A Primer on Indemnity

By JOHN J. SMITHER


A. Introduction
Indemnity involves the shifting of risk for a loss from the indemnitee to the indemnitor, effectively releasing one party in advance of responsibility for its own negligence. In Texas, the common law allowed a party to shift the entire burden of loss from one tortfeasor to another.1 However, following the enactment of article 2212A of Texas’ Revised Civil Statutes, the Texas Supreme Court in 1980 abolished the common law application of indemnity between joint tortfeasors (except in cases of purely vicarious liability) holding that the all-or-nothing approach under the common law was inconsistent with article 2212A’s comparative negligence system, which provided that damages could be apportioned among liable defendants according to their percentage of responsibility.2 Although the scope of indemnity was significantly narrowed by the supreme court’s holding, the issue of indemnity continues to arise in the context of contractual agreements, products liability, oilfield services contracts and vicarious liability.
While the standards for establishing entitlement to indemnity, whether set forth in case law or in a statutory scheme, appear on their face to be straightforward, there is usually some disagreement in every case in which a party seeks indemnity as to whether the indemnity claim sought is valid or enforceable. Certainly, each case has its own facts and analysis, depending on the language of the indemnity provision or statute at issue. With this in mind, rather than set forth an exhaustive analysis of all of the relevant case law on the topic of indemnity, the following should be considered a starting point for assessing whether indemnity may be available against other parties

B. Contractual Indemnity
Questions about contractual indemnity usually arise in situations between premises owners, general contractors and subcontractors, and may require analysis of several agreements to determine who, if anyone, owes indemnity to whom. Generally, a premises owner will insert in its agreement with a general contractor an indemnity provision that seeks indemnity for liability, attorneys’ fees and expenses for injuries sustained by the general contractor’s employees or subcontractors – even if the injury arose out of the premises owner’s own negligence. The general contractor will then typically seek similar indemnity from all subcontractors retained on a worksite. When an injury occurs and a lawsuit looms, one of the first questions from a client and/or insurer in cases involving several potentially responsible parties is invariably, “Can we pass this liability on to someone else?”
The supreme court has established a two-part “express negligence” test for determining the enforceability of indemnity provisions in that parties seek to shift the entire burden of loss for their own negligence. First, the party which seeks indemnity from the consequences of its own negligence must express that intent in specific terms within the four corners of the contract.3 Second, the contract’s indemnity provision must be conspicuous, such that it would attract the attention of a reasonable person who looks at the contract.4
The express negligence test is not an affirmative defense, but a rule of contract construction determinable by the court as a matter of law.5 Consequently, indemnity provisions that do not state the intent of the parties within the four corners of the agreement are unenforceable as a matter of law.6 In Enserch v. Parker7 for instance, the Texas Supreme Court considered and approved an indemnity provision in a contract between J.W. “Bill” Christie, Inc., a company that serviced a pipeline, and Enserch Corporation, which owned and operated the pipeline in question:
“[Christie] assumes entire responsibility and liability for any claim or actions based on or arising out of injuries, including death, to persons or damages to or destruction of property, sustained or alleged to have been sustained in connection with or to have arisen out of or incidental to the performance of this contract by [Christie] ... regardless of whether such claims or actions are founded in whole or in part upon alleged negligence of [Enserch]. [Christie] further agrees to indemnify and hold harmless [Enserch] ... in respect of any such matters and agrees to defend any claim or suit or action brought against [Enserch].”8
The court reasoned the contract was drafted in such a manner as to put Christie on notice that it would indemnify Enserch even if Enserch were ultimately found to be negligent. The court found the language of the contract that shifted the burden of loss onto Christie was unambiguous.9
Addressing the conspicuousness re-quirement, the court adopted the standard set forth in the Texas Business & Commerce Code, which states, “A term or clause is conspicuous when it so written that a reasonable person against whom it is to operate ought to have noticed it.”10 The court noted that language in capital headings, language in contrasting type or color, and language in an extremely short document exemplified conspicuous provisions.11 The court also reviewed several examples of provisions which were not conspicuous, including indemnity language on the reverse side of a sale order surrounded by unrelated terms, and language that appeared in small light type on the back of a rental form.12
Courts have found, however, that even if a provision is not conspicuous, a party who seeks to enforce the provision may dispose of this issue by presenting proof of actual notice.13 The Fourteenth Court of Appeals, for instance, considered the two-and-one-half-page length of a contract in combination with evidence that the president of the company had actually read the agreement as sufficient evidence to establish actual notice of an indemnity provision.14
Since the Texas Supreme Court made clear in 199415 that indemnity is an all-or-nothing proposition, Texas courts have held that indemnity provisions that do not specifically express the intent of the parties or that are not conspicuous fail as a matter of law. Therefore, in considering the effect of an indemnity provision, the drafter should state as succinctly as possible the obligations of the indemnitor with respect to the scope of indemnity, and should highlight or otherwise call attention to the indemnity provision, such that it would clearly be conspicuous as that term is understood in the indemnity context.

C. Statutory Indemnity
The Legislature has enacted several statutory indemnity provisions to define and/or limit the scope of indemnity related to sellers of products, contractors providing well and/or mine services and contractors in construction contracts. The Legislature defined the scope of indemnity owed by a manufacturer of products to an innocent retailer in Texas Civil Practice and Remedies Code Section 82.001, et seq. Under this statutory scheme,
“A manufacturer shall indemnify and hold harmless a seller against loss arising out of a products liability action, except for any loss caused by the seller’s negligence, intentional misconduct, or other act or omission, such as negligently modifying or altering the product, for which the seller is independently liable.”16
Further, “products liability action” is defined as “[A]ny action against a manufacturer or seller for recovery of damages arising out of personal injury, death, or property damage allegedly caused by a defective product whether the action is based in strict tort liability, strict product liability, negligence, misrepresentation, breach of express or implied warranty, or any other theory or combination of theories.”17
Therefore, any party which qualifies as a “seller” is eligible for indemnity for any “loss,” including court costs and other reasonable expenses, reasonable attorneys’ fees and other reasonable damages.18
The manufacturer’s duty to indemnify is triggered by joinder of the seller as a defendant in a products liability action and continues without regard to the manner in which the action is concluded.19 Furthermore, the duty to indemnify includes not only product liability claims, but also other theories of liability such as negligence, and is applicable even if it is later established that the defendant seller did not actually sell the product.20 Therefore, a manufacturer owes indemnity even if there are mixed allegations of products liability and independent negligence against the retailer. A plaintiff’s unsupported allegations of negligence are not sufficient to invoke the exception to the duty to indemnify the seller, which may only be established by a finding that the seller’s independent conduct was a cause of the plaintiff’s injury.21 Therefore, the retailer’s independent negligence is a fact question which must be determined by the fact finder before a manufacturer may reject a tender of indemnity from a seller under chapter 82.
Chapter 127 of the Civil Practice and Remedies Code sets forth the scope of indemnity between operators and contractor, in cases involving oilfield services and other mineral agreements. The supreme court in Ken Petroleum Corp. v. Questor Drilling Corp.22 examined the legislative history of the Texas Oilfield Anti-Indemni-ty Act in determining the act’s intent:
“The Legislature found that ‘an inequity is fostered on certain contractors by the indemnity provisions in certain agreements pertaining to wells for oil, gas, or water or to mines for other minerals.’ The legislative history indicates that in 1973, drilling and other contractors had agreed to indemnify operators but were unable to obtain insurance at a reasonable cost or in some cases to obtain any insurance at all to cover liability that might be incurred from the indemnity obligations. Contractors were thus subjected to significant liability with no feasible means of insuring against those obligations. The Legislature accordingly declared ‘certain agreements that provide for indemnification of a negligent indemnitee are against the public policy of this state.’”23
Section 127.003 of the Civil Practice & Remedies Code provides in relevant part:
“[A] covenant, promise, agreement, or understanding contained in, collateral to, or affecting an agreement pertaining to a well for oil, gas, or water or to a mine for a mineral is void if it purports to indemnify a person against loss or liability for damage that:
(1) is caused by or results from the sole or concurrent negligence of the indemnitee, his agent or employee, or an individual contractor directly responsible to the indemnitee; and
(2) arises from:
(A) personal injury or death;
(B) property injury; or
(C) any other loss, damage, or expense that arises from personal injury, death, or property injury.”24

This chapter does not apply if the parties agree in writing that the indemnity obligation will be supported by liability insurance coverage furnished by the indemnitor, subject to certain limitations.25 If the parties agree to provide differing amounts of insurance coverage, the indemnity obligation for each party is limited to the lower amount of insurance.26 Nor does the chapter apply in agreements in which the burden of procuring insurance is an obligation separate and in addition to an indemnity obligation.27 In summary, if operators and contractors in an oilfield services contract agree to mutually indemnify each other, their agreement must be supported by liability insurance coverage to be enforceable.
The Texas Legislature also enacted provisions for the protection of contractors dealing with architects and engineers in construction contracts in chapter 130 of the Civil Practice and Remedies Code. Section 130.002, for example, provides that a covenant or promise in connection with or collateral to a construction contract is void and unenforceable:
“[I]f the covenant or promise provides for a contractor who is to perform the work that is the subject of the construction contract to indemnify or hold harmless a registered architect, licensed engineer or an agent, servant, or employee of a registered architect or licensed engineer from liability for damage that:
(1) is caused by or results from:
(A) defects in plans, designs, or specifications prepared, approved, or used by the architect or engineer; or
(B) negligence of the architect or engineer in the rendition or
conduct of professional duties called for or arising out of the
construction contract and the plans, designs, or specifications that are a part of the construction contract; and
(2) arises from:
(A) personal injury or death;
(B) property injury; or
(C) any other expense that arises from personal injury, death, or property injury.”28

D. Vicarious Liability
Common law indemnity has been abolished in Texas, except in cases where the defendant’s liability is purely vicarious.29 Vicarious liability is imposed upon one for the conduct of another, based solely upon the relationship between the two.30 Generally speaking, a person who, without fault, has become subject to tort liability for the unauthorized and wrongful conduct of another, is entitled to indemnity from the other for expenditures properly made to discharge the liability.31 Under the common law doctrine of indemnity, the tortfeasor who is entitled to indemnity receives total reimbursement from another tortfeasor for damages paid to the plaintiff.32 Examples of vicarious liability relationships include employer/employee and principal/agent, as well as innocent retailers.33
In conclusion, an attorney reviewing a loss should always consider whether indemnity is available, and in so doing, should weigh all potential alternatives for obtaining indemnity – through contract, statute common law, or a combination.

Endnotes
1. B&B Auto Supply v. Central Freight Lines, Inc., 603 S.W.2d 814, 816-17 (Tex. 1980). 2. Id. at 816-817. 3. Ethyl Corp. v. Daniel Constr. Co., 725 S.W.2d 705 (Tex. 1987); Enserch Corporation v. Parker, 794 S.W.2d 2 (Tex. 1990). 4. Dresser Inds. v. Page Petroleum, 853 S.W.2d 505 (Tex. 1993). 5. Fisk Elec. Co. v. Constructors & Assoc., 888 S.W.2d 813 (Tex. 1994). 6. Gulf Coast Masonry, Inc. v. Owens-Illinois, Inc., 735 S.W.2d 239 (Tex. 1987). 7. 794 S.W.2d 2 (Tex. 1990). 8. Enserch, 794 S.W.2d at 6. 9. Id. Enserch arose following the death of two Christie employees who were working on the pipeline. Id. at 4. 10. Dresser, 853 S.W.2d at 511; Tex. Bus. & Com. Code §1.201(10). 11. Dresser, 853 S.W.2d at 511. 12. Dresser, 853 S.W.2d at 510 (citing K&S Oil Well Service, Inc. v. Cabot Corp., 491 S.W.2d 733, 737 (Tex. Civ. App.–Corpus Christi 1973, writ ref’d n.r.e.); Safway Scaffold Co. v. Safway Steel Prod., Inc., 570 S.W.2d 225, 228 (Tex. Civ. App.— Houston [1st Dist.] 1978, writ ref’d n.r.e.)). 13. Coastal Transport Co. v. Crown Cent. Petroleum Corp., 20 S.W.3d 119 (Tex. App.—Houston [14th Dist.] 2000, pet. denied). 14. Id. at126. 15. See Fisk, 888 S.W.2d 813. 16. Tex. Civ. Prac. & Rem. Code §82.002(a). 17. Tex. Civ. Prac. & Rem. Code §82.001(2). 18. Tex. Civ. Prac. & Rem. Code §82.001(3) and §82.002(b). 19. Meritor Automotive v. Ruan Leasing Co., 44 S.W.3d 86, 89 (Tex. 2001); Fitzgerald v. Advanced Spine Fixation Sys., Inc., 996 S.W.2d 864, 866 (Tex. 1999); Tex. Civ. Prac. & Rem Code, §82.001(e)(1). 20. Meritor, 44 S.W.3d at 91; Fitzgerald, 996 S.W.2d at 869. 21. Meritor, 44 S.W.3d at 91. 22. 24 S.W.3d 344 (Tex. 2000). 23. Ken Petroleum Corp. v. Questor Drilling Corp., 24 S.W.3d 344, 348 (Tex. 2000). 24. Tex. Civ. Prac. & Rem Code §127.003. 25. See Tex. Civ. Prac. & Rem Code §127.005. 26. Ken Petroleum Corp., 24 S.W.3d at 351. 27. Getty Oil Co. v. Insurance Co. of N. Am., 845 S.W.2d 794 (Tex. 1992). 28. Tex. Civ. Prac. & Rem Code §130.002(a). 29. B&B Auto Supply, 603 S.W.2d at 816-17; St. Anthony’s Hosp. v. Whitfield, 946 S.W.2d 174 (Tex. App.—Amarillo 1997, writ denied). 30. St. Anthony’s Hosp., 946 S.W.2d at 177-178. 31. Humana Hosp. Corp. v. American Medical Sys., Inc., 785 S.W.2d 144 (Tex. 1990). 32. B&B Auto Supply, 603 S.W.2d at 816-17. 33. St. Anthony’s Hosp., 946 S.W.2d at 177-78; Humana Hosp. Corporation, 785 S.W.2d at 145.

John J. Smither is a shareholder at Hays, McConn, Rice & Pickering, P.C., where his practice areas include insurance coverage, employer liability, products liability, and general civil litigation. Smither earned his B.A. in 1990 from Vanderbilt University and his law degree in 1993 from South Texas College of Law.

< BACK TO TOP >