Texas Federal Court Rejects Challenge to Additional-Insured Coverage Based on Anti-Indemnity Statute

In another policyholder-friendly decision, a Texas federal court denied an insurer’s attempt to rely on an anti-indemnity statute to avoid a duty to defend an additional insured. Knife River Corporation – South, v. Zurich American Insurance Company, et al., No. 3:21-CV-1344-B, 2022 WL 686625 (N.D. Tex. Mar. 8, 2022).

Knife River Corporation-South (“KRC”) contracted with the Texas Department of Transportation to complete road work. KRC subcontracted with AWP Inc. to place signage at the construction site. The subcontract required that AWP defend and indemnify KRC for certain claims. A driver crashed in the construction area and sued KRC and AWP, among others. The underlying petition alleged, among other things, that KRC and AWP failed to properly warn the traveling public of the unreasonable danger posed by the construction and roadway hazards requiring signage. KRC settled the underlying lawsuit and plaintiffs dismissed all underlying defendants.

KRC filed suit for declaratory relief and breach of contract regarding AWP’s insurers’ duties to defend and indemnify KRC as an additional insured. The insurers moved to dismiss, arguing, among other things, that KRC’s additional-insured claim was prohibited under Texas’s Anti-Indemnity Statute. Specifically, the insureds contended that KRC was seeking coverage from its subcontractor’s insurers for KRC’s own negligence, not the negligence of AWP, which was barred by Texas’s Anti-Indemnity Statute.

Based on Texas’s eight-corners rule, the court denied the insurers’ motion to dismiss. The court explained that the underlying petition alleged that the settlement arose out of, in whole or in part, the negligence of AWP, and KRC sought to recover only damages attributable to AWP’s negligence. For this reason, Texas Anti-Indemnity Statute did not apply. The court also declined the insurers’ invitation to consider the AWP subcontract as extrinsic evidence under a limited exception to the eight-corners rules. The court explained that the AWP subcontract contradicted the facts alleged in the pleadings and interpreting the subcontract for coverage purposes would overlap with the merits of liability, and it could not be considered when evaluating coverage under the eight-corners rule.

Takeaways

Knife River is a helpful ruling for builders and general contractors seeking coverage as an additional insured for claims that can be read as seeking to impose liability on the additional insured potentially based on the conduct of the named insured. While a number of states have passed anti-indemnity statutes like Texas’s, the case law on these statutes has favored policyholders, as courts have been reluctant to enforce anti-indemnity statutes against insureds. The Knife River decision is another example of a court refusing to use an anti-indemnity statute to limit the valuable right to additional-insured coverage that builders and general contractors negotiate with subcontractors.