The Supreme Court answered the Fifth Circuit’s certified question inquiring whether the employee exception in the Texas Anti-Indemnity Act (TAIA) permits additional insured coverage when an employee who was injured on the job site sues the additional insured for his personal injuries. Can the injured employee recover under these circumstances and is he a co-employer of the indemnitor under the Texas Workers’ Compensation Act (TWCA)?
Skanska USA, Inc. (Skanska) was hired by Berkel & Co. Contractors (Berkel) as a general contractor on a large construction project in Houston, Texas. Skanska required all of the subcontractors it hired on site to participate in a contractor-controlled insurance program (CCIP), which provided both commercial liability and worker’s compensation insurance. In the course of the work at the project, Berkel leased a crane from Maxim Crane Works, L.P. (Maxim) for work on the construction site. The lease required that Berkel name Maxim as an additional insured under Berkel’s commercial general liability insurance, which was Zurich American Insurance Company (Zurich). Maxim did not enroll in Skanska’s CCIP.
The incident at the center of this case stemmed an injury suffered by Tyler Lee when a Berkel employee operating the Maxim crane caused the boom to collapse crushing his leg. Lee recovered worker’s compensation benefits under Skanska’s CCIP and sued Berkel, Maxim and others in Texas state court. The jury returned a verdict for Lee, allocating 90% of the fault to Berkel and 10% to Maxim.
In a separate lawsuit, which was removed to federal court, Maxim and Zurich disagree as to whether additional insured coverage is enforceable in this situation. The answer depends on whether or not Lee is considered an employee of Berkel who is the indemnitor under TAIA section 151.103.
Question Before the Court
The U.S. Court of Appeals for the 5th Circuit has requested guidance as to the scope of the employee exception to the Texas Anti-Indemnity Act (TAIA). The general rule under the TAIA is that the indemnitor is prohibited from indemnifying or insuring another party (the indemnitee) against a claim caused by the negligence or other fault of the indemnitee or its employees or agents. Tex. Ins. Code §151.102. An exception to this general provision allows the indemnitor to insure the indemnitee against a claim for the bodily injury or death of the indemnitee’s employee, agent, or subcontractor. The issue here involves whether the exception is impacted by provisions contained in the Texas Worker’s Compensation Act. (TWCA)
The general rule under the TAIA is that indemnification provisions are prohibited in construction contracts. “A provision in a construction contract, or in an agreement collateral to or affecting a construction contract, is void and unenforceable as against public policy to the extent that it requires an indemnitor to indemnify, hold harmless, or defend a party, including a third party against a claim caused by negligence or fault, the breach or violation of a statute, ordinance, governmental regulation, standard, or rule, or the breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier,” Tex. Ins Code §151.102.
The TAIA also limits the enforceability of some provisions for additional insured coverage: “A provision in a construction contract that requires the purchase of additional insured coverage is void and unenforceable to the extent that it requires or provides coverage the scope of which is prohibited under this subchapter for an agreement to indemnify, hold harmless, or defend.” §151.104(a)
The TAIA does include an exception to this general rule and this is the crux of the controversy presented in this case. The exception states: “Section 151.102 does not apply to a provision in a construction contract that requires a person to indemnify, hold harmless, or defend another party to the construction contract, or a third party against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or subcontractor of any tier.
In this case the injured employee, Lee, was awarded damages by a jury finding Maxim negligent and 10% responsible for Lee’s harm. Under sections 151.102 and 151.104 of the TAIA, and portions of the equipment lease or the CGL policy that required Berkel or Zurich to insure Maxim against claims caused by Maxim’s own negligence would be void. That being the case, the parties can agree on the fact that Zurich’s liability depends on whether TAIA’s employee exception applies to Lee’s claims and whether he was an employee of the indemnitor. Maxim asserts that TAIA includes any person or entity that the TWCA would treat as an employee of the indemnitor.
Does the TWCA change the ordinary meaning of employee in the TAIA employee exception?
The TAIA does not contain an definition of employee. Maxim contends that the legislative intent behind the TAIA in this exception was to prevent “cram down” indemnification, which allows upper tier contractors to force their subcontractors to take on indemnification obligations when they have neither control over the construction site nor its operations. Maxim says that as an equipment supplier it did not control the site or its operations and should not be held responsible for the accident that occurred when the crane crushed Lee’s leg.
Maxim also notes the similarity in language between the employee exception in 151.103 and the “knock-for-knock” rule. That rule is an indemnity provision, “under which contracting parties accept financial responsibility for personal injury claims of their own employees even if the injury is due to the fault or negligence of other parties to the contract.” Maxim argues that the knock-for-known rule is customary in the construction industry and would rightfully allow for indemnity without contradicting the requirement of the TAIA.
The court did not agree with Maxim on either point. In looking at the plain language of the TAIA, it did not find a reason to expand its meaning beyond what is plainly stated. Under the TWCA a general contractor may provide worker’s compensation insurance coverage to a subcontractor and its employees. Tex. Lab. Code §406.123. For all intents and purposes, this makes the general contractor the employer of the subcontractor and employees only as to worker’s compensation coverage.
This section of the Labor Code also offers incentives to general contractors to offer such insurance to subs. An employer who does so is immune to claims raised by a subcontractor’s employee as to anything other than worker’s compensation benefits. TWCA expressly protects contractors who are not direct employers of the subcontractor’s employees and they may assert a statutorily supported defense claiming worker’s compensation as the exclusive remedy available to claimants. Energy Gulf States, Inc. v. Summers, 282 S.W.3d 433, 444 (Tex. 2009).
Since the scope of potential general contractor liability is so limited by the TWCA, the court here does not agree that the context of the TAIA supports an alternate definition of employee so as to impose liability on the general contractor for Maxim’s part in the negligent behavior that caused the injury. It also explained that the terminology of “co-employers” and “co-employees” are terms that have only been utilized by courts and are not part of the statutory definition. The court agreed with the federal district court in its finding that nothing “warrants treating Berkel as the employer of Skanska’s employees, such that Berkel and Skanska would be deemed co-employers of Lee.” In effect this means that even if section 406.123 applied to TAIA, the claims by Lee would still not be applicable to the TAIA exception.
Finally, Maxim contends that “the mere fortuity of where the crane landed shouldn’t alter Zurich’s obligation to provide coverage.” The court found that this bad luck argument was in its words “absurd.” Section 151.102 does allow the obligor to indemnify other parties or its employees on a voluntary basis against the obligor’s own fault. The court found no “cram-down” indemnification in this case. In fact, no indemnification is present at all. Voiding the additional insured portion of the Berkel CGL policy would not require Maxim to be responsible for any other party’s negligence because it was already assigned its portion of damage by the jury and that portion reflects its degree of fault.
In its conclusion, the court found that Maxim did not show that the Legislature intended anything beyond the plain meaning of employee In its writing of the TAIA. Therefore, it will retain its common meaning and it is not affected by whether or not the indemnitor and the injured subcontractor in this case are co-employees under the TWCA.