandard provisions e xculpating an d indemn ifying theoperator by the non-operators, contained in the modelform joint operating agreement published by theAmerican Association of Petroleum Landmen("A.A.P.L."), would fail the ex press neglige nce test.The A.A.P.L. form provides that the operator, in itscapacity as operato r, is to have no liability to the otherparties for losses or liabilities, unless such losses orliabilities result from the gross negligence or willfulmisconduct of the oper ator. The A.A.P.L. model formprovides that costs attributable to the negligence of theoperator are to be borne and paid by each partyaccording to its interest. Even though the A.A.P.L. formwas revised in 1989, these provisions dealing withrelease and indemnification of the operator were notrevised to bring the form into compliance with theTexas express neg ligence rule. A . Derman , The Newand Improved 1989 Joint Operating Agreement: AWorking Manu al, NATURAL RESOURCES,E N E R G Y A N D E N V IR O N M E N T AL LAWSECTION, MONOGR APH SERIES No. 15. A.A.P.L.Form 610-1989 Mod el Form O perating Ag reement;A.A.P.L. Form 610-1982 Mo del Form OperatingAgreem ent; A.A.P.L. Form 610-1977 M odel FormOperating Agreement; and A.A.P.L. Form 610-1956Model Form O perating Ag reement. D arden, In Suppo rtof the Operator Liability Provision of the AAPL ModelForm Joint Operating Agreement: A Pre-EmptiveStrike Against Possible Claims Made Under PagePetroleum, Inc. v. Dres ser Indus tries, Inc., 18 TEX.ST. B. SEC. REP. OIL GAS & MIN. L. 20 (1994).However, there still may exist an issue as to whetherthese exculpatory and indemnity provisions of the JointOperating Agreement must still meet the fair noticerequirements, and if they do not, then whether they areenforceable. White, Winding Your Way Through theTexas Oilfield Anti-Ind emnity Statute, the Fair NoticeRequirements and Other Indemnity Related Issues, 37S. TEX. L. REV . 161, 176-77 (1996).

(b) Gas Pipelines. "We ll or mineservice" is defined in § 127.001(4) (Vernon 1997). Gaspipelines and "fixed associated facilities" are expresslyexcluded from the prohibitions of the statute by being

excluded from the definition of "well or mine service ."Section 127.001(4)(B).

(3) Permitted Indemnity: "IndemnitySupported by Insurance". Section 127.005 TEX.CIV. PRAC. & REM. CODE ANN . (Vernon Supp.2002) permits specified forms of indemnity if supportedby specifically permitted levels of insurance.Section 127.005 as amended in 1995 provides

(a) This Chapter does not apply to anagreement that provides for indemn ity if the partiesagree in writing that the ind emnity obliga tion willbe supporte d by liability insurance coverage to befurnished by the indemnitor subject to thelimitations specified in Subsection (b) or (c).

(b) With respect to a mutua l indemn ityobligation (defined below), the in demnityobligation is limited to the extent of the coverageand dollar limits of insurance or qualifiedself-insurance each party as indemnitor has agreedto obtain for the benefit as to the other party asindemnitee.

(c) With respect to a unilatera l indemn ityobligation (defined below), the amount of insurancerequired may not exceed $500,000.

Section 127.001 (Vernon 1997) contains thefollowing definitions of "mutual indemnity obligation"and "unilateral indemnity obligation":

(3) "Mutual indemnity obligation" means anindemnity obligation in an agreement pertaining toa well for oil, gas, or water or to a mine for amineral in which the parties agr ee to indem nify eachother and each o ther's contracto rs and theiremployees against loss, liability, or damages arisingin connectio n with bodily inj ury, death, and damageto property of the respective employees, contractorsor their employees, and invitees of each partyarising out of or resulting from the performance ofthe agreem ent....

(6) "Unilateral indemnity obligation" meansan indemnity obligation in an agreement pertainingto a well for oil, gas, or water or to a mine for amineral in which one of the parties as indemnitoragrees to indemnify the other party as indemniteewith respect to claims for personal injury or death tothe indemnitor's employees or agents or to theemployees or agents of the indemnitor's contractorsbut in which the indemnitee does not make areciprocal indemnity to the indemnitor.

The Fifth Circuit in Camp bell v. Sonat Offsho reDrilling, Inc ., 979 F.2d 1115 (5th Cir. 1992) held thatunder the Texas Oilfield Anti-Indemnity Act, anindemnitee may collect indemnity up to the amount ofinsurance actually obtained by the indem nitor (in thiscase the indemnitor had $10,000,000 insurancecoverage even though the Te xas O ilf ieldAnti-Indem nity Act prohibited requiring the indemnitorto carry in excess of $300 ,000 in insur ance). In th iscase, Union Texas Petroleum Corporation ("UTP")hired a drilling vessel from Sonat Offshore Drilling("Sonat") to drill a well on the outer continental shelfoff the coast of Louisiana. UTP also entered into an


agreement with Frank's Casing Crew and Ren tal Tools,Inc. ("Fran k's") to perform casing and other services onboard the drilling vessel. Campbell, an employee ofFrank's, was injured while transfer ring to S ona t'sdrilling vessel from a supply boat hired by UTP. AfterCampb ell sued UTP and Son at, UTP filed a third-par tycom pla int a gain st Fr ank 's and Frank's insurers seekingindemnity pursuant to the indemnity provisioncontained in the purchase order between UTP andFrank's.

The "indemnity supported by insurance" exceptionto the prohibition against indemnities does not apply toagreeme nts with respect to the purchase, gathering,storage, or transpo rtation of oil, gas, brine water, freshwater, produc ed water, petroleum products, or otherliquid commodities. In other w ords, no ind emnityagainst one's own negligence is allowed in theseinstances. Section 127.005(a) (Vernon Supp. 2002).

Only Texas, Louisiana, New Mexico and Wyominghave anti- indemnity statute s directed p articularly at oiland gas opera tions. See gen erally Battiato &Gilbertson, The Changing Insurance Market-- WhoWill Bear the Risks? , 32 ROCKY MTN. MIN. L. INST.§ 17.04 a t 17- 16 (1986) ; Owen L. A nderson, TheAnatomy of an Oil a nd Ga s Drilling C ontract,25 TULS. L.J. 359, 42 1-31 (1990).

E. Rules of Construction.

1. General Rules.

a. Intent. A contract of indemnity is read,as any other contract, to ascertain the intent of theparties. Ohio O il Co. v. Sm ith, 365 S.W.2d 621, 627(Tex. 1963); Spenc e & How e Const. C o. v. Gulf O ilCorp., 365 S.W .2d 631 , 637 (T ex. 1963 ); Mitchell's,Inc. v. Friedman, 303 S.W.2d 775, 777-78 (Tex. 195 7);and Sun Oil Co. v. Renshaw Well Service, Inc., 571S.W.2d 64, 68 (Tex. Civ. App .--Tyler 197 8, writ ref'dn.r.e.).

b. Strictissimi Juris . Once the intent of theparties is ascertained, the doctrine o f strictissimi juris isapplied to prevent the Indemn ifyin g Pe rsons's liabilityfrom being extended beyond the terms of theagreeme nt. Liberty Steel Co. v. Guardian Title Co. ofHouston, Inc., 713 S.W.2d 358, 360 (Tex. App.--Dallas1986, no writ ).

2. Elements of an Indemnity . An indem nityis comprise d of the follow ing comp onents: (a) the"indemnitors" (the "Indemnifying Person"), (b) the"indemnitees" (the "Indemnified Persons"), (c) theindemnified events, acts or omissions (the"Indemnified Matters"), (a) the indemnified liabilities(the "Indemnified Liabilities"), and (b) any excludedmatters or excluded liabilities (the "ExcludedMatters").

a. Indemnifying Persons. In Jones v. SanAngelo Nat. Bank, 518 S.W.2d 622 (Tex. Civ.App.--Beaumont 1974, writ ref'd n.r.e.) the court foundthat a corporation was not an Indemnifying Person andrefused to require the corpora tion to make contributionto a sharehold er for one-h alf the amount paid by suchshareholder to the other shareholder in connectio n withthe paying shareholder's satisfaction of a debt of the

corporation pursuant to a corporate dissolutionagreeme nt.

(1) Multiple Indemnifying P ersons:Rights of Contribution. When two perso ns separate lyindemnify a third party, then as between themselves,each is liable for only ha lf. Hobb s v. Teledyn e Movib leOffshore, Inc., 632 F.2 d 1238 , 1241 (5 th Cir. Unit A1980)--applying Louisiana law.

(2) Indemnifying an IndemnifyingPerson: No Right of Contribution. The cou rt inCamp bell v. Sonat Offshore Drilling, Inc., 27 F.3d 185(5th Cir. 1994) rejected the argument of Frank's CasingCrews and Rental Tools that it could o btaincontribution from Union Texas P etroleum in a casewhere both Fran k's and Unio n had inde mnityagreeme nts naming a liab le third party (Sonat OffshoreDrilling) as an I ndemnified Person. In an earlier case,Campbell v. Sonat Offshore Drilling, Inc., 979 F.2d1115 (5th Cir. 1992) ("Campbell I" ) the court foundthat Frank was obligated to indemnify Sonat OffshoreDrilling for an injury sustained by Frank's employee(Campbell). See discussion of Camp bell I on page 43hereof. In this second case ("Campbell II") Frank wasattempting to share its liability with Union TexasPetroleum since both Frank and Union Texas Petroleumhad indemnified Sonat for injuries to Fr ank 'semployees.

The court in Campbell II found, however, thatFrank's indemnity, which was contained in its contractwith Union Texas Petroleum, expressly provided thatFrank indemnified both Sonat and Union TexasPetroleum for injuries to Frank's employee. UnionTexas Petroleum did not have to make contributiondespite its separate indemnity undertaking in thecontract be tween Un ion Texa s Petroleum and Son at.

These cases involved injuries sustained byCampb ell, an employee of Frank's Casing Crews andRental Tools, who was injured while transferring ontothe jack-up dr illing vessel owned by Sonat OffshoreDrilling. Uni on T exa s Pe trol eum had cha rter ed S ona t'svessel and had agreed to indemnify Sonat for suchinjuries (the UTP/Sonat Contract). Fra nk's had agreedto indemnify Union Texas Petroleum and Sonat againstliability for injuries to Frank's employees in its contractwith UTP (the UTP /Frank's Contract).

Also see Foreman v. Exxon Corp., 770 F.2d 490,498 n.13 (5th Cir. 1985) and Corbitt v. Diamond M.Drilling C o., 654 F.2d 329 (5th Cir. Unit A 1981).

b. Indemnified Persons.

(1) Direct Beneficiaries.

(a) Primary Indemnified Party. Indemnification clauses typically name a primary p artyand secondary persons as being Indemnified Persons.For example, an owner may be named as the primaryIndemnified Person in a construction contract requiringthe contractor to indemnify the owner for liabilitiesarising out of the contractor’s construction activities.

(b) Secondary IndemnifiedPersons. In addition to naming the owner as theprimary Indemnified Person , the owner may also


require that the scope of the indemnity also includeliabilities of other persons by listing them as“additional” Indemnified P ersons.

Provision:

“Indemnified Persons” shall include (a) the Owner,the Owner’s partners, affiliated companies of Owneror of any partne r of Owner, (b) O wner’sconstruction lender, (c) the Architect, and (d) as toeach of the persons listed in (a)-(c) the followingpersons: each of such person’s respective partners,partners of their partners, and any successors,assigns, heirs, personal representatives, devisees,agents, stockhold ers, officers, directors, employees,and affiliates of any of the p ersons listed in th isclause (d).

Other examples of contractual enlargements of directbeneficiaries of an indemnity are "additional namedinsured" endorsem ents to liability policies and "dualobligee riders" on p erformance bon ds.

The importanc e of specifically d esignating in theindemnity clause all of the persons intended to beIndemnified Persons is e mphasize d by Melvin Green,Inc. v. Questor Drilling Corp., 946 S.W.2d 907(Tex.A pp.--Ama rillo 1997, no writ ) where the courtfound that a consultant was not an Indemnified Personwithin the listing of indemnity clause covering the“Operator, its officers, directors, employees and jointowners”. Other provisions of the IADC Drilling BidProposal and Dayw ork Drilling C ontract spe cificallylisted “consultants”. For example, the provisiondefining “daywork” stated that “For purposes hereof theterm ‘daywork’ means .... under the direction,supervision and control of O perator (w hich term isdeemed to include an employee, agent, consultant orsubcontra ctor engaged by Operator to direct drillingoperation s).”

An example w here an Ind emnified Person was notfully protected is the case of Amerada Hess Corp. v.Wood Group Production Technology, 30 S.W.3d 5(Tex.App. [14th Dist.] 200 0, writ denied). In Hess thecourt found that a p ortion of the a ttorney’s fees Hessincurred in defending a suit brought by an injuredemployee of the Wood Group was not covered by theWood Group’s indemnity. Hess sought and obtainedreimbursement from the Wood Group for the $200,000it had paid to settle the claim, but was denied the rightto recover 100% of the $141,743.75 in attorney’s feesit incurred in d efending the c laim. The trial court’sfinding that the $200,000 settlement of the claim wasreasonab le was upheld by the court of appeals despitethe fact that another defendant (Graham) was releasedin the settlement ag reement. T he court fo und that thesettlement amount was reasonable as to the potentialliability of Hess alone. However, Hess in defending theclaim, also was de fending a claim against Graham forGraham’s negligence. H ess had agre ed to indem nifyGraham. The Wood Group had indemnified Hess. Thetrial court held tha t the Wo od Gro up indem nity did notinclude Hess’ con tractual obliga tion to indem nifyGraham; and thus did not include the po rtion of Hess’fees incurred in defending Graham.

(2) Third Party and Incidental

Beneficiaries.

(a) Bonds. Indemnity bonds usuallyare construed as contracts of indemnity not creatingthird party beneficiary rights to sue on bond protectingindemnitee of bond. Fidelity & Deposit Co. ofMaryland v. Reed, 108 S.W.2d 939 (Tex. Civ.App.--San Antonio 1 937, no writ ); 10 TEX. JUR. 3d,Bonds and Undertakings (1980).

(b) Creditors. It has been h eldthat creditors of the seller of a business are not thirdparty beneficiaries of an "all bills paid" indemnitycontained in a contract for the sale of a busine ss so as torevive a claim otherwise barred by the statute oflimitations. House of Falcon, Inc. v. Gonzalez, 583S.W.2 d 902 (T ex. Civ. Ap p.--Corpu s Christi 1979, nowrit). A creditor of an Indemnified Person has beenheld to be merely an incidental beneficiary of anindemnity agreement and does not have the right tobring suit directly again st the Indemnifying Person.Hurley v. Lano International, Inc., 569 S.W.2d 602(Tex. C iv. App.--T exarkana 1 978, writ ref'd n.r.e.).

c. Indemnified Matters. The matterscovered by the indemnity can included events, acts, andomissions of the Indemnified Persons and/or theIndemnifying Persons.

(1) Strict Construction Limiting Scopeof Indemnified Matters. After the court hasdetermined that an indem nity is intended, the doctrineof strictissimi juris or strict constru ction is used toprevent liability under the indemnity contract frombeing extended beyond th e terms of the c ontract.Courts have stated that the Ind emnifying Pe rson isentitled to have the indemn ity contract strictlyconstrued in the Indem nifyi ng P erso n's favor. Smith v.Scott , 261 S.W. 1089 (Tex. Civ. App.-- Amarillo 1924,no writ); Ohio O il Co. v. Sm ith, 365 S.W.2d 621 (Tex.1963); and other cases discussed b elow. Cou rtsexamine the "event" to determin e whether it is withinthe scope of Indem nified Matters.

The San Antonio court of appeals has held that anindemnity for one’s own negligence a lso includes a llshades and degrees of negligence, including one’s owngross negligence. Webb v . Lawson - Avila Const., Inc.,911 S.W.2d 457 (Tex. App.--San Antonio 1995, writdism’d by agreement). See discussion below atArticle IIE2c(4)-Contractual Indemnity - Rules ofConstruction - Elements of Indemnity - IndemnifiedMatters - Contractu al Exceptions reviewingcontractual exceptions for negligence as including anexception for one’s own gross negligence.

(2) Conflicting Terms: Express Dutyand Indemnity. Many times a contract containing anindemnity provision w ill also contain a duty provisionor other cove nant which co nflicts with the indem nityprovision. In such cases, the inde mnity is strictlyconstrued and effect is first given to the confl ictingprovision.

In Eastman Kodak Co. v. Exxon Corp., 603 S.W.2d208 (Tex. 1980), the supreme court found that therewere conflicting provisions in the contract containingan indemnification provision. Damages resulted from


an explosion of a pipe line that transporte d propa ne toKo dak 's facility. The contract contained both aprovision requiring the Indemnifying Person to hold theoil compan y harmless from the oil company's ownnegligence, and a provision which placed re sponsibilityfor pipe line breakages on the oil company. The courtwas applying the "clear an d unequiv ocal" test.

(3) Liabilities “A rising O ut Of.” Indemnity provisions seek to tie the indemnifiedliability in some fashion to relationship between theIndemnified Person and the Indemnifying Person. Themost common means of connection is to state that theliabilities indemnified “arise out of” some aspect of therelationship, such as indemnifying an owner, as theIndemnified Party, for bodily injuries or deaths “arisingout of the Work”of a contractor.

Queries: Does the Indemnified Matter (liability) haveto be “proximately caused” by the acts oromissions (negligence) of the IndemnifyingPerson? ...at least “in part” by the acts oromissions (negligence) of the IndemnifyingPerson?

The elements of a negligence cause of action are aduty, a breach of that d uty, and dam ages prox imatelycaused by the breac h of duty. Doe v. Boy s Clubs ofGreater Dallas, Inc., 907 S.W.2d 472, 477 (Tex. 1995).The compo nents of proxim ate cause are “c ause-in-fact”and “foreseeability.” The test for cause-in-fac t iswhether the negligent act or omission was a substantialfactor in bringing about injury, without which the harmwould not have occurred. “Foreseeability” requires thata person of ordinary intelligence should haveanticipated the danger created by a negligent act oromission. It asks whether th e injury might re asonablyhave been contem plated as a re sult of the defend ant’sconduc t.

The court in Sieber & C allicutt, Inc. v. L a Gloria ,66 S.W.3d. 340 (Tex.Ap p.-Tyler 20 01, no writ ) found,in a case where the negligence of the Indem nified Party(La Gloria) and the negligence of the IndemnifyingParty (Sieber & Callicutt) was determined to be equal,that the negligence of the Indemnifying Party was a“substantial factor” and “a proximate c ause” of theliability although not the only factor in causing theIndemnified Matter (liab ility to the estate of a deceasedemployee of the Indemnified Party, La Gloria). LaGloria settled the wro ngful death action and sued Sieber& Callicutt on Sie ber & C allicutt’s indemnity in itsmaintenance contract with La Gloria. The trial courtfound that there was a rea sonable risk that La Glo riawould have been found grossly negligent (the manwaycover was in extreme disrepair), Sieber & Callicutt alsowas negligent (by running a hot water line into the tankand not advising La Gloria), and La Gloria and Sieberwere equally neglige nt. The Indemnifying Party(Sieber & Callicutt) urged the court to find that the“arising in any manner” language in the indemnity didnot “provide a lower causal conn ection than p roximatecause” and thus it should no t be require d to indem nifyLa Gloria, even for Sieber’s proportion of causation.The court rejec ted Siebe r’s argument n oting that thetrial court found that Sieber was negligent and that acomponent of negligence is proximate cause. Since theindemnity provision express ly provided for Sieber toindemnify La Gloria for Sieber’s proportionate share of

liability, Sieber was liable to La Gloria for one-half ofthe settlement.

Provision:

Contractor (Sieber & Calicutt) agre es to holdharmless and unconditionally indemnify La Gloria,its directors, officers, agents, representatives andemployees against and for all liability, costs andexpenses, claims and damages which La Gloria atany time suffer or susta in or become liable for byreason of any accidents, damages or injuries eitherto the person s or prop erty or both, of Co ntractor, itssubcontractors and supp liers, or to the persons orproperty of La Glo ria, its subcontractors andsuppliers, arising in any manner from the Workperformed hereunde r, including but n ot limited toany negligent act or omissio n of La Glo ria, itsdirectors, officers, agents, representatives oremployees, provided however, that if the negligenceof La Gloria shall be found to be greater than orequal to the comparative negligence of theContractor, then the Contractor shall only be liab leto La Gloria to the extent of the Contractor’s ownnegligence.

The phrase “arising out of” has been the subject ofrecent cases. In General Agents v. Arredondo, 52S.W.3d 762 (Tex.Ap p.-San An tonio [4th Dist.] 200 1, nowrit) the court broadly construed the exclusion for“injuries arising out of a contractor’s andsubcontra ctor’s operations” contained in a contractor ’scommercial general liability policy as not being limitedto injuries caused by an act of the contractor orsubcontractor. The court found that “all that is requiredis a “causal connection”. The court cited the followingauthorities for this conclusion:

Cf. Mid-Century Ins. Co. v. Lindsey, 997S.W.2d 153, 156- 57 (Tex. 1999)(“For liabilityto ‘arise out of’ in the context of an ‘additionalinsured’ endorsement does not require thatnamed insured’s act caused accident.”) Indeed,in more rece nt cases, the Fifth C ircuit hasrecognized that the phrase “arising out of” is“understood to mean ‘originating from,’‘having its origin in,’ ‘growing out of,’ or‘flowing from.’” American States Ins. Co. v.Bailey, 133 F.3d 363, 370 (5 th Cir.1998)(quoting Red Ball Motor Freight, Inc. v.Employe rs Mut. Liab. Ins. Co., 189 F.2d 374,378 (5th Cir. 1951 )). Thus, a “cla im need o nlybear an ‘incidenta l relationsh ip’ to theexcluded injury for the po licy’s exclusion toapply.” Bailey, 13 F.3d at 370 (quotingContinental Cas. Co . v. Richmond, 763 F.2d1076, 1080-81 (9 th Cir. 1985 ).”

The concept of liability being a covered liability asone “arising out of” the “work” or “operations” is anissue that has been litigated in the context of coverageof an addition al insured’s negligence under anadditiona l insured end orsemen t. See the discussion ofI I I B C o o r d i n a t i o n w i th I n s u r a n ceCoverage-Additional Insured Status for casesaddressing the issue of whe ther an additional insuredendorsement on a liability policy covers an additionalinsured’s negligence as one “arising out of theoperations” of the named insured.


(4) Injuries.

(a) "Injuries" . The failure of theindemnity provision to specifically cover "personalinjuries" was held to be fatal, even though theindemnity provision otherwise wo uld meet the expressnegligence test, in Ard v. Gemini Exploration Co., 894S.W.2d 11 (Tex. Civ. App.-- Houston [14th Dist.]1994, writ denied).

(b) Injuries To IndemnifyingPerson. An indemnity provision whereby a contractorindemnified a railroad against liability for injuries to thecon trac tor's agents and employees, but did not mentioninjuries to the contractor, did not indem nify againstinjuries to the contrac tor. The Indemnified Matters didnot include injuries to the Indemnifying Person, thecontractor. International G.N.R. Co. v. Lucas,70 S.W.2d 226 (T ex. Civ. App.--Texarkana 1934),rev'd on other grounds 99 S.W.2d 297 (Tex. Comm.1936), later app, 123 S.W.2d 760 (Tex. Civ. App.--Eastland 1938, writ ref'd ), cert. denied 308 U.S. 573(1939) and aff'd in part an d rev'd in p art on othergrounds 100 S.W.2d 97 (Tex. Comm. 1937).

(c) Injuries To Employee ofIndemnified Person. In one case, an indem nityprovision in a lease wher eby the lessee undertoo k toindemnify the lessor aga inst liabilities arising out ofinjuries to "persons whomsoever" has been construedrather broadly by a court to include the employees ofthe lessor. Gulf, C. & S. F. R. Co. v. McBride, 309S.W.2d 846, rev'd on other grounds, 322 S.W.2d 492(Tex. 1958). Also see Faulk Management Services v.Lufkin Industries, In c., 905 S.W.2d 476 (Tex . App.--Beaum ont 199 5, writ denied).

(d) Injuries To Employee ofIndemnifying Person. The T exas Supr eme Co urt inEnserch Corp. v. Parker, 794 S.W.2d 2, 7 (T ex. 1990)construed the following reference to "death to persons"to be specific enough to overcome the Workers'Compensa tion Bar in holding that an employer hadcontractually assumed liability to indemnify a thirdparty (Enserch) for liabilities arising out of theconcurrent negligence of the third party (the thirdparty's negligent supervision of the employer's work):

Provision:

(Christie) assumes entire respo nsibility and liabilityfor any claim or actions based on or arising out ofinjuries, including death to persons ... incidental tothe performa nce of this con tract by (Christie)... .(Court's emp hasis in bold.)

A full statement of the in demnity clause and adiscussion of the court's finding that this clause met theexpress negligence test is found above in the discussionof the cases applying Ethyl.

The supreme court found that this language wassufficient to refer to em ployees of the IndemnifyingPerson (Christie) and therefore met the requirements ofthe Texas W orkers' Compensation Act that permits "anexpress agreemen t in writing assuming liability" by anemployer for injuries to its employees. The court citedwith app rov al th e co urt o f appea ls' decision in VersonAllsteel Press Co. v. Carrier Corp., 718 S.W.2d 300

(Tex. App.--T yler 1985 , writ ref'd n.r.e.) which held thefollowing similar language sufficient to overcome theWorkers' Compensation Bar:

Provision:

(Carrier) ... covenants to indemnify and holdharmless Verson ... from and against any and allloss, damage , expense, cla ims, suits or liabilitywhich Verson or any of its employee s may sustainor incur ... for or by reason of any injury to or de athof any person or persons or damage to anyproperty, arising out of ... any claimed inadequate orinsufficient safeguards o r safety devices . (Enserchcourt's emph asis.)

Id. at 301.

The supreme court in Enserch distinguished thefollowing provision in Port Royal Dev. v. BraseltonConstr. Co., 716 S.W.2d 630, 632 (Tex. App.--CorpusChristi 1986, writ ref'd n.r.e.) on the grounds that thelanguage expressly stated that the Indemnifying Personwould not indemnify the Indemnified Person for theIndemnified Person's own negligence:

Provision: The subcontractor agreed to indemnify thecontracto r from liability

for or on account of injury to or death of person orpersons ... occurring by reason of or arising out ofthe act or (neglige nce) of Subcontractor ... exceptthe act or (negligence) of the Contractor inconnection with performance o f this Contract.(Emph asis added by Enserch court.)

The Indemnified Matters did not include injuries toan employee of the Indem nifying Person due to thenegligence of the Indemnified Person.

In Fisher C onstr. Co. v. Riggs, 320 S.W.2d 200,210 (Tex. Civ. App.--Houston 1959), rev'd on othergrounds, 325 S.W .2d 126 (Tex. 19 59), and vacated onother grounds 326 S.W .2d 915 (Tex. Civ . App.--Houston 1959, no writ ), the court of appeals found thata subcontractor was required to indemnify a contractorfor contractor's negligent acts that injured thesub con trac tor's employees pursuant to indemnity whichspecifically incl ude d in juri es to sub con trac tor'semployees; the subcontractor's employees wereconsidered to be "business invitees" in the portion ofthe construction site where injury occurred.

The T exarkana C ourt of Ap peals in Texas UtilitiesElectric Co. v. Babcock & Wilcox, 893 S.W.2d 739(Tex. App.--T exarkana 1 995, no writ ) found that thefollowing indemnity provision did not cover injurie s toan employee of Flour Daniel, a contractor employed byTexas Utilities, the Indemnified Person:

Provision:

[Babcock & Wilcox agree to indemnify TexasUtilities for claims against Texas Utilities fordamages arising from] p ersonal injury or death ordamage to property o f Company's [Babcock's]agents, servants and employees, as well as theagents, servants, and employees of Com pan y's[Babcock 's] subcontractor, whether or not arising


from sole or concurrent negligence or fault ofPurchaser [Texas Utilities].

(e) To Independent Contractor ofIndemnifying Person. It has been held that anindemnity provision which clearly limited acon trac tor's obligation to indemnify the property ownerfor injuries sustained b y the contracto r's and itssubcontrac tor's "employees" did not cover an injurysustained by a person while serving as an independentcontractor, notwithstanding that the individual washired, as well as paid, by the contractor . Ideal LeaseService, Inc. v. Amoco Production Co., 662 S.W.2d 951(Tex. 1983).

(5) Damages. In drafting the classes ofliabilities covered by an indemnity care should be givento the scope of covered items. For exa mple, are“punitive damages” of the Indemnified Person to becovered? Are the punitive damages of an employee oran agent covered, if the employer is not liable? For adiscussion of “punitive damages” see Alamo Nat’lBank v. Kraus, 616 S.W.2d 90 8, 910 (Tex. 1981) andTEX. CIV. PRAC. & REM. CODE §§ 41.001 et seq.(Vernon 1997).

Adding “employees” or “agents” to the list ofIndemnified Persons may capture damages nototherwise awarded against the Indemn ified Perso n in itscapacity as employe r. See Fort Worth Elevators, Co. v.Russell, 70 S.W.2d 397, 406 (Tex. 1934), overruled onother ground s by Wrigh t v. Gifford-H ill & Co., 725S.W.2d 712 (Tex. 1987)-a corpora tion may be liable inpunitive damage s for gross neg ligence only if thecorporation itself commits gross negligence. Becausea corporation can “act only through agents of somecharacter,” Fort Worth E levators, 70 S.W.2d 402,courts have develop ed tests for distinguishing betweenacts that are so lely attributable to agents or employeesand acts that are dire ctly attributable to the corporation.See Hamm erly Oaks, Inc. v. Edwards, 958 S.W.2d 387(Tex. 1997). A corporation is liable for punitivedamages if it authorizes or ratifies an agent’s grossnegligence or if it is grossly negligent in hiring a n unfitagent; See King v. McG uff, 234 S.W.2d 403 (Tex.1950)-adopting RESTATEME NT OF TORT S § 909;Purvis v. Prattco, Inc., 595 S.W.2d 103, 104 (Tex.1980) -citing the RESTATEMENT (SECOND) OFTORTS § 909, which is unchanged form the originalRESTATEMENT OF TOR TS § 9 09; or if it com mitsgross negligence through the acts or o missions of a“vice principal” See Hamm erly Oaks, Inc. v. Ed wards,958 S.W .2d 387 , 389 (T ex. 1997 ). A “vice principal”encompasses: (a) corporate officers; (b) those whohave authority to employ, direct, and d ischarge serv antsof the master; (c) those engaged in the performance ofnondeleg able or absolute duties of the master; and (d)those to whom the master has confided the managementof the whole or a department or a division of thebusiness. Hamerly O aks, 958 S.W.2d 391.

(6) Contractual Exceptions

(a) Broad Exception for Liabilitiesof Indemnified Person. In Renfro D rug Co . v. Lewis ,235 S.W.2 d 609 (T ex. 1950), 23 A.L.R.2d 1114(1950), the court refused to extend the les see 'sindemnity covering injuries to persons occurring on theleased premises fro m any cause to include liabilities

arising out of defects in the premises where theindemnity contained an exceptio n for "any l iabilitywhich lessor would be liable." Also accord Port Royal.

(b) Exceptions for GrossNegli gence, Knowing Actions, and WillfulMisconduct of Indemnified Person.

i) "Gross Negligence". Grossnegligence is more than momentary thoughtlessness,inadvertence, or error of judgment. It means such anentire want of care as to establish that the act oromission was the result of actual conscious indifferenceto the rights, safety, or welfare of the person affected.TEX. CIV. P RAC. & REM . COD E ANN . § 41.001(5)(Vernon 1997). The test for gross negligence containsboth an objective and a subjec tive comp onent.Transportation Ins. Co. v. M oriel, 879 S.W.2d 10, 21,22 (Tex. 1994). Objectively, the defendant's conductmust involve an extreme degree of risk, which is afunction of both the magnitude and the probability ofthe anticipated injury to the plaintiff. Also seeWal-Mart Stores, Inc . v. Alexan der, 878 S.W.2d 322,325-26 (Tex. 1993). Subjectively, there must beevidence that the defendant had actual, subjectawareness of the risk involved, but nevertheless wasconsciously indifferent to the e xtreme risk. Thedefendant knew about the peril, but its acts or omissionsdemonstrated that it did not car e. Moriel, at 21;Alexander at 326; Mobil Oil Corp. v. Ellender, 968S.W.2d 917, 922 (T ex. 1998 ). Also see UniversalServices Co., Inc. v. UNG, 904 S.W.2d 638 (Tex. 1995)for a case arising under the common law definition of“gross negligence.” The fact that a defendant exercises“some care” do es not insulate the defendant from grossnegligence liability. See Mo riel, 879 S.W.2d at 20(discussing cases before Burk R oyalty Co . v. Walls, 616S.W.2 d 911, 921-22 (Tex. 19 81) that erro neouslyfocused on “entire want of care” part of the grossnegligence definition in reasoning that “some care”defeated a gross neglige nce finding. In 1995 theLegislature substituted “malice” for gross negligence asthe prerequisite for punitive damages. However, theLegislature also defined “malice” with a definitionmirroring the definition of “gross ne gligence” inTransportation Ins. Co. v. M oriel, 879 S.W.2d 10, 23(Tex. 1994) . TEX. CIV. PRAC. & REM. CODE §41.001(7) (Vernon 199 7).

ii) A Continuum of Culp ableMental States. The court in Kenneth H. HughesInterests v. Westrup, 879 S.W.2d 229 , 232-33 (Tex.App.--Houston [1st Dist.] 1994, writ denied)interpreted an exclusion from a contracto r's indemnitycontained in a construction contract between acommercial landlord and its contractor for

"any claim aris(ing) out of the sole and grossnegligence or willful misconduct of Owner (thecommercial landlord, the Indemnified Person)"

as including as an exclusion the landlord's "knowing"violation of the warranty of commercial habitabilityand/or "knowing deceptive trade practice" in its leasewith the injured tenant.

This case involved a shoe store that was put out ofbusiness in the landlord's shopping center by repeatedflooding arising out of the action of a backhoe operator


of a subcontractor of landlord's construction contractor.The case involved dual theories of recovery, thenegligence of the contractor and the knowing deceptivetrade practice and breach of warranty of the landlord.

The backhoe operator accidentally broke a sewerline, and cove red it up afte r he discovered his errorinstead of reporting the acciden t. The tenan t reportedto the landlord that water was seeping from a leak in theslab outside of its premises. The landlord, who wasunaware of the backhoe op erator's actions, repeatedlyreassured the tenant after each of several floods, that ithad corrected the problem when, in fact, it knew it hadnot.

The court held that the intent of the parties byexcluding gross negligence, also must have intended toexclude knowing conduct of the landlord, which is a"more culpable standard than gross neglige nce." Thecourt noted that to hold other wise would b e to hold thatthe intent of the partie s was that the inde mnitees wou ldnot be entitled to indemnity for an act done with themental state at the low end of the "continuum" ofculpable mental states, bu t would be so entitled for anact done with a mental state that is higher on the scale,i.e., an act that is more culpable than another for whichthey indisputably a re not entitled to indemnity. Luna v.North Star Dodge Sales, Inc., 667 S.W.2d 115, 118(Tex. 1984).

iii) E x c e p t i o n f o r S o leNegligence Includes Sole Gross Negligence. Thecourt in Crown Central Petroleum Corp. v. Jennings,727 S.W.2 d 739 (T ex. App.-- Houston [lst Dist.] 1987,no writ) held that a clause "excepting only claimsarising out of accid ents resulting from the solenegligence of Owner" included accidents arising fromthe sole gross negligence of the owner.

iv) E x c e p t i o n f o r S o leNeglig ence Does Not Affirmatively CreateIndemnity for Indemnified Person's ConcurrentNegligence. However, the court of ap peals' reliance inCrown Central Petroleum Corp. v. Jennings upon itsopinion in Singleton v. Crown Central PetroleumCorp., 713 S.W.2d 11 5 (Tex. App.--Houston [lst Dist.]1985) was misplaced since, after citing the Singletonwrit history of "writ ref'd n.r.e," the Texas SupremeCourt withdrew its opinion and reversed the court ofappeals in Singleton at 729 S.W.2d 690 (Tex. 1987).The court of appeals both in Jennings and Singletonerroneo usly concluded that the above quoted language"excepting ..." was an express statement that theconcurrent negligence of the Indemnified Person wasindemnified by the Indem nifying Perso n. As noted inthe discussion of the Texas Supreme Court casesconstruing Ethyl, the Texas Supreme Court held thatthis type language states what is not to be indemnified,and not what is indemnified.

(7) Scope of the Work Limitations.Courts have attempted to limit the scope of theIndemnified Matters to job site injuries or activities andwork within the scope of the contract.

(a) C o n t e m p l a t e d W o r k .Indemnified Liabilities may be contrac tually limited tosuch injuries as "arise out of" or are "in connectionwith" the work being performed by the Indemnifying

Person. If the indemnity is so limited, then it might beheld not to cover the negligent acts of the IndemnifiedPerson that are unrelate d to the performance of thescope of the work by the Indemnifying Person. Sun O ilCo. v. Rensha w Well Se rv., Inc., 571 S.W.2d 64, 70-71(Tex. App.--Tyler 1978, writ ref'd n.r.e.);Westinghou se Electric Corp. v. Childs-Bellows, 352S.W.2d 806, 832 (Tex. App.--Ft. W orth 196 1, writref'd); and Martin W right Electric Co. v. W.R.Grimshaw Co., 419 F.2d 1381 (5th C ir. 1969), cert.denied, 397 U .S. 1022 (1970) . The cou rt inWestinghou se Electric Corp. v. Childs-Bellows, 352S.W .2d 806 (T ex. Civ. Ap p.--Ft. Wo rth 1961 , writref'd) found that the indemnity agreement of asubcontractor did not include injuries to thesub con trac tor's employees who had been injuredthrough the negligence of employees of the contractorengaged in work unre lated to the sub contract.

However, this result might also be explained asbeing an attempt by pre-Ethyl courts to limit ind emnityagreeme nts with the "clea r and uneq uivocal" test. SeeDupre v. Penrod Drilling Corp., 993 F.2d 474, 479(5th Cir. 1993).

In another case, the court held that thesub con trac tor's indemnity did not extend to the death ofthe subcontractor's employee caused by the negligentacts of the contrac tor's employe es. Brown & Root,Inc. v. Service Painting Co., 437 S.W.2d 630 (Tex. Civ.App.-- Beaum ont 196 9, writ ref'd ). The death of theemployee of the subco ntractor did not " occur inconnec t ion wi th" the subcontra cte d work ,notwithstanding the fact that the employee was engagedin sublet work at the time of the em ployee's dea th. Thework being perfo rmed by the employee of the generalcontractor was not connected to the work beingperformed by the employee of the subcontractor. TheBrown & Root indemnity clause reads:

Provision: Subcontractor agrees to inde mnifyand to save General Contracto r ...harmless from and against all claims... which may be caused or alleged tohave been caus ed in whole or in partby, or which may occur or be allegedto have occurred in connection with,the performance of the Sublet Work.

See also West inghouse Electric Co rp. v .Childs-Bellows, 352 S.W.2d 806 (Tex. Civ. Ap p.--Ft.Worth 1961, writ ref'd); Ohio O il Co. v. Sm ith, 365S.W.2d 621 (T ex. 1963 ); Spence & Howe Constr.Co. v. Gulf Oil Corp., 365 S.W.2d 631 (T ex. 1963);and Alamo Lumber Co. v. Warren, 316 F.2 d 287 (5 thCir. 1963).

(b) Job Site. In Sun O il Co. v.Renshaw Well Service, Inc., 571 S.W.2d 64 (T ex. Civ.App.--Tyler 1978, writ ref'd n.r.e.), the court found thatthe indemnified person was no t entitled toindemnification against injury to a worker inj ured whiledriving from the work site after completion of the work.

In Martin W right Electric Co. v. W. R . GrimshawCo., 419 F.2 d 1381 (5th Cir. 19 69), cert. denied 397U.S. 1022 (1970), the court refused to extend thesubcontractor's indemnity to includ e the death o f asub con trac tor's employee killed while leaving work


after putting his tools away where the death was causedsolely by the contractor's negligence.

(8) Contemplated Time Covered.Indemnity provisions h ave been strictly construed tolimit the time of the occurrence of the IndemnifiedMatters.

In Manges v. Willoughby, 505 S.W.2d 379 (Tex.Civ. App.--San Antonio 1 974, writ ref'd n.r.e.), thecourt construed an indemnity by a sublessee to thesublessor, which had "assumed all obligations" underthe lease, as not covering damages to the leasedpremises which occurred prior to the sublease.

However, an indemnity provision whereby anequipment lessee agreed to indemnify the lessor forloss, damage, and expense incurred to the leasedequipment and agreed to be responsible for the return ofthe leased equipment at its expense did not terminatewhen the equipment was delivered by the lessee to athird party selected by the lessee, but terminated whenactually delivered b ack to the lesso r. M. M. SundtConstr. Co. v. Contractors Equipment Co., 656 S.W.2d643 (T ex. App.--E l Paso 19 83, no writ ).

(9) Negligence of Indemn ifyingPersons Not Same as Negligence of IndemnifiedPersons. Clearly, provisions requirin g theIndemnifying Persons to indemnify the IndemnifiedPersons against loss resulting from the negligent acts oromissions of the Indemnifying Persons do not coverloss caused by the negligence of the IndemnifiedPersons. Humble Oil & Refining Co. v. Wilson, 339S.W.2d 954 (T ex. Civ. Ap p.--Wac o 1960 , writ ref'dn.r.e.) and nume rous other c ases cited herein.Extensive litigation over the intent of the drafters ofsuch indemnity clauses lead the Texas Supreme Courtto adopt the "express negligence" doctrine discussed inArticle IIB - Contractual Indemnity - IndemnityAgainst One’s Own Negligence above.

F. Particular Provisions.

1. Attorney's Fees for Defense byIndemn ified Perso n of Cla im.

a. General Rule . The general rule is thatatto rney's fees are not recovera ble by a claimant unlessthere is a statutory provision allowing attorney's fees.

b. Attorney's Fees in Common LawIndemnity Actions.

(1) Liability for Attorney 's Fees inDefending Against Claims if Claim Not Settled; ButNo Liability for Attorn ey's Fees f or suit to C ollecton Common La w Indemnity . Att orn ey's fees incurredin suing to enforce a right to common indemnity are notdamages recovera ble in a com mon law ind emnityaction by the indemnitee against indemnitor. SeeConann Constructors, Inc. v. Muller, 618 S.W.2d 564(Tex. Civ. App .--Austin 198 1, writ ref'd n.r.e.) wherethe court held that a breach of implied warranty offitness gives rise to a common law action for indemn ityfor damages including damages to a third party(homeowner damaged by overflowing septic tank suedneighbor who sought indemnity from contractor).

The court held that common law indemnity includesattorne y's fees in defending the liability su it but doesnot include the attorney's fees in suing thecontractor seeking indemnity. Central Consolidated,Inc. v. Robertshaw Controls Co., 868 S.W.2d 910 (Tex.App.--Beaumont 1994, no writ )--innocent retailer mayseek indemnity from manufacture r for its attorney's feesincurred in establishing that the retailer was merely an"innocen t conduit."

(2) DTPA and Common Law Liabilityfor Attorney 's Fees. TEX. BUS. & COMM. CODEANN. § 17.555 (Vernon 19 87), the Texas DeceptiveTrade Practices A ct provide s that a party is"indemnified" for all sums it is required to pay as aresult of defending an action brought against it underthe DTPA, including costs and attorney's fees.Section 17.555 provides

A person against whom an action has beenbrought under this subChapter may seekcontribution or indem nity from one who, under thestatute law or at common law, may have liability forthe damaging event of which the consumercomplains. A person seeking indemnity as providedby this Section may recover all sums that he isrequired to pay as a result of the action, hisattorn ey's fees reasonab le in relation to the amountof work perfo rmed in ma intaining his action forindemnity, and his costs.

(a) No Liability for Common LawIndemnified Person ’s Attorn ey's Fees in DefendingPlaintiff's DTPA C laim Absent Liability to thePlaintiff by the Common Law Indemnifying Person.The DTPA does not describe the nature of or set thestandard for obtaining the statutor y rights tocontribution and indem nity. The Texas Supreme Courtin Plas-Tex , Inc. v. U.S . Steel Corp ., 772 S.W.2d 442,446 (Tex. 1989) concluded that this Section of theDTPA was "intend ed to incor porate existing principlesof contribution and indemnity law into DTPA cases" asopposed to creating independent statutory rights toindemnity. Therefore, in Plas-Tex the supreme courtreversed the trial court's award to a defendant (aproduct seller) against another defendant (the productmanufacturer) for i ts at torn ey's fees the product sellerincurred in successfully defending a consumer's DTPAaction. The consumer, a buyer of resins used in themanufacture of fiber glass pools, brought a DTPAaction against the resin manufacturer and the seller.

Since the court of appeals had reversed the trialcou rt's finding that the product manufacture r was liablefor the event complained of by the plaintiff, thesupreme court held that the product manufacturer hadno obligation of indemnity to the product seller,including the product seller's attorney's fees insuccessfully defending the suit. "There is no right ofindemnity against a defendant who is not liable to theplaintiff." Plas-Tex at 446 citing Hunter v. Ft. WorthCapital Corp., 620 S .W.2d 547, 553 (Tex. 1981 );Brown & Root, Inc . v. Rust En g'g, 679 S.W.2d 576,578 (T ex. App.--T exarkana 1 984, writ ref'd n.r.e.).

(b) Liability by Common LawIndemnifying Person for Common Law IndemnifiedPerson 's Attorney's Fees in D efending Plaintiff'sDTPA Claim, if Common Law Indemnifying Person


Liable to the Plaintiff. In Swafford v. View-CapsWater Supply Corp., 617 S.W.2d 674 (Tex. 1981), theindemnitor, View-Caps, was found to be liable to theplaintiff, but the indemnitees, Swafford and Baker, wereabsolved of liability. In sustaining attorney's fees to theindemnitee s, the Texa s Suprem e Court said

The only question before this Court iswhether Swafford a nd Bak er are entit led toindemnity from View - Caps for the ir attorney feesunder Section 17.55A of the DTPA (predecessorSection to 17.555A). We hold that Swafford andBaker are entitled to recover attorney's fees underthe express pr ovisions of th e statute. ... The juryfound that View-Caps was liable for the eventcomplained of by Pu rcell. The statute expresslyauthorizes indemnity for a ttorney's fees in thissituation.

(3) No Attorney's F ees for Indemn ifiedPerson's Defense, if Indemnifying Person SettlesPlaintiff's Claim . It has been he ld that settlement ofthe claim by the inde mnitor, which if proved w ouldestablish a common law right of indemnification,eliminates attorney's fees incurred by the indemniteein defendin g suit. In Humana Hospital Corp. v.American Medical Systems, Inc., 785 S.W.2d 144 (Tex.1990), the Texas Supreme Court considered a questioncertified by the United States Court of Appeals. Thecourt was asked:

Under Texas law, is a seller of a product entitled toindemnification from the manufacturer for attorney'sfees incurred by seller during the litigation wherethe manufacturer settles the case with the p laintiffbefore a judicial determination of the liability of theparties is made?

Id. at 145.

Plaintiff had brou ght a negligenc e/strict produ ctsliability suit to recover damages arising from therupture of a prosthetic penile device. The device wasdesigned, manufactured and sold by American MedicalSystems to Humana Hospital. Humana Hospitalsupplied the device to plaintiff's physician for surgicalimplant. Humana filed a motion for summary judgmentseeking indemnity and attorney's fees from AmericanMedical Systems. The motion was granted, entitlingthe hospital to be indemnified by American MedicalSystems if the plaintiff recovered against Humana.American Medic al settled the suit with the plaintiffwithout any judicial determinatio n of the liability of theparties. Humana objected to the court's order disposingof the case because the court did not award Humana theattorney's fees it had incurred in defending the case.

Quoting its holding in Plas-Tex, the Texas SupremeCourt in Humana Hospital held that there is no right ofindemnity against a defendant who is not liable to theplaintiff. Since the settlem ent did not inc lude a courtdetermination that American Medical was negligent orthat the prosthesis was unreasonably dangerou s,Humana could no t obtain inde mnity for its defensecosts.

Although this holding appears to be based oncommon law indemnity, it may also be applicable tocontractual indemnity claims. See McDaniel v.

Anheuser-Busch, Inc., 987 F.2d 298 (5th Cir. 1993)holding the indemnitor was not obligated to defend theindemnitee against all claims and suits, or for costsincurred in defense o f baseless claims, since theindemnity clause required only that the indemnitorindemnify for injuries "c aused" b y acts or omissions ofthe indemnitee.

c. Contractual Indemnity Covering“Attorney’s Fees” and “Costs” as an Exception.Atto rney's fees have been recoverable by theIndemnified Person a gainst the Inde mnifying Pers on incertain contractual indemnity cases.

(1) Attorn ey's Fees in DefendingAgainst a Claim and Enforcing Indemnity asIndemnified Liabilities. The expense of defending aliability suit and in subse quently enforcing thecontractual indemnity are reimbursable when theI n d e m n i f i e d P e r s o n r e c o v e r s c o n t r a c t u a lindemnification from the Indemnifying Person. AnIndemnified Per son 's attorney's fees in defending aliability suit are recoverable from the IndemnifyingPerson as “indemnified damages” even though notexpressly mentioned in the indemnity provision.Attorney’s fees may be awarded to the IndemnifiedPerson pursuant to TEX. CIV. PRAC. & REM. CODE§ 38.001(8) (Verno n 1997 ) in connectio n with a suitagainst the Indemnifying Person for its breach o f itscontract of indemnity. Arthur’s Garage v.Racal-Chubb, 997 S.W.2d 803 (Tex.App.-Dallas 1999,no writ). The purpose of indemnification is to make theIndemnified Person whole. Tubb v . Bartlett, 862S.W.2d 740, 751 (Tex. App.--El Paso 1988, writdenied); Continental Steel Co. v. H. A. Lott, Inc., 772S.W.2d 513, 517 (Tex.App.-Dallas 1989, writ denied);Texas Const. A ssoc., Inc. v. Ba lli, 558 S.W.2d 513(Tex. Civ. App.--Co rpus Christi 1 977, no writ ); FisherConstr. Co. v. Riggs, 320 S.W.2d 200 (Tex. Civ.App.--Houston 1959), rev'd on other grounds, 325S.W.2d 126 (1959) and vacated on other grounds, 326S.W.2d 915 (Tex. Civ. App .--Houston 1 959); Barnes v.Calgon Corp., 872 F. Supp. 349, 353 (E .D. Tex. 1994).

However, a different rule may app ly to “costs” and“expenses” beyond attorney’s fees. In Arthur’sGarage v . Racal-Chubb, 997 S.W.2d 803(Tex.App.-Dallas 1999, no writ ) the court held thatfailure of the indemnity provision to expressly cover theIndemnified Person’s litigation costs preventedrecovery of the following expenses incurred by itsattorney: filing fees, courier fees, postage, telephoneexpenses, long distance charges, and fax charges. Thecourt considered these costs to be included within thehourly billing rates and reasonab le fees of the attor ney,unless the indemnity contract expressly covered theseitems as an Indemnified Matter.

(2) No Attorney's Fees for Indemn ifiedPerson 's Defense of Negligence Claim if IndemnityFails Express Negligence Test. The Texas SupremeCourt in Fisk Electric Co. v. Constructors & A ssoc.s,Inc., 888 S.W.2d 813 (Tex. 1994) held that there is noobligation to indemnif y an Indem nified Perso n for itscosts, including any attorney's fees it incurs, resultingfrom a claim made against it for its own negligenceunless the indemnification agreement m eets the expressnegligence test. It is undisputed that the indemnityprovision did not exp ressly provid e that the


Indemnifying Person, F isk Electric C o., agreed toindemnify Constructors for Constructor's negligence.

The court of ap peals had held that an obligation toindemnify one for its attorney's fees and costs ofdefense is separate fro m an obliga tion to indem nify onefor its own negligen ce. Conse quently, the court ofappeals concluded that in order to obtain summaryjudgmen t, thus avoiding liability under the indemn ityagreement for the Indemnified Person's cost of defense,the Indemnifying Person, Fisk Electric Co., had to firstestablish that the Indemnified Person, Constructors, wasnegligent.

This case arose when an em ployee of F isk, asubcontractor, sued Constructors, the generalcontractor, for injuries the em ployee sustain ed inperforming electrical work at One Shell Plaza.Constructors brought a third-party action against Fiskseeking con tractual indem nity.

The indemnity clause provided indemnity for thefollowing liabilities:

Provision:

11.3 INDEMNIFICATION AND HOLDHARMLESS CLAUSE: To the fullest extentpermitted by law, (Fisk) shall indemnify, holdharmless, and defend (Constructors) ... from andagainst all claims, damages losses, and ex penses,including but not limited to attorney's fees, arisingout of or resulting from the performance o f (Fisk's)work ... provided that any such claim, damage, loss,or expense (a) is attributable to bodily or personalinjury, sickness, d isease, or death, or patentinfringement, or to injury ... and (b) is caused inwhole or in part by any negligent act or omission orany act or omission resulting in the strict liability of(Fisk) or anyone directly or indirectly employed byit(,) anyone for whose acts it may be liable, o r iscaused by or arises out of any products, material, orequipme nt furnished b y (Fisk).....

The court of appeals concluded that the summaryjudgment proof offered by Fisk only established that theplaintiff claimed Constructors was negligent and thatthe indemnity provision did not expressly state that Fiskwould indemnify Constructors from its own negligence.

The supreme court noted that following Ethyl, thereexisted a split of authorities among the courts of ap peal.

The court of ap peals in Fisk relied on the followingpost-Ethyl court of appeals' decisions allowing recoveryof defense co sts: Constru ction Investments andConsultants, Inc. v. Dresser Industries, Inc. 776S.W.2d 790, 792 (Tex. App.--Houston [1st Dist.] 1989,writ denied); Contine ntal Steel C o. v. H.A. L ott, Inc.,772 S.W.2d 513 (Tex. App.--Dallas 1989, writ denied);M.M. Sundt C onst. Co. v. Contractors Equipment Co.,656 S.W.2d 643 (Tex. App.--El P aso 198 3, no writ );Copeland Well Servic e, Inc. v. Sh ell Oil Co., 528S.W.2d 317 (Tex. App.--T yler 1975 , writ dism 'd); R. L.Jones Co. v. City of San An tonio, 809 S.W.2d 565, 569(Tex. App.--San Antonio 1 991, no writ); R.B. Tractors,Inc. v. Mann , 800 S.W .2d 955 (Tex. Ap p.--San Anto nio1990, no writ); a Fifth Circuit op inion: Patch v. AmocoCo., 845 F.2d 571 (5th Cir. 1988); Champlin Petroleum

Co. v. Goldsto n Co., 797 S.W.2d 1 65, 166 (Tex.App.- -Corpus Christi 199 0, writ denied); and apre-Ethyl Texas S upreme C ourt opinio n: Cira &Payne, Inc. v. Wa llace & Ridd le, 484 S.W.2d 559, 562(Tex. 1972).

However, the supreme court found that the expressnegligence requirement for the enforcement of anindemnity agreement is not an affirmative defense to bealleged and proved by the defendant IndemnifyingPerson, but rather is a rule of contract c onstructio n.The court held that Fisk 's ob liga tion to p ay at torn ey'sfees arose out of its duty to indem nify. Absent a d uty toindemnify, there is no obligation to pay attorney's fees.

Additiona lly, the court cited cases from otherjurisdictions drawing a p arallel to the ind emnitycontract of a commercial general liability policy. Asnoted by the dissent in Continental Steel, in this respect,the indemnity provision operates like an insurancepolicy; if an insurance policy excludes coverage forintentional torts, an insured cannot claim coverage forfees and costs ev en if it successfully defends againstallegations that it committed an intentional to rt. SeeContinental Steel, 772 S.W .2d at 523 (Lagarde, J.dissenting).

The supreme court observed that a rule like thatproposed by Constructors regarding defense expenseswould

"leave indemnitors liable for a cost resulting from aclaim of negligence which they did not agree tobear. Significantly, it would also leave indemnitorsvulnerable to indemnitees who might settle caseswithout admitting negligence, leaving theindemnitor to pay the costs of settlement anddefense."

The supreme court declined to carve out anexception to the expre ss negligence rule for contra ctswhich although they d id not expr essly indemnify theIndemnified Person fo r its own neglige nce, clearly,expressly or broadly covered the Indemnified Per son 'sdefense costs. In this regard, the supreme court wasunwilling to follow the contract interpretation used byChief Justice Tom Phillips, when Chief Justice Phillipswas the trial court judge in Construction Investmentsand Consultants, Inc. v. Dresser Industries, Inc.,776 S.W.2d 79 0, 792 (Te x. App.--Houston [1 st Dist.]1989, writ denied).

The Fisk indemnity language appears to bepatterned on the indemnity clause contained in theAIA A401 Standard Form of Agreement BetweenContractor and Subco ntracto r (1987 Edition). Doesthe AIA form pass the express negligence test? Is itsindemnity provision conspicuous? See Appen dix 1.

Also see Glendale Construction Services, Inc. v.Accurate Air Systems, Inc., 902 S.W.2d 536 (Tex.App.--Houston [1st Dist.] 1995, writ denied), holdingno right to attorney’s fees absent an enforceableindemnity provision.

In the Dresser case, the court of appeals found thefollowing extensive contract language as clearlyindicating the intent of the Indem nifying Perso n tocover the Indemnified Person's attorney's fees


($142,633.20) where th e Indemnified Perso nsuccessfully defended against the neglig ence suit, eventhough the indemnity provision otherwise would notpass the exp ress negligenc e test:

Provision:

Contractor (CIC) shall, except as otherwiseexpressly provided herein, indemnify, protect andsave Dresser ... harmless against any and all actions... including costs of litigation, attorney fees andreasonable expense s in conn ection ther ewith ...whether or not such loss, injury, or damage shall bevalid or groundless, and Contractor agrees that incase Dresser ... shall be made defendant in any suit..., Contractor, immediately upon notice fromDresser, shall be bound and obligated to assumethe defense thereof, including the settlementnegotiations and shall pay ... expenses re sultingfrom ... . It is understood and agreed by Contractorthat in case Dresser is m ade defe ndant in any suitor action an d Contra ctor fails or neglects toassume the defense thereof, after having beennotified so to do b y Dresser, th at Dresser maycomprom ise and settle or defend any such suit oraction, and Con tractor shall be bound andobligated to reimburse Dresser for the amountexpended by it in settling and compromising anysuch claim, or in the amount expended by Dresserin paying any judgment rendered therein, togetherwith all reasonable attorneys' fees incurred byDresser by reaso n of its defen se or settlem ent ofsuch claims. (Empha sis added by court.)

Id. at 791.

The court of appeals held that CIC 's obligation toindemnify Constructors for attorney's fees and costs inthe defense of the underlying suit is sep ara te from C IC'sobligation to indemnify Constructors for Constructors'negligence. The court held that "an Indemnified Personmay recover attorney's fees and costs where it was notfound negligent, even though the indemnity provisiondid not me et the expres s negligence sta ndard."

2. Choice of Laws.

a. No Express Choice of Laws Provision.In Maxu s Explora tion Co., f/k/a Diamond ShamrockExploration Co. v. Moran Bros., Inc., 817 S.W .2d 50(Tex. 1991), th e Texas Suprem e Court ha d to determinewhether Kansas law or Texas law applied absent anexpress choice of laws provision in a contractcontaining indemnity provisions. In Maxus, the TexasSupreme Court determined that the laws of Kansas wereto be applied to the indemn ity clause to dete rmine if itwas enforceab le. The indemnity clause invo lved inMaxus is the mutual indemnity clause contained in thestandard form "Daywork Drilling Contract" publishedby the International Association of Drilling Contractors.

The oil well operator (Maxus Exploration f/k/aDiamond Shamrock) brought a declaratory judgmentaction in Texas against the drilling contractor (MoranBros.) to determine the validity of the contractualindemnity provision c ontained in th e Drilling Co ntract.Diamond Shamrock had previously in response to thedemand of Moran Bro s. accepted the defense of aninjury claim filed by an employee of one of Diamond

Sha mro ck's contractors (Boydstun). Moran Bros. andMaxus agreed to reserve for determination in asubsequent suit the issue of the enforceability of theindemnity provision.

The employee of the contractor of Diamond wasinjured while working on Moran's rig. The accidentoccurred in Kansas where Moran Bros. was performingcontract drilling services for Maxus. The employee, aresident of Oklahoma, sued Moran, a Texascorporation, in the United States District C ourt inKansas. Moran filed a cross- action against DiamondShamrock for indemn ity under the dr illing contract.Diamond Shamrock undertook to defend Moran in thelitigation. Moran Bros. and Diamond Shamrock eachreserved any right it might have to seek indemnity orother damages from the other. Based upon a juryverdict that Boydstun had suffered $3 million indamages cau sed 90% by M ora n's negligence, the courtrendered judgment against Moran for $2.7 million.Moran then settled with Boydstun. Diamond Shamrockand its insurer paid approximately half the settlementamount and Moran paid the balance. The supremecourt followed the following steps in determining thatKansas law applied. The court stated

In deciding which state's law should govern theconstruction of contractual rights we havepreviously looked to the principles s tated in theRESTATEMENT (SECOND) OF CONFLICT OFLAWS (1971) [hereinafter the "Restatement"].DeSa ntis v. Wackenhut Corp., 793 S.W.2d 670, 679(Tex. 1990), cert. denied, 498 U .S. 1048 , 111 S. C t.755, 112 L. Ed. 2d 775 (1991); Duncan v. CessnaAircraft Co., 665 S.W.2d 41 4, 420 (Tex. 1984).We look to those principles again here.

Id. at 53.

In Duncan v. Cessna Aircraft Co., the TexasSupreme Court had to determine whether Texas or NewMexico law controlle d the constru ction of a rele aseexecuted by Duncan (on behalf of herself as widow andher minor children in a w rongful dea th action) in favorof Air Plains West, Inc. The Texas Supreme Court heldthat Texas had the most significant relationship to thisissue. The court held that the release language whichreleased Air Plains and "any other corporations orpersons whomsoever responsible therefor, whethernamed herein or not" did not release Cessna, themanufacturer of the airplane . Id. at 418. The courtassumed that the release would be enforceable underNew Mexico law, but determined that since Texas hadthe most significant relationship to the matter, thatTexas law would apply to construe the release. Thecourt refused to be bound by the traditional tort choiceof laws rule of lex loci delec ti (i.e., apply the law of theplace where the wrong occurred--New Mexico wherethe crash occurred). Similarly, the cour t noted that itwould not follow other lex loci rules such as lex locicontractus.

Conseq uently, the lex loci rules will no longer beused in this state to resolve conflicts problems.Instead, in all choice of law cases, except thosecontract cases in which the parties have agreed to avalid choice of law clause, the law of the state withthe most significant relationship to the particular


substantive issue will be applied to resolve thatissue. (Italics add ed by autho r.)

Id. at 421.

(1) General Rule: In Absence ofChoice of Laws Prov ision, Apply Law of State w ithMost Significant Relation ship . The supr eme cou rt inMaxus referred to the following statement in theRestatement as controlling the determination of theapprop riate state's laws to gove rn an indem nity incontracts containing no choice of laws provision:

The existence of a co ntractual right to in demnity,and the rights created thereby, are determined by thelaw selected by application of the rules of§§ 187-188.

RESTATEMENT (SECOND) OF CONFLICT OFLAWS § 1 73, Comment b (1971).

The Restatement sets forth the following generalrule in Restatement § 188(1) to be applied in caseswhere the parties have not themselves chosen what lawgoverns the ir agreeme nt:

The rights and duties of the parties with resp ect toan issue in contract are determined by the local lawof the state which, with respect to that issue, has themost significant relations hip to the transaction andthe parties under the principles stated in § 6.

Section 188(2) lists the contacts comprising therelationship between tra nsactions and locale ordinarilyto be taken into account in app lying the principles in§ 6. These include:

(a) the place of contracting,(b) the place of negotiation,(c) the place of performance,(d) the location of the subject matter of the

contract, and(e) the domicile, residence, nationality, place of

incorporation and place of business of theparties.

(2) Law of Place of PerformanceApplica ble to Service Contracts . The court, quotingDeSa ntis, found that as to service contracts "[a]s a rule,(the fact that the services are almost entirely in aparticular state) that factor alone is c onclusive indetermining what state's law is to apply." DeSantis v.Wackenhut Corp., 793 S.W.2d at 679 (Tex. 1990).Section 196 of the Restatement states

The validity of a contract for the rendition ofservices and the rights created thereby aredetermined, in the absence of an effective choice oflaw by the parties, by the loc al law of the statewhere the contra ct requires that the services, berendered, unless, with respect to the particularissue, some other state has a more significantrelationsh ip under the principles stated in § 6 to thetransaction and the parties, in which event the locallaw of the other state will be applied.

(3) On Balance This IndemnityContract Governed by Law A pplicable to ContractWhich Contains the Indemnity Provision. The court

determined the law of Kansas, exclusive of its choice oflaws rules, would be applied to the indemnity provision.Under Kansas law the indemn ity provision was held bythe Texas Supreme Court to be enforceable. The courtfollowed the following analysis:

(a) Restatement Rule on Particu larContracts . The court noted that in so me instances , itis more ap propriate to consider the disputed contractualissue separately from the contract as a whole.RESTATEMENT (SECOND) OF CONFLICT OFLAWS Title C, Particular Issues, at 631-32 (1971)states

... most issues involving a contract will usually begoverned by a single law, (occasionally) anapproach directed to the particular issue, rather thanto the kind of contract inv olved, will provide a morehelpful basis for the decision of a choice-of-lawquestion.

The court noted that even assuming that theindemnity obligations should be consid ered sepa ratelyfrom the contract as to the determination of theapplicab le state rules, the indemnity obligations wereperforma ble for the most part in Kansas. Therefore,pursuant to § 196 relating to conflicts of laws in servicecontracts, the court determined that the law of the stateof Kansas was to be used, unless some othe r state(Texas) had a more significant relationship to thetransaction and the parties under the principles in § 6 ofthe Restatem ent.

(b) Determination if AnotherState Has a M ore Significant Relationship thanState of Performance. Section 6 provides that absenta statutory directive concerning the law to be applied ina case, the follo wing seven fac tors are relev ant:

the factors relevant to the cho ice of the app licablerule of law include

1) the needs of the interstate and internationalsystems,

2) the relevant policies of the forum,3) the relevant policies of other interested

states and the relative interests of thosestates in the determination of the particularissue,

4) the protection of justified expectations,5) the basic polic ies underlying th e particular

field of law,6) certainty, predictability and uniformity of

result, and7) ease in the determination and application of

the law to be applied.

i) Public Policies of BothStates Examined. The court first examined the publicpolicies of both states to determine if either state's lawswould declare the particular ind emnity provision to beunenforceable as a matter of law.

a) Texas. The cou rt notedtwo expressions of Texas public policy relating to theindemnity provisions.

i) Express Negligence.The court reviewed the language of the indemnity and


found that the language "without limit and withoutregard to the cause or causes thereof or the negligenceof any party or parties" met the express negligencetest applied in Texas. Citing identical language inTheriot v. Bay Drilling Co rp., 783 F.2d 527, 539-41(5th Cir. 1986).

ii) T e x a s O i l f i e l dAnti-Indemnity Statute. After reviewing argumentsthat the indemnity provision was violative of therequireme nts for a valid indemnity provision under theTexas Oilfield Anti-Indemnity Statute, the courtconcluded that it wa s the Texas Leg isla ture 's intent onlyto protect Texas contractors who work on mineral w ellsand mines in Texas and not to read the statute to havean extraterritorial reach, absent some agreementbetween the parties. Maxus at 57. See TEX. CIV.PRAC. & RE M. COD E ANN. § 12 7.002(a).

b) Kansas. The court notedthat Kansas does not have an anti-indemnity statute andfollows the "clear and unequivocal" test in enforcingindemnity provisions. The court concluded that theindemnity clause would meet the "clear andunequivocal" test under Kansas law.

ii) Remaining Six FactorsExamined. Of the seven choice of l aws principles inSection 6 of the Res tatement, the co urt found that thefollowing four factors militated clearly in favor ofapplying Kansas law: a) the protection of justifiedexpectations; b) certainty, predictability and uniformityof result; c) ease in the determination and application ofthe law to be applied; and d) the basic policiesunderlying the particular field of law. The courtanalyzed these factors as follows:

Although the parties did not express a choice ofwhat state's law would g overn their a greement, theyshould have expected that Kansas law would at leastbe invoked. Kansas law was in fact applied inBo ydst un's personal injury action. Although a sta temay have an interest in applying its law to aparticular issue arising und er a contrac t, incircumstances like these it is less desira ble thatKansas law govern Boydstun's action and Texas lawgovern the defendants' cross-claims than it is thatthe same law govern both.

Id. at 57.

As to the two remaining principles to beconsidered--the relevant policies of Texas and Kansasand the relative interests of each in determining thevalidity of indemnity agreements like the one before thecourt--the court found that each principle p ointed tochoosing a different state's law. The court declin ed toexpress its opinion on whether the particular provisionin Maxus would violate the Texas OilfieldAnti-Indemnity Statute, assuming Texas law applied.Since the court concluded that the Texas statute was notdesigned to have extraterritorial reach and Kansas hadno public policy against such ind emnity provisions, thecourt held that on b alance the factors required theapplication of Kansas law.

b. Express Choice of Laws Provision. TheTexas Supreme Court has adopted the principles setforth in§ 187 of the RESTATEMENT (SECOND) OF

CONFLICT OF LA WS (1 971) in o rder to determine ifa choice of laws provision is to be enforced.DeSa ntis v. Wackenhut Corp., 793 S.W.2d 670 (Tex.1990). See Weine r and Ale, Making Choice of Law aContact Sport: Contractual Choices of Law in Texas,54 TEX. B.J. 262 (Mar. 1991) for an analysis of theDeSantis opinion an d for sugges tions for max imizingthe chance that a contractual choice of laws provisionwill be enforce d by a Te xas court. If the law of anotherstate is chosen and the contract is for the sale, lease,exchange, or other disp osition of goo ds for the pric e,rental, or consideration of $50,000 or less, any elementof the execution of the contract occurred in Texas anda party is a resident of Texas or is an entity createdunder the laws of Texas, then the boldface type, capitalletters, or other conspicuous manner requirements ofTEX. BUS . & COM M. CO DE AN N. § 35.52 (VernonSupp. P amphlet 2 003) will ap ply.

Under the Restatement rule, the choice of lawsprovision will be upheld unless all the factors inRestatement § 187(2)(b) are met; namely, (a) someother stat e's law would a pply had the parties not madea choice; (b) that other state has a materially greaterinterest than does the chosen state in the enforcea bilityof the contractual provisions at issue; and (c) thecontractual provisions at issue violates a fundamentalpolicy of that other state.

New Mexico has upheld a provision choosing Texaslaw to apply to an indemnity that indemn ified againstthe Indemnified Person’s negligence, even though suchan indemnity would not be enforceable under NewMexico law. The New Mexico court found that theprovision did not violate a fundamental public policy ofthe State of New Mexico even though New Mexicostatutes prohibited a similar contractual indemnity forcontracts governed by New Mexico law. The courtfound that the same pub lic policy cou ld be uph eld(promotion of safety) by upholding the indemnity sincethe Indemnifying Party also was required to obtaininsurance supporting its indemnity. Regan v. McGeeDrilling Corp., 933 P.2d 86 7 (New. M ex. 1997 ) (“it issaid that courts sho uld invoke th is public policyexception only in ‘extreme ly limited’ circum stances....Otherwise, since every law is an expression of a state’spublic policy, the foru m law would always preva ilunless the foreign law were identical, and the exceptionwould swallow the rule (rule-the rights of the parties toa contract are primarily determined by the terms of thecontract.).”

3. Assignability. The ability to assign anindemnity or to include within the scope of anindemnity subseque nt proper ty owners is a va luableright that can add value to a pr operty. A typicalcontract contain ing an indemnity may contain as tandard "successor and assign" prov is ion.Consideration should be given to wheth er this provisionextends to the indemnity obligation. For example, anenvironmental indemnity from a major oil company inconnection with the sale of the comp any'sdecommissioned oil refinery can be like an insurancepolicy against otherwise uninsurable environmentalrisks.

4. Cumulative or Exclusive Remedy. Theindemnity should address whether its rights areexclusive of any other remedy available to the


Indemnified Person. It might be argued that anindemnity was intended to be the exclusive remedyafforded to the Indemnified Person as to a particularrisk. The wording of the indemnity will be strictlyconstrued and might not cover a subsequ ently occurringrisk, unless expressly covered (e.g., change of law orchange in classification of a substance to a hazardoussubstance in the case of an environmental indemnity).

5. Powers Granted to Indemnified Person.The following types of provision s granting broadpowers to an Indemnified Person have been upheld.

a. M o d if icat io n o f I n s t r u m en tsIncreasing Liability. It has been held that anindemnity contract is not contrary to public policy eventhough the contract makes vouc hers or affidavits primafacie evidence of any loss paid by the IndemnifiedPerson and gives the Indemnified Person power to alterand modify instruments and to execute new obligationsthat fix the Indemnifying Person's liability withoutnotice to the Indemnifying Person.

In Hammond v. Travelers Indem. Co., 553 S.W.2d205 (Tex. Civ. App.--Houston [14th Dist.] 1 977, nowrit), the court upheld a clause in an indemnificationagreement in a surety bond which provided forindemnification of all claims resulting from suretyship,or any renewal, extension, modification, or continuationfor suretyship or additional suretyship even thoughincreases in the surety bond were made without theknowledge or consent of the Indemnifying Person (thesurety company).

b. Expenses Incurred in Good Faith. Aprovision requiring the Indemnifying Person (principalon a surety bond) to reimburse the Indemnified Personfor all disbursements made by it in good faith, belief ofliability, necessity, or expediency, regardless of whethersuch factors existed in actuality, has been upheld. Central Surety & Ins . Corp. v. M artin , 224 S.W.2d 773(Tex. Civ. App .--Beaumo nt 1949 , writ ref'd ); Shaw v.Massachusetts Bonding & Ins. Co., 373 S.W.2d 553(Tex. C iv. App.--D allas 1963 , no writ ).

c. Prior Notice Provision. In a caseinvolving a lease which provided that a landlord 's dutyto repair the leased premises was conditioned upon thetenant giving notice or upon the landlord obtainingknowledge of the defect, the tenant was not entitled toindemnification from the landlord for liability forinjuries sustained by the tenant's customer occasionedby an unrep orted defe ct in the prem ises. Stool v. J. C.Penney Co., 404 F.2d 562 (5th Cir. 1968).

d. Discretion.

(1) No Common Law Indemnity forVoluntary Settlements of Indemnified Liability.Settlement by one joint tortfeasor extinguishes anycommon law and statutory contribution rights suchperson may have had. Beech Aircraft Corp. v. Jinkins,739 S.W.2 d 19 (T ex. 1987 ); International ProteinsCorp. v. Ralston- Pu rina Co., 744 S.W.2d 9 32 (Tex.1988); TEX. CIV. PRAC. & REM. CODE ANN.§ 33.015(d) (Vernon 19 97).

In MAN GHH Logistics GMB H v. Em scor, Inc., 858S.W.2d 41 (Tex. App.--Houston [14th Dist.] 1 993, no

writ), the court of ap peals denie d both the seller and thebuyer of a crane contribution and indemnity against theother after each had separately settled with theclaimants for $3,000,000 for deaths and injuriessustained when a 15 2 foot towe r crane fell ove r whilebeing dismantled. The seller of the crane (Emscor)voluntarily settled two de ath claims in O ctober, 1990.In November, 1990, the buyer of the crane (MANGHH) agreed to a $3,000,000 judgment in favor of thetwo families.

Additiona lly, the court denied b oth the seller andthe buyer respectively any right to "contractualcontribution" pursuant to the reciproca l indemnityagreeme nts contained in the Asset Purchase Agreementbetween seller and bu yer. The Asset PurchaseAgreement pro vided as follows:

Provision:

IndemnificationsIndem nification by Sellers. Sellers (Emscor),jointly and severa lly, hereby indem nify and holdharmless the Purchaser and its respective successorsand assigns from and against any loss, damage, orexpense (including reasonable attorney's fees)caused b y or arising out o f:

(i) any breach or default in the performance bySellers of any cove nant or agreement ofSellers conta ined in this Agre ement;

(ii) any breach o f warranty or inaccurate orerroneous representation made by Sellersherein, in any Exhibit hereto, or in anycertificate or other instrument delivered byor on behalf of Sellers pursuant hereto;

(iii) third party clai ms r ega rdin g Em sco r'smanagement of Purchaser's Wolff towercranes prior to the Closing Date;

(iv) third party claims regarding any matterrelating to title to or Emsco r's maintenanceof the Purchase Assets prior to the ClosingDate; or

(v) any liability arising out of a ny and allactions, suits, proceedings, claims,demands, judgments, costs, and expenses(including reasonable legal and accountingfees) incident to any of the foregoing.

The court dismissed each party's request forcontractual indemnity and/or contribution from theother party. The court found that the quoted provisiondid not protect the b uyer (and co nversely the reciprocalprovision did not protect the seller) because (1) it didnot provide that the other party would reimburse thesettling party for any vo luntary settlemen ts made withany plaintiffs; (2) the provisions did not mention"contribution" and failed to discuss any apportionmentof fault; and (3) the pro vision did not express any intentby the parties for a claim for reim burseme nt. Id. at 43.

(2) No Equitab le Right to SettleIndemnified Claim Absent Contra ctual Right toSettle Without Consent. In Liberty Steel Co. v.Guardian Title Co. of Houston, Inc., 713 S.W.2d 358,


360 (Tex. App.--D allas 1986 , no writ ), the court heldthere did not exist an equitable right in the IndemnifiedParty (Guardian Title Co.) to settle a claim (an abstractof judgment bonded around) when the IndemnifyingPerson did not voluntarily step in and assume thedefense against the adverse claimant. The IndemnifiedPerson had sent a letter to the Indemnifying Personrequesting the Indemnifying Person to "honor theterms" of the indemnity agreement. The court foundthat the indemnity contract did not contain a provisionobligating the Indemnified Person to offer to undertakethe defense of the claim and that the IndemnifyingPerson never made a "tender of the defense" to theIndemnified Person. Therefore, the Indemnified Personcould not obtain reimbursement of the amount paid tosettle the adverse claim when the Indemnified Personsettled the claim in violation of the followingcontractual provision:

Provision:

no payment, co mprom ise, settlement, accord orsatisfaction shall be made without the prior writtenapproval of Liberty Steel (the IndemnifyingPerson) ....

(3) Settlement Authority . Delegatingsettlement authority to the Indemnified Person has beenupheld.

Drafting: The indemnity provisio n attached inAppen dix 2 and 7 contains the followingprovision protective of the IndemnifiedPerson in the condu ct of the defen se of anIndemnified Liability:

(1) the Indemn ified Perso n ispermitted to employ its own counsel inaddition to the counsel employed bythe Indemnifying Person;

(2) the cost of the IndemnifiedPer son 's counsel is also an IndemnifiedLiability;

(3) the Indemnified Person is given theSright to settle claim s in the event thatthe Indemnifying Person does notprovide a defense to the claim; and

(4) amounts paid by the IndemnifyingPerson under such circum stances is anIndemnified Liability.

Also see Appendix 7 (Supplemen talProvisions) which sets out procedures forthe Indemnified Person to determine if theIndemnif ying Person w ill honor itsobligation to provide a defense and, if not,for the Indemn ified Person to employcounsel to defend the claim.

(a) Contracts. A court has upheld aprovision in a contract tha t authorized a right-of-wayowner to comp romise and settle all claims for damagewithin the right-of-way in co nnection with an indemnityprovision with a contrac tor. Phillips Pipeline Co. v.McKown, 580 S.W.2d 435 (Tex. Civ. App.--Tyler1979, writ ref'd n.r.e.). Also see S ieber & Ca licutt,

I n c . v . L a G l o r i a , _ _ _ S . W . 2 d _ _ _12-00-001-00123-CV (Tex.App.-Tyler 20 01, no writ )and Amerada Hess Corp. v. Wood Group ProductionTechnology, 30 S.W.3d 5 (Tex. App. [14 th Dist.] 2000,writ denied) upholdin g settlement au thority granted byan Indemnifying Person to an Indemnified Person.

(b) Bonds. An indemnityprovision that "any dec ision, determ ination, settleme nt,defense, compro mise, or othe r action in con nection withany matter arising under an indemnity bond would befinal, conclusive, a nd uncon ditionally bind ing on theindemnitor" has been upheld as not being against pub licpolicy. Engbrock v. Federa l Ins. Co., 370 F.2d 784(5th Cir. 1967). In Ford v. Aetna Ins. Co., 394 S.W.2d693 (Tex. Civ . App.-- Corpus C hristi 1965 , writ ref'dn.r.e.), the court upheld an indemnity provision whichgranted the indemnified person (surety on aperformance and paym ent bond) e xclusive po wer tomake conclusive determinations of claims and demandsto be paid.

(4) Settlement Standards.

(a) Reaso nable and Prudent. For asettling Indemnified Person to recover an amount of thesettlement from this Indemnifying Perso n, theIndemnified Person must show the potential liability toa claimant and that the settlement was reasonable,prudent and made in good faith under thecircumstances. Fireman’s Fund Ins. Co. v.Commercial Standard Ins. Co., 490 S.W.2d 818, 824(Tex. 1972);overruled on other grounds by EthylCorp. v. Danie l Constr. Co., 725 S.W.2d 705, 708(Tex. 1987); Sieber & Calicutt, Inc. v. La Gloria, 66S.W.3d 340 (Tex. App.-Tyler 2001 , no writ ) andAmerada Hess Corp. v. W ood Gro up ProductionTechnology, 30 S.W.3d 5 (Tex.App. [14th Dist.] 2000,writ denied); Texas Property Casualty Ins. Gty.Ass’n v. BSA, 947 S.W.2d 68 2 (Tex.App.-Austin 1997);Getty Oil Corp. v. Duncan, 721 S.W.2d 475, 477 (Tex.App.--Corpus Christi 1986, writ ref’d n.r.e.). Absent anunconditional contractual right to settle, an IndemnifiedPerson who settles a claim without obtaining a judicialdetermina tion of his liability, assumes in his action forreimburse ment, the burden of proving facts that mighthave rendered him liable to claimant, as well as thereasonableness of the amou nt he paid . AerospatialeHelicopter Corp. v. Universa l Heath Services, In c., 778S.W.2d 492, 50 0 (Tex. A pp.--Dallas 1 989), cert.denied, 498 U.S. 854, 111 S. CT. 149, 112 L.Ed.2d 115(1990). Determining whether a settlem ent of awrongful de ath case is reaso nable involves experienceand specialized knowledge. An attorney must reviewand analyze, among other things, the underlying facts,the identity of the defendant, the damage elementsavailable to a plaintiff, the specific injuries or lossesincurred by a plaintiff, the settlement amounts receivedin similar cases, th e complexity of the case, as well asthe strength and resources of the opposing counsel. SeeBurrow v. Arce, 997 S.W.2d 2 29 (Tex. 1999). Also seeSieber & Calicutt, Inc. v. La Gloria, 66 S.W.3d340(Tex.App.-Tyler 2001, no writ ) where court foundthat La Gloria settlement was reasonable, prudent andmade in good faith and thus was to be reimbursed bySieber & Calicutt pursuant to the indemnity agreementbetween La Gloria and Sieb er & Calic utt. The co urt inAmerada Hess Corp. v. Wood Group ProductionTechnology, 30 S.W.3d 5 (Tex.App. [14th Dist.] 2000,


writ denied) upheld a settlement as being rea sonableand entirely covered by the indemnity agreement eventhough another defendant was a lso released because theexpert’s testimony supported the trial court’s findingthat the settlement am ount was reasonable as to theIndemnified Person’s potential liability independent ofthe other release d defend ant’s potential liab ility; noapportionment of the settlement amount was required.

(b) Good Faith. An IndemnifiedPerson can not recover to reimb urse himself foramounts paid in settlement, if the settlement was notmade in good faith. H.S.M. Acquisitions, Inc. v. West,917 S.W.2d 872, 880 (Tex. App.--Corpus Christi 1996,writ denied). Additiona lly, even though an indemn ityagreement vests settlement a uthority in the IndemnifiedPerson, a contractual requirement of settling in "goodfaith” can lead to liability on the part of the settlingIndemnified Person. The court in H.S.M. Acq uisitions,Inc. found the term s of an agree d judgm ent between aclaimant and the Ind emnified P erson to be collusive, inpart because the settling parties agreed to keep theterms of the judgment confidential and not to file anabstract or o ther public n otice of the jud gment.

In Associated Indemnity Corp. v. CAT Contracting,Inc., 918 S.W.2d 580 (Tex. App.--Corpus Christi 1966,no writ), the court found that an Indemnified Personbreached a covenant of good faith contained in thesettlement authorizatio n provisio n of an indemn ityagreement supporting a performance bond when thebonding company (Surety) settled a bond claim withoutadequa te investigation of the circumstances of theclaim, and without advance notice to the principal andan opportu nity for the princip al to argue its cas e withthe obligee. The court further found a common lawduty of good faith and fair dealing under thesecircumstances, the breach o f which gave rise to mentalanguish damages on the part of the owners of theprincipal. The pro vision in the inde mnity agreementgranted the fo llowing settleme nt authority:

Provision:

The Surety shall have the exclusive right to decideand determine whether any claim, liability, suit orjudgment made or bro ught against the Surety or theindemnitors or any one of them on any such bondshall or shall not be paid, compromised, resisted,defended, tried or app ealed, and the Surety’sdecision thereon, if made in good fa ith, shall befinal and binding upon the indemnitors. Anitemized statement of the payments b y the Suretyfor any of the purposes specified herein, sworn toby an officer of the Surety, or the voucher orvouchers for such payments, shall be prima fa cieevidence of the liability of indemnitors to reimbursethe Surety for such amounts, w ith interest.(Emph asis added by author.)

G. Settlement Agreements.

1. Effect of Settlement by Plaintiff with aJoint Tortfeasor.

a. One Recovery Rule: Credit forSettlement Payments . Although the court in Kenne thH. Hughes Interests v. Westrup found that the defendant(landlord) was liable to the plaintiff (tenant), the

land lord 's $23,000 liability was more than offset by the$770,000 settlement payment made by its jointdefendants, a contractor (which had indemnified thelandlord) and the c ont rac tor's subcontra ctor. The courtfollowed the "one recovery" rule announced in StewartTitle Guaranty Co. v. Sterling, 822 S.W .2d 1 (Tex.1991). In that case, the supreme court held that "(t)herecan be but one recovery for one injury, and the fact thatmore than one defendant may have caused the injury orthat there may be more than one theory of liability doesnot modify this rule. Sterling, at 8; and Ojeda deToca v. Wise, 748 S.W.2d 449 (T ex. 1988 ). Kenne th H.Hughes Interests v. Westrup, 879 S.W.2d 229, 233-34,240 (Tex. Ap p.- Housto n [1st Dist.] 1994, writ denied).

b. Effect of Settlement (by Release andIndemnity) by Plaintiff of a Joint Tortfeasor WhichAlso is an Indemnifying Person. In Martine z v. GulfStates Utility Co., 864 S.W.2d 802 (Tex .App.--Houston [14th Dist.] 1 993, writ denied) theplaintiffs, who were in jured whe n they accidentallytouched a high voltage wire, w ere held to be precludedfrom recovering against Gulf States, the utility companyand owner of the utility pole, because they hadpreviously settled their claim with the contractor, whichowed a statutory indemnity to the utility company forsuch type of accid ents. Plaintiff, Daniel Hernandez,was killed, and plaintiffs, Clarence Thompson, Sr. andDavid Martinez, were injured, in repairing a w ater wellfor the defendant property owners, Clarence Thompson,Jr. and Pamela Mendez. Hernandez was killed whenClarence Thompson, Sr., Martinez and Hernandezaccidentally touched a high voltage wire.

The court found that a circuit of ind emnity , createdby statute and by contract (the release agreement), hadbeen created by the settlement agreement that precludedrecovery by the plaintiff against the utility compa ny. Insettling with the property owners, Thompson Jr. andMendez, the plaintiffs executed a typical releasereleasing these defendants "for any and all claims,demands ... and causes of ac tion ... whether in contractor in tort ... for and on account o f injuries sustained ...(including) any liability for any cross actions seekingcontribution and indemnity. . .." TEX. HEALTH &SAFETY CODE ANN. § 752.008 (Vernon 1992)creates a statutory indemnity by persons responsible forhaving workers near utility lines if they do not followthe advance notice and precautionary proceduresestablished to protect against these type of ac cidents.

The court found that a circuit of ind emnity existedprecluding recovery against the utility company sincethe utility company h ad a sta tutory indemnity by thesettling defendants, who had a con tractual indem nity(release) from the plaintiffs.

c. Express Negligence Rule AndSettlement Agreements .

(1) The Settlemen t Agree ment Itself .The court in Martinez v. Gulf States Utility Co., 864S.W.2d 802 (Tex. App.--Houston [14th Dist.] 1993,writ denied), also held that the express negligencedoctrine was not applicable to the release executed as apart of the settlemen t agreemen t since the plaintiffcould not claim surprise as to the cross claim by the


utility company against the settling defendant forstatutory indemnity. The release explicitlycontemplated cross actions b y the other co -defendan t.Liability was cer tain. Id. at 805.

(2) Settlement Authority. If theindemnity clause does not pass the express negligencetest and the plaintiff's injuries arise from a negligenceclaim or through a strict liability claim against theIndemnified Person, then the Indemnifying Person isnot liable for a settlement negotiated by the IndemnifiedPerson, even though the indemnity agreement containsan absolute power to settle. Coastal States CrudeGathering Co. v. Natural Gas Odorizing, Inc., 899S.W.2d 289 (Tex. Ap p.--Housto n [15th Dist.] 199 5, nowrit)- -Coastal not able to collect back on $10,500,000settlement paid to persons injured by fire and explosionfueled by propane gas o dorized and so ld by Coastalusing odorizing chemicals supplied by Natural GasOdorizing. Indemnity agreement failed to mentionliability arising out of strict liability and was containedon back of purchaser order in inconspicuous fashion(same black ink as rest of order form). The courtquoted Fisk Electric Co. v. Constru ctors & Associates,Inc., 888 S.W.2d 813 (Tex. 1994) in rejecting Coa stal 'sargument that the express negligence test was notapplicab le where absolute settlem ent authority grantedto the Indemnified Person:

The Fisk court made explicitly clear that allowingthe rule proposed by Coastal would "leaveindemnitors vulnerable to indemnitees who mightsettle cases without admitting negligence, leavingthe indemnitor to pay the costs of settlement anddefense." Id. at 815. T he court further stated in afootnote that even if a settlement could be contestedby the indemnitor , such a result wo uld retard, ratherthan advance , the policy of p reventing sate llitelitigation surroundin g interpretatio n of indemn ityclauses.

2. Covenants Not to Execute. In Ard v.Gemini Explora tion Co. a nd Reso lve Drilling C o.,894 S.W.2d 11 (T ex. App.-- Ho uston [14th Dist.] 1994,writ denied), the court found that a covenant by aninjured employee (Ard) of the Indemnifying Person(RRS Services, Inc.) not to execute (a " covenan t not toexecute") upon the assets of the Indemnified Person(Resolve) did not extinguish the liability of theIndemnified Person in such a manner as would preventthe Indemnified Person and the injured party fromrealizing upon the Indemnified Person 's excess liabilityinsurance policy. "Therefore, the fact that theindemnitee, Resolve, will not have to pay any damagesdoes not eradicate Resolve's liability, nor does iteradicate an indemnitor's or an insure r's duty to pay."The "covena nt not to exec ute" was the re sult ofinsurance settlement paid b y the Ind emn ified Per son 'sprimary insurance carrier.

A covenant not to execute is a contract rather thana release. See Garcia v. Am. P hysicians Ins. Exch ., 812S.W.2d 25, 33 (Tex. App.--San Antonio 1 991), rev'd onother grounds, 876 S.W.2d 842 (Tex. 19 94); Y.M.C.A.of Metro . Ft. Worth v. Commercial Standa rd Ins. Co .,552 S.W.2d 497, 59 5 (Tex. A pp.--Ft. Worth 1977), writref'd n.r.e., per curiam, 563 S.W.2d 246 (Tex. 1978).Its legal effect is similar to a "covenant not to sue"because it does not eliminate a damage award; the

underlying tort liability remains. Garcia , 812 S.W.2dat 32-33; Y.M.C.A ., 552 S.W .2d at 505 . Also gen erallysee RTC v. N orthpark Joint Ven ture, 958 F.2d 1313(5th Cir. 1992) where the court rejected the argument ofa guarantor tha t it had no liability on its gua rantybecause the debt guaranteed was a non -recourseliability of the note maker.

3. Insurer's Duty to Insured. The variousduties of an insurer to its insured are illustrated byCrum & Forster, Inc. v. Monsanto Co., 887 S.W.2d103 (Tex. App.--T exarkana 1 994, no writ ) whereMonsa nto was awarded $71,048,070.22 for actual andtreble damage s, prejudgm ent interest and attorney's feesarising out of th e ins ure r's obtaining a financial interestin, and control of, litigation against its insured in anattempt to defeat the insu red's reimbur sement rightsunder an environm ental impairm ent liability policy.INS. CODE Art. 21.21 § 16(a) (Vernon 1981)violation.

H. Framework for an Indemnity Provision.

1. Provision Protecting Indemnified PersonFrom Sole or Concurring Negligence. See theindemnity provisions contained in the Appendix ofForms. Also see the clauses proposed by Richard L.Scheer in Scheer, Model Contractual Indem nityProvisions Effective to P rotect an Indemn itee AgainstHis Own Negligence or Other Fault , 50 TEX. B.J. 602(Jun. 1987) and Ellis and Kes sler, Exculpation andIndem nity Clauses, 23RD ANNUAL MORTGAGELENDING INSTITUTE (UNIV. TEX. 1989); Civins,Dealing with Environmental Issues in Real Esta teContra cts, 3RD ANNUAL A DVANCED REALESTATE DRAFTING COURSE C (STATE BAR OFTEXAS PDP 1992); S chwenke, Hazardous Waste:Hazardous Headac he to Borro wers and Lenders , 22NDANNUAL MORTGAGE LENDING INSTITUTE(UNIV. TEX. 1988) for extensive Appendix ofenvironmental indemnity agreements and relatedagreements; and Ride r and Shuly, EnvironmentalConsiderations in Nego tiating an d Draftin gCommercial Real Estate Documents, 1ST ANNUALADVANCED REAL ESTATE DRAFTING COURSEI (STATE BAR OF TEXAS PDP 1990). Pierce,Structuring Routine Oil and G as Trans actions toMinimize Environmental Liability, 33 WASHBURN L.J. 76 (1993); Parker and Slavich, Contractual Efforts toAllocate the Risk of Environ mental Liability: Is Therea Way to Make Indemnities Wo rth More Than the PaperThey are Written On? , 44 SW. L. J. 1349 (1991); Hassand Roska, Environmental Indemnities and OtherEnvironmental Provisions in the Purchase and sale ofMineral Properties, 38 ROCKY MTN. MIN L. INST.22-1 (1992).

The following "model” indemnity agreement has thefollowing components :

(1) Prerequisites to its validity. A choice of lawsprovision; drafted to co mply with com mon law (the fairnotice requirements) and statutory require ments (toaddress the Workers’ comp bar; recognition of thelimits of coverage for certain architect’s liabilities).

(2) Events triggering the indemnity obligation. Listing of the "Indemnified Matters” as to whichIndemnified Liabilities are indemnified.


(3) The scope of the Indemnified Liabilities.Definition of the "Indemnified Liabilities”, includingthe types of Liabilities Covered (sole, concurre nt, strict,statutory, employee injuries, disease, gross), the typesof Liabilities listed as E xcluded M atters, time periodcovered, types of damages covered (actual,consequential, fines, punitive).

(4) The settlement and defense procedures. Theprocedures for responding to claims covered by theindemnity (managing the defense and settlement of theclaim, selection of co unsel, time limit for giving noticeof claim, the handling of the pursuit of other remediessuch as available insurance).

(5) The parties to the indemnity. Definition of the"Indemnifying Persons” and the "IndemnifiedPersons” (parent, sub sidiaries, officers, directors,successors, assigns, beneficiaries).

(6) The remedies for enforcement of the indemnity.Supporting insurance, releases, waivers, attorneys’ feesfor enforcing indemnity.

The following "pitfalls” may be asso ciated withindemnity provisions:

(1) Unlimited Liability. Contractual indemnities arecommo nly unlimited as to the dollar liability covered,unlike insurance which is written for specified limits;does not have de ductible s; and may not b e limited toavailable insurance.

(2) Broad Risks Covered. Contractual indemnitiesare commonly broader in scope than the insuranceprogram provided in the same contract. For example,commercial general liabilit y insurance c overs "b odilyinjury” whereas contractual indemnities may be wordedwith language different than or broader than thecoverage terms of the C GL po licy, such asindemnifying as to "injuries” or "personal injuries”.

(3) Financial Strength of Indemnifying Person.Contractual indemnities are dependent upon thefinancial strength of the Indemnifying Person.

Attached as Appendix 3 is a comparison of theindemnity provisions contained in the 1977 Edition andthe 1997 Edition of the AIA A201 Ge neral Conditionsof the Construc tion Contra ct. Note that none of theprovisions are differentiated from other p rovisions inthe AIA forms and therefore are not more conspicuousthan other provisions and do not ex pressly refer eitherto the negligence or strict liability of the IndemnifiedPerson as being covered.

Provision: 1997 Edition A201 GeneralConditions of the ConstructionContract

3.18.1 To the fullest extent permitted by law,the Contractor shall indemnify and hold harmlessthe Owner, the Architect, the Architect’sconsultants, and agents a nd emplo yees of any ofthem from and against claims, damages, losses andexpenses, including bu t not limited to attorneys'fees, arising out of or resulting from performance ofthe Work , provided that such claim, damage, loss orexpense is attributable to bodily injury, sickness,

disease or death, or to injury to or destruction oftangible property (other than the Work itself)including loss of use resulting therefrom, but onlyto the extent caus ed in whole or in part by negligentacts or omissions of the Contractor, aSubcontractor, anyone directly or indirectlyemployed by them or anyone for whose acts theymay be liable, regardless of whether or not suchclaim, damage, loss or expense is caused in part bya party indemnified hereunder. Such obligationshall not be con strued to negate, abridge, or reduceother rights or obligations of indemnity whichwould otherwise exist as to a party or persondescribed in this Paragraph 3.18. (Underlining anditalics added by author).

The underlined reference to "regardless ... caused inpart by a party indemnified hereunder” neither coversexpressly the concurrent negligence of the Owner norliability incurred by the Owner arising out of strictliability. The same deficient language is used in theAIA A401 Standard Form of Agreement BetweenContractor and Subcontractor.

The Indemnified Liabilities covered by the AIAlanguage "bodily injury, sickness, disease, or death, orto injury or to de struction of tang ible property (otherthan the Work itself), including loss of use there from”tracks the coverage langu age of the C GL po licy,thereby limiting the liabilities covered to the matterscovered by the insurance, except there is no dedu ctibleand no up side limit.

2. Provision for Contractual ComparativeRespo nsibility. A system of contractual comparativeresponsib ility might be intro duced. T he following is anexample of an indemnity provision for a Le aseemploying contractual comparative responsib ility (alsosee Appendix 7 ):

Provision:

1. Tenan t's Indem nity. _________________.

2. Land lord's Inde mnity . ________________.

3. Concu rrent Neg ligence, P roducts Liabilityand/or B reach of Warra nty. If a claim orcause of action arises out of the joint orconcurrent causation, responsibility orfault, whether negligence, strict liabilityin tort, gross negligence, breach ofwarranty, express or implied, productsliability, breach of the terms of this Lea seor willful misconduct of the parties heretoor their Instrumentalities, each ofLandlord and Tenant shall indemnify theother to the extent that the indemnifyingparty's or i t s Ins trumenta l i ty 'snegligence, strict liabili ty in tort, grossnegligence, breach of w arranty, exp ressor implied, products liability, breach ofthe terms of this Lease or willfulmisconduct causes or contributes to theloss, claim, judgment o r liabilities.

4. Settlement. It is expressly agreed that inthe event either party should fail orrefuse to participate in settlement of a


claim for damages the other party maysettle with the claimant without prejudiceto such party's indemnity rights set forthherein, it being expressly recognized thata settlement, after dem and sha ll be madeon the non-settling party hereto,constit u tes a se t t lement o f theproportionate fault, including but notlimited to, negligence of both partieshereto, which proportionate fault maylater be apportioned between the partieshereto. Another comparative negligenceapproach not involving cross indemnitiesis to limit indemnity to the percentage ofnegligence of the Indemnifying Person.

Provision:

Notwithstanding the foregoing, Tenant’sobligation to indemnify the Indemnified Personsshall extend only to the percentage ofrespons ibility of Tenant and of Ten ant’sInstrumentalities in contributing to suchLiabilities.

A further approach is to limit liability to cases wherethe Indemnified Person ’s percentage of liability exceedsthe Indem nifying Perso n’s percenta ge of liability.

Provision:

Notwithstanding the foregoing, Tenant’sobligation to indemnify the Indemnified Personsshall apply only where the percentage ofnegligence of Tenant and of its Instrumentalitiesin contributing to the Liability exceeds thenegl ig ence of the Land lord and i tsInstrumentalities.

Also see Sieber & Calicutt, Inc. v. La Gloria, 66S.W.3d 340 (Tex.App.-Tyler 2001, no writ ) where thecourt found that Sieber & Calicutt was at least equ allynegligent as was La Gloria and therefore La Gloria wasentitled to recover indemnity of one-half of the amountit paid in settlement of a wrongful death suit broughton behalf of one of its deceased employees. Theindemnity provision limited Sie ber & C alicutt’sindemnity to it proportio nate share o f liability if itsliability was equal to or less than La Gloria’s liability.The La G loria indemnity provision reads a s follows:

Provision:

Contractor (Sieber & Calicutt) agre es to holdharmless and unconditionally indemnify La Gloria,its directors, officers, agents, representatives andemployees against and for all liability, costs andexpenses, claims and damages which La Gloria atany time suffer or sustain or become liable for byreason of any accidents, damages or injuries eitherto the persons or property or both, of Contractor, itssubcontractors and suppliers, or to the persons orproperty of La Gloria, its subcontractors andsuppliers, arising in any manner from the Workperformed hereunder, including but not limited toany negligent act or omission of La Gloria, itsdirectors, officers, agents, representatives oremployees, provided however, that if the negligenceof La Gloria shall be found to be greater than or

equal to the comparative negligence of theContractor, then the Contractor shall only be liab leto La Gloria to the extent of the Contractor’s ownnegligence.

I. Environmental Indemnities.

1. CERCLA . CERCLA contains a specificprovision recognizing the validity of inde mnityagreements. Section 96 07(e) provide s:

(1) No inde mnification ... agre ement ... shallbe effective to transfer from the owner or operatorof any ... facility or from any person who may beliable for a release o r threat of release und er thissection, to any other p erson the liab ility imposedunder this section. Nothing in this Subsectio n shallbar any agreement to insure, hold harmless, orindemnify a party to such agreemen t for any liabilityunder this section.

(2) Nothing in this subchapter, including theprovisions of paragra ph (1) of this S ubsection, sh allbar a cause of action that an owner or operator orany other person subject to liab ility under thisSection or a guarantor, has or would have, byreason of subrogation or otherwise against anyperson.

CERCLA, 42 U.S.C.A. § 9607(e) (1983).

Although a responsib le party can no t "shift" itsstatutory "liability," it can o btain an inde mnity(agreement to be reimbursed) for such liability, therebyshifting the financial loss a rising out of such liability.Joslyn Manu facturing Co. v. Ko ppers Co ., Inc., 40 F.3d750 (5th Cir. 19 94)--even if the indemnity agreementdoes not specific ally mention CERCLA or even"environmental contamina tion." This case involved theassumption by the assignee of the lessee's liabilitiesunder a lease. The lease contained a broad formindemnity agreement. The lease predated CERCLAand provided for indemnification for "all" liabilitiesarising out of the condition of or defect in the premises.The court found that the indemnity included CERCLAresponse costs for contamination by the assignor/lesseewhich predated the assignmen t to the assignee. SeeWelborn, Environmental Liabilities of Land lords inCommercial Leasing: Avoidance and Indemnities fromthe Landlord’s Perspective, ALI-ABA Modern RealEstate Transact ions (1996), C ommitte e onE n v i r o n m e n t a l C o n t r o l s , E n v i r o n m e n t a lIndemnification--A Practical App roach to RiskAllocation, ABA Sec tion of Business Law 1993 AnnualMeeting (N.Y.); M. E llis, Private IndemnityAgreem ents Under Section 107 of CERCLA, 22 E NV 'TREP. (BNA) 1953 (Dec. 6, 1991); Haas and Roska,Environmental Indemnities and Other EnvironmentalProvisions in the Purchase and Sale of MineralProperties, 38 ROCKY MT N. MIN. L. INST. 22-1,22-37 to 22-43 (1992); and Parker and Slavich,Contractual Efforts to Allocate the Risk ofEnvironmental Liability: Is There a Way to MakeIndemnities Worth Mo re Than the P aper They a reWritten On?, 44 SW. L.J. 1349, 136 3-64 (1991).

The allocation of environmental risks in a salestransaction through representations, warranties, and


indemnities will generally result in a contractualassumption of liability.

In cases where a condition is known to exist, apreferable method may be to provide for an exp ressassumption of liability. An environmental ind emnityagreement may be em ployed to shift back to the sellera potential cleanup risk arising out of detected marginalcontaminations that are below reportable levels, butsignificant enough to trigger agency action if thecondition comes to the attention of the governmentalagency.

2. Interpretation under Applicable Law .There is a disagreem ent among courts as to wh ether a"uniform" federal common law or state law should beapplied in interpreting indemnity agreements underCERCLA. Compare Mardan Corp. v. C.G.C. Music,Ltd., 804 F.2d 1454, 1458 (9th Cir. 1986)--applyingstate law with Wiegmann & Rose Int'l Corp. v. NLIndustries, 735 F. S upp. 95 7, 962 (N .D. Cal.1990)--adopting a uniform federal rule.

3. Oilfield Anti-Indemnity Statute. TheTexas O ilfield Anti-Indem nity Statute which prohibitsindemnity agreements in oil and gas se rvice contra ctsthat seek to encompass the Indemnified Person's ownnegligence or fault, does n ot apply to a surface estateowner who imposes ind emnity obliga tions on its lesseeand other developers. Section 127.04(2) TEX. CIV.PRAC. & REM. CODE ANN. (Vernon 1997) provides:

This Chapter does not apply to loss or liability fordamages or an expense arising from:

(2) property injury that results frompollution, including cleanup and control of thepollutant....

See discussion of the Texas Oilfield Anti-Indem nityStatute at Article IID4c–Contr actual Indemnity -Elements - Statutory Limits on Indemnity - Oil andGas Service Contracts above.


III. Coordination with Insurance Coverage.

A. Types of Insurance. Lawless, InsuranceCoverage for Construction Liabilities, 9TH ANNUALCONSTRUCTION LAW CONFERENCE (STATEBAR OF TE XAS 1 996); H osford, KeepingCovered--Drafting Insurance C lauses in Leases, LoanDocumen ts and Construction Contracts, 7THANNUAL ADVANCED REAL ESTATE DRAFTINGCOURSE N (STATE BAR OF T EXAS 199 6);LeBarron, Drafting Insurance Provisions, 4THANNUAL ADVANCED REAL ESTATE DRAFTINGCOURSE (STATE BAR OF TEXAS 1993); Walts, Ed,Genera l Liability Insurance Provisions and Indem nitiesand Property and Casualty Insurance Policies,ADVANCE REAL EST ATE LAW SEMIN AR N(STATE BAR OF T EXAS 199 3).

1. Liability Insurance.

a. Worker s ' C ompensa t io n a ndEmployer s' Liability Insurance. Although anIndemnifying Person's (tenant's, contractor's orsubcontr actor's) workers' com pensation in surance willnot eliminate the p otential liability of the IndemnifiedPerson (the landlord, owner or contractor in the aboveparenthetical examples), it may provide a buffer againstpotential claims and m ake it less likely that theIndemnified Person w ill be sued by a n injuredemployee of the Indemnifying Person. Becauseworkers' compensation statutes limit the recovery by anin jured employee from the em ployer, a nindemnification provision is approp riate so as to ensurethat the employer remains ultimately liable for damagesin excess of the statutory workers' compensation limits.

(1) Waiver of Subrogation. As notedbelow, in order to avoid the workers' compensationcarrier suing the Indemn ified Perso n to obtaincontribution and reimbursement for amounts paid bythe carrier to the employee, the parties should obtain awaiver of subrogation endorsement in favor of theIndemnified Persons. The right of a workerscompensation insurer to subrogate against a third p artywho may have caused an employee injury is recognizedby statute. TEX. LABOR CODE § 417.001 (Vernon1996) pro vides as follows:

417.001. Third Party Liability.

(a) An employee or legal beneficiary may seekdamages from a third p arty who is or b ecomes liab leto pay dama ges for an injur y or death that iscompe nsable under this subtitle and may alsopursue a cla im for workers’ co mpensatio n benefitsunder this subtitle.

(b) If a benefit is claimed by an injured employee ora legal beneficiary of the employee, the insurancecarrier is subrogated to the rights of the injuredemployee and may enforce the liability of the thirdparty in the name of the injured employee or thelegal beneficiary. If the recovery is for an amountgreater than that paid or assumed by the insurancecarrier to the employee or the legal beneficiary, theinsurance ca rrier shall:

(1) Reimbu rse itself and pay the costs fromthe amount recovered; and

(2) Pay the remainder of the amountrecovered to the injured employee or thelegal beneficia ry.

Since a workers compensation insurer pays benefits ona strict liability basis, it is entitled to receive the firstdollars of any recov ery by the employee from a thirdparty to the extent that p arty caused o r contributed tothe injury rather than the employer.

In most states, workers compensation insurance iswritten on the 1992 edition of the WorkersCompensation and Employers Liability InsurancePolicy form (WC 00 00 01 A) developed by theNational Council on Com pensation Insurance("NCCI"). This form is silent with respect to a pre-loss waiver by employer. Therefore, a waiver ofsubrogation executed prior to a loss should prevent theinsurer from subrogating against the third party, evenwithout an endorsement to the policy. The NCCI hasdrafted an advisory endorsement for use with thestandard policy (WC 00 03 13). This endorsementreads as follows:

We have the right to recover our payments fromanyone liable for an inju ry covered by this policy.We will not enforce o ur right against the person ororganization named in the Sched ule. (Thisagreement applies only to the extent that youperform work under a written contract that requiresyou to obta in this agreeme nt from us.)

This agreemen t shall not ope rate directly orindirectly to benefi t anyone not named in theSchedule.

A premium as high as 2% of the total po licy premiummight be charged for the endo rsement, if requested ona blanket basis (usually between $500- $1,500). Whenrequested on a specific project, the charge is usually 2to 5% of the premium att ributable to th e projec t towhich it applies, if it can be so segregated.

(2) Worker s' Compensation Bar. Acontractual indemnity by t he employer of theIndemnified Person is necessary to overcome theWorkers' Compensation Bar so as at least to pass backto the employer the employer's percentage ofresponsib ility (if not all of the emp loyee's dama ges inexcess of the statutory wo rkers' comp ensation limits tothe employer's liability) which might otherwise beborne by the Indemnified Person absent the indemnity.The contractual indemnity should also be drafted topass back to the e mployer the costs of defense of theemployee's claim.

(3) Employ er's Liability Coverage. Itis important for the Indemnified Person to require theIndemnifying Per son to o bta in E mpl oye r's LiabilityInsurance in order to afford employer insurancecoverage for risks not covered by workers'compensation insurance (e.g., gross negligence of theemployer) and persons not co vered by workers'compensation insurance (e.g., indirect damages as aresult of the worker's injuries, due to spouses anddependents, loss of consortium and loss of income).

b. Commercial Gen eral Liab ilityInsurance. Comme rcial Gene ral Liability ("CGL")


Insurance provides broad liab ility coverage. It issimilar to an "all risk" policy in that it providescoverage against liabilities unless specifically excluded.CGL policies usually include the cost to defend theinsured in addition to the insured loss. A CGL polic yhas the following three basic covera ges:

(1) Bodily Injury and PropertyDamage. This coverage is for amounts which theinsured is legally obligated to pay as damages as aresult of bodily injury or prop erty damag e occurring (ifthe policy is an "occurrence" policy), or arising out ofclaims made (if it is a "claims made" policy), duringthe policy period, and such bodily injury o r proper tydamages are caused by an accident occurring within thecoverage territory specified in the insurance p olicy.The "commercial” general liability policy form hasbeen in use since 1986. It is broader in scope than the"comprehensive” general liability polic y form. Bo thforms are in use nationally. A commercial generalliability policy automatically includes coverageextensions for Contractual Liability, Personal InjuryLiability, Host Liqu or Liability, Broad Fo rm Prop ertyDamage Liability and eight other extensions, whichpreviously ha d to be inclu ded by en dorseme nt.

Most commercial general liability policies includethe following six se parate "lim its” of liability:

(1) Each Occurrence.(2) General Aggregate.(3) Product and C ompleted O perations.(4) Persona l Injury Liability.(5) Fire Dam age Liability.(6) Medical Expense.

The Occurrence limit is the maximum payable forclaims arising out of any one occurrence.

The General Aggregate limit is the maximumpayable for all claims during the year arising out ofoccurrences other than Product and CompletedOperations losses. The General A ggregate limit can bebroadened by two different endorseme nts:

(1) Aggregate Limit Per Location Endorsement.This endorsement applies the General Aggregate limitseparately to each "location” owned by or rented to theinsured.

(2) Aggregate Limit Per Project Endorsement.This endorsement is used for construction contractingand similar risks. This endorsement applies the GeneralAggregate limit separately to each project away fromthe premises owned by or rented to the insured, withoutlimitation on the number of pro jects.

The Product Aggregate limit is the maximumpayable for all claims during the year arising out ofproduct and completed operations exposures. Productand Completed Operations coverage still must beendorsed onto CGL policies and is not automa ticallycovered.

The triggering term for co verage wa s changed in1966 from "accident” to "occurrence”. "Occurrence”is now defined in CG L policies as:

an accident, including continuous or repeatedexposure to conditions, which results, during thepolicy period, in bodily injury or property damageneither expected nor intended by the insured.

The "occurrence” definition broadened the scope ofcoverage afforded by its "accident”-based predecessorin two important ways. First, it specifically recognizedcoverage for injuries resulting from long-term exposureto conditions (as distinguished from an abrupt eve nt). Second, it clarified that the policy covered theunintended consequences of intentional acts.

Texas courts have struggled with the concept ofan intentional act resulting in unintended injury.

In the 1967 case, Massachusetts Bonding an d Ins.Co. v. Orkin E xtermina ting Co., 416 S.W.2d 396, 400(Tex. 1967), involving a coverage dispute under apre-1966 "acciden t”-based C GL po licy for prop ertydamage resulting from the negligent application of thepesticide Lindane, the Texas Supreme Court held thatthe term "accident” as used in the policy included"negligent acts of the insured causing dam age which isundesigned and unexpected”. The court of appeals hadstated in coming to the same conclusion that "(s)incethe claim ... was predicated on acts committednegligently, even in violation of the law, but not withthe intent to inflict injury, such claim was within thecoverage of the insurance policy”. Orkin ExterminatingCo. v. Massa chusetts Bonding and Ins. Co., 400S.W.2d 20, 27 (Tex. Civ. App.--Houston 1965), rev’don other grou nds, 416 S.W.2d 39 6 (Tex. 1967).

In Argon aut Sou thwest Ins. C o. v. Maupin, 500S.W.2d 633 (Tex. 1973), the Texas Supreme Courtappears to have limited Orkin to those situations wherethe acts resulting in damage are "negligent”, as opposedto "willful or intentional”. In Maup in, a state highwaycontractor entered into an agreeme nt to purchaseborrow material from Kipper. The contractor enteredonto the property believed to be owned by Kipper andremoved 5,774 cubic yards of borrow material. It waslater determined that Kipper did not own the property,and thus, the real landow ners sued the contractor intrespass. The co ntractor filed a claim unde r his"occurrence”-based liability policy contending that theremoval of the material was an occurren ce or accid ent.In rejecting coverage under the policy, the TexasSupreme Court held:

where the acts [removing the material] arevoluntary and intentional and the injury is thenatural result of the act, the result was not caused byaccident even though the result may have beenunexpected, unforseen and unintended.

Maupin, 500 S.W.2d at 635. One commentator arguesthat the supreme court failed to understand the intent ofthe insurance industry policy drafters that the term" o c c u r r e n c e ” e n c o m pa s s e s th e u n i n te n d edconsequences of intentional ac ts and that the co urt’sdecision may have been swayed by the fact that theclaim--intentional trespass--by definition constitutes anintentional act to injure property. Therefore, the courtmay have presumed a constructive intent to causeinjury. This has resulted in many su bsequen t courtsfocusing erroneously on the damage-causing act, asopposed to the resulting ha rm. Lawless, Insurance


Coverage for Construction Lia bilities, 9th ANNUALCONSTRUCTION LAW CON FERE NCE 3 (State Barof Texas 1996).

However, in 1993, in State Farm F ire & Cas. Co. v.S.S., 858 S.W.2d 374 (Tex. 1993), the Texas SupremeCourt recognized a distinction between inte ntional actsand intended inj ury. The court was called upon theinterpret the "intentiona l injury exclusion” in ahomeowners policy in a claim resulting from th etransmission of herpes. The court held that coveragewas not precluded when the policyholder did not knowthat his intentional conduct (engaging in sexualintercourse) was "substantially certain” to result in thetransmission of the disease. The court found adifference between performing acts that one thinksmight cause injury (which are covered), and acts thatone knows are "substantially certain” to cause injury(which are not covered). State Farm Fire & Cas. Co. v.S.S., 858 S.W.2d at 378. It is unclear how the supremecourt will interpret a coverage issue for bodily injurieswhich are unintended but the result of an intended act.

(2) Personal or Advertising Injury."Personal injury" is defined in the CGL policy as injury(other than bod ily injury) arising out o f false arrest,malicious prosecutio n, wrongful en try or evic tion, orwritten slander or lib el, or certain violatio ns of privacy.

(3) Medical Payments . MedicalPaymen ts Coverag e covers m edical paym ents arisingout of the bodily injury caused by an accident to certainpersons other than the insured.

(4) Exclusions. By its very nature asthird- party liability insurance, CGL policies excludecoverage for losses to an insured ’s own personal or realproperty. The primary reason for the exclusions in theCGL policies is that separate lines of coverage areavailable in the market place for these specific risks(e.g., property insurance, workers’ compensationinsurance, automobile insurance). Some of theexclusions to coverage are for the following:

(a) Intentional Acts. Bodily injuryor property damage expected or intended by theinsured, excepting the use of reasonab le force to protectproperty or perso ns.

(b) Alcohol. Bodily injury orproperty damage related to certain uses of oroccurrences associated with alcohol. (This exclusionmay necessitate requiring the Indemnifying P erson toobtain a Liq uor Liability P olicy.)

(c) Worker s' Compensation andEmployers' Liability Insurance Coverage.

(d) Pollution. Certain damagesresulting from pollution or release of hazardousmaterials.

The so-called "p ollution exclu sion” to coverage hasbeen the subject of much controversy and recentlitigation. See Lawless, Insurance Coverage forC o n s t r u c ti o n L i a b i l i t i e s , 9 t h A N N U A LCONSTRUCTION LAW CONFERENCE 11-32 (StateBar of Texas 1996) for an extensive review of cases and

regulatory history concerning the "pollution exclusion”in CGL policies.

The 1966 CGL p olicy was gene rally interpreted tocover bodily injuries and property damage caused bygradual pollution events as long as the resulting injuriesor damages were neither "expected nor intended” by theinsured, notwithstanding that the release or discharge ofthe pollutants m ay have bee n intentional.

In 1970 insurers developed a standardized pollutionexclusion, which was adopted by the Tex as State Boardof Insurance in 1970 a s a manda tory endor sement to allCGL policies effective in Texas on or after July 8,1970. Order No. 13844, Texas State Board ofInsurance, approving Manua ls of Liabilit yInsurance-Contamination or Pollution Exclusion andEndors ements (May 29, 1970). The 1970 CGLpollution exclusion endor sement reads as follows:

Provision: 1970 Pollution Exclusion Endorsement

It is agreed that the insuranc e does no t apply tobodily injury or property damage arising out of thedischarge, dispersal, release or escape of smoke,vapors, soot, fumes, acids, a lkalis, toxic chemicals,liquids or gases, waste materials or other irritants,contaminants or pollutants into or upon land, theatmosphere, or any water course or body of water;but this exclusion does no t apply if such discharge,dispersal, release or escape is sudden andaccidental.

The Insurance Rating Board ("IRB”) and theMutual Insurance Rating Board ("MIRB”), now knownas the Insurance Services Office, Inc. (”ISO”), and thesponsors of the change to the CGL policies, providedthe State Board of Insurance with the following official"explanation” concerning the scope and effect of thepollution ex clusion end orsemen t:

Coverage for pollution or contamination is notprovided in most cases under present policiesbecause the damages can be said to be expected orintended and thus are excluded by the definition ofoccurrence. The [standard-form pollution]exclusion clarifies this situation so as to avoid anyquestion of intent. Coverage is continued forpollution or contamination caused injuries when thepollution or contam ination results from anaccident....

It is instructive to take note of the following criticismsof this "explanation” contained in Morto nInternatio nal, Inc. v. General Ac c. Ins. Co., 134 N.J. 1,629 A.2d 83 1, 852 (N .J. 1993 ), cert. den’d sub nom .;Ins. Co. of N. America v. Morton International Co., 114S.Ct. 2764, 129 L.Ed.2d 878 (1994) as commentedupon in Lawless, Insurance Coverage for ConstructionLiabilities, 9th ANNUAL CONSTRUCTION LAWCONFERENCE 19-20 (State Bar of Texas 1996). Inexamining the IRB’s explanation of the 1970 pollutionexclusion, the New Jersey Supreme Court in Mortonconcluded that "[t]he first sentence of the IRB ’sexplanation is simply not true.” The insurance industryhad drafted the 1966 "occurrence” based generalliability policy to cover property damage for gradualpollution, with no restriction on the "suddenness” of thepollution discharge. Indeed, the "occurrence”-based


policy "seemed tailor mad e to extend coverage to mostpollution situations.” Ro senkranz, N ote, The PollutionExclusion Through the Looking G lass, 74 GEO. L. J.1237, 1251 (1 986). T he New J ersey court furtherobserved that "The second se ntence of the I RB’sexplanation is even more misleading than the first one. Despite the IRB’s assertion that the exclusion merely‘clarifies this situation’, the exclu sion actually pu rportsto preclude coverage for all coverage for unintentionalpollution damage except for that caused by sudden andaccidental discharges” . Morton , 629 A.2d at 852. TheNew Jersey Supreme Court stated that "[t]o describeda reduction of coverage of that magnitude as a‘clarification’ not only is misleading, but comesperilously close to de ception”. Id. at 853. That"coverage is continued for pollution or contaminationcaused injuries when the pollution or contaminationresults from an accident” contradicts the very wordingof the exclusion that coverage is not afforded unless thedischarge of pollutants is "sudden and accidental”.The explanation ignores the "injuries” versus"discharge” distinction and "the conc lusion is virtuallyinescapab le that the memorandum’s lack of clarity wasdeliberate.” Morton, 629 A.2d at 853.

Scope of 1970 Pollution Exclusion. The followingcases are instructive on the scope of the 1970 pollutionexclusion. Meridian Oil Production, Inc. v. Ha rtfordAcc. & Ind. Co., 27 F.3d 150 (5th Cir. [Tex.]), reh’g enbanc den’d, 35 F.3d 564 (1994)--pollution damagesarising from M eridian’s oil and gas activities did notconstitute covered occurren ces when M eridian’s"conduct inevitably and predicta bly caused thepollution”; In re Texas Eastern Transmission Corp.PCB Contam ination Insurance Coverage Litigation,870 F.Supp. 1293 (E.D. Pa. 1992)--applying Texas lawin holding that the term "damages” is ambiguous andthat a policyhold er’s costs of complying with either ademand or an injunction to remedia te property damageor bodily injury is recovera ble "as damages”, ifincurred primarily because of actual and imminentthird-party property damage, bodily injury, or both;Snyder General Corp. v. C entury In demn ity Co., 907F.Supp. 991 (N .D. Tex . 1995), appeal pending (5thCir.)--holding that environmental response costs are notcovered damages; Mustang Tractor & Equipment Co. v.Liberty Mutua l Ins. Co., 76 F.3d 89 (5th Cir. 1996),appeal pending (5th Cir.)--damages do not includecontribution and indemnity claims for environmentalcleanup costs; also held that " sudden and accidental”unambigu ously has a temporal component that canmean either (1) an instantaneous or abrupt event or(2) an unexpe cted incide nt of limited duration (caseinvolved a solvent leak that occurred within a 24- hourperiod that was unexpected and therefore a fact issueexisted preventing summary judgment against theinsured); Americ an Sta tes Ins. Co. v. HansonIndustries, 873 F.Supp. 17 (S.D. Tex. 1995)-the"sudden and accidental” language in the pollutionexclusion is clear and unambiguous, and that the "initialdischarge, not the resulting damage, must be [both]sudden and accidental in order to avoid the” exclusionand that the "term ‘sudden’ has a temporal meaning of‘quick or abrupt’, not ‘unexpected’ or ‘unintended’”(case involved intentional dumping of hazardous wastesat a dump site without knowledge of the substancespollutant content); and Union Pacific Resource Co. v.California Union Ins. Co., 894 S.W.2d 40 1 (Tex.App.--Ft. Worth 1994 , writ den’d)--reversed trial

court’s holding that waste disposal at a landfill over a 3year period o f time was not "accidental” as being notthe relevant "discharge”, but that the "polluting‘occurrence’ is the ‘discharge, dispersal, release, orescape’ or ‘seepage, pollution or contamination’ oftoxic material into the environment”.

In 1985 the Texas State Board of Insuranceapproved the use of a no n- mandato ry endorse ment,which has become to be known as the "absolute”pollution exclusion. O rder No . 46331 , Texas S tateBoard of Insurance, approving an Optional PollutionExclusion Endorsement (Feb. 19, 1985). The 1985CGL "ab solute” pollution exclusion reads a s follows:

Provision: 1985 "Absolute” Pollution Exclusion"(f)”

(f) This insurance doe s not apply to:

(1) to "bodily injury” or "property damage”arising out of the actual, alleged or threateneddischarge, dispersal, release or escape of pollutants:

(a) at or from premises owned, rentedor occupied by the named insured;

(b) at or from any site or locationused by or for the named insured or others for thehandling, storage, disposal, processing or treatmentof waste;

(c) which are at any time tra nsported,handled, stored, treated, disposed of, or processedas waste by or for the named insured or any personor organization for whom the named insured may belegally responsible; or

(d) at or from any site or location onwhich the named insured or any contractors orsubcontractors working dire ctly or indirectly onbehalf of the named insured are performingoperations;

(i) if the pollutants arebrought on or to the site or location in connectionwith such operations; or

(ii) if the operations are totest for, monitor, c lean up, rem ove, conta in, treat,detoxify or neutralize the pollutants.

(2) to any loss, cost or expense arising out ofany governm ental directio n or request that thenamed insured test for, monitor, clean up, remove,contain, treat, detoxify or neutralize pollutants.

Pollutants means any solid, liquid, gaseous orthermal irritant or contaminant, including smoke,vapor, soot, fumes, acids, alkalis, chemicals andwaste. Waste includes materials to be recycled,reconditioned or reclaimed.

Subparagraphs (a) and (d) (i) of paragraph (1) of thisexclusion do not apply to "bodily injury” or"prop erty damage” caused by heat, smoke or fumesfrom a hostile fire. As used in this exclusion, ahostile f i re means one which becomesuncontro llable or breaks out from where it was


intended to be.

The following explanation of the scope and intent ofthis exclusion is contained in the following statementcontained in ISO’s filing with State Board of Insurance:

This endorsement introduces a total pollutionexclusion for bodily injury and property damagearising from the disc harge of po llutants. Theexclusion does no t apply to damages arising out ofproducts or completed operations nor to certainoff- premises discharges of pollutants .

Scope of 1985 Pollution Exclusion. The followingcases are instructive on the 1985 "absolute” pollutionexclusion: National Union Fire Ins. Co. v. CBIIndustries, Inc., 907 S.W .2d 517 (Tex. 19 95)--in thiscase the Texa s Suprem e Court he ld that the "absolute”pollution exclusion unambiguously precluded coverageto the insured for damages and injuries resulting fromhydrofluoric acid being released into the atmospherewhen a crane’s load fell on a pipe connected to astorage tank containin g hydrofluoric acid resulting in 60lawsuits; and the following cases following the lead ofthe supreme c ourt: Pro-Tech Coatings, Inc. v. NationalStandard Ins. Co., 897 S.W.2d 885 (Tex. App.--Dallas1995, no writ )--Dallas Court of Appeals held thatdespite the "absolute” pollution exclusion the insurerhad a duty to defend Pro-Tech in two suits allegingbodily injuries resulting from exposure in the workplaceto produc ts containing as bestos and silica, as well as toother toxic dust, fume s, and vapo rs, since the cou rt heldthat Pro-Tech wa s not performing "operations” at thesites where the exposures took place (the prod uctscausing the fumes were manufactured by Pro-Tech andended up at the sites where the plaintiffs were exposed);Round Rock Plaza Venture v. Ma ryland Cas. Co., 1996WL 63956 (Tex. App.--Austin 1996)--held exclusionwas ambiguous under the facts of case, in that it was notclear that sewage overflowing from a toilet fell underthe definition of "pollutants” or "wastes” in theexclusion; Constitution State Ins. Co. v. Iso-Tex. In c.,61 F.3d 40 5 (5th Cir. 1995)--insured causing injuries byexposing third parties to r adioactive medical wa steexcluded from coverage as a "waste”; Navajo RefiningCo. v. CIGNA Ins. Co., 1995 WL 861201 (S.D. Tex.1995)--no coverage for release of gasoline from aruptured pipeline; and Northborok Ind. Ins. Co. v.Water District Management Co., Inc., 892 F.Supp. 170(S.D. Tex. 19 95)--did no t cover injurie s to publicresulting from drinkin g water from water wellscontaminated with benzene.

Owned-or Leased-Property Exclusion

The "owned - or leased-p roperty" exclusion to theCGL policy has been held to preclude coverage for thecosts of cleaning up the insured’s own property wherethe contamination is loc ated solely o n the insured’sproperty and doe s not pose a threat to third-p artyproperty. See, e.g., Western World Ins. Co. v. Dana,765 F.Supp. 1011 (E.D. Cal. 19 91); United States v.Conservation Chem ical Co., 653 F.Supp. 152 (W.D.Mo. 19 86). Some courts have held that this exclusiondoes not apply to preclude coverage of cleanup costs onthe insured’s property when the cleanup is necessary toprevent the migration of pollutants into groundwater oronto adjacent third-party prop erty. See GerrishCorp. v. Universal Un derwriters Ins. Co., 754 F.Supp.

358 (D.Vt. 19 90), aff’d, 947 F.2d 1023 (2nd Cir. 1991), cert. den’d, 112 S.C t. 2939 (1 992); Bankers Tru stCo. v. Hartford Acc. & Ind . Co. 518 F.Supp. 371(S.D.N.Y. 1981), vacated on other grounds, 621F.Supp. 685 (S.D .N.Y. 19 81); City of Edgerton v.General Cas. Co., 493 N.W.2d 768 (Wis. App. 1992),aff’d in part, rev’d in part on othe r groun ds, 517N.W.2d 463 (1994).

A Texas federal district court in American StatesIns. Co. v. Hanso n Industries, 873 F.Supp. 17 (S.D.Tex. 1995) h eld that under Texas law the surfaceproperty owner "owned” the groundwater, and thatsince the contamination of the groundwater was limitedto the insured’s property, the "owne d-prope rty”exclusion barred recovery. In In re Texas Ea sternTransmission Corp. PCB Contamination InsuranceCoverage Litigation, 870 F.Supp. 1293, 1344 (E.D. Pa.1992), aff’d on other gro unds, 15 F.3d 1249 (3rd Cir.),cert. den’d sub nom. Texas Eastern TransmissionCorp. v. Fidelity & Cas. Ins. C o. of N.Y., 115 S.Ct. 291,130 L. Ed.2d 206 (1994), a Pennsylvania federaldistrict court app lying Texas law held that the owned-property exclusion did not preclud e coverag e for costsof cleaning up an insured’s property that were"significantly related” to actual third-pa rty harm or tothe prevention of future "imminent and sub stantial”third-party damages Recently, a Wisconsin court ofappeals court held tha t a CGL p olicy’s pollutionexclusion did not ap ply to the property damageprovisions of the product and completed operationscoverage. The court determined that the products andcompleted operations coverage contained its ownexclusions--but not the pollution exclusion.Additionally, the court decided that the owned andoperated property exclusion did not apply, finding thatcontaminated ground water was not "property owned oroperated” by the gas station owner, but was owned bythe people of Wisconsin. Therefore, although theowned property exclusion barred the gas stationowner’s recovery for soil cleanup costs, it did not barrecovery of ground water cleanu p costs. Robert E. LeeAssoc., Inc. v. Peters, 557 N.W. 2d 457 (Wis. App.1996). See also Patz v. St. Pau l Fire & Marine Ins.Co., 15 F.3d 699 (7th Cir. 1994).

No Coverage under "Personal Injury Coverage”

In Northb rook Ind . Ins. Co. v. Water DistrictManagement Co., Inc., 892 F.Supp. 170 (S.D. Tex.1995) the court held that benzene contamination of theDistrict’s well water was not a "wrong ful entry”covered under the personal injury po rtion of its CGLpolicy; otherwise the court held the absolute pollutionexclusion would be meaningless . The cou rt cited insupport of its holding, Gregory v. Tennessee GasPipeline Co., 948 F.2d 203 (5th Cir. 1991) andDecorative Center of Hou ston v. Emplo yers Cas. Co.,833 S.W.2 d 257 (T ex. App.--C orpus Ch risti 1992, writden’d).

(e) Autom obile Injuries. Personalinjury or property d amage arisin g out of autom obileuse.

(f) Property Dama ge to O ther'sProperty Under Insured's Care. Property damage toproperty of third parties in the care, custody, andcontrol of the insured.


(g) Assumption of Liability ExceptUnder "Insured C ontracts" . CGL policies, byendorsement, will extend coverage under the "incidenta lcontract coverage" of the policy to include contractualassumption of liabilities of another person for bodilyinjury or property damages to a third person("Contractual Liability Coverage" under "InsuredContra cts").

"Insured contracts" are defined in CGL policies asincluding "that part of any other contract or agreementpertaining to your business under which you assume thetort liability of another to pay damages because of'bodily injury' or 'proper ty damage' to a third person ororganization, if the contract or agreement is made priorto th e 'bo dily inju ry' or 'pro per ty da mag e.'"

"Contractual Liability” coverage is contained in theCGL policy as an exception to an exclusion fromcoverage. The e xclusion provides:

Provision: Contractual Liability Coverage

This insurance does not apply to "Bodily Injury” or"Prop erty Damage” for which the insure d isobligated to pay damages by reason of theassumption liability in a contract or agreemen t. This exclusion d oes not ap ply to liability fordamages:

1. assumed in a contract or agreem ent that is an"Insured Contract”, provide d the "B odilyInjury” or "pro perty Damage” occurssubsequent to the execution of the contractor agreement; or

2. that the insured would have in the absence ofthe contrac t or agreem ent.

An "Insured Contract” is defined as:

1. a lease of premises2. a sidetrack agreement3. any easement o r license agree ment exce pt in

connection with construction or demolitionoperations on or within 50 feet of a railroad

4. an obligation, as required by ordinan ce, toindemnify a munic ipality, except inconnectio n with work for a municipa lity

5. an elevator maintenance agreement6. that part of any other contract or agreement

pertaining to your business (including anindemnification of a municip ality inconnection with work for a municipality)under which you assume the tort liability ofanother party to pay for "Bodily Injury” or"Prop erty Damage” to a third person ororganization. Tort liability means a liabilitythat would be imposed by law in the absenceof any contra ct or agreem ent.

Contractual Liability coverage excludes coveragefor Personal Injury liability assumed by contract oragreement, unless such coverage is endorsed on to theinsured’s CGL policy. For example, guard servicecontracts typically contain a provision requiring theowner to indemnify the guard service from liability forthe types of liabilities that are embraced by the term

"Personal Injury” (libel, slander, defamation ofcharacter, false arrest, wron gful eviction, a nd evasion ofprivacy) . In such case unless the owner has its CGLpolicy endorsed to cover this indemnity, the o wner isuninsured for this contractually assumed liability.Alternatively, the owner c ould requ ire that it be listedas an additional insured on the guard service’s CGLpolicy.

(5) Duty to Defend. An importantcoverage under the C GL po licy is the "duty to defend”imposed upon the insu rer in the even t of a suit by aninjured or damaged third-party. A typical CGL policyprovides that this duty applies "even if the allegationsof the suit are groundless, false, or fraudulent.” Theduty to defend is determined solely from the face of thepleadings and withou t reference to facts outside thepleadings (sometimes referred to as the "eight cornersrule” or the "co mplaint allega tions rule”). ArgonautSouthwest Ins. Co. v. Maupin, 500 S.W.2d 633, 635-36(Tex. 1973); Gulf Chemical & Metallurgical Corp. v.Associated Metals & Minerals Co rp., 1 F.3d 3 65 (5thCir. [Tex.] 1993)-- toxic tort case.

c. Autom obile Liability. As noted above,CGL policies exclude coverage for injuries andproperty damages arising out of use by theIndemnifying Person (including its employees) of anautomobile. Depend ing on the po tential risk of theIndemnified Person being named a s a defenda nt inaccidents arising out of the Indemnify ing Person's useof automobiles, this risk may make it important that theIndemnified Person require the re tention of auto mobileliability coverage.

2. Property Insurance.

a. Landlord and Te nant R elationsh ip.The landlord has an insurable interest in the building.The tenant also has an insurab le interest in the buildingwith respect to the leased premises and in the buildingitself if the tenant has an o bligation to re pair or rebuildthe building in the e vent of damage or destruction.Both the landlord and the tenant have insurable interestswith respect to personal property and fixtures which arelocated in the building or the lea sed prem ises. Withrespect to improvement installed by the tenant, both thelandlord and tenant ha ve insurable interests. Theland lord 's interest may be insured if the tenantimprove ments have become fixtures to the building.Likewise, the tenant's interest in the continued use andenjoyment of the tenant improvem ents is an insurab leinterest under "im provem ents and be tterments"coverage under its pro perty policy. The tenant will alsotypically need to obtain insurance for its personalproperty located at the leased premises, as landlordswill typically require a waiver of liability with respectto damag e to the tenant's pe rsonal pro perty.

The landlord-tenant relationship can range from asingle tenant building to a multi-tenant office building.

b. Owner and C ontrac tor Rela tionship .Prope rty insurance in a construction project is to protectthe owner 's, co ntra cto r's, subc ont rac tor's and lend er'seconom ic interests in the project aga inst the p roj ect'shigh vulnerability during construction to the perils offire, weather, veh icles, equipm ent, or other namedperils.


The number o f parties with insura ble interests in theproject is, thus, more complicated in a constructionproject than in many other multi- party relationships.The extent of the insurable interests of the two principalparties, the owner and the contractor, depends onwhether the construction contract is absolute ordivisible. The con struction con tract determines whobears the risk of loss during the course of construction.If the contractor's obligation is to build a structure fora fixed sum that is a bsolute and unqualified, t hecontractor bears the risk of loss before completion ofthe building. If the owner takes possession ofcompleted portions o f the constructio n in intervalsduring the course of construction of the entire pro ject,the contract may be characterized as "divisible" withthe risk of loss to the completed portions passing to theowner in stages. The subcontractors also have insu rableinterests in the project to the extent they have providedlabor or materials to the project for which payment isnot yet made. Therefore, the owner, the contractor, andthe subcontractors should be "named insureds" and theconstruction lender should be listed as an "additionalinsured," "as their interests may appear."

The most appropriate property coverage during theconstruction period is "builder's risk insurance."Build er's risk insurance typically protects againstdamage to or destruction of (1) the building underconstruction; (2) the c ont rac tor's machinery, tools, andequipment at the construction site; and (3) m aterials andsupplies to be used in construction that are at the site orwithin 100 feet of the site. Builder's risk can either be"named perils" coverage, c overing the in sured onlyagainst losses resulting from specifically named p erils(e.g., fire and extended coverage) or "all risk" coverage,covering a broad range of pe rils with specificallyexcluded perils negotiated at the time of the purchase ofthe insurance.

B. "Additional Insured" Status.

1. Definition. An "additional insured" is aperson covered by an insuranc e policy in addition to thenamed insured. The Additional Insured designationseeks to achieve the following "results”:

(1) Backstops the Indemnity. It provides a "safetynet” should the ind emnity prov ision be une nforceab leor otherwise be deficient.

(2) Insurance Coverage for the AdditionalInsured. It provides a limited form of primarycoverage for the additional insured.

(3) Limits Subrogation Against the AdditionalInsured. It may remove the possibility of subrogationagainst the additional insured for cove red liabilities.

(4) Direct Policy Rights to the AdditionalInsured. It provides the additional insured with directpolicy rights within the primary insured’s policy,including defense cost coverage for claims involvingthe additional insured.

The Additional Insured designation may involve oneor more of the following "pitfalls”:

(1) Dilution of Limits Available to the PrimaryInsured. The primary insured will be sharing itsliability coverage with the additional insured, therebydeleting the to tal amount o f protection a vailable to it.

(2) Erosion of Limits Available to AdditionalInsured. Claims may have already occurred during thepolicy year, reducing the re maining ava ilable Aggre gateLimits, thus impairing th e limits of liability availab le tothe additional insured through the Additional Insureddesignation.

(3) Misleading Certif icates of Insurance. Asnoted below, when the designation of additional insuredstatus is evidenced only by a certificate of insurance,there is no guarantee of coverage.

(4) Many Different Fo rms of Endorsement.There are many different forms of additional insureddesignation. It is possible that the additional insuredendorsement will be crafted by the insurer to delete thecoverage sought by the additional insured. Unless theadditional insured stipulates the form of additionalinsured endorsem ent, and the ch oice is left up to theinsurer, it is likely that the insurer will provide the mostlimited form possible.

For a very useful discussion of the "ins” and "outs”of insurance coverage, including copies of the variousISO promulgated Ad ditional Insurance Endo rsements,see Comiskey, Advanced Insurance Issues for RealEstate Attorneys, ADVANCED REAL ESTATE LAWCOURS E v (State Bar of Texas 1996).

2. Types of Insurance.

a. Property . As to property insurance, anyperson with an "insurable interest" in the insuredproperty can be added as an additional insured.

b. Liability. Additiona l insured statustypically affords the additional insured protectionagainst vicarious liability arising out of the namedinsu red 's acts but depending on the insurancecovenant or the policy language may cover theaddit ional insured's own negligence. As such, itsuppleme nts the protectio n afforded by the indem nityprovisions. Richmon d, The Additional Problems ofAdditional Insureds, 33 TORT & INS. L. J. 945 (1998);Richmond and Blac k, Expanding Liability Coverage:Insured Contracts and Additional Insureds, 44 DRAKEL. REV. 7 81 (199 6); Sigmier a nd Reilly, Coverage forIndependent Negligence of Additional Insureds, FORTHE DEFE NSE (A p. 1995); Beck, Ethical Issu es inJoint Representation Under Subcontract Require mentsfor Defense and Additional Insured Status, THECONST RUCTIO N LAW YER 25 (Jan. 199 5).

(1) Coverage For Additional Insured'sNegligence. For example, listing the owner on thecon trac tor's CGL P olicy, or the contracto r on itssubcontractor's CGL Policy, will afford the ownerliability protection. However, whether a covenant tolist a person as an additional insured on the insured’sliability policy or ad ditional insured status provid escoverage for the additional insured’s negligence couldwell depend upon language of the insurance covenantand the insurance policy. When such language is silentor ambiguous, courts may lo ok to the ind emnity


language and other language in the contract and customand practice to d etermine the in tention of the parties.Also, the language of the insurance policy, additionalinsured endorsement and certificate of insurance will beexamined to determine the scope of the insurancecoverage.

(a) Getty Round 2: ExpressNegligence Doctrine Not Applicable to InsuranceCovenant - Additional Insured’s Sole NegligenceMay Be Covere d by Additional InsuredEndorsement. In Getty Oil Co. v. Insurance Co. ofNorth America, NL Industries, Inc., Youell andCompanies, 845 S.W.2d 794 (T ex. 1992 ), cert. de n'd ,510 U.S. 820, 114 S. Ct. 76, 126 L. Ed. 2d 45 (199 3),the Texas Supreme Court declined to extend the expressnegligence doctrine to invalidate contractual provisionsrequiring Getty to be listed as an additional insured onNL Industries' liability policies in a case where theindemnity pro vision e xclu ded indemn ity fo r Ge tty'snegligence but the insurance provision did notexpressly state that the insurance was to cover injuriesdue to Getty's negligence. The court reviewed thefollowing provision:

Seller (NL Industries-the chemical supplier) agreesto maintain at Seller's sole cost and expense, fromthe time opera tions are com menced hereunde r untilOrder is fully performed and discharged , insuranceof all types and with minimum limits as follows, andfurnish certificates to Purchaser's PurchasingDepartment evidencing such insurance with insurersacceptable to Purchaser (Getty - the chemicalbuyer):...

Workmen's Compensation $500,000Statutory Em ployer's Liability

Genera l Liability: $500,000Bodily Injury

...Automo bile Liability: $500,000Bodily Injury...

All insurance coverages carried by Seller,whether or not required hereby, shall extend toand protect Purchaser, its co- owners and jointventurers (if any), to the full amount of suchcoverages and shall be sufficiently endor sed towaive any and all claims by the underwriters orinsurers against Purchaser, its co-owners, jointventurers, agents, emp loyees and in surance carriers.

Seller shall indemnify, defend and holdharmless Purchaser, its co-owners, joint venturers,agents, employees and insurance carriers from anyand all losses, claims, actions, costs, expenses,judgments, subrogations or other damages resultingfrom injury to any person ... arising out of orincident to the performance of the terms of thisOrder by Seller ... Seller shall not be heldresponsib le for any losses, expenses, claims,subrogations, actions, costs, judgments, or otherdamages, directly, solely , and prox imately causedby the negligence of Purcha ser. Insurance covering

this indemnity agreement shall be provided bySeller. (Empha sis added by author.)

Previous ly, in a 1986 case ("Getty Round 1"), Gettyhad been unsuccessful in seeking indemnity against NLIndustries. Getty Oil Corp. v. Duncan, 721 S.W.2d 475(Tex. App.--Co rpus Christi 1 986, writ ref'd n.r.e.).Getty lost Getty Round 1 when the court determinedthat the contractual indemnity provision meant what itsaid: "Seller shall not be resp onsible for a ny losses ...solely caused by the negligen ce of Purc haser."

The facts giving rise to Getty Round 1 are asfollows. Getty purchased various chemicals from NLIndustries for Getty's oil pro duction and explorationoperations in the Midland, Texas area. A barrel ofchemical demulsifier d elivered by N L Industries toGetty exploded in the vicinity of a Getty well, killingCarl Duncan, an independent contractor working forGetty. Duncan's esta te and survivors brought wrongfuldeath and survival actions against Getty and NLIndustries (Getty Round 1). The jury found Getty 100%negligent. The jury also found that NL Industries wasnot negligent and that it placed ad equate warnings on itschemicals. There was, however, no finding that theaccident did not arise out of or was not incident to NLIndustries' performance of its purchase order.

i) Cause of Action AgainstInsurance Purchaser for Failure to L ist Other Partyas Additional Insured. The court in the instant action("Getty Round 2") was being reque sted by Ge tty toreverse the holding of the trial court and the court ofappeals in a subsequent suit brought by Getty againstNL Industries for its failure to name Getty as an"additional insu red " on NL Ind ustr ies' insurancepolicies and against NL Industries' insurers. Getty wassuing on multiple theories: as to NL Industries--breachof contract to purchase insurance on its behalf; violationof § 1.203 of TEX. BUS. & C OMM . CODE (Te x.UCC) (Verno n 1994 ) (obligation of good fa ith and fairdealing); negligence; violation of the Texas DeceptiveTrade Practices Act; and common law fraud; and as tothe insurers--breach of contract to extend it insurancecoverage; violation of TEX. INS. CODE Art. 3.62(Vernon 1981) (repealed) (failure to pay claim); breachof the duty of goo d faith and fair d ealing; negligence;violation of the DTPA; and common law fraud.

The trial court in Getty Round 2 granted summaryjudgment against Getty on four gro unds: (1) a contractprovision requiring the seller to pu rchase liabilityinsurance for the buyer violated the Tex as OilfieldAnti-Indem nity Statute, §§ 127.001-.007, TEX. CIV.PRAC. & REM. CODE ANN . (Vernon 1997); (2) thesame contractual provision violated the common lawexpress negligence rule; (3) the prior litigation of arelated indemnity provision p recluded the present suitunder the doctrine of res judicata ("Claim Bar"); and(4) collateral estoppel prevented Getty from relitigatingultimate issues of fact and law litigated in GettyRound 1 (" Issue Bar").

The court o f appeals s usta ined the t rial cou rt'ssummary judgment on the basis that Getty was barredby res judicata , having already c ross- claimed againstNL Industries in Getty Round 1 for contractualindemnity and having lost. In dicta , the court ofappeals opined tha t the insurance p rovision wo uld


violate the Texas Oilfield Anti-Indemnity Statute byallowing Getty to avoid the consequences of its ownnegligence. The court of app eals also noted that Texascourts would "undoubtedly extend (the expressnegligence doctrine) to the insurance provisionscovering the indemn ity obligation that purp ort toprotect the indemnitee from the results o f its solenegligence." 819 S.W.2d 908, 914.

The supreme court found that Getty was notrequired to bring any o f its cross-claims against NLIndustries in the suit by Dunca n. Howev er, once G ettychose to cross-claim for indemnity, it was requiredunder res judicata to bring all its actions in the sameaction.

ii) Cause of Action A gainstInsurers. As to the claims against the insurers, thecourt held that Getty was not barred by either resjudicata or collateral e stoppel. Res judicata was notapplicab le even though as a general matter under Texaslaw a former judgm ent bars a sec ond suit aga inst allwho were in "privity" with the parties to the first suit.Since NL Industries' insurance policies contained a"no-action" provision (suit against the insurer wasspecifically prohibited before the insured's liability wasreduced to judgme nt), the court fou nd that Ge tty couldnot have joined the insurers as defendants in GettyRound 1 anyway. Co llateral estopp el did not ap plyeither since the court found that Getty Round 2 was nota relitigation of either (1) an issue o f fact--did Dun can 'sinjuries arise out of NL's performance o f the purchaseorder? (did the parties intend to limit the insurance toinjuries caused by NL Industries' negligence?) or (2) anissue of law--did NL Industries' breach its insurancecovenan t?

iii) Express Negligence DoctrineInapplica ble. Finally, the court h eld that the expressnegligence doctrine would not be extended tocontractual provisions, othe r than indem nityagreements, and therefore was not a basis forpreventing litigation as to whether Getty was anadditional insured under NL Industries' policies. Thecourt stated

We express no op inion regard ing whether G etty isan additional insured under NL's insurance policieswith INA or Youell, or the extent of such coverage,if it exists.

Id. 806.

(b) If Express NegligenceStandard Not Applicable to Insurance, Is The Clearand Unequivocal Standard Applicable to InsuranceC o v e n a n t s a n d t o A d d it ional I n s u r e dEndorsem ents? Prior to the adoption o f the expressnegligence doctrine as the test to determine whether anindemnity provision extended to the indem nitee’snegligence, the Texas Supreme Court followed the"clear and uneq uivocal” stan dard. Fireman’s FundInsurance Co. v. Commercial Standard Indemnity Co.,490 S.W.2d 818 (Tex. 1972). See discussion of theFireman’s Fund case abo ve at "IIBlb(1)(b) IndemnityA g a i n s t O n e ’ s O w n N e g l i g e n c e -Background--1971-1987 Clear a nd Un equivocalStandard-Broad Statements No Longer Sufficient

Unless Obligations Expressed in Clear andUnequivo cal Terms-Fireman’s Fund”.

i) Insurance Covenant toObta in Additional Insured Endorsement. Covenantsin transaction documents for one party to list the otherparty and other persons on its liability insurancepolicies as an additional insured run the gamut from asimple statement “x shall be listed as an additionalinsured on Contractor’s commercial general liabilitypolicy” to specifying the form of the additional insuredendorsement and the relatio nship between its coverageand the other insurance coverage of the additionalinsured. The follo wing is an example of a detailedcovenant requiring the contractor to list the owner as anadditional insured.

Provision:

Paragraph 16.2.2 . Commercial GeneralLiability.

Bodily Inj ury/ $1,000,000combined single limit and umbrella

Property Damage $3,000,000(Occurrence B asis)

Products - Comp./Op Agg.$2,000,000

Personal & Adv. Injury $1,000,000

Fire Damage $100,000(Any one fire)

Med. Exp ense $5,000(Any one person)

This policy shall be on a form acceptable to Owner,endorsed to include the Indemnified Persons asadditional insureds (specifically naming John Doe, JohnDoe, M.D., P.A. and the Building Owner, and theirofficers and emp loyees as additional insureds) onstandard ISO form CG 20 26 or other endorsementform acceptable to Owner without exclusion for theadditional insured’s neglig ence (whether sole orcontributory), contain cross liability and severability ofinterest endorsements, state that this insurance isprimary insurance as r egards any o ther insurancecarried by the Indemnified Persons and shall include thefollowing coverages:

1. Premises/Ope rations;2. Independent C ontractors;3. Completed Operations for a period

of two years follow ing theacceptance of Contractor's Work;

4. Broad Form C ontractual L iabilityspecifically in support of, but notl i m i t e d t o , t h e I n d e m n i t yParagraphs of the contract;

5. Broad Form Pro perty Damage; and6. Personal Injury Liability with

employee and contractual exclusionsremoved.


Parag raph 1 6.2.3 . Business Automobile Policy.

Bodily Inj ury - $500 ,000 co mbined sin gle limit

This policy shall be on a standa rd formwritten to cover all o wned, hired and non-ownedautomobiles. The po licy shall include and cover theIndemnified Persons a s additiona l insureds withwaiver of subrogation against such persons either byblanket provision in th e policy (provided suchprovision is provided to and reviewed by Ownerand determined to be acceptable) or by endorsementby Texas Standard Automobile Endo rsement formTE 99 01B - Additional Insured and contain awaiver of subrogation in favor of the IndemnifiedPersons by Texas Standard from TE 20 46A -Changes in Transfer of Rights of Recovery A gainstOthers to US (Waiver of Subrogation).

Provisions: See the following forms in the Appendix:

1. Appen dix Form 8 Attachment toContractor’s Certificate or Proof ofInsurance.

2. Appen dix 14 ISO form CG 20 26. 11 85Additional Insured - Designated Person orOrganization.

3. Appen dix 20 CGL Blanket Endorsement.Contractor's Extended Liability.

4. Appen dix 10 TE 99 01B - Additional Insured.

(ii) Scope of AdditionalInsured Endorse ment. The scope of coverage of anadditional insured endorsement is defined by the wordsof the policy and the endorsement to the policy. TheInsurance Services Office, Inc. (“ISO”), a tradeorganization to which most national insurers belong,has promulgated numerous additional insuredendorsem ents for use natio nally.

Provisions:

See Footnote [45] to Volum e 2 of this Article for aList of ISO Additional Insured En dorsements fora listing of these com monly used endorsem ents. Seethe following most commonly used additionalinsured endorsement forms in the Appendix:

Commercial General Liability Policies:

1. Appendix 13 CG 20 10 10 91 AdditionalI n su r e d - O w n e r s , L e s s e e s o rContractors-S c h e d uled Person orOrganization.

2. Appen dix 14 CG 20 26 11 85 AdditionalI n s u r e d - D e s i g na t e d P e r s o n orOrganization.

3. Appen dix 15 CG 20 11 01 96 AdditionalInsured-Managers or Lessors ofPremises.

4. Appendix 21 CG 20 33 07 98 AdditionalI n s u r e d - O w n e r s , L e s s e e s o rContr actors– Autom atic Status When

Required in Construction Agreementwith You.

5. Appen dix 22 CG 20 37 10 01 AdditionalI n s u r e d - O w n e r s , L e s s e e s o rContrac tors–Com pleted Ope rations.

Business Auto Policies: The omnibus “who isthe insured” clause of the basic standardBusiness Auto Policy (“BAP”) automaticallyincludes the most com mon circu mstances inwhich parties other than the named insured areinsured und er the name d insured’s p olicy.

1. CA 00 01 07 97 Business Auto PolicyOmnibus Insured Provision. Thisform of BAP covers within th e “who isthe insured” and the “you” references:the named insu red; various persons usinga covered auto owned, hired, orborrowed by the named insured with thenamed’s insured’s permission (the”permissive user” category of insureds);and any pe rson liable for the conduct ofan insured “to the extent of thatliability.”

2. Appen dix 10 TE 99 01 B AdditionalInsured Endorsement. This form hasbeen approved for use in Texas to thesame effect as the CA 20 48. In additionto specifying insured status for a personnamed in the endorsement, the Texasendorsement also provides notice to theaddit ional insured whe n the policy iscancelled.

3. Appen dix 11 TE 20 46 A - Changes inTransfer of Rights of Recovery A gainstOthers to US (Waiver of Subrogation).

Workers Compensation. It is not generallyapprop riate (except in borrowed servant, dualemployment or leased employee situations) for oneparty to a contrac t to require the other party to name theother party as an ad ditional insured on its workerscompensation and emp loyers liability polic y. Thiswould result in the other party being covered forinjuries to its employees under th e insured’s wo rker’scompensation policy. As disc ussed elsewh ere in thisArticle, the concer n raised by the risk of third-par tyactions by an injured employee of an insured employeragainst a related par ty (e.g, suit by an injured employeeof a contractor against the premises owner, or suit by aninjured employee of a subcontractor against thecontractor, or suit by an injured employee of a tenantagainst the landlord) can be addressed byindemnification by the employer and designation of therelated party as an additional insured.

Appen dix 12 WC 42 03 04A Waiver of OurRight to Recover from Others. The additionalconcern that the workers compensation carrierwill seek reimbursement from a party liable forthe employee’s injury (other than the employeragainst whom such suits are barred) may beaddressed by contractually requiring theemployer/indemnifying person to w aive rightsof subrogation.


A Houston Court of Appe als held that the insurancecovenant to obtain an additional insured endorsementreviewed by the court did not evid ence an inten t tocover the sole neglige nce of an ad ditional insured. InEmery Air Freight Corp. v. General Tra nsport Systems,Inc., 933 S.W.2d 312 (Tex. Ap p.--Housto n [14th D ist.]1996, no writ ], the court found that the followingadditional insured pro vision did not cover a liab ilitythat arose out o f the sole negligence of the additionalinsured:

Provision:

7. Contractor shall obtain an d maintain at itsown expense insurance in such forms and minimumamounts as set forth below naming Emery as anadditional insured. Contracto r shall furnish Emerycertificates from all insurance carriers showing thedates of expiration, limits of liability thereunder andproviding that said insurance will not be modifiedon less than thirty (30 ) days’ prior w ritten notice toEmery.

Minimum Limits of Insurance:

A. Worker’s Compensation -- StatutoryB. General Liability Insurance -- $1 Million

Comb ined Single L imitC. Automo bile Liability -- $1 Million

Comb ined Single L imitIf Contractor fails to obtain and maintain theinsurance coverage set forth abov e, Emery sha llhave the right, but not the obligation, to obtain andmaintain such insurance at Contractor’s cost or, atits option, to term inate this Agreement for cause asprovide d in Section 9 hereof.

8. Contractor shall be solely respo nsible andliable for any and all loss, damage or injury of anykind or nature wh atever to all pe rsons, whetheremployees or otherwise , and to all pro perty,including Emery shipments while in theContracto r’s custody and control, arising out of orin any way resulting from the provision of serviceshereunder, and Contractor agrees to defend,indemnify and hold harmless Emery, its agents,servants, and employees from and against any andall loss and expense, including legal costs, arisingout of the provision of the services hereunder, byContractor.

This provision w as contained in a Cartage Agreeme nt,an agreemen t whereby G TS agreed to provide localdelivery services in Beaumont for Emery, a nationalfreight service. Ap parently, the Beaumont facility fromwhich GTS provided the delivery service was "ownedor operated” by Emery, but the Cartage Agreementprovided that GTS had exclusive charge and control ofthe services bein g perform ed. See footnote 1 in theopinion. The trial co urt howeve r determine d thatEmery was solely liable for the injury sustained by oneof GTS’s employees at the Beaum ont facility. This suitwas brought by Emery against GTS to reim burseEmery for the monies awarded to the injured employee.Emery sought to rec over again st GTS for failing tocause GTS’s liability insurance to list Emery as anadditional insured.

The court of appeals noted that the Texas SupremeCourt had twice previously, in Getty Oil Co. v.Insurance Co. of North America (Getty II discussedimmedia tely above) and Firema n’s Fun d Ins. Co . v.Commercial Standard Ins. Co. (discussed previously),dealt with the interaction o f an indemnity clause and aninsurance clause in a co ntract. The Fireman’s Fundcontract had a liability insurance clause which requiredthe contractor to obtain liab ility insurance in ord er to"protect the Owner ... against all liabilities, claims, ordemands for injuries or damages to any person orproperty growing out of the performance of work underthis specification.” Fireman’s Fund, 490 S.W.2d at821. Another cla use, appe aring later in the co ntract,indemnified the owner fro m claims aris ing from thecontracto r’s perfo rmance (with the exception of thoseclaims arising out of the owner’s negligence). TheFireman’s Fund court addressed whether the languageof the insurance clause reflected an intention for thecontractor to carry insurance covering the owner’snegligent acts. The court noted that the above-quotedlanguage from the insurance clause was "insufficient toclearly indicate an intention to protect thecontractor-indemnitee against liability for damagescaused solely by the latter’s (the owner’s) ownnegligence.” Id. at 822. Noting that "all of the relevantprovisions of a contract shou ld be con sidered inarriving at its intent and meaning,” the Fireman’s Fundcourt observed that other sentences in the insuranceprovision required liab ility insurance covering only thecontracto r’s agents, employees, and vehicles. It alsonoted that the indemnity provision specifically exceptedany assumptio n of the owner’s negligence by thecontractor. The Fireman’s Fund court held that

(W)e cannot agre e ... that the requirem ent inSection 12 that Wallace carry certain liabilityinsurance for the protection of General Motorsevidenced an intention to cover negligent acts of thelatter. While the meaning of the contract provisionsrelating to liability insurance are not clear, the mostreasonable construction is that they were to assureperformance of the indemnification agreement asentered into by the parties. Such provisions areoften required to guard against the insolvency of theindemnitor, and they should not be considered asevidence of intent to broaden the contractualindemnity obligation.

Fireman’s Fund, 490 S.W.2d 818 , 823 (Tex. 1972).

The court of appeals in Emery noted that the TexasSupreme Court in Getty had determined that theadditional insured provision being litigated in Gettywas a free-standing obligation , which requir ed by itslanguage an extension of coverage "whether or notrequired [by the other provisions of the contract]” andwas in addition to the requirem ent in the indem nityprovision that contained an internal provision forinsurance to support the indemnity. Getty , at 804, 806.

The court of ap peals noted that the suprem e court inGetty declined to extend the e xpress neglig ence rule toinsurance agreements, and concluded that

As such, an insurance agreement which stands alonecan shift the risk of insuring against one party’s ownnegligence to another p arty without a specific


expression of intent, even thou gh an indem nityclause cann ot.

This case, then, requires a two-ste p analy sis. First, we must determine whether the indemnityclause satisfies the express negligence rule, therebyindemnifying appellant (Emery) against its ownnegligence. Second, we must determine whether theinsurance clause mere ly supports the indemn ityclause or stands alone, representing an independentobligation.

The court of appeals held that even though Emerywas to be listed as an additional ins ured on G TS’sliability insurance policy, the "‘most reasonab leconstruction’ of the insuranc e provision s in the CartageAgreement ‘is that they were to assure the performanceof the indemn ity agreemen t as entered in to by theparties.’” [The court borrowed such language from thecourt in Fireman’s Fund]. The court based thisdetermination on the following factors:

(1) the indemn ity provision d id not have an internalprovision requiring insurance to support the indemnitydistinct from other provisions for insurance in theagreeme nt;

(2) the insurance provision does not requirecoverage "whether or not required” by other clau ses;and

(3) the insurance clause does not expressly covernegligence, nor did the in demnity clause, because ofthe application of the express negligence rule.

Another court of appeals has found that the"additional insured” endorsement to a CGL did notcover the negligence of the additio nal insured, b ut onlythe negligence of the "first named insured” (thecontractor). Granite C onstructio n Co., Inc . v.B i t u m i n ous Ins . Cos . , 8 3 2 S . W . 2 d 4 27(Tex.A pp.--Ama rillo 1992, no writ ). Granite soughtcoverage for a lawsuit brough t by an emp loyee of acontractor hired by G ranite to haul as phalt from itsconstruction site. Granite ha d agreed by contract toload the trucks and the contractor’s responsibility wasto haul the asphalt after Granite loaded the truck s.Granite was named as an "additional insured” in thecontracto r’s CGL policy. The endorsement limitedGranite’s coverage as follows:

Provision:

Liability arising out of operations performed forsuch insured (Granite) by or on behalf of the namedinsured (the contractor).

In the negligence suit the employee alleged thatGranite had negligently loaded its truck in such amanner that the truck overturned and injured him.Granite sought coverage under the additional insuredendorseme nt, contending that the employee’s injuries"arose out of” hauling operation s performe d for Gra niteby the contractor. The court disagreed, holding that theclaim against Granite arose out of Granite’s loadingoperations and not out of operations performed by thecontractor, the only operations for which Granite wasinsured. Id., 430. The court also rejected Granite’sargument that the employee’s claim was covered

because of the certificate of insurance naming it as aninsured for all of its work in Texas. The court held thatthe certificate itself did not manifest the coverageafforded Granite, rather it merely e videnced Granite’sstatus as an insure d. Id., at 429.

The Texas S upreme C ourt has rece ntly given abroad construction to the phrase “arising out of” in acase involving the constructio n of an autom obile polic y.In Mid-Century Ins. Co. v. Lindsey, 997 S .W.2d 153,156 (Tex. 19 99), while attem pting to get into hisparents’ truck through the sliding rear window, a boyaccidently touched a loaded shotgun on a gun rackmounted over the window and shot a man sitting in anadjacent parked car. The relevant insurance policyprovided coverage for injuries arising out of the use ofa motor vehicle. The court held:

For liability to “arise out of” the use of a motorvehicle, a causal connection or relation must existbetween the accid ent or injury and the use of themotor vehicle.

Id. at 156. W hile the direct ca use of the injurystemmed from the boy’s conduct in touching the gun,the court conclude d that the man ’s injury “arose o ut of”the use of the truck because the injury-producing actand its purpose were an integral part of the use of thevehicle. Id. at 158- 59. The court noted that thevehicle must be more than the “locational setting” forthe injury. See id. at 156.

The First Court of Appea ls considered “arising outof” in the context o f an additional-insured provisioncovering liabilities arising out of the “operations” ofthe named insured in Admiral Ins. Co. v. Trident NGL,Inc., 988 S.W.2d 45 1 (Tex.App. [1 st Dist.] 199 9, writden’d). In Admiral, a company hired to service an o iland gas facility named the facility’s owner as anadditional insured for liab ility arising out of the servicecompa ny’s “operations.” While one of the servicecompa ny’s (the named insured’s) employees wasunloading tools on the premises of the additionalinsured, a compressor on the property exploded. Theemployee, injured as a result of the explosion, sued thefacility’s owner, and the owner sought a declaration thathe was covered as an additional insured under thepolicy. The court of a ppeals follo wed what itconsidered the “majority view” from federal courts andcourts in other jurisdictions construing similarendorsements:

[F]or liability to “arise out of operations” of anamed insured it is not necessary for the namedinsured’s acts to have “caused” the accident; ratherit is sufficient that the named insured’s employeewas injured while present at the scene in connectionwith performing the named insured’s business, evenif the cause of the injury was the negligence of theadditional insured. (emphasis added)

The Third Court of Appeals has also found that anadditional insured’s negligence is covered by anadditional insured end orsemen t covering liabilities“arising out of [the named insured’s] work” inMcCarthy v. Cont. Lloyds, 7 S.W.3d 725 (T ex.App.-Austin [3rd Dist.] 199 9, no writ ). McCa rthy, ageneral contractor, hired Crouch/Fisk Electric Companyand Crouch Electric Company to provide electrical


services for a Motorola construction project McCarthywas managing. A n employe e of Crouc h (the namedinsured) was injured as he walked down a slipperyincline on premises owned by McCarthy (the additionalinsured). Walking down the incline to get too ls toperform Crouch’s work was an integral pa rt of its workof McCa rthy. Crouch/Fisk a nd Crou ch Electricpurchased separate commercial general liab ilityinsurance policies from Continental Lloyds InsuranceCompany (“CLIC”) and American Casualty Companyof Reading, P ennsylvania (“A CC”). McCarthy wasadded to both policies by endorsement as an additionalinsured. The additional insured endorsements read asfollows:

Provisions:

CLIC Additional Insured Endorsement

WHO IS AN INSURED ... the person ororganization shown in the Schedule (McCarthy), butonly with respect to liability arising out of “yourwork” (Crouch’s) for that insured (McCarthy) by orfor you (Crouch). [emphasis added]

ACC Additional Insured Endorsement

The insurance provided to the additional ins ured islimited as follows: 1. That person or organization[McC arthy] is only an add itional insured w ithrespect to liability arising out of: ... b. “Yourwork” for that additional insured (McCarthy) by orfor you (Crouch). [emphasis added]

The insurance companies argued that “arising outof” means co ming directly from the negligence ofCrouch, the contractor, and could not arise in a casewhere only the owner was negligent. The court ofappeals found that coverage occurs where there is acausal connection between the liability and the namedinsured’s work, even though only the additional insuredis negligent. The employee’s injury occurred while hewas on the construction site for the purpose of carryingout Crouch’s work for M cCarthy. Thus, there was acausal connection between the injury and C rouch’sperformance of its work for M cCarthy; acc ordingly,McC arthy’s liability for the injury “arose out of”Crouch’s work form McCarthy. The court noted

As he was walking down this incline to go to theequipment trailer, Wilso n ‘fell on the mud dy,slippery surface.’ These allegations show thatwalking down the incline to get tools to p erform itsjob was an integral part of Crouch’s work forMcC arthy. Thus, the accident occ urred whileWilson was on the construction site for the purposeof carrying out Crouch’s contract with McCarthy.There was more than a mere loc ational relation shipbetween the injury and Wilson’s presence on thesite. Wilson’s injury occurred while he wascarrying out a necessary part of his job for Crouch.Therefore, there is a causal connection betweenWilson’s injury and C rouch’s pe rformance of itswork for McCarthy and the liability “arose ou t of”Crouch’s w ork for M cCarthy.

The court rejected the insurance compan y’s attemptto limit coverage to cases where the named insured alsowas negligent. T he court held

The insurance companies offer a competinginterpreta tion for the phrase “arising out of” thatthey claim is equally reasonable and thus creates anambiguity. Their interp retation wou ld limit theinterpretation of “arising out of” to mean comingdirectly from; i.e., for liability to arise out ofCrouch’s work for McCarthy, the liability must stemdirectly from Crouch’s negligence and cannotextend to negligence caused sole ly by McC arthy.Post-Lindsey , however, su ch a restricti veinterpretation no longer appears reasonable in Texasand cannot be used to create amb iguity. However,were we to consider the phrase “arising out of”ambiguous, we would apply the familiar rules thatconstrue the policy against the insurer and reach thesame result.

The court of appeals in Highland Park v. TrinityUniversal Ins. Co., 36 S.W.3d 916 (Ct.App. [5th Dist.]Dallas, 2001, no writ ) also was called upon to construean “arising out of ‘your work’” additional insuredprovision. James Watkins, a plumber employed byWard Brothers, was injured on the Highland ParkShopping Center pre mises owne d by Hen ry S. MillerInterests, Inc. while riding a Man-Lift in HighlandPark’s parking garage. Trinity Universal refused todefend Highland Park in the suit brought by Watkins inwhich he alleg ed that the M an-Lift was unsafe. Basedon McCarthy and Trident NGL, the court found thatthe additional insured endorsem ent covered HighlandPark’s sole negligence because the liability arose out ofthe work of the na med insured on the additionalinsured’s premises.

The Fifth Circuit applying Texas law followedTrident NGL as oppo sed to Granite in Mid-ContinentCasua lty Co. v. Swift Energy Co., 206 F.3 d 487 (5th

Cir. 2000). This case involved two contractors ( AirEquipment and Flournoy Drilling Co.) performingservices for the same par ty (Swift Energy C o.). AirEquipment was both a contractor of Swift Energy anda contractor performing services for Flou rnoy. AirEquipment’s employee (Lozano) was injured on SwiftEnergy’s well site while performing services forFlournoy. Swift Energy was an additional insured onAir Equipment’s liability policy pursuant to thefollowing policy provision that designated as additionalinsured persons

Provision:

SCHEDULE. Name of person ororganization:

Any person or organization for whom the namedinsured has agreed by written “insured co ntract” todesignate as an additio nal insured su bject to allprovisions and limitations o f this policy....

WHO IS AN INSURED (Section II) is amended toinclude as an insured the person or organizationshown in the Sched ule, but only with re spect toliability arising out of your ongoing operationsperformed for that insured. (emphasis added)

The contract between Swift Energy and Air Equipmentcontained a mutual indemnity provision, required eachparty to carry liability insurance to support theindemnified liability under each party’s indemnity, and


required each party to add the oth er to its liabilitypolicy “for liabilities and indemnities assumed by” theindemnifying party. Mid-Continent argued that AirEquipm ent’s employee was injured while performingwork for Flournoy and not for Swift and thereforealthough Swift was an additional insured under AirEquipm ent’s policy, the injury was not a liab ilitycovered by Air Equipment’s indemnity to Swift andconsequ ently was not a liability covered pursuant to the“insured contract” provisions of Air E quipment’s policywith respect to Swift’s additional insured statusthereunder. Mid-Continent also argued that theindemnity contract between Air Equip ment and S wiftwas unenforce able unde r the Texa s Oilfield Anti-Indemnity Act (“TOAIA ”) on various grounds. TEX.CIV. PRAC. § REM. CODE ANN. § 127.003 (Vernon1997).

The court rejec t Mid-Co ntinent’s argum ents findingthat Mid-Continent asked the wrong question.

We emphasiz e that Mid -Continent’s first argumentdoes not require us to determine whether Swift wasentitled to indemnity under the indemnity provisionof the MSA (the contrac t between Swift and A irEquipment). Rather, it requires us to answer thedifferent question of whether Swift should bedenied coverage as an additional insured under thePolicy because the MSA is not an “insuredcontract.” The presumptions involved in thesedifferent contexts are diametrically opposed . ....under Texas law indemnity agr eements are strictlyconstrued in favor of the ind emnitor (he re, AirEquipm ent).... By contrast, insurance policies arestrictly construed in favor of coverage (forSwift)....It does appear that Lozano was injuredwhile on Swift’s premises for the purpose of helpingto perform Air Equipment’s business. This is theexact factual scenario present in Admira l. In sum,while we are not required to decide whether Graniteand Admira l are distinguisha ble, if they are,Admiral would govern und er these facts.

The court also reasoned that even if the liability aroseout of Air Equipment’s operations for Flournoy, theyalso arose out of Air Equipm ent’s opera tions for Swift,since Flournoy was Swift’s contractor.

The Fifth Circuit in Mid-Continent Casualty Co. v.Chevron Pipe Line, ___ F.3d ___ (5 th Cir. 2000)construed an “arising out of your work” additionalinsured endorsement as covering injuries to a namedinsured’s employee performing services for theadditional insured on the additional ins ured’s premises.The court noted

The Mid-Co ntinent endo rsement and those inGranite and Admiral are not identical.Mid-C ontinent uses “liability arising out of ‘your(PMI’s) work ’”, defined by the policy as the namedinsured’s [PMI’s] work or operations, while theGranite and Admiral endorsements, resp ectively,used “liability arising out of operations performed... by or on behalf of the named insured”, ... and“liability arising out of the named insured’soperations” Admira l, 988 S.W.2d at 454 (em phasisadded). On the other hand, the pertinent languagein the two additional insured end orsemen ts at issuein McCarthy is identical to that in Mid-Continent’s.

See McCarthy, 7 S.W.3d at 727 n. 4. .... To theextent that there is a conflict in the approach takenby Granite and Admiral in interpreting theendorsement, e.g., fault-based versus activity-based,we agree with CPL that our affirming thecoverage-for-CPL-ruling does not require us toresolve such conflict. We are persuaded that, in thelight of Granite’s focus on the word “operations”in the endorsement, which it considered inconjunction with the parties’ division of operationsin its services con tract, there is no need here toreach the same non-coverage holding. First, theword “operations” doe s not appear in theMid-Continent endorsement; rather, it uses “yourwork”, which, per its policy definition as work oroperations, may indicate that broader coverage wasintended; second, the underlying services contractdoes not divide responsibilities between CPL andPMI vis-a-vis PMI’s work; and finally, based on thefinding in the Fant action that PMI controlledFant’s work at CPL, his injury, at least in p art,“arose out of” PMI’s work for C PL. [Em phasisadded]

Majority R ule: Out of State

Cases Finding Coverage of Additional Insured’sNegligence. The following cases have upheld coverageof an additional insured ’s negligence: MarathonAshland Pipe Lin e v. Maryla nd Cas ualty , 243 F.3d1232 (10th Cir. 2001)(under Wyoming law “ongoingoperations for insured” type additional insuredendorsement covers the “natural consequence” of thenamed insured’s act hiring its employee and includesthe negligence of the additional insured; court notedthat WEBSTER’S THIRD NEW INTERNATIONALDICTIONARY (Unabridged 2000) at page 1576defines “ongoing” as “that [which] is going on; that[which] is actually in progress: and at page 1581defines “operations” as “a doing or performingesp[ecially] of action); Fireman’s Fund Ins. Co. v.Atlantic Richfield Co.,____ (Cal.App . 4th 2001)(findingthat ISO CG 20 10 10 01 Addit ionalInsured-Own ers, Lessee or Contractors (SeeAppen dix 13) which cove rs an additio nal insured forliabilities arising out of the work of the named insuredcovered the additio nal insured’s sole negligence [failureto maintain a step] because the accident ha ppened whilethe injured employee was performing work for theadditional insured); Meadow Valley Contractors v.Transcontinental Ins. Co., 27 P.3d 594 (UT2001) (“liability arising out of your work” endorsementcovered additional ins ured’s sole ne gligence since it“originated from, was incid ent to, and wa s inconnection with” the work of the named insured);Philade lphia Electric Co. v. Nationwide Mutual Ins.Co., 721 F.Supp. 740 (E.D. PA. 198 9)-found additionalinsured endorsement for "any work performed by(insured)” as broad enough to cover additionalinsured’s negligence (indemnity was generally wordedindemnity with exclusion for indemnitee ’s solenegligence); Rupp v. American Crystal Su gar Co ., 465N.W.2d 614, 617 (N.D. 1991)-court held "there couldbe no purpose for the insurance provision o ther than toprotect (the owner) from the consequences of its ownnegligent acts”; Clark v. B & D Inspection Service, 896F.2d 105 (5th Cir. 1990)-construed the following policylanguage: "as an add itional insured, any person ororganization when required to be so named but only as


respects operations of the named insured” as includingadditional insured’s negligence finding that "the policylanguage addresses the factual context in which theliability of the named insured arises, not the legal theoryon which it is based.”; Woods v. Dravo Basic M aterialsCo., 887 F.2d 618 (5th Cir. 1989)-insurance covenantto "cover all risks”; Valentine v. A etna Ins. C o., 564F.2d 292 (9th Cir. 1977 ); Jokich v. Union Oil Co., 574N.E.2d 214 (Ill. 1991)-insurance covenant providedthat it was not limited by the coverage of the indem nity(indemnity provision was a limited indemnity excludingthe Indemnified Person’s sole negligence); McIntosh v.Scottsda le Ins. Co., 992 F.2d 251 (10th Cir. 1993);Saavedra v. Murph y Oil U.S.A., In c., 93 F.2d 1104 (5 thCir. 1991); Charter Oak Fire Ins. C. v. Trustees ofColum bia University , 604 N.Y.S.2d 55 (1993); andTransamerica Ins. Grou p v. Turn er Constr. C o., 601N.E.2d 473 (199 2).

Minority Rule: Out-of-State Cases FindingAdditional Insured Not Covered for OwnNegligence. Consolidation Coal Co. v. Liberty MutualIns. Co., 406 F.Supp 1292 (W.D.Pa. 1976)-insurancecovenan t limited additio nal insured’s coverage to "butonly with respect to acts or omissions of the namedinsured in connection with the named insured’soperations”; First Ins. Co. v. State, 665 P.2d 648 (Ha.1983)-additional insured endorsement contained anexclusion of coverag e for "...bodily injury or pro pertydamage arising out of any act or omission of theadditional insured or a ny of his emplo yees, other thangeneral supervision of work performed for theadditional insured by the named insured”; NationalUnion Fire Ins. Co. v. Gle nview P ark District, 632N.E.2d 1039 (Ill. 1994)-policy provided coverage"...with respect to operations performe d by or on behalfof the Named Insured” but then stated that the coverage"... shall not apply to damag es arising out o f thenegligence o f the Addition al Insured(s) ...”

A number of courts have held that the "additionalinsured” is only covere d for liability resulting from thenegligence of the named insured (i.e., only forvicarious liability), and not the additional insured’s ownnegligence. Harbor Ins. C o. v. Lewis, 562 F.Supp. 800(E.D. Pa. 198 3); Travelers Ind. Co. v. Ha nover Ins.Co., 470 F.Supp. 630 (E.D. Va. 1979); National UnionFire Ins. Co. v. Glenview Park District, 632 N.E.2d1039 (1994) ; Federal Ins. Co. v. Commerce & IndustryIns. Co., 589 N.Y.S.2d 439, 187 A.D.2d 278 (1992),appeal den’d, 599 N.Y.S.2d 804, 616 N.E.2d 159(1993); Scottish & York Int’l Ins. Group v. E nsign Ins.Co., 709 P.2d 397 (W ash. App. 1985).

(2) Exclusion if Additional InsuredHas Insurance. The dec ision in Elf Exploration,Inc. v. Cameron Offshore Boats, Inc., 863 F. Supp. 386(E.D. Tex. 1994) also illustrates the risk inherent in notreading the insurance policy of the p arty obligated toname the prospe ctive additional insured as an additionalinsured. The court found that a fact issue existeddefeating a summary judgment motion as to whether theproposed additional insured had accepted thedefend ant's insurance policy which contained anadditional insured provision that included the plaintiff,but which provision was worded so as to excludecoverage in cases where the proposed additionalinsured was already insured (a so-called "EscapeClause").

Provision:

Provided that where the Assured is, irrespective ofthis insurance, covered or p rotected against any lossor claim which would otherwise have been paid bythe Assurer, under this policy, there shall be nocontribution by the Assurer on the basis of do ubleinsurance or otherwise.

The party providing the insurance provided insurancenaming the proposed additional insured as an additionalinsured and therefo re did not vio late the cove nant toname the plaintiff as an ad ditional insured, but theadditional insured provision contained as EscapeClause. Timely review and objection may need tooccur to d efeat this waiver a rgument!

(3) Express Exclusion of AdditionalInsured’s Negligence. The holding in BP Chem icals,Inc. v. First State Ins. Co., 226 F.3d 420 (6 th Cir. 2000)in which the 6th Circuit applied Texas law emphasizeswhy it is important to obtain and read a copy of theAdditional Insured Endorsement and not to rely eitherupon a statement in the Certificate of Insurance that “‘x’is an additional insured for liabilities arising out of thework ‘y’” or upon a general statement in the contractthat “x” is to be listed as an additional insured on “y’s”commercial general liabili ty policy. The court in thiscase held that the additional insured endorsement meantexactly what it said “the negligence of the additionalinsured is excluded” and that the certificate of insurancestating that “x” was an additional insured and thecontractual provision in the contract between “x” and“y” that be listed as an additional insured did not clearlyprovide for covera ge of the add itional insured’snegligence. The follo wing are the provisions in thecontract, the certificate of insurance and theendorsem ent.

Provisions.

Contract. Contractor [Bath] shall have acomprehensive general liability po licy in theamount of at least $1,000,000 with an AdditionalInsured Endorsement naming O wner [BP Chemica l]as an additional insured.

Contractor hereby indemnifies and agree s to defendand save Own er and its affiliated C orporatio ns, theiragents, servants and employees harmless from anyand all losses, expenses, demands a nd claims thatmay be claimed or for which su it is brought for anyactual or alleged b odily injury or death occ urring toany person whatsoever, in any manner arising out ofor in connection with, or resulting in w hole or inpart out of the acts of omissions of Contractor, orany subcontractors employed by or under the directcontrol of the Contractor, and their respectiveofficers, agents and employees in the performanceof the Work in accordance with this Agreement, andagrees to pay all damages, costs and expenses,including attorneys’ fees, arising in connectiontherewith. Such obligation shall not apply when theliability arises solely from the negligence of Owner,its employees or agents. Such obligation shall alsobe limited, in a case involving or alleging jointnegligence between Contractor and Owner, itsemployees or agents, to Contractor’s actual


percentage of comparative negligence, if any, foundby the trier of fact in a cause of action broughtagainst Contractor arising out of the performance ofthe Work or alleged negligence in accordance withthis Agreement. This indemnity obligation ofContractor shall not be app licable to the extent thatOwner is provided coverage as an additionalinsured under Contractor’s insurance policies asspecified in Exhibit A to this Contract, or to theextent that the right of indemnity is prohibited orlimited by the laws of the state in which the Work islocated.

Certificate of Insurance. Owner is anadditional insured there under as re spectsliability arising out of or from the Workperformed by Contractor for Owner.

Endorsement. It is agreed that additional insuredsare covered under this policy as required by writtencontract, but only with respect to liabilities arisingout of their operations performed by or for thenamed insured, but excluding any negligent actscommitted by such additional insureds.

(4) Listing as Additional InsuredWithout Indemnity Agreement. There are importantconsiderations to be remembered when evaluatingrelying solely upon listing a party as an additionalinsured without a bac kup contra ctual indem nityagreeme nt. The policy may be canceled with or withoutthe additional insured’s knowledge; the insurer maybecome insolvent; and policy limits and exclusionsfrom coverage may limit the protection.

(5) Cause of Action Against InsurancePurchaser for Failure to List Other Party asAdditional Insured. A party that brea ches itscontractual obligation to list the other party as anadditional insured is liable fo r all damages suffered asa result by the non-listed p arty, including atto rney’s feesincurred by the non-listed party in defend ing a claimthat would hav e fallen within the protection of theadditional insured endorsement. The court in CoastalTransport Co. v. Cro wn Cen tral Petroleum Corp., 20S.W.3d. 119 (Tex.App.-Houston [14th Dist.] 2000, writdenied) found that Coastal failed to list Crown as anadditional insured on C oastal’s Trucker’s Policy andwas liable to Crown for the $4,816,549.28 judgmentobtained by an employee of Coastal that was injured onCrown’s premises. Crown was sued by Coastal’semploye e, who was injured when the truck he wasrefueling on Crow n’s premises c aught fire due toCrown’s negligent maintenance of Crown’s gasrefueling equipment. The insurance provision did notrefer to an additional insured designation but providedfor Coastal to obtain insurance protecting Crown.

Provision:

Carrier agrees to purchase at C arrier’s cost ...Comprehensive General Liability Insuranceincluding care, custody and control coverage andliability assumed w ith $1,000 ,000 limit peroccurrence for bodily injury and property damagecombined.

(6) Additional Insured’s "OtherInsurance”. The use of additional insured status as a

risk transfer device is aimed at procuring insuranceprotectio n under someone else’s policy rather thanhaving to rely upon on one’s own policy. Additionalinsured Indemnified Person’s m ust verify that any otherinsurance coverage to which they hav e access will notinterfere with payment by the Ind emnifying Pe rson’spolicy on a primary and non-contrib utory basis. T his isthe interplay of the Indemnifying Person’s CGL policywith the additio nal insured’s o wn CGL policy.

Assuming both the Ind emnifying Person’s CGLpolicy and the additional insured/Indemnified Person’spolicies are standard from policie s, then both willdeclare themselves to be primary insurance unlesssome modification is effected to eliminate this conflictby amendm ent to the Indemnified Person’s p olicy. Hardwa re Dealers Mutual Fire Ins. Co. v. Farmers Ins.Exchange, 444 S.W.2d 583 (Tex. 1969). Note thatendorsing the Indemnifying Person’s policy to providethat it is primary does not solve the proble m. In fact,most CGL policies already provide that they areprimary in virtually all cases in which the additionalinsured would bring a claim on that CGL policy. Butthe policy also provides for proration when otherinsurance is available to the additional insured.Hardwa re Dealers Mutual Fire Ins. Co. v. Farm ers Ins.Excha nge, 444 S.W.2d 5 83 (Tex. 1969).

The following is the standard "other insurance”provisions in the ISO standard CGL policy form:

3. Other Insurance.

If other valid and c ollectible insura nce isavailable to the insured for a loss we coverunder Coverages A or B of this CoveragePart, our obligations are limited as follows:

a. Primary Insurance

This insurance is primary except when b.below applies. If this insurance isprimary, our obligations are not affectedunless any of the other insurance is alsoprimary. Then we will share with all thatother insurance by the method describedin c. below.

b. Excess Insurance

This insurance is excess over any of theother insurance, whether primary,excess, contingent or on any other basis:

(1) That is Fire, Extended Coverage,Builders Risk, Installation Risk orsimilar cover age for "yo ur work;”

(2) That is Fire insurance for premisesrented to you; or

(3) If the loss arises out of themaintenance or use of aircraft,"autos” or watercraft to the extentnot subject to E xclusion g. ofCoverage A (Section 1)

When this insurance is excess, we willhave no duty under Co verages A or B to


defend any claim or "suit” that any otherinsurer has a duty to defend. If no otherinsurer defends, we will undertake to doso, but we will be entitled to theinsured’s rights against all thos e otherinsurers.

When this insurance is excess over otherinsurance, we will pay only our share ofthe amount of the loss, if any, thatexceeds th e sum of:

(1) The total amoun t that all such otherinsurance would pa y for the loss inthe absence of this insurance; and

(2) The total of all deductible andself-insured amounts under all thatother insurance.

We will share the remaining loss, if any,with any other insurance that is notdescribed in this Excess Insuranceprov is ion and was not boughtspecifically to apply in excess of theLimits of Insurance shown in theDeclaratio ns of this Cove rage Part.

c. Method of Sharing

If all the other insura nce perm itscontribution by equal shares, we willfollow this method also. Unde r thisapproach each insurer contributesequal amounts until it has paid itsapplicab le limit of insurance or noneof the loss remains, whichever comesfirst.

If any of the other insurance does notpermit contribution by equal shares,we will contribute by limits. Underthis method, e ach insurer’s share isbased on the ratio o f its applicablelimit of insurance to the totalapplicab le limits of insurance of alinsurers.

The additional insured/Indemnified Perso n shouldamend its own policy to provide that it is excesscoverage to the insurance available to it as anadditional insured und er the Indem nifying Perso n’sCGL policy. One commentator has suggested that theway of address ing this "pitfall” is to request a "PrimaryLiability Endorsement” to the prima ry insuring party’spolicy. See Comiske y, Advanced Insurance Issues forReal Estate Attorneys, ADVANCED REAL ESTATELAW COURSE v-4 (State Bar of Texas 1996) whichoffers the following advice:

The purpose is to eliminate the effects of the "OtherInsurance” clause, preventing one insured’s liabilityinsurance from participating in sharin g a loss witha liability insurance of another insured. Beforewarned, however, that there is no standard form

of Primary Lia bility wording, and many insurancewill not offer primary liability coverage. Whenconfronted with a insurance company that isunwilling to provide this endorse ment, a reaso nable

compromise is to request tha t Primary Lia bility beprovided at least for the scope of the AdditionalInsured endorsement. Then be certain that youhave requested the broad est possible AdditionalInsured wording. Outside of Texas, it is a fairlycommon practice for th e Addition al Insured toendorse that organization’s policy to be excessover the Primary Liability insurance. That is avaluable safeguard. The Texas Department ofInsurance, however, does not recog nize thisendorsemen t, and many insurance companies aretherefore no t familiar with this op portunity.

See Appendices 17-18 for “Other Insurance”Clauses and ISO Endorsements to Indemnitee’sCGL P olicy.

3. Persons Listed. A disadvantage of being an"additional insured" as oppose d to a "named insured" isthat additional insured status does not provide coveragefor the officers, directors, and partners of the additionalinsured, unless specifically listed individually asadditional insureds. An additional insured provisioncovering "employees” of the additional insured does notcover a "volunteer” assisting the additional insured.Sturgill v. Kubosh Ins. Co. of America, __ S.W.2d __(Tex. App.- -Houston [1st Dist.] Nov. 14, 1996) 1996WL 665552.

4. Oilfield Anti-Indemnity Statute NotProhib itive of Additional Insureds Covenant. InGetty , the Texas Supreme Court additionally held thatthe Texas Oilfield Anti-Indemnity statute did notprohibit an insurance covenant requiring a p erson (inthis case the "Indemnified Person") from being listed asan additional insured on the Indemn ifyin g Pe rson'sliability insurance policies. The insurers argued that thepractical effect of contracting for an additional insuredprovision in the contrac t between G etty and NLIndustries wa s to cause Ge tty to be indem nified for itssole negligence. The supreme court responded

While we do no t deny the effect o f insurancecoverage, we decline to expand the language of ourAnti-Indem nity statute to encompass insuranceprocurement provisions th at are not actu allyindemnity agreements. Rather, we construe thelanguage of the statute strictly to permit parties tocontract freely with regard to agreements notcovered by the statutory language. Thus theadditional insured provision of HB-5357 is notcovered by the Anti-Indemnity statute.

Id. 805.

The court referenced the following casesinterpreting other types of anti-indemnity statuteswherein addi t ional insured provisio ns weredifferentiated from statutorily prohibited indemnityagreements. See Voisin v. O.D.E.C.O. Drilling Co.,744 F.2 d 1174 , 1177 (5 th Cir. 198 4), cert. den 'd, 470U.S. 1053 (1985)--Longshoremen's and HarborWorkers' Compensation Act § 5(b), 33 U.S.C.A. § 5(b),33 U.S.C.A . § 905(b ) (1976 ); Kinney v. G.W. Lisk Co.,556 N.E.2d 1090 (1990)--N.Y. Gen. Oblig. Law § 5-322.1 (McK inney 198 9) construc tion and ind emnity;Bosio v. Branigar Organization, Inc., 506 N.E.2d 996(1987)--ILL. REV. CIV. STAT. ch. 29, par.61 (1985)construction; Cone B ros. Contracting Co. v.


Ashland-Warren, Inc. 458 So. 2d 851, 855-56 (Fla.Dist. Ct. App. 1984)--FLA. STAT. ch. 725.06 (1977)construction anti-indemnity. The LouisianaAnti-Indem nity statute expressly prohibits additionalinsured clauses that shift the burden of insurance. LA.REV. STA T. ANN. § 9:278 0(G)(West 1986 ).

C. Waiver of Recovery: Waiver of Subrogation.

1. Definitions.

a. "Subrogation". "Subrogation" is anequitable theory that allows a party w ho has paiddamages or other compensation to another person(damaged party) as a result of a third person's act oromission to "step into th e shoes" o f the damag ed partywho has been so paid and to p ursu e the dam age d pa rty'sremedies against the party who committed the act oromission. "Subrogation" therefore simply means thesubstitution of one creditor for another. One commonexample of a s ubr oga tion is an insu rance c omp any'ssubrogation suit against a third party who has caused orcontributed to bodily inju ries or prop erty damag es tothe insured, the insured's employees or o ther persons.

In a comme rcial leasehold, liability for p ropertydamages due to fire or other casualty may becontractual or may result from an independent tortbecause a party neglige ntly causes dam ages to the otherpar ty's property. The victim of the damage becomes the"creditor" and the pe rpetrator b ecomes th e "debto r."Most landlords and tenants carry property insuranceand liability insurance. The property insurance is anindemnity contract against accidental lo ss of prope rtywhile the liability insurance is an indemnity contractagainst liability to third parties for negligent acts.

The property insurance carrier of the party whosuffered the loss has an equitable right of subrogation totake over the right of the insured as a cr editor inrelation to the debtor who negligently caused the loss.The court in Finger v. Southern Refrigeration Services,Inc., 881 S.W.2d 890 (Tex.Ap p.--Housto n [1st Dist.]1994, writ denied) rejected the argume nt that a prop ertyinsurer did not hav e a right to bring suit in the name ofthe named insured, the landlord, to recover insubrogation against a negligent contractor hired by thetenant. The leased premises burned after an employeeof the tenant, a Monterrey H ouse restaur ant, tried torestart a heater that had been left in a partially-repairedcondition by the tenant's contractor. The tenant hadpaid for a fire insurance policy which named thelandlord as the insured. The contractor argued that thelandlord had no damages to which the insurer could besubrogated since the insurer had paid to fix thelandlord's building!

When a subrogation claim is made against the liableparty, they will undoubtedly tender the defense of theclaim to their liabil ity insurer who h as contracte d toindemnify them from claims of liability. However, thelease normally provides that the parties release eachother from liability for damage of the type covered bythe damaged party's insurance and each party coven antsto cause their respective p roperty insura nce com pany towaive their subrog ation rights with the result that theparties will be compensated by their casualty insurerswithout resulting in any subrogation claims by theinsurers again st the negligent p arty.

b. "Waiver of Subrogation". "Waiver ofSubrogation" is the waiver, in advance , of the equitab leright of subrogation of the person paying the damagesor other compensa tion to recover against the third partyfor the monies so paid.

c. "Waiver of Recovery". "Waiver ofRecovery" is the waiver, in advance, by one party ofsuch party's right to recover against the other party fordamage s caused b y the other pa rty.

2. Claims for Damage o r Loss of Property .

a. Landlord and Te nant R elationsh ip. Inthe landlord- tenant relationship, the tenant is liable tothe landlord if the te nant negligently destroys thepremises (e.g., negligently cause d fire) absen t aprovision in the lease to the c ontrary. Nagorny v. Gray,261 S.W.2d 741 (Tex. Civ. App.--Ga lveston 19 53, nowrit).

(1) Covenant Requiring Party toInsure its Own Property Not Equivalent to Waiverof Recovery or Waiver or Subrogation. Uponpayment by the landlord's insurer for the insuredproperty loss, the landlord's insurer is subrogated to theland lord 's claim and can sue the tenant to recoup theinsurance proceeds. In Wichita City Lines, Inc. v.Puckett , 295 S.W .2d 894 (Tex. 19 56), the TexasSupreme Court held that where the lease merelyprovided that the landlord agreed to carry fire andextended coverage insurance on the building, part ofwhich was occupied by the landlord, there was no dutyon the landlord to procu re insura nce for th e benefitof the tenant, and the insurers were not precluded fromobtaining a subrogated cause of action from payment ofdamages on account of fi re caused b y ten ant'snegligence. The court rejected the tenant's contentionthat the intent of the parties for including a covenant ofthe landlord to insure its own building (presumably thecost was built into the rent) was to exculpate the tenantfor its own negligence.

(2) Covenant Requiring Other Party toPay for Insurance Equivalent to Waiver of Recoveryby Insured Against Insurance Purchaser. In PublixTheatres Corp. v. P owell , 71 S.W .2d 237 (Tex.Comm.App. 1934), the lessee agreed in the le ase tocarry the fire insurance on the leased building, a t theless ee's expense, naming the landlord as the insured.The insurer paid , but the landlord still sued the tenantfor the loss. The supreme court declared that to permitthe lessor to keep the insurance money and also tocollect from the lessee wo uld be a do uble reco very.

Query: What about insurer's subrogationclaim against insurance purchaser?

In Interstate F ire Ins. Co. v. First Tape, Inc., 817S.W.2d 142 (T ex. App.--H ouston [1s t Dist.] 1991, writdenied), the court of ap peals refused to limit the waiverof subrogation contained in the lease to claims againstthe current tenant so as to permit the otherwisesubrogated insurer to pursue the former tenant afterassignment. First Tape, therefore, was able to retain theprotection of the waiver of subrogation clause evenafter the lease was assigned.


(3) Ration ale for Waiv ers o fSubrogation. Since the landlo rd's primary inter est isinsuring the landlord's improvements, and the tena nt'sprimary interest is in insuring the tenant's property, whymake the other pa rty liable for a risk tha t is alreadyinsured? Because both parties can be protected byinsurance, neither is particularly interested in imposingliability on the other. The issue is how to allocate therisk of loss--or, more precisely, which party should paythe property insurance prem iums.

(a) Avoids Double Coverage. Torequire each party to carry coverage for negligentlycausing damage to another party’s property forces thelandlord and the tenant to in sure bot h the land lord 's andthe tenant's prop erty, which results in e ach insuring itsown and the o ther par ty's property. To avoid this needfor double c overage e ach party can agree to look to itsown insurance carrier for property loss caused by theacts or omissions of the other pa rty and waive rights ofrecovery and subrogation against each other. If bothlandlord and tenant are to be liable for the risk ofnegligently caused loss to the property of the other, thenthe landlord and every tenant in a multi-tenant projectmust not only be sure to have a policy for its ownproperty but must be sure that their liability insuranceis sufficient to cover the replacement cost of the entirebuilding and all of tenants’ property therein. A moresensible approach is to have the lan dlord take out acasualty policy and have the premium costs paid by thetenants in the building under an ope rating costpass-through provision in the lease.

(b) Allocates Risk to PropertyInsurer. A waiver of subrogation clause assures thatthe insurance carrier for the property owner pays for theproperty loss as opposed to the other party's (thenegligent landlord's or tenant's, as the case may be)liability insurance ca rrier. See Hagan, Using Wa iversand Indemnities in Co mmercial Le ases, THEPRACTICAL REAL ESTATE LAWY ER 11 (1993),also repeated at ALI- ABA'S PRACTIC E CHECKLISTMANUAL FOR DRAFT ING LEASES: Checklists,Forms, and Drafting Advice from The Practical Lawyerand The Practical Real Estate Lawyer 149 (1994), forthe rationale that the approp riate allocation of risk is torequire each party to insure its own property and waiverecovery, and waive subroga tion against the other fordamages to each other's property due to the negligenceof either party.

(c) Usually Inadeq uate Lia bilityInsurance to Cov er Risk. Why is this the bestapproach? This ques tion incorrec tly assumes that thereis adequate liability insurance to cover the loss. Manytimes there will be no liability insurance because theparty self-insures. The more likely situation is that theliability insurance p olicy of the neglig ent party willhave limits far short of the loss involved (for example,where a negligent employee of the tenant leaves thecoffee pot on at night which results in a large officebuilding burning down). In a large multi-tenantbuilding, the loss could easily exceed the liab ilityinsurance coverage of a small tenant. Ev en if there issufficient property loss coverag e under the lia bilitypolicy, there usually is a larg e deduc tible anddissipation of the time and energy in a contest betweenthe insurance companies and the parties over the issueof who negligently caused the fire.

(d) Risk Already Factor ed in toProperty Insurance Premium. Also, moreimportantly, is the fact that claims a gainst prop ertyinsurance are much less likely to result in higherpremiums or loss of co verage than claims against theliability insurance. The property insurance carrier hasmore than likely alread y calculated it s premium basedon the assumption that it will not be able to recoup itscosts via subr ogation ag ainst a negligent te nant.

(4) Waivers. Waiver of recovery is thelandlord or tenant waiving its rights or recovery for theacts of the other. Waiver of subrogation is the landlordor tenant or both waiving the right of its insurer to besubrogated to th e lan dlo rd's or te nan t's claim. W hile awaiver of recovery also is a waiver of subrogation(because the insurer has n o rights left to which to besubrogated), a waiver of subrogation alone is no t awaiver of recovery.

(a) Valid Despite N egligence ofReleased Party . In Texas, waiver of recovery andwaiver of subrogation clauses are valid. SeeInternational Co. v. Medical-Professional Building ofCorpus Christi , 405 S.W.2d 867 (Tex. Civ.App.--Corpus Christi 1966, writ ref'd n.r.e.)--lesseewaived in advance any claims for damages caused bylessor's negligent failure to mainta in boilers in portionof premises under landlord's control "to extent thatlessee was compensated by insurance for suchdamage s;" and Williams v. A dvanc ed Tech nology Ctr.,Inc., 537 S.W.2d 531 (T ex. App.--Ea stland 197 6, writref’d n.r.e.)--subrogatio n suit brought against lessee byless or's fire insurance c arrier was ba rred by lesso r'swaiver of subrogation clause contained in lease,notwithstanding lessee's breach of the lease bypermitting the leased premises to be used for an extrahazardous operation.

(b) Scope of Release d Parties.The care with which waiver of recovery and waiver ofsubrogation clauses should be drafted is illustrated bya recent Lou isiana case. RTC v. Gaspe r-Virgillio a/k/a"Sonny" Virgillio, 27 F.3d 178 (5th Cir. 1994). ClubDaiquiris burned to the ground as a result of a thenegligent use by Sonny Virgillio, an employee of thetenant, of comb ustible mate rial "to facilitate theremoval of the fixtures." Subsequent to the executionof the lease, the tenant assigned the lease to a jointventure of which it was a joint venturer. ISLIC, theinsurer of the landlord, sued in subrogation, to collectfrom Susson, Inc ., the tenant named in the lease, for thedamages paid by the insurer to the landlord. The leasecontained the following waiver provision:

Provision:

Lessor will keep the leased premises insured againstloss or damage by fire, with the usual commercialextended coverage endorsements, and in the eventof loss, neither lessor nor its insurer shall have anyrecourse against lessee, it being understood andagreed that the lessor assumes all risk of damage toits own property arising from any insured risk.

The Fifth Circuit, applying Louisiana law, held thatunder Louisiana law, the assumption of all risk by thelandlord and waiver of recourse against the tenant


relieved the tenant of liab ility for its own negligence;therefore, the joint venture was not liable for thenegligent acts of its employee. But the court found thatthe waiver pro vision did no t specifically inclu de awaiver of recover y against "em ployees, a gents,servants, or officers" a nd therefore did not preventrecovery against the employees or officers of theoriginally-named tenant, or of the successor tenant. Theexpress negligence test is not the law in Lou isiana. Id.n.1, p. 180. In order for this provision to have the sameresult in Texas, it wo uld have to exp ressly provide thatthe lessor waiv ed (release d) all claims ag ainst the ...

Provision:

tenant, its successors and assigns, and theemployees, agents, servants, and officers, of thetenant and its successors and assigns, for damag e tothe landlord's property arising out of the negligenceof the tenant, its successors and assigns, and theemployees, agents, servants, and officers of tenan t,and its successors and assigns.

See Dresser Industries, Inc. v. Page Petroleum, Inc.,853 S.W.2d 505 (T ex. 1993) discussed atArticle IV --Exculpation Provisions and Releases

(c) Waiver as to Specific Risk orInsurance Proceeds? Should the waiver extend tospecified risks or only to th e extent of the proceedsactually recovered from the insurer? If the waiver isonly as to the insurance proceeds, then the parties areexposed for the deductible or losses in excess of theother party's insurance coverage.

(d) Express Negligence. Thewaiver should expressly cover loss due to thenegligence of the other pa rty. Although no Te xas casehas yet addressed whether the waiver of subrogationclause must meet the fair notice requirements, suchclauses are exculpation clauses identical in effect asthose held unenforceable for failing to m eet the fairnotice requireme nts, including the e xpress negli gencetest, in Dresser Industries, Inc. v. Page Petroleum, Inc.853 S.W.2d 505 (Tex. 1993). If so, then most waiverof subrogation clauses in standard use are notenforceable as written!

(e) Scope of Risk Covered. Careshould be taken in drafting the scope of the waiver ofsubrogation. A waiver of subrogation as to "thepremises" does not include the tenant's furniture,equipment, machinery, goods or supplies which thetenant might bring o n to the prem ises. SeeInternational Medical Sales, Inc. v. Prudential Ins. Co.of Americ a, 690 S.W.2d 84 (Tex. Civ. App.--Dallas1985, no writ ).

(f) Verification of Effect ofWaivers on Insurance Coverage and Cost ofInsurance Coverage. Before the parties agree towaivers of recovery or subrogatio n, they should verifythat their respective insurance policies will not bevoided due to the waiver. Also, the parties sho ulddetermine, in advance, if the waivers will impact thecost of coverage. Confirmation of endorsementreflecting contractual indemnity, waiver of subrogationand additional ins ured/loss p ayee should be verified asa condition of extending the wa ivers.

(g) Coordination with OtherContractual Provisions. The waiver of subrogationand other provisions of the contract may be inconsistentleaving ambiguities as to the parties’ intent. A leasemay require the tenant at the terminatio n of the lease toreturn the leased premises in its original conditionexcept for "reasonable wear and tear and damage bycasualty not occurring through the tenant’s negligence”.Such a clause is potentially in conflict with a waiver ofsubrogation clause. Similarly, a provision w hereby atenant indemnifies the landlord for loss arising out ofthe tenant’s negligence is in conflict with the waiver ofsubrogation provision. The indemnity provision in suchcase needs to exclude the loss covered by the waiver ofsubrogation provision.

(h) I m pl i e d W a i vers o fSubrogation. Some courts have implied a waiver ofsubrogation when the contract did not contain anexpress waiver of subrogation. In Lumber M utual Ins.Co. v. Zoltek Corp., 647 N.E.2d 395 (Mass. 1995) theMassachusetts supreme court held that the landlordintended a tenant to be a co-insured and the beneficiaryof an implied waiver of subrogation against the tenantfor its negligently caused damage to the landlord’sproperty, where the leased contained a provisionobligating the tenant to maintain the premises in goodcondition "damage by fire or other casualty excepted”,the tenant paid a portion of the landlord’s insurancepremiums through an operating expense pass throughclause, and the landlord had expressly provided that thetenant was no t required to carry prop erty insurance onthe building.

b. Owner and C ontrac tor Rela tionship .Waivers of subroga tion have be en upheld in numerousconstruction contract cas es. See Snodgra ss, Waiver ofSubrogation and Allocation of Risk in ConstructionContracts, 62 DE F. COU NS. J. 95 (Jan. 199 5). SeeAppen dix 1, AIA Documen t A201-GeneralConditions of the Contract for Co nstruction,Paragraph 11.3.7 (1997 E d.). Waivers of subrogationin the AIA system are designed to shift to the ownerand its property insurance carrier the risk of loss to theproject during construction. Such provisions are avalid risk allocation for the following reasons: (1) Theyavoid disruption and disputes between the partiesinvolved in the construction project; (2) They allow theparties to identify and allocate the risk s associated withthe project; and (3) They allow one party to con tract toprovide the property insurance for all risks associatedwith the project for all parties. Under the AIAdocuments, the owner is responsible for obtaining thetype and amounts of property coverage.

(1) Parties Released. The form ofwaiver of subrogation contained in the AIA d ocumen tsis a "waiver of recovery” between the parties (e.g., theowner and the contractor in Paragraph 11.3.7 to theAIA A201 General Conditions of the Contract forConstruction. See Appendix 3 ), but also is a waiverof recovery b y the parties against "any o f theirsubcontractors, sub-subcontractors, agents andemployees” and requires that these third partiessimilarly provide a waiver of recovery against all suchparties to the p roject.

Provision: Par. 11.3.7 AIA Document A201


The Owner o r Contracto r, as appro priate, shallrequire of the Architect, Architect’s consultants,separate contractor s described in Article 6, if any,and the subcontra ctors, sub- sub contracto rs, agentsand employees of any o f them, by app ropriateagreements, written where legally required forvalidity, similar waivers each in favor of otherparties enumerated herein.

However, courts have permitted the insurer to subrogateand sue such other third parties, such as the architect,despite the AIA broad listing of released parties, wherethe owner required the architect to maintain errors andomissions insurance. St. Paul Fire & Marine Ins. Co. v.Freem an-Wh ite Assoc.s, In c., 366 N .E.2d 480 (N.C.1988).

(2) Scope of Liabilities Released. Thewaiver of subrogation contained in the AIA A201waives recovery between the parties to the extentcovered by prope rty insurance applicable to the Work.

Provision:

for damage s caused b y fire or other perils to theextent covered by property insurance obtainedpursuant to Paragraph 11.3 or other prop ertyinsurance applicable to the Work....

Since releases are construed by courts narrowly, theAIA waiver of subrogation language has beeninterpreted narrowly. In SSDW Co. v. BriskWaterproofing Co., 556 N .E.2d 10 97 (N.Y . 1990), aNew York court held that the waiver clause found in theAIA Constructio n Projec ts of a Limited Scope formapplied only to damages occurring to areas within thelimits of the "work” and not to the parts of the buildingoutside the "work” . Also see Public Employees MutualIns. Co. v. Sellen Constr. C o., 740 P.2d 913 (Wash .App. 1987).

The time period covered by the "waiver” has beenthe subject of litigation. In Autom obile Ins. C o. v.United H.R.B., 876 S.W.2d 791 (Mo. App. 1994) aninsurer of the owner brought a subrogation actionagainst a con tractor for pr operty dam aged cau sed by afire that occurre d five months after final payment hadbeen made to the contractor and after the owner hadexclusive control of the premises. The court found anambiguity between the AIA provisions. The contractortook the position tha t it had an insurable interest in theproperty as long as the owner maintained the insurancepolicy in effect at the time the work was being done.The court, however, held that the waiver of subrogationprovision no longer applied after final payment becausethe contractor no longer had an insurable interest in "thework”.

(3) Clarific ations as to OtherContractual Requirements . The AIA Waiver ofSubrogation contains the following provision clarifyingthat certain other risk allocation p rovisions do not voidthe allocation to the insurer of property damage risk.

Provision:

A waiver of subrogation shall be effective as to aperson or entity even though that person o r entitywould otherwise have a duty of indemnification,

contractual or otherwise, did not pay the insurancepremium directly or indirectly, and whether or notthe person or entity had an insurable interest in theproperty damaged.

(4) Fair Notice Requirement. The AIAWaiver of Subrogation pro vision is drafted as a waiverof recovery. However, this provision does not meet thefair notice requirements for releases articulated inDresser Industries, In c. v. Page Petroleu m, Inc., 853S.W.2d 505 (T ex. 1993 ) in order to r elease liabilitiesarising out of the Released Party’s negligence. Theprovision is neither consp icuous nor does it expr esslyrefer to the negligence of the party being released.

Forms of waiver of recovery and subrogation in alease are contained in Appendix 7 ; and for constructioncontracts are contained in Appendix 15), AIADocument A201-G eneral Co nditions of the Contract forConstruction for attachment to AIA DocumentA101-Standard Form of Agreement Between Ownerand Contractor, Paragraph 11.3.7.

3. Bodily Injury. In relationship s between tw oparties with employees subject to workers'compensation insurance, the parties should considerwaiving, in advance, the workers' compensationinsurance carrier's right by way of sub rogation torecoup amounts paid as compensation to the employeefor the emplo yee's injuries from the o ther party for itsliability to the injured employee [e.g., landlordrequiring the tenant/employer to waive th e ten ant'sclaim (i.e., insurer's claim)] for contribution orreimbursement for amounts paid to compensate theinjured employee arising in whole or in part out of thenegligent act or omission of such party (the landlord).Waiver of subrogation as to workers' compensationcar rier 's claims has been upheld as valid in Texa s.National Union Fire Ins. Co . of Pittsburgh, Pa. v.Pennzo il Co., 866 S.W.2d 248 (Tex. App.--CorpusChristi 199 3, no writ ).

The court in Hartford Accident & Indemnity Co. v.Buckland, 882 S.W.2d 440 (Tex. App.--Dallas 1994,writ denied) held that the waiver of subrogationcontained in the endorsement to the workers'compensation policy issued by Hartford Accident toFish Engineerin g and Co nstruction, Inc. waived bo thHartford Accident's statutorily-granted right to bereimbursed for payments previously paid to the injuredemployee and its right to a cr edit for future b enefitpayments it still had to p ay ag ains t the emp loye e'srecovery a gainst the neglige nt third party.

A typical form o f waiver of sub rogation in a lease isset forth in Appendix 7 .

4. Insurance Policy Endorseme nts.

a. Liability Policies. The standard formCGL policy, the ISO commercial general liability formCG 00 01, is silent as to pre-loss waivers, althou gh itexpressly prohibits post-loss waivers. ISO haspromulgated the following endorsemen t forms for usewith its standard types of liability policies:


(1) CGL. CG 24 04 10 93 "Waiver ofTransfer of Rights of Recovery Ag ainst Others toUs” endorsem ent. Appendix 23.

The TRANSFER OF RIGHTS OF RECOVERYAGAINST OTHERS TO US Condition (Section IV- COMMER CIAL GENERAL LIABILITYCONDITIONS) is amended by the additio n of thefollowing:

We waive any right of recovery we may haveagainst the person or organization shown in theSchedule above because of payments we make forinjury or damage arising out of your ongoingoperations or "your work” done under a contractwith that person or organiz ation and inc luded in the"products-completed operations ha zard.” T hiswaiver applies only to the person or organizationshown in the Schedule above.

(2) O w n e r s a n d C o n t r a c t o rsProtec tive. CG 29 88 10 93 endorsem ent.Appendix 24.

The TRANSFER OF RIGHTS OF RECOVERYAGAINST O T H E R S T O U S Conditio n(Section IV) is amended by the addition of thefollowing:

We waive any rights of recovery we may haveagainst the person or organization shown in theSchedule above because of payments we make for"bodily injury” or "property damage” arising out ofyour ongoing operation s. This waiver app lies onlyto the person or organization shown in the S cheduleabove.

(3) Commercial Auto . CA 00 01 .

5. TRANSFER OF RIGHTS OF RECOVERYAGAINST OTHER TO US

If any person or organiz ation to or for whom wemake payment under this Coverage Form hasrights to recover damages from another, thoserights are transferred to us. That personorganization must do everything nec essary tosecure our rights and must do nothing after"accident” or "loss” to impair them.

b. Property Policies. Many commercialproperty policies and inland marine policies includesubrogation clauses that imply permission to grantpre-loss waiver. How ever, some forms may sp ecificallydeny the insured the right to waive subrogation. TheISO form expressly recognizes the right of the insuredto waive subrogation. The following is the subrogationclause contained in the ISO Commercial PropertyConditions Form CP 00 90:

TRANSFER OF RIGHTS OF RECOVERYAGAINST OTHERS TO US

If any person or organization to or from whomwe make paym ents under this Coverage Part hasrights to recover damages from another, thoserights are transferred to us to the extent of ourpayment. That person or organization must do

everything necessary to secure our rights againstanother party in writing:

1. Prior to a loss to your Covered Proper tyor Covered Income.

2. After a loss to your Covered Property orCovered Income only if, at time of loss,that party is one of the following:

a. Someone insured by thisinsurance;

b. A business firm:

(1) Owned or controlled by you;or

(2) That owns or controls you; or

c. Your ten ant.

This will not restrict your insurance.

Builders risk insurance is written on a variety of forms.Therefore, it is important to determine whether thepolicy prohibits waiver of subrogation. The typicalmutual waiver of subrogation in the owner-contractorconstruction contract form may inv alidate the builder’srisk coverage.

The following is the ISO Builders Risk CoverageForm CP 00 20 10 91 provision:

4. Waiver of Recovery Against Others

You may not waive your rights to recoverdamages from an architect, engineer or buildingtrades contractor or subcontractor with respectto the described premises except as agreed to inwriting by us. This provision supersedes anyprovision to the contrar y in the TRANSFER OFR I G H T S OF RECOVERY AG AINSTOTHERS TO US C ommercial PropertyConditions.

D. Certificates of Insurance. As a general rule,certificates of insurance do not govern the insurancepolicy’s coverage. A certificate of insurance can bemisleading in several ways and provide a false sense ofsecurity that the policy matches the certificate.Hamilton, Problems Arising From Additional InsuredsEndorsements-Dealing With An Additional InsuredCertificate Is Not As Simple As It May Seem, For ThereAre Many Pitfalls to Be Faced, 62 DEF. COUNS. J.384 (July 1995).

Being designated as a Certificate Holder does not makethe certificate holder an insured, additional insured, ora third party beneficiary covered by the policiesinsurance. Gracid a v. Tagle , 946 S.W.2d 504(Tex.A pp.-- Corp us Christi 199 7, no writ ).

1. ACORD. Appendixes 8 and 9 contain acopy of the ACORD form of Certificate of Insurance25-S. The ACOR D 25-S certificate contains thefollowing qualifications:

Provision: Certificate does not create coverage.


This certificate does not amend, extend or altercoverage afforded by the policies below.

Provision: Certificate does not state prior claims onlimits.

Preservation of Policy ProvisionsThis is to certify that the policies of insurance listedbelow have been issued to the insured named abovefor the policy pe riod indica ted. Notwithstandingany requirement, term or condition of any contractor other document with respect to w hich thiscertificate may be issued or may pertain, theinsurance afforded by the policies de scribed he reinis subject to all of the terms, exclusions andconditions of such policies. Limits as shown mayhave been reduc ed by paid claims.

Provision: No duty to notify certificate holder.

CancellationShould any of the above describ ed policies becancelled before the e xpiration d ate thereof, theissuing company will endeavor to mail ___ day’swritten notice to the certificate ho lder name d to theleft but failure to mail such notice shall impose noobligation of liability of any kind upon thecompany, its agents or represe ntatives.

The certificate holder should require the followingmodifications to the ACORD 25-S:

(1) The certificate of insurance should be amendedto require prior notification of cancellation or materialchange to the policy’s coverage.

(2) The certifica te of insurance should be amendedto state the extent of prior claims against the insuredlimits or to prov ide for a sep arate limit app licable to theadditiona l insured’s pro ject.

(3) The certificate of insurance should be amendedto acknowledge that the policy p remium ha s been pa idfor the indicated insurance, including for theendorsement to add the a dditional insu red to the policy.

(4) The certificate of insurance should be amendedto provide that the additional insured is insured for itsconcurrent and sole negligence. The contract with theIndemnifying Party should also contain these samerepresentations and co venants.

(5) The certificate of insurance sho uld be amendedto provid e that in the event of conflict between thecertificate and the policy the certificate controls andamends the policy.

In J.M. Co rbett Co. v. Insuran ce Co. of N orthAmerica, 357 N.E.2d (I ll. App. 19 84) the co urt heldthat the indemn ity language type d on the certificatecreated a separate contract between the insurer and theadditional insured providing broader coverage thanwhat was affor ded by the policy.

2. Policy Contr ols. Commo n problem s withcertificates of insurance include the possibility thatcertificates issued by agents contain errors and thepossibility that the certificates fail to reveal speciallimitations applicable to the coverage afforded. Some

courts take the position, based on language sim ilar tothe above-quoted language from the ACOR D 25-SForm, that a certificate o f insurance do es not createcoverage. See S.L.A. Property Management v.Angelina Casualty Co., 856 F.2d 69 (8th Cir. 1988)(certificate listing a different person as the additionalinsured did not control over actual listing on policyendorsement); and Mercado v. Mitchell, 264 N.W.2d532 (Wis. 1978).


IV. Exculpation and Limitation of LiabilityProvisions and Releases.

A. Distinguished from Indemnity Provision. SeeIkard, Exculpatory Clauses and Their Effec tiveness toProtect Drafters and Fiduciaries, 18th ADVANCEDESTATE PLANNING AND PROBATE COURSE(STATE BAR O F TEX AS 199 4); Annot., 49 A.L.R. 3d321, Validity of Exculp atory Clause in L easeExempting Lessor from Liability (1973); Annot., 30A.L.R. 4th 971, Applicability of Exculpatory Clause inLease to Lessee's Dam ages Resulting F rom DefectiveOriginal Design or Construction (1984 ); Annot., 8A.L.R. 1393, Validity, Construction and Effect ofAgreement Exempting Operator of Amusement Facilityfrom Liability for a Persona l Injury or Dea th of Patron(1966); Annot., 66 A.L.R. 4th 622, Liability for InjuryIncurred in Opera tion of Po wer Go lf Cart (1988);Annot., 88 A.L.R.3rd 1236 Liability of Youth Camp, itsAgents or Employees, or of Scouting Leader orOrganization for Injury to Child P articipan t inProgram (1978); Annot., 73 A.L.R.4th 4 96, Liability ofLocal Government Entity for Injury Resulting from Useof Outdoor Playgro und E quipm ent at Mu nicipallyOwned Park or Recreational Area (1989). Springer,Releases: An Added Measure of Protection fromLiability , 39 BAYLOR L.REV. 487 (1987); Smith,Selected Topics in Lease Drafting : Indemnities,Waivers, Disclaimers and Remedies, ADVANCEDREAL ESTATE DRAFTING COURSE Q (STATEBAR OF T EXAS 199 0).

1. Definitions.

a. "Exculpation". Examp le: "I am notliable ... ." An "exculpatory " provision is defined as aprovision that "clears or tends to clear a person fromalleged fault or guilt; excusing." BLACK'S LAWDICTIONARY, p. 566 (6th Ed., 1990). Anexculpatory provision is d esigned to e xclude, a sbetween the parties to a contract, certain designatedduties, liabilities or costs due to the occurrence ornon-occurrence o f events.

b. "Releases". Example : "You are notliable ... ." A "release" is defined as

A contractual arrangem ent whereb y one partyassumes the liability inherent in a particularsituation, thereby relieving the other party ofresponsib ility ... . [An] [a]greement or contract inwhich one party agrees to hold the other withoutresponsib ility for damag e or other liab ility arisingout of the transaction involved.

BL ACK'S LAW DICTIO NARY , p. 658 (5 th Ed.,1979).

c. “Limitation of Liability”. Example :“If I am liable, my liability to you is limited to $___.”A “limitation o f liability” provision sets an upper limitto the amoun t recoverab le by one pa rty against theother.

2. Characteristics.

a. Rights or Obligations between Parties.

(1) Indemnity. An indemnity rather thanextinguishing a cause of action, creates a potentialcause of action in the Indemnified Person against theIndemnifying Person. If the undertaking is toindemnify against liability, the cause of action matureswhen the Indemnified Person incurs liability covered bythe agreement. But, if the obligation is to indemnifyagainst the loss incurred by the Indemnified Person, thecause of action matures when the loss has been realized.See Wallerstein v. Spirt , 8 S.W.3d 774(Tex.A pp-Austin [3rd Dist.] 199 9, no writ )-involving anindemnity by partners but not a release betweenpartners.

(2) Release. A release surrenders legalrights or obligations between the parties to theagreement. Cox v. Robinson, 150 S.W. 1149, 1155(Tex. 1912); Quebec v. Gulf, C. & S. F. R. Co., 81 S .W.20, 21-22 (Tex. 1904). A release extinguishes theclaim or cause of action as effectively as would a priorjudgment between the parties and is an absolute bar toany right of action o n the released matter. Hart v.Traders & General Ins. Co., 189 S.W .2d 493, 494(Tex. 1945). For these reaso ns, a release is ex presslydesignated as an affirmative defense. TEX. R. CIV. P.94.

(3) Limitation of Liability. Limitationof liability provisio ns are not sub ject to a pen altyanalysis because, b y their nature, they cannot be used topenalize a party for a b reach of co ntract. Arthur’sGara ge v. Racal-Chubb, 997 S.W.2d 803(Tex.App.-Dallas 1999, no writ) and Fox Elec. Co. v.Tone Guard Sec. Inc., 861 S.W.2d 79, 83 (Te x.App.-Ft.Worth 1993, no writ ).

A limitation of liability pr ovision is not a liquidateddamage provision. A liquidated damage provision fixesliability at a specific amount or at a specifiedpercentage of the consideration paid under a con tract.Unlike a limitation of liab ility provision, a liquidateddamage provision m ust satisfy the following penaltyanalysis: (1) the harm caused by the breach must beincapable of being estimated or be difficult to estimateat the time of entry into the agreement, and (2) theamount of liquidated damages called for must be areasonab le forecast of jus t compen sation. See Arthur’sGarage v. Racal-Chubb, 997 S.W.2d 803(Tex.App.-Dallas 1999, no writ ) [limitation of liabilityprovision contrasted to liquidated damage provision];Vallance & Co. v. D’Anda, 595 S.W.2d 587, 589(Tex.Civ.App.-San Antonio 19 80, no writ ); andPhillips v. Phillips, 820 S.W.2d 78 5 (Tex. 1991).

b. Liabilities to Third Parties.

(1) Release . A release extinguishes anyactual or potential claim for liability and injury the"releasor" (the "Releasing Party") might have againstthe "releasee" (the "Released Party"), without regard tothe Rel eased P arty 's actual or po tential liability to thirdparties. See Whitson v. Good bodys, I nc., 773 S.W.2d381, 38 3 (Tex. A pp.--Dallas 1 989, writ denied).


(2) Indemnity. An indemnity does notrelate to liability claims be tween the parties to theagreeme nt, but obligates the Inde mnifying Pers on toprotect the Indemnified Person against liability claimsof persons not a party to the agreemen t.

The following is an example of an exculpatoryprovision in a commercial lease:

Provision:

Section 2: WAIVER - No IndemnifiedPerson shall be liab le in any manner to Tenantor any other party for any injury to or death ofpersons or for any loss of or damage to theproperty of Tenant, its emp loyees, agents,customers, invitees, or of other s, regardless ofwhether such pro perty is entrusted to employeesof the Building, or such loss or dam age isoccasioned by casualty, theft, or any other c auseof whatsoever nature, whether or not due inwhole or in part to the negligence or strictliability of the Indemnified Person, unless causedby the willful misconduct or gross negligence ofan Indemnified Person. In no event shall anyIndemnified Person be liable in any manner toTenant or any other party as the result of theacts or omissions of Tenant, its agents,employees, contractors or any other tenant ofthe Building . All personal property upon theLeased Premises shall be at the risk of Tenantonly , and none of the Indemnified Persons shallbe liable for any damage thereto or theft thereof,whether or not due in whole or in part to thenegligence of any Indemnified Person.

B. Elements.

1. Requirement to Be Conspicuous.

In Dresser Industries, Inc. v. Page Petroleum, Inc.,853 S.W.2d 505 (Tex. 1993), the following provisionscontained in work orders of Dresser and HoustonFishing Tools Company were examined by the TexasSuprem e Court:

Dresser Provision:

There are obviously many conditions in and aboutthe well of which we can have no knowledge andover which we can have no control. Therefore, we(Dresser) accept this service order only on conditionthat we do not guarantee any particular result fromservices to be perfo rmed her eunder. Except wheredamage or injury caused by gross or willfulnegligence on our pa rt, (Page) sha ll indemnify(Dresser) and hold (Dresser) free and harmless fromall claims for person al injuries, includ ing death anddamage, including subsurface d amage o r injury tothe well and damages attributable to pollution orcontamination and cost o f control and removalthereof, alleged to have been caused by ouroperations under this serv ice order, includingclaims alleging that injuries or damages werecaused by (Dresse r's) negligence, whether suchclaims are made by (Page), were caused by(Dresser's) negligence, whether such claims aremade by (Page), by (Page's) employees, or by thirdparties. (Em phasis add ed by autho r.)

Houston Fishing Tools Provision:

(A) (Houston Fishing Tools) shall not be liab leto (Page) on any theory o f legal liability againstwhich (Houston Fishing T ools) may legally contractfor any injury or damage to p ersons ... or toproperty (whether subsurface or not, includingreservoir loss) and any losses arising out of suchdamage where such damag e is sustained inconnection with, arising out of, or resulting from theservice or material used in the service.

(D) The theories of liab ility referred to in(paragraph (A) ... include, but are not limited to,breach of express or implied w arranty and th e soleor concurrent negligence of (Houston FishingTools). (E mphasis ad ded by au thor.)

Page Petroleum drilled a well located in ColoradoCounty to a depth of 11,00 0 feet and co ntracted withDresser to conduct log tests. Houston Fishing Toolswas called in to "fish" out Dresser's equipment thatbecame stuck in the well bore. While Houston FishingTools was attempting to dislodge the equipm ent, it lostseveral thousand feet of wireline and drill pipe downthe hole which could not be retrieved. Page attemptedto clear the hole by performing a side proc edure. T hisside procedure was not successful; therefore, Pageplugged and abandoned the well and was forced to drilla new well. Page then brought suit against Dresser andHouston Fishing Tools alleging negligence and seekingcompensation for damages to the original we ll. BothDresser and Ho uston Fishing T ools defen ded the suitbased on the contractual provisions recited above.

The jury attributed liability 5 0% to P age, 40% toHouston Fishing Tools and 10% to D resser.

The court of appeals construed the Dresserprovision as an "indemnity" and therefore could notexculpate Dresser from its own negligence. Since theDresser provision was an indemnity, the court held thatreference to Page indemnifying Dresser from claims byPage (see underlined language in Dresser provision)was clearly inadvertent and repugnant to the intent ofthe parties. Once the court of appeals determined theclause to be an ind emnity, it found that as an indemnityit could not be an exculpation or release operating toextinguish a claim between the parties to a suit.

Conversely, the court of appeals found that theHouston Fishing To ols provision was a "release" whichexculpated Houston Fishing Tools from liability toPage.

The supreme c ourt held tha t complianc e with thefair notice requ irements is a question of law for thecourt, overruling Goodyear Tire & Rubber Co. v.Jefferson Const. Co., 565 S.W.2d 916 (Tex. 1978).The supreme court then found that the Dresser and theHouston Fishing Tools provisions were both notconspicuous as a matter of law.

a. Indemnity, Releases, Excu lpations:Effect the Same. Following the reasoning o f thedissent in the court of appeals ' decision, the supremecourt found that, whether the provision was couched asan indemnity, a release or an exculpation provision, theeffect was the same, to transfer the risk of liability for


one 's own negligence. The court stated its reasoning asfollows:

As Justice Va nce stated in his d issenting opinio n inthe court of appeals, these agreements, whetherlabeled as indemnity agreements, releases,exculpatory agreements, or waivers, all operate totransfer risk. ... Although we recognized that mostcontractual provisions operate to transfer risk, theseparticular agreements are used to exculpate a partyfrom the conseq uence of it s own negligence.Because indemnification of a party for its ownnegligence is an extraord inary shifting of risk, thisCourt has develop ed fair notice requirements whichapply to these types of agreemen ts. The fair noticerequireme nts include the express negligencedoctrine and the co nspicuous requireme nt. EnserchCorp. v. Parker, 794 S.W .2d 2, 8 (T ex. 1990 ). ...the conspicuous requirement mandates "thatsomething must appear on the face of the [c ontract]to attract the attention of a reasona ble person whenhe looks at it." Ling & Co . v. Trinity Sav. & LoanAss'n , 482 S.W.2d 841 , 843 (Tex. 1972)....[w]e can discern no reason to fail to afford the fairnotice protections to a party entering into a releasewhen the protections have been held to app ly toindemnity agreements and both have the sameeffect. ... This is especially true because of thedifficulty often inherent in distinguishing betweenthese two similar provisions.

Id. 508.

The same rules have been held to apply to limitationof liability provisions. Arthur’s Gara ge v.Racal-Chubb, 997 S.W.2d 803 (Tex.App.-Dallas 1999,no writ). The court of appeals in Arthur’s Garageupheld the following lim itation of liability provision,limiting an alarm company’s liability to $350 inconnection with damages sustained by Arthur’s Garagewhen a smoke detector failed to operate:

Provision:

Liquidated Damages and Indemnification. It isexpressly understood and agreed that seller is not aninsurer and that insurance, if any, covering personalinjury and property loss or damage on pur cha ser'spremises shall be obtained by the purchaser; thatthe payments provided for herein are based so lelyon the value of the s ystem and/o r service as set fo rthherein, and are un related to the value of thepur cha ser's property o r the prop erty of otherslocated on purchaser's premises; that seller makesno guarantee or warranty including any impliedwarranty of merchan tability or fitness that thesystem or service supplied will avert or preventoccurrences or the consequences therefrom whichthe system or service is inten ded to detect or av ert.

Purchaser acknowledges that it is impractical andextremely difficult to fix the actual dam ages, if any,which may proximately result from a failure toperform any of the obligations herein or a failure ofthe service and/or system to op erate beca use of,among other things: the uncertain amount or valueof purchaser's property or the property of otherswhich may be lost or damaged; the uncertainty of

the response time of the police or fire department orother appropriate agency; the inability to ascertainwhat portion, if any, of any loss would beproxima tely caused by seller's failure to performany of its obligations or failure of its equipm ent tooperate; the nature of the services to be performedby seller.

If there shall, notwithstanding the above pro visions,at any time be o r arise any liability on the part ofseller by virtue of this agreement or due to thenegligence of seller or othe rwise, such liability isand shall be limited to the sum of three hundredfifty and no/1 00 dollar s ($350 .00), which su m shallbe paid and received as liquidated damages, suchliability as herein set forth is fixed as liquidateddamages and not a penalty and this liability shall becomplete and exclusive.

In the event purchaser desires seller to assumegreater liability for the performance of its serviceshereunder, a choice is hereby given of obtaining fu llor limited liability by paying an additional a mount,proportioned to the responsib ility, and an additionalrider shall be attache d to this agree ment settingforth the additional liability of the seller andadditional charge.

The rider and additional o bligation shall in no waybe interpreted to hold seller as an insurer. (em phasisadded)

The court found that this provision was not aliquidated damage provision, but rather was a limitationof liability provision. As such the provision was notsubject to penalty analysis. The pro vision set a limit tothe liability of alarm company to its customer. Thealarm contract also included an indemnity. Theindemnity was also upheld and is discussed above. Thecourt found the limitation of liability provision and theindemnity were conspicuous (all cap s) and exp resslycovered the negligence of the alarm co mpany.

But see Reuben H. Donnelley Corp. v. McKinnon,688 S.W.2d 612 (Tex.App.-Corpus Christi 198 5, writref’d n.r.e.) finding that limitation of liability clauses donot limit liability for tort liabilities (but the Donnelleydecision and the cases cited by it may turn on thecourt’s finding that the telephone comp any occupies amonop olistic position and a conclusion that it is againstpublic policy to enfo rce limitation of liabilityprovisions in contracts with a public service utility) andDeKa lb Hybrid Seed Co. v. Agee, 293 S.W.2d 64(Tex.Civ.App.-Beaumont 1956, writ ref’d n.r.e.)(anorder form for baby chicks contained a clause limitingthe seller’s liability to the price of the chicks, cour t heldclause did not apply to seller’s fraud, an intentionaltort); as contrasted to Wade v . Southw estern Bell T el.Co., 352 S.W .2d 460 (Tex.C iv.App.-A ustin 1961 , nowrit), Southwestern Bell Tel. Co. v. Delanney, 809S.W.2d 493 (T ex. 1991 , Gonzale z, J., concurringop.)(contract limited liability: “The applicant agreesthat the telephone company shall not be liable for errorsin or omissions of the directory advertising beyond theamount paid for the dire ctory adve rtising omitted inwhich error occurs for the issue life of the directoryinvolved.”), Vallance & Co. v. DeAnda, 595 S.W.2d587 (Tex.Civ.App.-San Antonio 1980, no writ)(“...suchliability is and shall be limited to a sum equal in amount


to the service charge hereunder for a period of servicenot to exceed six months....”[$147 on a $9,500 loss]),and the majority line of cases cited in Helms v.Southwestern Bell Tel. Co ., 794 F.2d 188 (5 th Cir.1986); and 5 S. WILLISTON, CONTRACTS § 781A(3d ed. 1961); RESTATEMENT OF CONTRACTS §339, Comment g (1932) ; see Annot., Liability ofTelephone Company for Mistakes in or OmissionsFrom its Directory, 47 A.L.R . 4th 882 (1986).

The majority op inion and Ju stice Gonz alez’concurring opinion in Southwestern Bell Tel. Co. v.Delanney did not address whether a properly draftedlimitation of liability provision can limit liability for tortliabilities arising out of a contractual relationship. Thecourt in Southwestern Bell Tel. Co. v. Delanney foundthat the liability in question w as a contrac tual liabilitylimited by the limitation of liability provision and wasnot a liability arising out of a tort. Both a contractbreach and a tort breach of du ty can arise from the sameset of facts. The c ourt in Southwestern Bell Tel. Co. v.Delanney addressed such d uality as follows:

The majority below relied on Montgo meryWard & Co. v. Sch arrenbe ck, 146 Tex. 153, 157,204 S.W.2d 508, 510 (1947), where we quotedfrom 38 AM .JUR. Negligence § 10 (1941) asfollows:

Accompanying every contract is acommon-law duty to perform with care,skill, reasonable expedience and faithfulnessthe thing agreed to be done, and a negligentfailure to observe any of these conditions isa tort, as well as a b reach of the c ontract.

In Scharrenbeck, the defendant agreed to repair awater heater in plaintiff’s home. A short time afterrepair, the heater ignited te roof, destroying thehouse and its contents. Although the contractobligated the defendant to put the water heater backin good working o rder, the law also implied a dutyto the defendant to act with reasonable skill anddiligence in making the repairs so as not to injure aperson or property by his performance. In failing torepair the water heater properly, the defendantbreached its contract. In burning down pla intiff’shome, the defendant breached a commo n-law dutyas well, thereby providing a basis for plaintiff’srecovery in to rt....

See PROSSER AN D KEETO N at 656; 1 J.EDGAR, JR. & J. SALES, TEXAS TORTSAND REMEDIES § 1.03 [4][b] at 1-36 (1990).We applied this a nalysis in Jim Walter Hom es,Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986),where we wrote:

The acts of a party may breach duties in tortor contract alone or simultaneously in both.The nature of the injury most oftendetermines which duty or duties arebreached. When the injury is only theeconom ic loss to the subject of a contractitself the action sounds in contract alone.

The Fort Worth Court of Appeals in Fox Elec.Co. v. Tone G uard Se c., 861 S.W .2d 79 (T ex.App.-F t.worth 1993, no writ ) upheld the following provision

resulting in limiting Ton e Guard ’s liability to $250 ona $500,00 0 fire loss:

Provision:

(21) APS IS NOT AN INSURER;LIQUIDATED DAMAGES; LIMITATIONOF LIABILITY: It is understood and agreed:That APS is no t an insurer; that insur ance, ifany, shall be obtained by Subscriber, that thepayments provided for herein are based solelyon the value of the services as set fo rth hereinand are unre late d to the v alue of th e Su bsc ribe r'sproperty, or the property of others located onSub scri ber 's premises; that APS makes noguaranty or warranty, inc luding any im pliedwarranty of merchantability or fitness that theequipment or services supplied will avert orprevent occurrences [sic] or the consequencestherefrom which the system is designed to detector avert. Subscriber ackno wledges that it isimpractical and extremely difficult to fix theactual damages, if any, which may prox imatelyresult from a failure to perform any of theobligations herein, including, but not limited toinstallation, service, maintenance or monitoringor the failure of the system to p roperly op eratewith resulting loss to S ubscriber because o f,among other things: (a) The uncertain amount ofvalue of Sub scri ber 's property or the property ofothers kept on the p remises which may be lost,stolen, destroyed, damaged o r otherwiseaffected by occurrences which the system orservice is designed to detect or avert; (b) Theuncertainty of the response time of any police orfire department, should the police or firedepartment be dispatched as a result of a signalbeing received or an audible device sounding;(c) The inab ility to ascertain wha t portion, ifany, of any loss would be proximately caused byAPS's failure to perform o r by its equipme nt tooperate; (d) The nature of the service to beperformed by APS. Subscriber understands andagrees that if APS sho uld be found liable forloss or damage due to a failure of theinstallation, maintenance, monitoring, service orequipment in any respect whatsoever, AP S'sliability shall be limited to a sum equal to thetotal of six (6) monthly payments or TwoHundred Fifty ($250 .00) Do llars, whichever isthe lesser, as liquidated damages and not as apenalty and this liability shall be exclusive; thatAPS shall not be liable for consequential orincidental damages except to the extent of theliquidated damage s herein pro vided; and thatthe provisions o f this Section sha ll apply if lossor damage, irrespective of cause or origin,results directly or indir ectly to persons orproperty, from performance or nonperformanceof the obligations imposed by this contract, orfrom negligence, active or othe rwise, of AP S, itsagents, servants, assigns or emplo yees. IfSubscriber wishes APS to assume a limitedliability in lieu of the liquidated damages ashereinabove set forth, Subscriber may obtainfrom APS a lim itation of liabil ity by paying anadditional monthly servic e charge to APS. I fSubscriber elects to exercise this op tion, a ridershall be attached to this Agreement setting forth


the terms, conditions and amount of the limitedliability and the additional monthly charge.Such rider and additional obligation shall in noway be interpreted to hold APS as an insurer.

The court dis tinguished Alpha Mktg., Inc. v.Hone ywell, Inc., 690 S.W.2d 35, 37 (Tex.App.-Dallas1985, writ ref’d n.r.e.) (“damages which may arise dueto the faulty operation of the system or failure ofservices provided”)and McCane-Sondock ProtectionSys. v . Emmittee, 540 S.W.2 d 764, 766(Tex.Civ.App.-Eastland 1976, no writ ) (“loss to thesecond party resulting by reason of failure of theperformance of the alarm system to operate”) on thebasis that the courts in these cases held the limitation ofliability clauses were not enforceable because therecould be no “failure of operatio n” or “faultyperformance” unless the alarm systems were installedand ope rating prop erly.

Query: Is a limitation of liability provisionlimiting liability for tort damages to aspecified amount en forceable ? If arelease in advance for one’s liability fornegligence is enforceable, why wouldnot a limitation of l iability in advancenot be enforceable?

b. Adoption of UCC Standard. Thesupreme court in Dresser Industries, Inc. v. PagePetroleum, Inc. adopted the "conspicuous" standard setforth in § 1.201 (10) of the Texas UCC applicab le tocontracts for the sale of go ods in this case dealing withthe sale of services. The court held that the UCCstandard would be applicable both to indemnity andreleases that relieve a party, in advance, ofr e s p o n s i b i l i t y f o r i t s o w n n e g l i g en c e .Section 1.201(10) provides

A term or clause is conspicuous when it is sowritten that a reasonab le person ag ainst whom it isto operate ought to have noticed it. A printedheading in capita ls (as: NON-NEGOTIABLE BILLOF LADIN G) is conspicuous. Language in thebody of a fo rm is "conspic uous" if it is in larger orother contrasting type or color. But in a telegramany stated term is "conspic uous."

TEX. BUS. COMM. CODE ANN. § 1.201(10)(Vernon 1994).

In both the Dresser and the Houston Fishing Toolcontracts, the provisions are located on the back o f awork order in a series of numbered paragraphs withoutheadings or contrasti ng type. Furthermore, thecontracts were found to be not so short that every termin the contracts must be considere d conspicuous.

How "conspicuous" is conspicuous? See Greer andCollier, The Co nspicuo us Requ irement: Litigating andDrafting Contractual Indemnity Provisions in TexasAfter Dresser Industries, Inc. v. Page Petroleum, Inc.,35 SO. TEX . L. REV. 243 (1994).

The supreme court in Littlefield v. Schaefer, 955S.W.2d 272 (T ex. 1997), found that a release w as notconspicuous when it was set in a type font too small toread even thoug h the heading was in larger font(heading w as in 4 point fo nt 4 p o i n t f o n t and the terms of the

release were in smaller font);the release was outlined ina box; the heading was all caps, in bold type and read“RELEASE AND WAIVER OF LIABILITY ANDINDEMNITY AGREEMEN T”; and above thesignature line appeared the ca ption in all caps,bold-faced centered and underlined type the followingstatement “I UNDERSTAND MO TORCYCLERAC ING IS DANGERO US. YES, I HAVE READTHIS RELEASE.” The court did not accept theargument that the release was conspicuous because ofits small contrasting type. “Where a party is not able toknow what the con tract terms are because they areunreadable, as a matter of la w the exculpatory clausewill not be enfo rced.”

In In Re H. E. Butt Grocery Co., 17 S.W.3d 360(Tex.A pp.-Houston [14th Dist.] 200 0, orig. proceeding)the court of appeals determined that testimony from theinjured employee to the effect that he was to ld not toread a waiver and release was ina dmissible p aroleevidence. The court found that the following noticewas unambiguous and supported the conclusion that theemployee was aware of the agreeme nt to arbitrateclaims and releasing his common law right to sueH.E.B. as a non-subscriber to the state’s workerscompensation system. The court noted that the noticewas in all caps and underlined.

Provision:

ELECTION OF COMPREHENSIVE BENEFITS,RELEASE, WAIVE R, INDEMNITY AN DARBITRATION AGREEMENT

NOTICE: BY SIGNING THIS AGREEMENT,YOU AGREE TO RELEASE AND WAIVECERTAIN RIGHTS TO SUE YOUR EMPLOYER,THE TRUST, THE TRUSTEE OF THE H. E.BUTT GROCERY COMPANY WELFA REBENEF IT TRUST, THE PLAN, AND THE PLANADMINISTRATOR IN EXCHANGE FOR THEAGREEMENT TO PROVIDE CERTAINBENEFITS THROUGH THE TRUST. YOUAGREE TO INDEMNIFY YOUR EMPLOYERAND THE RELEASED PARTIES IN CERTAINCIRCUMSTANCES AND YOU AGREE TOARBITRATE ALL FUTUR E DISPUT ES. THISAGREEMENT AFFECTS YOUR LEGALRIGHTS! READ THIS AG REEMENTCAREFULLY AND MAKE SURE YOUUNDERSTAND IT BEFORE SIGNING IT!

To similar effect is the holding in Lawrence v. CDBServ., 1 S.W.3d 903 (T ex.App.-Amarillo [7th Dist.]1999, aff’d) as to a waiver of the common law right tosue and election to participate in an employers that wasin bold type in a 2 page election form.

See discussion of the Conspicuousne ss requirementin Article IID1c--Elements of an IndemnityProvision earlier in this Article.

c. Actual Notice. The court noted that thefair notice requirements are not applicable when theIndemnified Person (Released Person) establishes thatthe Indemnifying Person (Releasing Person) possessesactual notice or knowledge of the indemn ity agreemen t,


citing genera lly Cate v. Dover Corp., 790 S.W.2d 559,561 (T ex. 1990 ). Dresser at 508.

2. Express Negligence Requirement. For thesame policy reasons that the supreme court in Dresserextended the conspicuous requirement to rele ases, itheld that the companion express negligence doctrinealso was to be applied to releases.

... we hold that the fair notice requirements ofconspicuousness and the express negligencedoctrine apply to both inde mnity agreem ents and toreleases in the circumstances before us; thus, wedisapprove of the Whitson opinion. [referring toWhitson v. Goodbodys, Inc. , 773 S.W.2d 381, 383(Tex. Ap p.--Dallas 19 89, writ denied)].

Dresser Industries, In c. v. Page Petroleum, Inc., 853S.W.2d 505, 50 9 (Tex. 1 993); Doe v. SmithklineBeecham Corp., 855 S.W .2d 248 (Tex. Ap p.--Austin1993, writ granted).

The court of appeals in Rickey v. Housto n HealthClub, Inc., 863 S.W.2d 148 (T ex. App.--Texarkana1993, writ granted)--jogger alleged that indoor astroturftrack not suitable as jogging trac k-- found the followingrelease failed the express n egligence test:

Provision:

You agree that you are aware that you are engagingin physical exercise and the use of exerc iseequipment and club facilities which could causeinjury to you. You are voluntarily participating inthese activities and assume all risk of injury to youthat might result. You hereby agree to waive anyclaims or rights you might otherwise have to sue thehealth club, its employees or ag ents for injury toyou on account of these activities. You havecarefully read this waiver and release and fullyunderstand it is a release of liability. You furtheragree to release seller fro m any liability for loss ortheft of person al proper ty.

The court in Polley v. Odom, 957 S.W.2d 932(Tex.App.-Waco 1997, judgm’t vacated) held that thefollowing “risk of loss” provision did not pass theexpress negligence test as it impliedly but did notexpressly release the landlord fro m liability for itsnegligence.

Provision:

Risk of Loss. Except where due to the willfulneglect of Lessor all risk of loss to personalproperty or loss to business resulting from any causewhatsoever shall be born exclusively by Lessee.

3. Prerequisites for Validity. The followingprerequisites must be satisfied for a release to be valid:

a. Public Policies.

(1) Oilfield Anti-Indemnity Statute .After refusing to enforce the releases reviewed in theDresser case on the grounds of not being conspicuo us,the Texas Supreme Court in footnote 5 notes

"Although we do note that today's holding wouldsuggest that Chapter 1 27 (the T exas OilfieldAnti-Indem nity Statute) wou ld apply to releases aswell as to indemnity agreements, we do not reachthe merits of suc h an argum ent."

Dresser at 510.

(2) Equal Bargaining Power . Therelease must not be the product of "unequal bargainingpower" in circumstances involving ind ispensableservices. This test is not well developed. In Crowell v.Housing Author ity of the City o f Dallas, 495 S.W.2d887, 888-89 (Tex. 1973), the court refused to enforce alandlord-imposed release by the residential tenant ofany damages "due to the conditions of these or otherpremises of the Landlo rd, from theft or from any causewhatsoever." The court stated

[T]he situation of (landlord) and its tenants presentsa classic example of unequal bargaining power.The terms of the contract are dictated by (landlord),and a prospective tenant has no choice but to acceptthem if he and his family are to enjoy decenthousing accommodations not otherwise available tothem.

Id. at 889.

The Texas S upreme C ourt has de fined thiscondition as being a case where "one party has no realchoice in accepting a n agreeme nt limiting the liabilityof the other party." Allright, Inc. v. Elledge, 515S.W.2d 266 (T ex. 1974).

There appears a pattern of cases upholdingexculpatio n provision s in commercial contexts but notin consume r matters. Ellis and Kessler, Exculpationand Indemnity Clauses, 23rd ANNUAL MORTGAGELENDING INSTITUTE 6-7 (UNIV. TEX. 1989) citingon comme rcial leases: Barragan v. Munoz, 525 S.W.2d559 (Tex. Civ . App.--El P aso 197 5, no writ );Mitterlehner v. Mercantile National Bank at Dallas,378 S.W.2d 137 (Tex. Civ. App.--Dallas 1964, writref'd n.r.e.), Fidelity U nion Life Ins. Co. v. Fine, 120S.W.2d 138 (Tex. Civ. App.--Waco 1938, writ dism 'd);and citing on reside ntial leases: Crowe ll v. HousingAuthor ity of the City of Dallas, 495 S.W.2d 887 (Tex.1973), Jones v. H ouston A ristocrat Apartments, Ltd.,572 S.W.2d 1 (Tex. Civ. App .-- Houston [1st Dist.]1971, writ ref'd n.r.e.), and Taylor v. Gilbert GertnerEnterprises, 466 S.W.2d 337 (Tex. Civ. App.--Houston[1st Dist.] 197 1, writ ref'd n.r.e.). Also see CorpusChristi National Bank v. Gerdes, 551 S.W.2d 521 (T ex.Civ. App.--Co rpus Christi 1 971, writ ref'd n.r.e.) inwhich the court up held a releas e clause in a willreleasing, in advance , gross negligen ce of aTestamentary Trustee.

The court of appeals in Arthur’s Garage v.Racal- Chubb, 997 S.W.2d 803 (Tex.App.-Dallas 1999,no writ) upheld the limitation of liability provision (setout above), which limited an alarm compan y’s liabilityto $350 in connection with damages sustained byArthur’s Garage w hen a smo ke detecto r failed tooperate. The court upheld this provision overchallenges based on public policy arguments. The courtfound that there was no disparity of bargaining powersince the provision permitted the customer to arrange


for greater service at a higher price “comme nsurate withthe level of prote ction desired .” The cou rt attempted toarticulate various economic public policy reasons forfinding the provision enforceable, including concludingthat the customer could have purchased insurance toprotect its interests.

(3) Unco nscionability. Whether acontract is unconscionable is a question of law for thecourt to decide . “Unco nsciona bility” has no preciselegal definition becau se it is not a conc ept but adetermination to be mad e in light of a variety of factors.In general, the term “unconscio nability” describes acontract that is unfair beca use of its overa llone-sidedness or the gross one-sidedness of its terms.Although no single test exists to determine if a contractis unconscionable, two questions are generally asked:(1) How did the parties arrive at the ter ms incontrove rsy; and (2) Are there legitimate commercialreasons which justify the inclusion of those terms? Thefirst question, described as the procedural aspect ofunconscio nability, is concerned with assent and focuseson the facts surrounding the bargaining process. Thesecond question, described as the substantive aspect ofunconscio nability, is concerne d with the fairness of theresulting agreement. The court in Arthur’s Garage v.Racal-Chubb, 997 S.W .2d 803 (Tex.A pp.-Dallas 1999,no writ) found that the limitation of liability provisionand the indemn ity provision were not unconscio nable“considering the totality of the circumstances” citingPony Express C ourier Co rp. v. Mo rris, 921 S.W.2d817, 820 (T ex.App.-S an Anto nio 1996, no writ );W a d e v . A u s t i n , 5 2 4 S . W . 2 d 7 9 , 8 5(Tex.Civ.App.-Texarkana 1975, no writ );Southwestern Bell Tel. Co. v. DeLanney, 809 S .W.3d493, 498-99 (Tex. 1991, Gonzalez, J. concurring op.);and Leon’s Bakery, Inc. v. Grinnell C orp., 990 F.2d 44,49 (2nd Cir. 1993). Also see TEX. BUS & COMM.CODE §§ 2.302 Unconsc ionable Con tract or Clause(Vernon 1994)( discussing unc onsciona ble contrac tsunder the Uniform Commercial Code) and 17.45(5)(Vernon Supp. 2002)(describing unconscionableactions under the Texas Deceptive Trade Practices -Consumer Protection Act); 1 J. White & R. Summers,UNIFORM COMMER CIAL CODE § 4-3 at 203 (3ded. 1988); and RESTATEMENT (SECOND) OFCONTRACTS § 208, co mment a (1 979); Le ff,Unco nsciona bility and the Code - The Emperor’s NewClause, 115 U. PA . L. REV. 485 (196 7); and Mallor,Unco nsciona bility in Contracts Between Merchants, 40SW. L. J. 1065 (1986 ).

(4) Minors. It appears th at a parent cannot release, in advance, a minor child's right to recoverfor personal injuries caused by the negligence ofanother. In Munoz v. II Jaz Inc. d/b/a PhysicalWhimsical, 863 S.W .2d 207 (Tex. App.-- Houston[14th Dist.] 1993, no writ ), the court held that a factissue existed whether an adult sister of the nin e-year-oldminor plaintiff had been authorized by the pa rents towaive the minor's rights when the adult sister waspermitted to take her sister to the amusem ent park. Theadult sister signed a release for "any accidents occurringwhile on the p roperty."

The court noted that the Tex as Suprem e Court hasa "strong, long -standing po licy to prote ct the interestsof its children" and cited the concurring opinion ofJustice Doggett wherein the Justice stated that parental

releases of a minor child's potential claims are"outrightly disfavored." Williams v. Patton, 821S.W.2d 141, 145 (T ex. 1991 ). See also Fitzgerald v.Newar k Morn ing Leg er Co., 111 N.J. Super. 104, 267557 (N.J. 1970)--holding that a release form signed bythe parent as a condition of the child's participation inan outing sponsored by the defendant was void asagainst public policy; Ferdor v. Mauwehu Council, BoyScouts of America, Inc., 21 Conn. Supp. 38, 143 A.2d466, 468 (Conn. Super. Ct. 1958)--holding that waiverof all claims for damages signed by the parent as acondition of the child attending summer camp wasinvalid as aga inst public po licy.

Query: What about the express negligence doctrine?Dresser Industries, Inc. v. Page Petroleum,Inc., 853 S.W.2d 505 (Tex. 1993).

(5) Gross Negligence. The co urt inSmith v. Golden Triangle Raceway, 708 S.W.2d 574(Tex. App.--B eaumon t 1986, no writ ) struck down aportion of a release that released the "release e" (therace track) from liability for its gross negligen ce. Thisis the position of the Restatement. RESTATEMENTOF CON TRA CTS § 574 (19 32). T he court citedvarious decisions from other jurisdictions supportingthis conclusion.

The court upheld the release as to injuries due to therace trac k's negligence. The cou rt found that this casedid not involve an issue of unequal bargaining power.There is no public p olicy to protect a right to be aspectator on the infield of a race track. Corpu s ChristiSpeedway v. Morto n, 279 S.W.2d 9 03 (Tex. Civ.App.-- San Antonio 1 955, no writ ). The co urt inKeszler v. Memoria l Medical Cen ter of East Texas, 931S.W.2d 61 (Tex. App.--Beaumont 1996, no writ ) heldthat a release covering "all causes of action, whethersounding in tort or contract” could not as a matter oflaw based on public policy release a claim based on thegross neglige nce of the R eleased P arty.

(6) Intentional Torts. The court inSedona Contrg. v . Ford, P owell, 995 S.W .2d 192(Tex.App.-San Antonio 1999, no writ ) noted thatconsent can constitute a defense for liability for anintentional tort, and thus reasoned that a waiver as tofuture intentional torts may be enforceable under certaincircumstances. Ford, Powell recomm ended tha t aschool district accept the bid of the second lowestbidder, Sedona was the lowest bidder. T he biddocuments contained the following waiver:

Provision:

By submitting a b id, each bidder agrees to waiveany claim it has or may have against the Owner[NEISD], the Architect/Engineer, and theirrespective employee s, arising out of or inconnection with the administration, evaluation, orrecommendation of any bid; waiver of anyrequireme nts under the Bid Documents; or theContract Documents; acceptance or rejection of anybids; and a ward of the C ontract.

The court noted that it had previously found GoldenTriangle to be too broad in its application of theRESTATEMENT (SECOND) OF TOR TS. In Smith v.Holley, 827 S.W .2d 433 , 438 (T ex.App.-S an Antonio


1992, writ denied) the court was faced with the issue ofwhether a prospective employee could release aprevious employer from liability resulting from thecommunication of information regarding their workhistory. In its analysis, the court recognized the holdingof Golden Triangle , but concluded that its applicationto intentional conduct was too broad. The court inSmith stated, “that it is universally reco gnized that inthe right circumstan ces one ca n consent to certainactions that otherwise would be intentional torts.” InSmith the court held Holley effectively consented to thepossibility of defamation by signing a release formauthorizing the release of work history. The court alsocited Unocal Corp. v. Dickson Resources, Inc., 889S.W.2d 604, 610 (Tex.App.-Houston [14 th Dist.] 1994,writ denied) holding that waiver, concerning oil and gasinformation, to be effective which permitted for thegeneral waiver of future intentional tort claims andextinguished plaintiff’s right to sue.

b. Mutuality. In Sterling ComputerSystems of Texas, Inc. v. Texas Pipe Bending Co., 507S.W.2d 282 (Tex. Civ. App.--Houston [1st Dist.] 1974,writ ref'd) the court refus ed to enforce a contract due toits failure to have the requisite basic considerationmerely because of the presence of the followingprovision in the contract:

SCS (Sterling) shall not be liable for its failure toprovide the services herein and shall not be liablefor any losses resulting to the client (Texas PipeBending) or anyone else by reason of such failure.

Id. at 282. The court refused to imply an obligation onSCS to perform the contract. See 31 TEX. JUR.2d 238§ 91 Contracts-Performance of agreement (1994).

Similarly, in Spellman v. L yons Petroleum, Inc., 709S.W.2d 295 (Tex. App.--Houston [14th Dist.] 1986,writ ref'd n.r.e.), the court refuse d to imply a reasonab leeffort to perform a contract which "contained norequirement that (Lyons Petroleum) make a rea sonableeffort to perform." See, however, Fuqua v. Fuqua, 528S.W.2d 896 (Tex. Civ. App .--Houston 1 975, writ ref'dn.r.e.) for a requirement of "good faith" or "reaso nableefforts."

On the other han d, "no personal liability clauses"or "non- recourse obligations" are common and upheld.In Duracon, Inc. v. Price, 817 S.W.2d 147 , 148 (Tex.App.--El Paso 19 91, writ den'd ), the court of ap pealsupheld the following no personal liability clause in alease:

Provision:

No personal liab ility is assumed under this Lease byLessee or Assignee, except as may b e otherwiseagreed between the parties in writing.

The court determined that the landlo rd's sole recoursewas to terminate the lease and for the tenant to lose theimprovem ents it had built on the premises (a RamadaInn).

c. Offer and Acceptance. As to existingclaims to be release d, a party must be aware of theclaim being releas ed and the claim must be sufficientlydescribed in the release to be understood by the releasor

as being releas ed. Victoria Bank & Trust Co. v. Brady,779 S.W.2d 893, 90 3 (Tex. C iv. App.--Co rpus Christi1989) , aff'd 811 S.W.2d 93 1 (Tex. 1991).

A release is not valid if the Releasing Party has beeninduced to execute the release by frau d. TexacadianFuels, Inc. v. Lone Star Energy, 896 S.W.2d 233 (Tex.App.--H ouston [1st Dist.199 5], judgment vacated byagreement, 922 S.W.2d 549 (Tex. 1996).

d. Typical Exculpations and Releases.

(1) Leases. The causes for whichlandlords frequently disclaim liability fall into threegeneral categories, which include : (i) damages causedby the tenant; (ii) damages typically covered byinsurance; and (iii) damages resulting from causesbeyond th e landlord 's control.

It is fairly obvious a s to why landlo rds disclaimliability for damages caused by the tenant. Thelandlord should no t be penalized by some act of thetenant or other persons connected to or in the control ofthe tenant.

The second type of disclaimer includ es thosedamages typically covered by insurance. These causesinclude the elements; the failure of equipment, pipe s,and wiring; and the d isruption of the tenant's businesscaused by repairs or alterations to the p ropertynecessitated by accidents.

The third category of disclaimer includes itemsviewed as no t be ing w ithin the l and lord 's control. Forexample, liability for damages caused by the acts ofother tenants or adjacent property owners; damagescaused by vandalism ; and events of " force majeure ." See for example, Federated Department Stores, Inc. v.Houston Lighting & Power C o., 646 S.W.2d 5 09 (Tex.App. [1st Dis t.] 1982, no writ ) where a departmentstore was unable to recover fo r lost profits due tointerruptions in electrical service where the powersupply contract contained a clause limiting liability tothe cost of repa ir of physical damages caused by thepower failure.

Another typical exculpation provision contained inlarge comme rcial centers is a provision exculpating thelandlord from liability beyond its interest in thecommercial center or b y limiting recovery against thelandlord to recovering a judgment lien against thelandlord’s interest in the commercial center withoutrecourse to other assets o f the landlord . The land lord’slender may insist upon such type of exculpation in orderto give the lender comfort that if it becomes the ownerof the center it is not expo sing its assets to liabilities tothe tenants. An issue may exist as to whether this typeof exculpation clause must meet the fair noticerequirements. Prudence dictates that all forms ofexculpation, release, and waivers built into leases beboth conspicuous and expressly reference that recoveryfor the negligence of the landlord as being exculpated,released or waived.

Similarly, an issue exists as to whether the standardwaiver of subroga tion needs to comply with th e fairnotice requirements (the express negligence test and theconspicuousness requirement).


See Append ixes 5 and 6 for various typical waiversand exculpatory clauses in land lord-oriented leases.

(2) Construction Contracts . Likeleases, construction contracts and subcontra cts containnumerous clauses whereby one party disclaims liabilityand the other pa rty waives or releases liability of theother party. Releases of recovery to the extent prop ertydamaged is covered by property insurance and waiversof subrogation are contained in the AIA standardconstruction docume nts. See Appendix 11 Waiver ofRecovery and Subrogation - AIA Forms A201 andA101 .

For example, in Derr Constr. Co. v. City ofHouston, 846 S.W.2d 854 (Tex. App.--Houston [1 stDist.] 1992, no writ ), the court held that arelease/inde mnity provision in a subcontract releasedthe owner (the C ity of Houston) from liability fordamages to the subcontractor's crane. The court heldthat the owner was a named third party beneficiary ofthe release in the subcon tract. The co urt also held thatthe sub con trac tor's insurer could not assert any rights ofsubrogation to pursue the owner for the monies it hadpaid the subcontractor for damages to the crane. Theprovision in the subcontract read s as follows:

Provision:

Subcontractor hereby assum es full responsib ilityand liability for the work to be performedhereunder, and hereby release, relinquishes anddischarges and agrees to indemnify protect and saveharmless Contracto r, the City ... from all claims,demands and causes of action of every kind andcharacter including the cost of defense thereof, forany injury to, includin g death of, person (whetherthey be third person, contractor, or employees ofeither of the parties hereto) and any loss of ordamage to property ( whether the same be thateither of the parties hereto o r of third parties)caused by or alleged to be caused, arising out of, orin connectio n with Subcontractor's work to beperformed hereunder ... whether or no t said claims,demands and causes of ac tion in whole o r in part arecovered by insurance hereinbefore ... . (Court'semphasis in b old; author 's emphasis und erlined.)

Id. at 858. This case was decided after the court ofappeals' decision in Dresser In dustries, Inc . v. PagePetroleum, Inc. upholding the Houston Fishing Toolrelease provision, b ut before the s upr eme cou rt'sdecision striking it down as not being co nspicuous. Thecourt did not address the conspicuousness of theprovision in Derr Construction. Also, the court did notreview the release in light of the express negligencetest.

The court of appeals in Valero Energy Corp. v.Kellogg Const. Co., 866 S.W.2d 252 (Tex.App.--Corpus Christi 199 3, writ denied) upheld thefollowing provisions waiving a contractor's liability fornegligence, gross negligence or products liability andwaiving the DTPA:

6.8 Owner sh all release, defend, indemnify andhold harmless Contractor, its subcontractors andaffiliates and their employees performing servicesunder this Agreement against all claims, liabilities,

loss or expense ... arising out of or in connectionwith this Agreement or the Work to be performedhereunder, including losse s attributable toContra cto r's negligence, to the extent C ontractor isnot compensated by insurance car ried under thisArticle.

6.9 Neither Contractor n or its affiliates nor itssubcontractors or vendors, either individually orjointly shall be liable to Owner or its affiliates,irrespective of whether alleged to be due tonegligence or otherwise, for loss of anticipatedprofits or interest, for loss by reason of Plantshutdown or non-operation of the Plant or otherequipme nt, for loss of catalysts or chemicals or forany consequential or special loss or damage arisingfrom any reason whatsoever.

The Supreme Court in Green International, Inc. v.Solis , 951 S .W.2d 384 (Te x. 1997 ) held that the fairnotice doctrine, used by the supreme court in DresserIndustries, Inc. v. Page Petroleum, Inc. 853 S.W.2d505 (Tex. 1993) to deny enforcem ent to a "release” ofliability for negligence occurring subsequent to theexecution of the release, should not be extend ed to denyenforcement of a "no damages for delay” clause and a"no consequent ia l damages for wro ngfultermination” clause.

The jury found that Green failed to timely delivermaterials, failed to deliver properly fabricatedmaterials, failed to provide proper access to the site,failed to coord inate or reso lve conflicts be tween thework of other sub contracto rs and So lis, failed to timelysubmit shop drawings, and failed to resolve co nflicts inplans and specifications. Because of these events, Solisincurred additional expenses and stop ped wor k due toGreen’s failure to pay for such add itional expenses.

The court stated

This clause doe s not constitute the type ofextraordinary risk-shifting found in Dresser. It isnot an indemnity agreement because it does not shiftGreen’s liability for third party claims to So lis...Also, this clause is not a release as defined inDresser because it neither “extinguishes[es] theclaim or cause of action” nor establishes “anabsolute bar to any right of action on the releasedmatter”.

The distinction between Dresser and thiscase lies in the fact that Dresser concerned theshifting of tort and negligence damages, whereas theno-dama ges-for-delay clause shifts eco nomicdamages resulting from a breach of contract. Wenoted in Dresser that most contra ct clauses op erateto transfer risk in som e way. ... However, we wereconcerned with clauses that o perate to shift risk inan extraordin ary way, such as ex culpating a p artyfrom the conseq uences of its own future negligence.... Here, the parties agreed that Solis would bear therisk that the projects would not be completed ontime, even if G reen cause d the delay.....

Interestingly, Justice Gonzales, who had written theopinion of the court in Dresser extending the fair noticerequireme nts to releases, is forced to dissent in GreenInternational, because he is unable to find the


“distinction” between a release and the no-damages-for-delay clause litigated in GreenInternatio nal. Justice Gonzales stated

This clause transfers all risk of de lay damage s toSolis. If operative, it relieves Green in advance ofany liability for such damages and surrendersSolis’s right to recov er them from Green. In veryplain language, it releases G reen from a ny liabilityresulting from delays. I therefore disagree with theCourt’s conclusion that “this clause is not a releaseas defined in Dresser....

Additionally, the delay-damages provisionwould exculpate Green in advance for delays causedby its own negligen ce. The o nly significantdifference between this release and the one at issuein Dresser is that this release is broader. It is notlimited to negligence, but may also be constru ed toabsolve Green o f liability for its own intentionalacts that delay So lis’s work. The policy underlyingDresser’s imposition of fair-notice standards, whichprotect parties from waiving their right to recoverfor negligence, apples with even greater force here.Because the delay-damage s provision m eetsDresser’s definition of release, and because thesame policy concerns arise regarding this particularrisk- sifting provision, I would apply the two--partDresser test to the facts of this case.

The court also noted that the public policy behindthe fair notice requirement of “conspicuousness” wasnot as strong in a case where the parties wereexperienced contractors familiar with the industrycustom of allocating risk for delays.

The provisions in qu estion read as follows:

Provision: "No Damages for Delay”

Contractor, except as p rovided for in thisparagraph 8(a) and (b ), shall not be liab le to theSubcontractor for delay to Subcontractor’s work bythe act, neglect or default of the Owner, Contractor,or the Architect, or by reason of fire, act of God,riot, strike, action of workmen or others, or anycause beyo nd Contr actor’s con trol.

(a) The Contractor will be liable to theSubcontractor for damages incurred as a result ofany acts, or failures to act, by the Owner whichdelays the Work, only if and to the extent the Owneris liable and pays the Contractor for such damages.

(b) Should Contractor delay Subcontractor in thework, Subcontractor shall receive an extension oftime for comp letion equal to delay if a written claimis made within forty-eight hours, and under nocircumstances shall Contrac tor be liable to pay toSubcontractor any compensation for suchContractor caused delays.

P r o v i s i o n : "No Damages for W r o n g fu lTermination”

Should subcontra ctor be wro ngfully terminatedunder this Agreement, the Subcontractor shall be

entitled only to be p aid a pro-rata percentage of thetotal Subcon tract price, equal to its percent ofcompletion and not for anticipatory profit, dama ges,or consequential dam ages.

(3) Waiver of Workers’ Compensa tion

System. The court of appeals in Beneficial PersonnelServices of Texas, Inc. v. Porras, 927 S.W.2d 177 (Tex.App.--El Paso 19 96, writ withdrawn and judgmentvacated by settlement) held that the following waiver byan employee of the bene fits of the Workers’Compensation Act contained in an employment contractcould not be enforced by the emp loyer to limit liabilityto its employee for injuries:

Provision:

3. Worker’s Compensation Benefits. BPS hasagreed in the Perso nnel Lease A greement w ith itsClient Company to provide worker’s compensationbenefits provided by a non- admitted insurancecarrier to Employe e for injuries co mpensab le underthe Texas Worker’s Compensation Act and similaracts of other jurisdictions (collectively referred to asthe "Act”) while Emp loyee is assigned to ClientCompany and to waive (give up) their common lawdefensed [sic] against the E mployee a s set forth inthe correspo nding Act. In exchange, the Employeeagrees to limit his/her recovery against BPS andClient Company for such compensab le injuries tobenefits allowed by the corresp onding Act. Thesebenefits are provid ed by a non- admitted insurancecarrier.

The court held that this provision did not satisfy theexpress negligence test or the conspicuo usnessrequirement of the fair notice test. The court labeledthis provision as an "extraordinary shift of common-lawliability outside the auspices of the state-sanctionedworkers’ compensation system.” The court held thatBPS’ agreement to make certain limited payments inreturn for the release from negligence liability did notrelieve BPS o f its obligation to comply with the fairnotice doctrine. T he found tha t the employmentagreement made "no mention of negligence, waiver ofcommon law rights, or any other specific statement thatthe parties intend ed to waive liability for BP S’s acts ofnegligence committed in the future.” Id., at 184.

e. Strict Construction. Since anexculpatory provision is drafted by the Released Partyto release or carve out liabilities or contractualobligations from other expressed or implied duties,courts will strictly construe such provisions. Releaseswill be subjec t to the same rules of constructiondiscussed above as to indemnity agreements. See thediscussion of the rules used by courts to interpretindemnity agreements at Article IIE Rules ofConstruction.

(1) Scope of Release . Any claims notclearly within the subject matter of the release arenot discharged. General ca tegorical rele ase clausesare narrowly construed. In Dunca n v. Cessn a AircraftCo., 665 S.W.2d 414, 422 (Tex. 1984). Vela v.Pennzoil Producing Co. , 723 S.W.2d 199(Tex.App.--San Antonio 1986, writ ref'd n.r.e.)--claimsnot clearly within subj ect matter of th e release are notdischarged, even if such claims existed at the time the


release was executed. In Victoria Bank & Trust Co. v.Brady, 811 S.W.2d 931, 938 (Tex. 1991), the supremecourt held that a release executed by a borrower in asettlement agreemen t releasing a ba nk "from a ny and allclaims and cause s of action ... direc tly or indirectlyattributable to the described loan transaction" did notinclude the bor row er's claim of tortious interference bythe bank in the borrower's contract with a third partyarising out of the borrower's sale of an asset as to whichthe bank err oneously as serted a secu rity interest.

The court in Mem orial Me dical Center of EastTexas v. Keszler, 943 S.W.2d 433 (Tex. 1997)distinguished the release litigated in Keszler from therelease litigated in Victoria . In Keszler Memorial andKeszler entered into a Compromise SettlementAgreement and a separate Release documentconcerning damage claims that Keszler asserted againstMemorial due to M emorial’s term inating staffprivileges at the hospital. Keszler later sued thehospital for fraud, negligence, and gross negligence forinjuries Keszler allegedly suffered due to exposure toethylene dioxide, a toxic sterilizing agent the hospitalused during his employment. The Keszler court foundthat the release langu age, releasing all as to “any othermatter relating to [Keszler’s] relations w ith[Memorial]”, included “a ll” claims including claims ofnegligently caused injuries to Dr. Keszler. The courtnoted that the release in Victoria was limited to claimsarising out of “the above described loan transaction”,which loan transac tion did no t as it turned out includeclaims arising out of another loan transac tion withVictoria Bank & Trust. The court also upheld therelease as being effective to release Keszler’s claim forgross negligence.

(2) A Continuum of Culpable MentalStates. See the discussion at Article IIE2c(4)Indemnified Matters - Contractual Exceptions.

(a) “ N e g l i g e n c e ” v e r s u s“Intentional Acts” . "Negligence" does not includeintentional acts. Richker v . Georg andis , 323 S.W.2d 90(Tex. C iv. App.--H ouston 19 59, writ ref'd n.r.e.).

(b) Exclusions for GrossNegligence. The issue of whether a release can coverfuture gross neglige nce has no t been ye t been decidedby the Texas Supreme Court. T he Supre me Cou rt inMemorial Medical Ce nter of East Texas v. Keszler, 943S.W.2d 433 (Tex. 1997 ) upheld the “all claims” releaseas covering K eszler’s claim for damages arising out ofMemo rial’s alleged gross negligence by making adistinction for post-accident waivers of liability. Thecourt stated

The court of appeals held that such a r elease isagainst public policy. 931 S.W.2d at 63 (citingSmith v. Golden Triangle Raceway, 708 S.W.2d574, 576 (Tex.App.--Beaumont 1986, no writ )).However the court of ap peals failed to distinguish apre-accident waiver of liability f rom a post-injuryrelease made in settlement of claims. In GoldenTriangle, the issue was whether a pre-injury releasecould effectively dispense with a claim of grossnegligence. Id. We have never held post-injuryreleases of gross negligence claims invalid. Thereis no logic in pr ohibiting pe ople from settlingexisting claims. Significantly, such a rule would

preclude settlement of many such cla ims. The courtof appeals erred in holding that Keszler could notrelease his gross negligence claim againstMemo rial.

In Franklin v. Marie Antoinette Con dominium OwnersAss’n, Inc., No. B064293 Cal. App. Ct. 2nd App. Dist.(1993), a California appeals court held that a unit ownerwas not entitled to recover fo r water dam age to her un itbased upon an exculpatory clause in the condominiumdeclaration. The clause barred the association fromliability for property damage caused by a centralplumbing leak unless the damage was caused by thegross negligence of the association or its directors. Theunit owner sustain ed $74 ,000 in da mages to he r unitfrom water leaking into her unit through the HVACvents. The court found that the exclusion from theexculpatory clause for "g ross negligen ce" did not coverthe omission o f the association to prevent damage to theunit owner's unit. The court also he ld that enforcementof the clause was reasonable and fair to thecondominium owners as a whole, since they had agreedto bear the risk of loss beyond what they could recoverfrom the asso ciation's insurance policy.

(3) Conflicting Provisions NullifyExculpation. An express duty paragraph and aseparate exculpation paragraph have been held tonullify the exculpa tion provisio n. Shintech, Inc. v.Group Constructors, Inc., 688 S.W.2d 144 (T ex.App.--H ouston [14 th Dist.] 198 5, no writ ).

(4) Parties Released.

(a) Named Specifically . InMcMillen v. Klingensm ith, 467 S.W.2d 193 (Tex.1971), the court held that a release d ischarges on lythose tortfeasors that it specifically names or otherwisespecifically indemnifies. T he Texa s Suprem e Court inDuncan v. Cessna Aircraft Co., 665 S.W.2d 414 (Tex.1984) approved the decisions in McMillen, and inLloyd v. Ray, 606 S.W.2d 545 , 547 (Tex. Civ.App.--San Antonio 1 980, writ ref'd n.r.e.) and Duke v.Brookshire Grocery Co., 568 S.W.2d 470, 472 (Tex.Civ. App.-- Te xarkana 1 978, no writ ) holding that themere naming of a general class of tortfeasors in arelease does not discharge the liability of each memberof that class. A tortfeasor can claim the protection of arelease only if the release re fers to him by name or w ithsuch descriptive p articularity that his identity or hisconnectio n with the tortious event is not in do ubt.

Also see Angus Chemical Co. v. IMC Fertilizer, Inc.,939 S.W.2d 138 (Tex. 1997) where the court held thatthe release by an injured party of a tortfeasor does notrelease the tortfeasor’s ins urer; Illinois Nat. Ins. Co. v.Pereez, 794 S.W .2d 373 (Tex.Ap p.--Corpu s Christi1990, writ den’d).

(b) "Agents" Do Not Include"Contractors" . The release in Doe v. SmithklineBeecham Corp., 855 S.W .2d 248 (Tex. Ap p.--Austin1993, writ granted) releasing Quaker Oats and its"agents" was held not to include a drug testinglaboratory that was hired by Quaker Oats to performpre-employment drug screens. The court held that thelab was an independent contractor and was not coveredby the employment application release form thatreleased "Quake r Oats, its employees and its agents,


from any liability based on the results of the drugscreening." See also Dresser Industries, Inc. v. PagePetroleum, Inc., 853 S.W.2d 5 05, 508-09 (Tex. 1993);Summ ers v. Skillern & Sons, Inc., 381 S.W.2d 352, 356(Tex. Civ. App.--Waco 1964, writ dism'd w.o.j.); but cf.Getty Oil Co. v. In surance Co. of No rth Ame rica, 845S.W.2d 794, 806 (Tex. 1992).

(5) Release of Unknown Claims.Release of future, unknown claims is permissible inTexas. Sweeney v. Taco Bell, Inc., 824 S.W.2d 289,292 (Tex. Ap p.--Ft. Wo rth 1992 , writ denied);Pecorino v. Raymark Indus., Inc., 763 S.W.2d 561(Tex. App.- -Be aumont 1 988, writ denied)--releaseexecuted in settlement of claim by worker and wifeagainst asbestos products manufacturers based onworker contracting asbestos released all claims,including those that might be discovered in the future,precluded subsequent action by worker's widow basedon death of worker from mesothelioma.

(6) Inadve rtently Released Matters.Although releases are to be construed narrowly, if therelease is broad enough to c over the released claims,then the claim is release d, even if the rele asor isunaware of claim. White v. G rinfas, 809 F.2d 1157 (5 thCir. 1987)--the court held that a settlement and releaseagreement settling prior lawsuit, purpo rted to waive allclaims or losses between the parties, would not be setaside on the basis of mutual mistake because theplaintiff purchasers were unaware of structural defectsin the foundation of the apartment project which wasthe subject of lit igation betwee n the parties. See alsoLubrizol Corp. v. E xxon C orp., 871 F.2d 1279 (5th Cir.1992), rehearing denied, 964 F.2d 1145 (5th Cir.1992), cert. denied, 113 S.C t. 186 (1992)--phrase "anyfact pleaded," as used in provision of settlementagreement in which plaintiff agreed that it would notassert "any claim or counterclaim" made in that action"or which could have been made based upon any factpleaded ," modified the phrase "which could have beenmade," rather than the previous clause concerning "anyclaim or counterclaim made ;" release thus affected notonly the claims a ctually raised in the suit, but all thosethat could have been made based on any fact pleaded.See however, Note, M ills, Personal Injury SettlementRelease are Avoidable on Grounds of Mutual Mistake:Williams v. Glash, 7 89 S.W .2d 261 (Tex. 199 0), 22TEX. TE CH LR. 309, 310 (1991).

C. "As Is". Absent an "as is" or similar clause, theseller of a product impliedly warrants that the productis merchantable, TEX. BUS. & COMM. CODE ANN.§ 2.314 (Tex. UCC) (Vernon 19 94), and that theproduct is fit for the particu lar purpo se for which it issold, Id. at § 2.315. Under the UCC "warranties" aredesigned to provide a remedy w hen a pro duct fails tomeasure up to the seller's representatio ns of quality.Mid-Continent Aircraft Co rp. v. Curry CountySpraying Service, In c., 572 S.W.2d 308, 313 (Tex.1978); Nobility Hom es of Texas, Inc. v. Shivers, 557S.W.2d 77, 80 (Tex. 1977). Disclaiming warranties byan "as is" clause shifts the economic risk of productquality from the seller to the buyer. T EX. B US. &COMM CODE ANN . § 2.316(c)(1)(Texas UCC)(Vernon 1994). See Annot., Construction and Effect ofProvision in Contra ct for Sale o f Realty by WhichPurchaser Agrees to Take P roperty " As Is" or in itsExisting Condition, 8 A.L.R. 5th 312, 373-79 (1992);

Weintraub, Disclaimer of Warranties and Limitation ofDamages for Breach of Warranty Under the UCC, 50TEX.L.REV. 60 (1973). Baggett an d Nolan , Use ofDisclaimers: "As Is Where Is P rovisions, 29thANNUAL MORTGAGE LENDING INSTITUTE(UNIV. TEX. 1995); Alderman, Current Status ofD T P A Waiv ers, "As I s Transac t ions andRepresentations and Warra nties, 18th ANNUALADVANCED REAL ESTATE LAW COURSE R(1996).

The Texas Supreme Court recen tly upheld the useof "as is” clauses as a me ans of risk man agement inPrudential Ins. Co. of America v. Jefferson Associates,Ltd., 896 S.W.2d 156 (Tex. 1995). In Prudential thebuyer recogniz ed that it was neither relying uponmaterials provided by the seller nor a misstatement bythe seller’s agent as to the character of the buildingbeing purchased. The court held:

A valid "as is agree ment, like the o ne in this case,prevents a buyer from holding a selle r liable if thething sold turns out to be worth less than the pricepaid bec ause it is impossible for the buyer’s injuryon account of this disparity to have been caused bythe seller .... The so le cause of a b uyer’s injury insuch circumstanc es, by its own ad mission, is thebuyer himself He has agreed to take the full risk ofdetermining the value of the purchase . He is notobligated to do so; he could insist instead that theseller assume pa rt or all of the risk by obtainingwarranties to the desire effect. If the seller iswilling to give such assurances, howev er, he willordinarily insist upon ad ditional compensation.Rather than pay mo re, a buyer may choo se to relyentirely on his own determination of the conditionand value of his purchase. In making this choice, heremoves the possibility that the seller’s conduct w illcause him d amage ....

Justice Cornyn’s concurring opinion arguesthat Goldm an’s "as is” agr eement i s relevant towhether Prudential caused him harm, but notcontrolling. If Goldman’s position at trial were thesame as the position he took in the ‘as is’agreeme nt, he could not recover on any of thetheories he asserts. Unable to show any reason whythe agreement should not be enforced, such asfraudulent induceme nt, Goldman ought to be held tohis voluntary, f reely negotiated a ffirmation of hisown assessment of the building. Justice Cornyn’sconcurring opinion suggests that Prudential shouldprevail if this was an arm’s-length transaction.Goldman d oes not dispute that it was.

Id., at 161-62.

1. Relevant in Apportioning Liability for

Third Party Injuries. An "as is" clause is not theequivalent of an effective indemnity or release, but maybe some evidence to be consid ered by the j ury inapportioning negligence liability between the seller andpurchaser of personal prope rty for injuries caused bycondition of the personal property. In Folks v. KirbyForest Ind. Inc., 10 F.3d 1173 (5th Cir. 1994), the courtof appeals fo und that the d istrict court committed anerror in advising the ju ry that the jury should notconsider the "as is" terms of the sale in assessingliability between Kirby and Hood Industries, Inc. In


Kirby Forest , an employee of Knight's MachineryRemoval was injured when a machine collapsed due tothe lack of hydraulic fluid. Kirby Forest had sold themachine "as is" to Hood Industries, Inc. at an auction atKirby 's closed plywood plant. After Hood Industriesbought the machine , it hired Knight MachineryRemoval to remove the machine and reinstall it in HoodIndustries' sawmill. Kirby Industries was liable forinjuries to Knight Machinery Removal's employee, asthe employee was an invitee injured by a conditionexisting on Kirby's premises. Id. at 1176 applying theRestatement (Second ) of Torts § 343 (1965) adopted inTexas in Adam Dante Corp. v . Sharpe , 483 S.W.2d452, 454- 55 (Tex. 1972), and rearticulated in Corbin v.Safeway Stores, Inc ., 648 S.W.2d 292 (Tex. 1983) andKeetch v. Kroge r Co., 845 S.W.2d 262, 266 (Tex.1992).

The court noted that Kirby did not contend that the"as is" clause reformed an otherwise defectiveindemnity clause. Id. 1180 n.14. However, the courtalso rejected the dissent's view that the court hadchanged the "as is" clause into an indemnity bypermitting its presence in the sales contract to beconsidered by the jury as some evidence inapportioning liability between selle r and buye r as toresponsib ility for the plaintiff's injury. Id. at 1180 n.16,and 1181 n.19.

2. Not Effective to Escape EnvironmentalLiability. An "as is" d isclaimer in a sales contract willnot shield the seller fro m liability to the buyer forcontributing towards environmen tal cleanup responsecosts under CE RCLA , 42 U.S.C . § 9607(a )(4)(B). SeeChannel Master Satellite Sys. v. J.F.D. Electronics, 702F. Supp. 1229 (E .D. N.C. 1 988). Also see SouthlandCorp. v. Ashla nd Oil, Inc. 696 F. Supp 994 (D.N.J.1988)--"as is" clause does not bar CERCLA claims;Allied Corp. v. Frola, 730 F. Supp. 626 (D.J.J.1990)--"as is" clause does not bar common law strictliability claims. See gen erally Clark, ContinuedLiability of Seller After a Sale of P roducin g Oil and gasProperties, 41 INST. ON OIL & GAS L. & TAX'N 5-1, 5-23 (1990)--discussing impact of an "as is" clauseon environmental liabilities.

See the discussion of provision s negating bu yer'sreliance on information or disc losures provide d by aseller in an "as is" contract in P ierce, StructuringRoutine Oil and Gas Transactions to M inimizeEnvironmental Liability , 33 W ASHB URN L. J. 76,112-119 (1993) . The allocation of environmental risksin a sales transactio n through re presentations,warrantie s, and indemnities will generally result in acontractual assumption of liability. In cases where acondition is known to ex ist, a preferab le method may beto provid e for an exp ress assump tion of liability.

Drafting: Baggett and Nolan, Use of Disclaimers: "AsIs Where Is Provisions, 29th ANNUALMORTGAGE LENDING INSTITUTE(UNIV. TE X. 1995).

An environmental indemnity agreement may beemployed to shift back to the seller a potential cleanuprisk arising out of detected marginal contaminationsbelow reportab le levels, but significa nt enough totrigger agency action if the condition comes to theattention of the g overnme ntal agency.

3. Fraud and Oral Statements. Of course, an"as is” clause cannot protect a seller from fraud ormaterial omissions. The court in Gopher Oil Co. v.Union Oil Co., 955 F.2d 519 (8th Cir. 1992) found thatan "as is” clause was ineffective in preventing a buyerfrom obtaining relief from a seller whose employeeshad oral statements as to prior occurrences at theproperty, but had omitted to mention a materialhazardous substance sp ill. See RESTATEMENT(SECOND) OF CONTRACT S § 161 (1981) providing"A person’s non- disclosure of a fact known to him isequivalent to an assertion that the fact does not exist inthe following cases only: ...” Also see Smith v. Levine,911 S.W.2d 427 (Tex. App.--San Antonio 1995, writdenied) as to fraud by oral misrepresen tations.

4. May Not Be Effective to Escape DTPALiability. Furthermore, the "consumer" has the right tocomplain that the contract was "unconscionable," seee.g., Wyatt v. P etrila, 752 S.W.2d 68 3 (Tex.App.--Corpus Christi, writ denied), and complain ofindependent affirmative misrepresentations made by theseller that would no t otherwise co nstitute actionab lefraud, see e.g., Weitzel v. Barnes, 691 S.W.2d 598(Tex. 1985). An effective waiver of the DTPA wouldaddress both of these issues. Texa s Decep tive TradePractices- Consumer Protection Act, § 17.42 TEX.BUS. & COM M. COD E ANN. (Verno n 1997); seeValero Energy Corp. v. K ellogg C onst. Co., 866S.W.2d 252 (Tex. App.--Corpus Christi 19 93, writdenied).

5. DTPA Waivers. Effective September 1,1995, the Texas Deceptive Trade Practices Act wasamended. These amendments added several exceptionsto the cove rage of the A ct. One of these exception s isfor large commercial transactions. Section 17.49(f) and(g) provides that the Act do es not app ly to contracts inthe following instances:

(1) transactions, a se t of transactions , or projectsinvolving a total consideration of more than $100,000,if the contract is written, the consumer is represented bylegal counsel, and the transaction does not involve theconsumer’s residence; an

(2) a transaction, a set of transactions, or projectinvolving a total consideration of more than $500,000,other than a transaction involving a consu mer’sresidence (in this $500,000 exception, there is norequirement that the consumer be represented by legalcounsel).

The 1995 amendments also simplified the means towaive the Act. Under the amended provis ion, aconsumer may waive the Act if: the waiver is in writingand signed by the consumer; the consumer is not in asignificantly disparate bargaining position; and theconsumer is represented by legal counsel in seeking oracquiring the goods or services. These amendm entseliminated the requirement that the consumer’s attorneyalso sign the waiver and eliminated the specialprovisions applicable to business co nsumers. Thewaiver is not effective if the consumer’s counsel wasdirectly or indirectly identified, suggested or selectedby a defendant or an agent of the defendant. Thewaiver must be conspicuo us and in bold-face type of atleast 10 points in size. It also must be identified by theheading "Waiver of Consumer Rights”, or similar


language, and include language substantially the sameas that provid ed in § 17 .4(c)(3).

The most significant definition changed by the 1995amendmen ts is that of "unconscionability”. The 1995amendm ents eliminated Section 17.45(5)(B) whichincluded within the meaning of "unconscionability” anact or practice which "resu lts in a gross disp aritybetween the value received and consideration paid, ina transaction involving transfer of consideration”.Thus, unconscionability may only be established byshowing an act or practice that takes adva ntage of aconsume r’s lack of ability, experience, or capacity to agrossly unfair degree. The amendments also clarifiedthe definition of "k nowingly” to in dicate that therelevant time is the time the act or practice complainedof occurred. The amendments added definitions for"economic damages” and "intentionally”.

D. Limitation of Liability Provisions.

1. Dis t ingu i shed f r o m E x c u l p ationProvisions and Releases. Unlike exculpatoryprovisio ns and releases, limitation of liability provisionsmerely limit one party’s liability to a predeterminedamount or type of allowed liability. Like exculpatoryprovisions and release s, a limitation of liab ilityprovision is a device used by the parties to manage riskand to allocate loss due to the occurrence of the risk. Ina sense a provision setting a limitation of liability is likea liquidated damage provision. 5 CORBIN ONCONTRACTS § 1068.

Since limitation of liability provisions do not relievea party of all risk, some courts have bee n willing touphold such type provisions where they o therwisewould no t uphold a c omplete shifting of risk by use ofa release or ex culpatory p rovision. See Drazek v.Moun tain River To urs, Inc. 884 F.2d 163 (4th Cir.1989); Lago v . Krollage , 535 N.E.2d 107 (1991);Galigan v. Arovitch , 219 A.2d 463 (P a. 1966);Evens v. Texas Pacific-Missouri Termina l R.R., 134F.2d 275 (5th Cir. 1943 ), cert. den. 319 U.S. 756, 87L.Ed. 1709, 6 3 S.Ct. 11 75 (194 3); Lumar Marine,Inc. v. Insurance Co. of North America, 910 F.2d 1267(5th Cir. 1990).

The use of limitation of liability provisions inconstruction or design contracts is statutorilyrecognized in Texas. TEX. CIV. PRAC. & REM.CODE § 130.0 04 (Ve rnon) pro vides that it does notprohibit or make void or unenforc eable a covenant or apromise to do the following:

Allocate, release, liquidate, limit or exclud e liabilityin connection with a construction contract betweenan owner or o ther person for whom a constructioncontract is being performed and a registeredarchitect or registered engineer.

2. Ration ale for Use. A limitation of liabilityprovision may be a suitable contractual risk shiftingdevice where the profit to be obtained in a transactionis otherwise outweighed by a high potential for risk ofenormous liability. In Markborough California, Inc. v.Superior Court, 277 Cal. App.3d 705, 277 Cal.Rptr.919 (Cal. 1991) a designer of a lake facing a$5,000,000 potential limited its liability to its fee of$67,000.

3. Types. Limitation of liability provisio ns fallinto two categories: provisions limiting the amount ofdamages to a predetermined or predeterminable amountand provisions limiting the type or characterization ofdamages recoverable.

a. Limitation of Amount of Liability. Themost widely used typ e of limitation of liab ilityprovision is in limiting the amount of damagesrecoverable. The follow ing is a limitation of liab ilityprovision suggested as an alternative provision by theAmerican Institute of Arch itects for use by A rchitectsin architect service agreements.

Provision:

12.2.1 COM PEN SATI ON. N either the arch itect,the architect’s consultants, nor their agents oremployees shall be jointly, severally or ind ividuallyliable to the owner in excess of the compensation tobe paid pursu ant to this agreement or of ______Dollars ($___), whichever is greater, by reason ofany act or omission, including breach of contract ornegligence not amounting to a willful or intentionalwrong.

AIA Document B511, Guide to Amendm ents to AIADocument B141 (1993 ed.). In Baker v. Roy H. HaasAssoc.s, Inc., 629 A.2d 1317 (Md.App. 1993 ) the courtenforce a limitation of liability provision in a homeinspection contract that lim ited an inspe ctor’s liabilityto the amo unt of its fee. The court uphe ld limiting theowner’s recovery for his $2,000 in damages to theamount of the inspecto r’s $250 fee on the basis that theinspector’s negligence w as not gross o r willful, thebargaining positions of the parties was relatively equa l,and the transaction did not involve a m atter of publicinterest.

Similarly, the amount of damages can be limited to theamount payable under available insurance.

Provision:

12.2.1 INSU RANC E. Neither the architect, thearchitect’s consultants, nor their agents oremployees shall be jointly or individ ually liable tothe owner in any amount in excess of the c urrentlymaintained professiona l liability insurance coveragecarried by th e architect.

AIA Document B511, Guide for Amendments to AIADocuments B141 (1 993 ed.).

A hybrid pro vision is a provision allowing the otherparty to choose either to limit liability to theprofessional fee being paid to the service provider orproviding an alternative higher fee, thus allowing theprofessional some compensation for the increased riskand funds with which to protect against the increasedrisk by purchasing insurance. The following provisionwas upheld in Georgetown Steel Corp. v. UnionCarbide Corp., 806 F.S upp. 74 (D.SC 1 992, reversedon other grounds ___ F.2d (4th Cir. 1993).

Provision:


Our liability for any damage on account of anyerror, omission or other professional negligence willbe limited to a sum not to exceed $50,000 or ourfee, whichever is greater. In the event the clientdoes not wish to limit ou r profession al liability tothis sum, we agree to waive this limitation uponreceiving client’s written request, and an agreementby the client to pay additional consideration of fourpercent (4%) of our total fee or $200.00 whicheveris greater.

b. Limitation of Type of Damages. Otherlimitation clauses limit the type of damages a party mayrecover by waiving certain types of damages, forexample waiving any right to consequential damages.See Florida P ower an d Light C o. v. Mid- Valley, Inc .,763 F.2d 1316 (11th Cir. 1985 ); Long Island LightingCo. v. IMO Delava l, Inc., 668 F.Supp. 237 (S.D. NY1987); Gibbes , Inc. II v. Law Engine ering, Inc ., U.S.App. Lexis 7602 (4th Cir. 1992). An example of thistype of provision is the following provision.

Provision:

Except as expressly provided in this Ag reement,neither party shall be liable for any special, indirect,incidental or consequential damages of any nature,including, without limitation, loss of actual oranticipated profits or revenue, loss by reason ofshutdown, loss of use or interest, nonoperation orincreased expense of manufacturing or operation orany costs, labor, or materials required forreconstruction or repairs. C ontractor’s a ggregateliability arising from this Agreement, regardless ofthe theory of reco very, including breach of contractor negligence, shall not exceed the scope and limitsof insurance req uired to be maintained in thisAgreem ent, except this agg regate liability limit shallnot apply to claims arising from damages caused byContracto r’s gross negligence, willful acts ormiscondu ct.