Andrew G. Witik | Litchfield Cavo LLP | March 22, 2018
The growing trend in the Western states of anti-indemnity legislation vis-à-vis construction activities has produced its most recent published and precedential decision in Oklahoma, JP Energy Marketing v. Commerce And Industry Insurance Co., 2018 OK CIV APP 14, 412 P.3d 121 (03/01/2018). This coverage case arose from multiple underlying lawsuits over property damage caused by a fire which erupted during the construction of JP’s Great Salt Plains Pipeline in Payne County, Oklahoma.
Anti-Indemnity legislation is significant because often owners, developers and general contractors shift their own liability and risk to subcontractors. Stated another way, “indemnification” and “additional insured” clauses routinely contained in construction subcontracts attempt to hold the subcontractor responsible for project site accidents and other losses that are not necessarily the fault or sole fault of the subcontractor.
In response to what appears to be a perceived unfairness toward subcontractors under this traditional risk shifting scheme, some state legislatures have enacted anti-indemnity laws that bear little resemblance to prior, and still the majority of anti-indemnity legislation throughout the states. Some states such as Texas, Oregon and Oklahoma, with very limited exceptions, have barred altogether the making, naming or endorsing of another company or entity as an additional insured entitled to coverage for its own negligence in the context of construction activities and work.
The Oklahoma Court of Appeals decision, with issuance of the Mandate on March 1, 2018, was released for publication. The JP Court in its affirmance of the trial court’s summary judgment finding in favor of the additional insured, and more specifically, that JP was entitled to defense and indemnity in the underlying suits under the policies of BITCO General Insurance Corporation, Alterra America Insurance Company and Navigators Insurance Company, addressed two issues of first impression:
- Whether the insurers’ particular policy language requires a direct contract between the pipeline owner, JP and the specific subcontractor to have the owner named an additional insured on the subcontractor’s liability policy?
- Whether Oklahoma’s anti-indemnity statute, 15 O.S. § 221, precludes coverage under the BITCO and Navigators policies as a matter of law?
This article focuses on the latter question – the Court of Appeals noting that “Oklahoma enacted the anti-indemnity statute in 2006, and [it was] the first appellate court to examine the statute.” The anti-indemnity law provides, in pertinent part, as follows:
- Except as provided in subsection C or D of this section, any provision in a construction agreement that requires an entity or that entity’s surety or insurer to indemnify, insure, defend or hold harmless another entity against liability for damage arising out of death or bodily injury to persons, or damage to property, which arises out of the negligence or fault of the indemnitee, its agents, representatives, subcontractors, or suppliers, is void and unenforceable as against public policy.
- The provisions of this section do not affect any provision in a construction agreement that requires an entity or that entity’s surety or insurer to indemnify another entity against liability for damage arising out of death or bodily injury to persons, or damage to property, but such indemnification shall not exceed any amounts that are greater than that represented by the degree or percentage of negligence or fault attributable to the indemnitor, its agents, representatives, subcontractors, or suppliers.
- This section shall not apply to construction bonds nor to contract clauses which require an entity to purchase a project-specific insurance policy, including owners’ and contractors’ protective liability insurance, project management protective liability insurance, or builder’s risk insurance.
- Any provision, covenant, clause or understanding in a construction agreement that conflicts with the provisions and intent of this section or attempts to circumvent this section by making the agreement subject to the laws of another state, or that requires any litigation, arbitration or other dispute resolution proceeding arising from the agreement to be conducted in another state, is void and unenforceable
Initially, the JP Court pointed out that the foregoing statute prohibits both “broad and intermediate form indemnity agreements in construction contracts,” that is barring indemnification for the indemnitee’s own negligence, sole or partial. In other words, in Oklahoma the subcontractor indemnitor can only be responsible for indemnifying the indemnitee general contractor or owner developer to the extent of the indemnitor’s own negligence. The Court of Appeals specifically reviewed the particular indemnification clauses contained in the subcontractors’ construction contracts and found the language in compliance with § 221 (B) of the anti-indemnity statute cited above. Because the indemnification language in the subcontracts only agreed to “indemnify and defend JP for liability arising from” the acts and omissions of the subcontractors and “[did] not agree to indemnify and defend JP for liability arising from” its own negligence the indemnification agreements did not run afoul of the statute.
Similarly, the Court of Appeals reviewed the additional insured endorsements to the subcontractors’ respective policies issued by BITCO and Navigators to determine whether the specific policy language obligated the insurers to indemnify or defend JP for its own negligence. Referencing the foregoing policy language from the BITCO policy, the Court of Appeals held that neither insurance policy under review violated § 221 (B) or were in conflict with the anti-indemnity statute, explaining as follows:
The BITCO policy’s additional endorsement provides coverage to JP for damages “caused, at least in part, by [Global’s] negligence[.]” The insurance does not apply to “‘bodily injury’ or ‘property damage’ resulting from any act or omission of [JP] or any of their employees, other than the general supervision of work performed for [JP] by [Global].” The policy does not cover JP against its own negligence. We hold the agreements to name JP as an additional insured in the IPS-Global Subcontract and the BITCO insurance contract do not violate § 221(B) nor do they conflict with the provisions and intent of Oklahoma’s anti-indemnity statute. See 15 O.S. § 221 (E)
The Court of Appeals decision in JP Energy Marketing illustrates yet again the criticality of knowing the scope of the specific anti-indemnity statute applicable to the construction project being undertaken. All construction project participants as well as their counsel should be aware that if litigation ensues the prime contract, all subcontracts and applicable insurance policies will be reviewed and interpreted together by the courts in conjunction with the relevant state’s anti-indemnity statute.