North Carolina’s Anti-Indemnification Statute is Amended

In 2019, the North Carolina General Assembly re-wrote the primary statute governing the enforceability of indemnity provisions in construction and design contracts. The legislation, signed into law by Governor Roy Cooper on July 8, 2019, both expanded and restricted the permissible scope of certain indemnity agreements.

House Bill 871 (ratified as S.L. 2019-92) amended N.C. Gen. Stat. §22B-1, North Carolina’s “anti-indemnity” statute.

The legislation added new subsections to §22B-1 that (1) render unenforceable agreements requiring a design professional to defend others for claims arising from the designer’s actions; and (2) authorize award of attorneys’ fees.

Duty to Defend

It is common in contracts in the construction industry that one party (“indemnitor”) will expressly agree in its contract to “indemnify, defend, and hold harmless” the other party to the contract (“indemnitee”) for claims brought against the indemnitee by a third party arising from actions of the indemnitor. For example, a designer may agree in its contract with the project owner to indemnify, defend, and hold harmless the owner for damages in the event a third party is injured and sues the owner for damages caused by the designer’s alleged negligence.

Under the amended statute, design professionals can no longer be contractually required to defend other parties to their contracts. A contract’s indemnity agreement may still be drafted to require the designer to indemnify others, but the duty to defend has been declared “against public policy, void, and unenforceable.”

This prohibition applies only to certain design professionals (architects, landscape architects, engineers, land surveyors, geologists, and soil scientists). The prohibition does not apply to others in the construction industry such as contractors, subcontractors, or suppliers.

Attorneys’ fees

The General Assembly added a new section to the statute, §22B-1(d), that expressly authorizes an award of attorneys’ fees in the context of indemnification. Entitlement to recover attorneys’ fees is regulated by statute and is permissible in only limited circumstances. Prior to this amendment, the anti-indemnity statute did not address whether an agreement to reimburse an indemnitee for its attorneys’ fees incurred in defending third-party claims was enforceable. The statute was silent on this issue. The amended statute now expressly validates indemnity agreements that require the indemnitor to reimburse the indemnitee for the indemnitee’s attorneys’ fees incurred in defending against claims brought by third parties that arise from the indemnitor’s actions.

This new section applies to all parties in construction and design contracts. Therefore although design professionals may not be required to provide a defense to an indemnitee, there is now a statutory pronouncement validating contractual indemnity agreements that require design professionals (along with contractors, subcontractors and suppliers) to reimburse other parties to their contracts for the indemnitees’ attorneys’ fees incurred in defending against third-party claims.

Effective date

The amendment to the anti-indemnity statute became effective on August 1, 2019, and applies to contracts “entered into, amended, or renewed” on or after that date.

It is not clear why the General Assembly opted to vary from the commonly used effective date for legislation affecting contracts – that the effective date of the legislation is a certain date and applies to contracts “entered into” on or after that date. This amendment’s much broader effective trigger date (contracts “entered into, amended, or renewed”) presents the opportunity to review existing open contracts and determine whether it would be in one’s interest to amend or renew these contracts to take advantage of this statutory change.