Industry Update: Important Legislation from the 84th Regular Session

Although the 84th Legislative Session was relatively quiet for the construction industry, several new laws notable to the field became effective this month. Some of these bills include: (1) House Bill 2049, which addresses the liability of design professionals who contract with “governmental agencies;” (2) House Bill 1455, which adds pre-suit requirements for defect claims by Condominium Owners’ Associations; (3) Senate Bill 1081, which requires information to be furnished to parties enrolling in a consolidated insurance program; and (4) House Bill 2475, which creates the Center for Alternative Finance and Procurement to assist the Texas Facilities Commission in managing public-private partnerships.

1. House Bill 2049 (effective Sept. 1, 2015): Limiting Liability of Architects and Engineers in Government Contracts

The passage of House Bill 2049 (HB 2049) addresses architects’ and engineers’ indemnity and defense duties under certain governmental contracts. Contracts between “governmental agencies” and design professionals frequently require the professional to indemnify and defend the governmental agency. While the duty to indemnify arises only after an adverse money judgment is awarded, the duty to defend often arises as soon as a claim is made. Because a defense obligation arises before a design professional is found to be at fault, these clauses often require such professionals to assume an uninsurable risk of loss.

In an effort to address these issues, HB 2049 amends Section 271.904 of the Local Government Code to prohibit the governmental agency from requiring the design professionals to assume the defense obligation, so long as the underlying claim is based upon acts of the governmental agency or some other entity under the government’s control. But a contract may still provide for the reimbursement of the government’s reasonable attorneys’ fees in proportion to the professional’s liability after a determination of fault. As to indemnification, HB 2049 clarifies that the indemnity obligation is limited to the extent of fault of the architect or engineer. The bill also allows a governmental agency to require that an architect or engineer name the agency as an additional insured in the general liability policy only and provide any defense afforded by that policy.

Finally, HB 2049 establishes a statutory standard for “governmental agency” contracts requiring that “a licensed engineer or registered architect . . . [must] perform services: (1) with the professional skill and care ordinarily provided by competent engineers or architects practicing in the same or similar locality and under the same or similar circumstances and professional license; and (2) as expeditiously as is prudent considering the ordinary professional skill and care of a competent engineer or architect.” Any government contract attempting to establish a different standard of care for an architect or engineer is void and unenforceable. This is important because parties often attempt to require a design professional to assume a heightened, or uninsurable, standard of care.

2. House Bill 1455 (effective Sept. 1, 2015): Pre-Claim Requirements for COAs

House Bill 1455 (HB 1455) provides added protection for developers, contractors, and design professionals against claims made by Condominium Owners’ Associations of eight or more units (COAs). Specifically, the bill amends Chapter 82 of the Texas Property Code so that COAs must now comply with certain procedural requirements before filing construction or design defect claims. Under HB 1455, before filing suit or initiating arbitration, a COA must, among other new requirements: (1) obtain an inspection and third-party report from a licensed engineer, with notice of the inspection to be given to all parties subject to a claim; (2) obtain approval from unit owners holding more than fifty percent of the total votes allocated under the COA’s declaration and give unit owners at least thirty days’ notice of the meeting at which said vote is to take place (with specific requirements included for the notice to be given); and (3) furnish unit owners and parties subject to a claim with a copy of the completed third-party report before giving notice of the meeting. The limitations period for filing suit or initiating arbitration is tolled until the first anniversary of the date the procedures are initiated by the COA, if the procedures are initiated in the final year of the applicable limitations period. Lastly, the bill allows condominium declarations to require binding arbitration or otherwise dictate a process for resolution for claims pertaining to the construction or design of a unit, and any modification or removal of such provisions from a declaration may not operate retroactively to claims occurring before the removal is effective.

3. Senate Bill 1081 (effective Jan. 1, 2016): Provision of Information to Parties in Consolidated Insurance Programs

Although not effective until early next year, Senate Bill 1081 (SB 1081) amends the Texas Insurance Code to require principals, including contractors and owners, under a consolidated insurance program (CIP) to make certain disclosures. A CIP, as defined by Section 151.001 of the Insurance Code, is “a program under which a principal provides general liability insurance coverage, workers’ compensation insurance coverage, or both that are incorporated into an insurance program for a single construction project or multiple construction projects.” Where a construction contract requires enrollment in a CIP, the principal—or the individual or entity procuring the CIP policy—is now required to provide the enrollee with various information about the program prior to enrollment, such as program contact information, eligibility requirements for enrollment, and a summary of coverage. The intended purpose of this law was to provide a mechanism for parties to request information about the coverages provided under the CIP.

The law provides that a party shall not be required to enter into a construction contract requiring enrollment in a CIP if not provided with the information mandated by SB 1081 from both the principal and contractor. If not furnished with this information, the party may opt not to enroll in the program.

Finally, SB 1081 permits a contractor to request a copy of the policy covering that contractor under a CIP. The failure to furnish a complete copy of the policy to the contractor upon request constitutes a material breach of the construction contract. Prior to the enactment of this law, contractors and subcontractors were often required to sign construction contracts without knowing the terms of the CIP.

4. House Bill 2475 (effective Sept. 1, 2015): Establishment of the Center for Alternative Finance and Procurement

House Bill 2475 (HB 2475) requires the Texas Facilities Commission to establish the Center for Alternative Finance and Procurement (the Center). The Center’s purpose is two-fold: to consult with governmental entities regarding the procurement and financing of qualifying projects and to assist those entities in securing and managing public-private partnerships, or “P3s,” including assisting with the receipt of proposals from or negotiations with private entities. Specifically, the Center is tasked with providing financial, technical, and other professional services as additional support to the existing Partnership Advisory Commission, which functions to evaluate P3 proposals and advise governmental entities receiving such proposals.

The foregoing is provided for informational purposes only and is not intended to provide legal advice or to serve as an alternative to seeking legal counsel.

Megan R. Kateff is an unlicensed associate with Allensworth & Porter, LLP. Megan externed in the House Parliamentarian’s Office at the Texas Legislature during the 84th Regular Session and is awaiting her bar examination results in November.  She can be reached at mrk@aaplaw.com.