Additional Insured and Contractual Indemnity Coverage in
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Additional Insured and Contractual Indemnity
Coverage in Commercial and Construction Contracts Reconciling Contractual Obligations With Policy Terms to Maximize Coverage
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WEDNESDAY, AUGUST 1, 2012
Presenting a live 90-minute webinar with interactive Q&A
Joann M. Lytle, Partner, McCarter English, Philadelphia
Charles J. Reitmeyer, Vice President and Associate General Counsel, Aramark, Philadelphia
Mitchell B. Reiter, Partner, Goldberg & Connolly, Rockville Centre, N.Y.
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OTHER PEOPLE’S INSURANCE:
Additional Insured Coverage
By
Joann M. Lytle, Esq.
McCarter & English, LLP BNY Mellon Center
1735 Market Street, Suite 700
Philadelphia, PA 19103
215-979-3800
jlytle@mccarter.com
Information which is copyrighted by and proprietary to Insurance Services Office,
Inc. ("ISO Material") is included in this publication. Use of the ISO Material is
limited to ISO Participating Insurers and their Authorized Representatives. Use by
ISO Participating Insurers is limited to use in those jurisdictions for which the
insurer has an appropriate participation with ISO. Use of the ISO Material by
Authorized Representatives is limited to use solely on behalf of one or more ISO
Participating Insurers.
August 1, 2012
6
What is Additional Insured Coverage?
Risk transfer method that allows one party
to a business relationship to obtain
coverage under another party’s policy.
7
Who Are The Players?
Additional Insured – the party seeking to
take advantage of another party’s
coverage.
Named Insured – the party whose policy
is providing coverage to the Additional
Insured.
8
Additional Insured vs. Additional “Named Insured”
Not the same thing.
“Additional Named Insured” has no generally
accepted meaning.
9
Additional Named Insured
“A person or organization, other than the first
named insured, identified as an insured in the
policy declarations or an addendum to the policy
declarations.”
“A person or organization added to a policy after
the policy is written with the status of named
insured. This entity would have the same rights
and responsibilities as an entity named as an
insured in the policy declarations….”
Irmi Online - Glossary of Insurance and Risk Management Terms
10
Additional Insured
“A person or organization not
automatically included as an insured
under an insurance policy, but for whom
insured status is arranged, usually by
endorsement. …”
Irmi Online - Glossary of Insurance and Risk Management Terms
11
Benefits for Additional Insured
Coverage without premium.
Doesn’t erode additional insured’s own limits
of liability.
No responsibility for deductibles.
Particularly important for companies who are
self-insured or who have retentions on their
own policies.
12
Benefits for Additional Insured
Supports indemnity obligation, which only has
value if the indemnitor has assets to fulfill it.
Defense coverage, without having to wait for a
resolution of the indemnity obligation.
Can be independent of, and provide broader
protection than, the indemnity obligation, i.e.,
for the additional insured’s negligence.
– Important where applicable state’s law prohibits
indemnification for one’s own negligence.
13
Disadvantages for Additional Insured:
No control over the defense.
– Significant where both the Named Insured and Additional
Insured are sued.
Limits must be shared among all insureds.
Often no business relationship with carrier.
14
Implications for Named Insured
Pros
– Allows transfer of the obligation to defend and
indemnify the indemnitee to the insurer.
Cons
– Erosion of limits.
– Limits shared by all insureds.
– Limits used to pay claims for which the Additional
Insured may be partly or entirely at fault.
– Responsibility for deductible.
– Higher premiums down the road based on loss
experience.
15
Relationships Giving Rise to Additional Insured Coverage
Construction
– General contractor requires additional insured status on
subcontractors’ policies.
Vendor/Vendee
– Vendor requires additional insured coverage on
manufacturer’s policy.
Service Agreement
– Customer requires additional insured status on service
provider’s policy.
Building maintenance
Cafeteria operation
16
Relationships Giving Rise to Additional Insured Coverage
Equipment Lease
– Lessor requires additional insured status on lessee’s
insurance.
17
Real Life Example
Manufacturer leases equipment to Customer.
Customer installs equipment in its plant and uses equipment to
manufacture insulation.
Explosion on one of the lines.
Very serious injuries to Customer’s employees, including
multiple deaths.
Customer’s employees sue Manufacturer.
Manufacturer has multi-million dollar retention for products
claims on its own policy, and Manufacturer’s policy does not
impose a duty to defend.
Manufacturer makes claim as an Additional Insured against
Customer’s policy for both defense and indemnification.
18
How Does One Become An Additional Insured?
Generally requires both contract between the
parties and an additional insured provision in an
insurance policy.
19
The Contract
An obligation to indemnify does not confer
additional insured status.
Does the contract contain an insurance
provision?
– Does it require that the other party name your client
as an additional insured?
– Does it specify the type and amount of insurance
coverage to be provided?
CGL, Umbrella?
Primary or Excess?
Limits?
20
The Insurance Policy
A contractual obligation to provide insurance is
ineffective unless the Named Insured’s policy
contains an Additional Insured Clause.
Usually in an endorsement.
21
Types of Additional Insured Endorsements
Both ISO endorsements and manuscript endorsements
– Two varieties
Blanket additional insured endorsements – grant
additional insured status to categories of
Additional Insureds or to those whom the Named
Insured has a contractual obligation to insure.
– Sometimes called automatic additional
insureds.
– If the contract does not specifically require
insurance, the endorsement is ineffective.
Scheduled additional insured endorsements – lists
the name of the additional insured.
22
Verifying Additional Insured Coverage
A certificate of insurance is not proof of
insurance
The Acord form specifically states that
additional insured coverage requires an
endorsement
23
24
Verifying Additional Insured Coverage
Ideally, request a full copy of the Named
Insured’s policy.
May not be that simple.
– For some large companies, the extent of their
insurance program, including limits and
deductibles, is a closely-guarded secret.
– In that situation, review the additional insured
endorsement(s), at a minimum.
– Review the Other Insurance Clause, if possible.
25
Additional Insured – Timely Notice Obligation?
A typical CGL policy will generally state that
an insured must give notice as soon as
“practicable” of an occurrence that may result
in a claim under the policy.
26
Additional Insured – Timely Notice Obligation?
In some jurisdictions, a named insured’s
timely notice will also constitute adequate
notice on the additional insured’s behalf.
27
Additional Insured – Timely Notice Obligation?
In Casualty Insurance Co. v. E.W. Corrigan Construction Co.,
Inc., 247 Ill. App. 3d 326 (Ill. App. Ct. 1993), the court rejected
the carrier’s attempts to argue that notice to the workers’
compensation department is insufficient to provide adequate
notice to the liability department for the same carrier.
“[I]f an insured notifies its insurer of an occurrence and
references its workers’ compensation policy, it should be
considered notice in regards to any general liability policy the
insured might have with the same insurer. Consequently, it
should also be adequate notice to the insurer for any
additional insured named on the general liability policy.”
Id. at 333.
28
Additional Insured – Timely Notice Obligation?
In some jurisdictions, however, the additional
insured must provide notice on its own behalf
in a manner consistent with the policy’s
specific terms and conditions.
29
Additional Insured – Timely Notice Obligation?
In Liberty Ins. Underwriters Inc. v. Great American Ins.
Co., No. 09 Civ. 4912(DLC), 2010 WL 3629470 (S.D.N.Y.
Sept. 17, 2010), the court determined an additional
insured has an implied duty to provide its own notice to
the insurance carrier even if the policy does not explicitly
require separate notice by the additional insured or the
insurer received actual notice of the claim from the
named insured or a separate source.
30
Additional Insured – Timely Notice Obligation?
Why is this a problem?
– In many cases, the only policy information an additional
insured has is a Certificate of Insurance
– Even assuming it contains current policy information, it’s
unlikely to contain the policy’s specific notice requirements
31
Whose Coverage is Primary?
Formerly a hotly-disputed issue.
ISO attempted to resolve the dispute in the CGL
policy itself.
The 2001 and later versions of the ISO CGL Policy
(CG 00 01 10 01) contain an amended Other
Insurance Clause (Section IV).
33
ISO Other Insurance Clause
• States that the Named Insured’s policy is excess
over any other policy on which “You” have been
added as an additional insured by way of
endorsement.
• Issues still arise when the other party’s
insurance purports to provide only excess
coverage.
• Issues also arise concerning whose policy pays
after the limits of the policy providing additional
insured coverage are exhausted.
34
Scope Of Additional Insured Coverage
How broad is it?
Does it essentially back-stop the Named Insured’s
contractual indemnity obligation?
– Which clause appears first in the contract – indemnity or
insurance?
Does it cover more than the Additional Insured would be
able to recover under the Indemnity Agreement?
– What if the indemnity agreement contains a monetary cap?
– What if the insurance provision states that the Additional
Insured will receive coverage in the minimum amount of
$________?
35
Scope of Additional Insured Coverage
What if the indemnity agreement is
unenforceable?
– For example, an agreement that purports to
indemnify the indemnitee for its own negligence?
– In a state where such an agreement is void as
against public policy?
36
Gilbane Building Co. v. Empire Steel Erectors, L.P., 691 F. Supp. 2d 712 (S.D.Tex. 2010), aff’d in part, rev’d in part, 664 F.
3d 589 (5th Cir. 2011)
Parr, an employee of Empire Steel, a
Subcontractor, fell off a ladder at a
construction site and sued Gilbane Building
Co., the General Contractor.
Gilbane Building Co. v. Empire Steel Erectors, L.P., 691 F. Supp. 2d 712 (S.D.Tex. 2010), aff’d in part, rev’d in part, 664 F. 3d 589 (5th Cir. 2011) (cont.)
Admiral Ins. Co. argued that because the indemnity agreement in the
Trade Contractor Agreement was unenforceable under TX law,
Gilbane was not covered as an additional insured.
The District Court rejected this argument, finding that the indemnity
and insurance provisions were separate clauses that do not reference
each other, are not intertwined or interrelated, and on their face stand
independently as separate obligations.
The 5th Circuit affirmed, finding that the indemnity agreement, even
though unenforceable, met the policy’s definition of an “insured
contract” and that Gilbane was an additional insured.
37
38
Norfolk & Dedham Mut. Fire Ins. Co. v. Morrison, 456 Mass. 463(2010), aff’d, 79 Mass. App. Ct. 1128 (Mass. App. Ct. 2011)
Dr. Beverly Shafer rented office space from
Cummings.
– The lease agreement required Dr. Shafer to
indemnify Cummings against liability to third
parties and to purchase insurance adding
Cummings as an additional insured.
39
Norfolk & Dedham Mut. Fire Ins. Co. v. Morrison
One of Dr. Shafer’s patients tripped in the
parking lot and sued both Dr. Shafer and
Cummings.
– Cummings (landlord) demanded that both Dr.
Shafer and Norfolk (Shafer’s insurer) indemnify it.
– Norfolk refused, citing a Massachusetts statute
voiding a tenant’s obligation to indemnify a
landlord.
40
Norfolk & Dedham Mut. Fire Ins. Co. v. Morrison
The Court held that the statutory prohibition
against indemnity agreements did not apply
to the insurance provision of the lease
agreement:
– “An agreement in a lease that the tenant
indemnify or hold harmless the landlord is distinct
from an agreement to purchase insurance on the
landlord’s behalf, which covers the liability of both
in the event of a negligently caused injury.”
41
Impact of Anti-Indemnity Statutes on Additional Insured Coverage
Recently, some states (e.g., California, Colorado, Kansas,
Louisiana and New Mexico) have enacted legislation prohibiting
coverage for the additional insured’s own negligence where
that negligence could not be transferred via an indemnity
agreement
In states where additional insured status is within the
jurisdiction of the anti-indemnity statute, an additional insured’s
coverage cannot be broader than its protection as an
indemnitee
42
Kansas Stat. S. 16-121
For example, Kansas Stat. (“KSA”) S. 16-121 (2011) in
relevant part provides:
– (b) “An indemnification provision in a contract which
requires the promisor to indemnify the promisee for the
promisee’s negligence or intentional acts or omissions is
against public policy and is void and unenforceable.”
– (c) “A provision in a contract which requires a party to
provide liability coverage to another party, as an
additional insured, for such party’s own negligence or
intentional acts is against public policy and is void and
unenforceable.”
43
Kansas Stat. S. 16-121
S. 16-121(f) indicates, “This section applies
only to indemnification provisions and
additional insured provisions entered into
after January 1, 2009.”
44
New Mexico Stat. Ann. S. 56-7.1
New Mexico Stat. Ann. (“N.M.S.A.”) S. 56-7.1 (2011) similarly
provides:
– A. A provision in a construction contract that requires one party to
the contract to indemnify, hold harmless, insure or defend the
other party to the contract, including the other party’s employees
or agents, against liability, claims, damages, losses or expenses,
including attorney fees, arising out of bodily injury to persons or
damage to property caused by or resulting from, in whole or in
part, the negligence, act or omission of the indemnitee, its
officers, employees or agents, is void, unenforceable and against
the public policy of the state.
45
New Mexico Stat. Ann. S. 56-7.1
Section 56-7.1(B) states further:
– B. A construction contract may contain a provision that, or shall be
enforced only to the extent that, it:
(1) requires one party to the contract to indemnify, hold harmless or
insure the other party to the contract, including its officers, employees
or agents, against liability, claims, damages, losses or expenses,
including attorney fees, only to the extent to that the liability,
damages, losses or costs are caused by, or arise out of, the acts
or omissions of the indemnitor or its officers, employees or agents.
Section 56-7.1(F) indicates “indemnify” or “hold harmless” “includes
any requirement to name the indemnified party as an additional
insured in the indemnitor’s insurance coverage for the purpose of
providing indemnification for any liability not otherwise allowed in this
section.
46
Typical Additional Insured Claim
Contract requiring that general contractor
be added as additional insured.
Subcontractor’s
Insurance
Company
Lawsuit alleging sole negligence of general contractor
Does additional insured’s liability to named insured’s
employee “arise out of” named insured’s ongoing
operations?
Injured Employee
Subcontractor
(Named Insured)
General Contractor
(Additional Insured)
47
Coverage for Additional Insured’s Own Negligence
Prior to 2004, a number of ISO additional insured
endorsements provided coverage for liability
“arising out of” the Named Insured’s operations
for the Additional Insured.
A number of courts construed “arising out of” to
be the same as “but for” causation.
If the liability would not have arisen “but for” the
named insured’s involvement, the additional
insured has coverage.
48
Coverage for Additional Insured’s Own Negligence
Township of Springfield v. Ersek, 660 A.2d 672 (Pa. Commw.
1995) (township was added to pro shop’s policy as additional
insured “with respect to liability arising out of operations
performed by” pro shop; policy covered damages for injuries to
pro shop’s employee, caused by township’s negligence, because
“arising out of” means causally connected with, not proximately
caused by).
Aetna Cas. & Surety Guar. Corp. v. Ocean Acc. & Guarantee
Corp., 386 F.2d 413 (3d Cir. 1967) (coverage provided for injuries
to named insured’s employee, caused by additional insured’s
sole negligence, where the additional insured’s liability would not
have arisen “but for” its engagement by or association with the
named insured).
49
Coverage for Additional Insured’s Own Negligence
McIntosh v. Scottsdale Ins. Co., 992 F.2d 251 (10th Cir. 1993) (festival
patron injured on fairgrounds brought suit against
township/additional insured. Festival operator’s insurer obligated to
cover township, even though township stipulated that it was 100%
negligent, since injuries “arose out of” Festival’s operations).
Allen-Stevenson School v. Burlington Ins. Co., 2008 N.Y. Misc. LEXIS
10587 (N.Y. Sup. Ct. Mar. 31, 2008) (“The additional insured
language…defines coverage…based on the scope of the named
insured’s work. As long as the claim against the additional insured
arises out of the named insured’s work, coverage is provided under
the Endorsement.”).
Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487 (5th Cir.
2000) (finding that injuries to named insured’s employee “arose out
of” named insured’s operations, even if the cause of the injuries was
the sole negligence of the additional insured).
50
The 2004 Amendments to ISO’s Endorsements
In response to these cases, in 2004, ISO
amended some of its most commonly-used
additional insured endorsements to make clear
that the additional insured’s sole negligence is
not covered.
Additional Insured only has coverage with
respect to liability for BI or PD caused, in whole
or in part, by the Named Insured’s conduct.
Includes copyrighted material of
Insurance Services Office, Inc.,
with its permission. 51
Comparison Of Pre- And Post-2004 Versions Of ISO CG 20 10
Did ISO’s Amendment Resolve The Issue?
Maybe not --
– In Gilbane, Admiral argued that since the complaint
contained no allegations of negligence on the part of Empire
(the Subcontractor/Named Insured), or anyone acting on its
behalf, the General Contractor, Gilbane, was not covered as
an additional insured
Gilbane Building Co. v. Empire Steel Erectors, L.P., 691 F. Supp. 2d 712
(S.D.Tex. 2010), aff’d in part, rev’d in part, 664 F. 3d 589 (5th Cir. 2011)
52
Did ISO’s Amendment Resolve The Issue? (cont.)
The District Court speculated that the named
insured’s negligence had not been pled because of
the statutory immunity of the Workers’
Compensation bar, but
Concluded that the claimant’s negligence could be
presumed and imputed to the named insured, thus
triggering Admiral’s duty to defend.
53
Did ISO’s Amendment Resolve The Issue? (cont.)
The Fifth Circuit reversed the district court’s ruling on
the duty to defend, finding that Parr’s negligence
could not be presumed.
– Applying the eight-corners rule, the Fifth Circuit concluded
that Admiral was only obligated to defend the GC/additional
insured “if the underlying pleadings allege[d] that Empire, or
someone acting on its behalf, proximately caused Parr’s
injuries.” 664 F.3d at 598.
54
Did ISO’s Amendment Resolve The Issue? (cont.)
The Fifth Circuit affirmed the district court’s finding
that Admiral was required to indemnify the
additional insured:
– A co-worker’s recount of Parr’s statement, immediately after he
fell, that his “‘feet got wrapped up in the extension cord’” was
persuasive. 664 F.3d at 601.
– The District Court properly “consider[ed] facts outside of those
alleged in the petition in determining the duty to indemnify.” Id.
55
56
Revised CG 20 10 Does Not Limit Coverage To Vicarious Liability
American Empire Surplus Lines Ins. Co. v. Crum
& Forster Specialty Ins. Co., No. H-06-004, 2006
U.S. Dist. LEXIS 33556 (S.D. Tex. May 23, 2006)
(language of endorsement requiring that Additional
Insured’s liability arise, in whole or in part, out of
Named Insured’s conduct, does not limit coverage to
vicarious liability, but provides coverage where both
Named Insured and Additional Insured are
negligent).
57
Final Thoughts
Additional insured coverage may provide more – or
less – coverage than the parties anticipated.
Review the actual insurance policy or the additional
insured endorsements.
Review indemnity and insurance provisions before
contracts are signed.
Consider any applicable legislation which may
impact the additional insured’s right to coverage.
Caution the business units about signing contracts
containing indemnity and/or additional insured
clauses.
ADDITIONAL INSURED AND CONTRACTUAL
INDEMNITY COVERAGE IN COMMERCIAL
CONTRACTS
August 1, 2012
Charles J. Reitmeyer 215-238-5979
reitmeyer-charles@aramark.com
Indemnification
● General Principles
• Disfavored by Courts
• Many states have anti-indemnification statutes, especially as to construction and transportation contracts.
• Intent of the parties must be clear.
• Port Authority v. Honeywell Prot. Serv., 222 N.J. Super. II, 535 A.2d 974 (1987)(“Strong public policy considerations along with the general rules governing the construction of contracts dictate that when the meaning of the indemnification clause is ambiguous, it should be strictly construed against the indemnitee.”)
• The law regarding indemnification as to certain issues may vary from state to state.
59
Indemnification
● Broad or Total Indemnification • Example: “To the maximum extent permitted by applicable law
and whether or not caused, directly or indirectly, in whole or in part, by the negligence, willful misconduct or other fault of the party to be indemnified, Supplier will indemnify and hold harmless Client and its respective officers, directors, employees and agents, from and against any and all claims, causes of action, suits, investigations, and administrative or other proceedings, and all related demands, damages, liabilities, fines, penalties, assessments, costs, expenses (including attorney’s fees) of every kind and nature, related to or arising out of the sale of products by Supplier, any breach of this Agreement by Supplier and any act or omission of the Supplier.”
60
Indemnification
• Under a broad or total indemnification provision, the indemnitor may be required to indemnify the indemnitee for its own negligence.
• Examples of such broad indemnification standards are where a party indemnifies another for any loss “arising out of Service Provider’s operations,” “arising out of the sale of products by Supplier” or “arising out of or incident to the contract.”
• Under most states' laws, an indemnification provision generally must address the indemnitee's negligence specifically before the indemnitor will be required to indemnify the indemnitee for an injury caused in whole or in part by the indemnitee. In this regard, indemnification provision phrases such as “to the full extent permitted by law,” “whether or not caused, directly or indirectly, in whole or in part, by the negligence, willful misconduct or other fault of a party indemnified hereunder” or “regardless of the negligence or fault of the CLIENT” generally indicate a very broad indemnification provision, whereby the indemnitor may be forced to indemnify the other party for its own negligence.
61
Indemnification
• Waiver of Workers Compensation Defenses - Many states also require specific language in an indemnity provision to obligate an employer to defend and indemnify a party for an injury sustained by that employer’s employee. The language in the indemnity provision must either expressly waive the employer’s immunity based on the exclusive remedy of the Workers Compensation laws or it must specifically state that an employer will indemnity a third party against claims made by its own employees. General or all inclusive indemnity language may be insufficient to act as a waiver of the immunity.
• Bester v. Essex Crane Rental Corp., 422 Pa. Super. 178, 619 A.2d 304 (1993) ( “A court will not materially rewrite the contract of the parties and insert terms which are not there in the absence of an explicit expression to waive the protection afforded by the Workmen’s Compensation Act.”)
62
Indemnification
● Limiting a Broad Indemnification Obligation • Where a potential indemnitor is being forced to agree to a broad
indemnification obligation, it may seek to limit its exposure by requesting a broad indemnification from the other side mirroring its indemnification obligations.
• Alternatively, a potential indemnitor may seek a qualifier demonstrating that it does not agree to indemnify the other party for losses clearly within its control. Examples of such qualifiers include: “except those losses caused by the sole negligence of the Client” or “except those losses caused by the gross negligence or intentional acts of the Purchaser.”
63
Indemnification
• Limited Indemnification
• Example:
• Service Provider shall defend (if requested by Client and with counsel approved by Client), indemnify and hold harmless Client, Client’s Affiliates and the officers, directors, agents, employees, shareholders, attorneys and assigns of each, from and against any and all claims, demands, suits, judgments, losses, liabilities, damages, costs or expenses of any nature whatsoever (including, without limitation, attorneys' fees, costs of litigation, consultants' fees, fines, penalties, settlements, or liens), caused by any: (i) negligent act or omission of Service Provider, its officers, directors, agents or employees; (ii) failure of Service Provider to perform the Services in accordance with generally accepted professional standards; or (iii) breach of Service Provider’s representations and warranties, agreements, duties or obligations as set forth in this Agreement.
64
Indemnification
● Other Limited Indemnification Standards
• Gross Negligence
• Sole Negligence
● Generally, a limited indemnification offers no greater protection than afforded by common law.
65
Indemnification
● Cross Claims for Indemnification • As many incidents involve allegations of fault against both
parties to a contract, to confirm the intent of the parties that each side is indemnifying the other only for its own negligence, consider the following indemnification provision:
– "If the damages, injury, loss or claim is caused by the negligence of both parties, the apportionment of said damages, injury, loss or claim shall be shared between both parties based upon the comparative degree of each party's negligence and each party shall be responsible for its own defense and its own costs, including but not limited to the cost of defense, attorney's fees and witnesses' fees and expenses incident thereto."
66
Indemnification
● Indemnification Triggers
• Please pay special attention to the clause that triggers the indemnification obligation. In this regard, broad triggers include phrases such as:
• “arising out of”
• “related to”
• “incident to”
• Limited triggers, on the other hand, include phrases such as “directly caused by.”
67
Indemnification
● Scope of the Indemnification Obligation
• Please also pay special attention to the clause that defines the scope of the indemnification obligation.
• Phrases that indicate a broad scope include “any and all losses, damages, claims, causes of action, demands, etc….”
• Phrases that indicate a more limited scope include “all third party personal injuries.”
• Indemnification provisions also sometime include specific exclusions for property damage, hazardous substances, and claims by the indemnitee as to damages to itself.
68
Indemnification
● Coverage Issues
• When agreeing to indemnify another party, you should review any relevant insurance policies as to issues or exclusions concerning an “Insured Contract” so that you are not exposed to an uninsured risk.
69
Insurance Provisions
● Example of an Insurance Provision • “Service Provider shall, at its own expense, obtain and maintain
for itself the kinds and minimum amounts of insurance required in this Agreement with insurers having an A.M. Best rating of at least A -. All insurers shall be licensed to do business in the state where the services are to be performed, and all insurance shall contain clauses providing Client not less than 30 days prior written notice of cancellation, nonrenewal or material change in such coverage. Failure to carry the required insurance coverages hereunder shall not relieve Service Provider of its responsibility for losses hereunder, and Service Provider’s obligations under this Agreement are not limited by any insurance that Service Provider carries.”
70
Insurance Provisions
● Types of Required Coverages
• Commercial General Liability
• Workers’ Compensation
• Automobile Liability
• Employee Dishonesty/Crime
• Professional Liability
• Employment Practices Liability
● Limits
71
Additional Insured Provisions
• Examples:
• “Service Provider shall include Client and its affiliated entities as additional insureds on its respective insurance coverage, excepting Workers’ Compensation insurance, employer’s liability coverage and commercial crime fidelity coverage.”
• “Each insurance policy shall include Buyer, its parent, subsidiary, affiliated and related companies and the officers, directors, agents and employees of said companies as additional insured parties, as their respective interests may appear.”
72
General Additional Insured Issues
• Most parties should grudgingly agree to provide additional insured status, as it allows the other party direct rights to its insurance policies.
• Depending on the Additional Insured Endorsement at issue, providing another party additional insured status may be worse than providing indemnification.
• Whose Insurance is Primary?
• The Insurance coverage provision should make clear whose insurance policies are "primary." Of course, most parties will seek to have their own coverage be excess of the other party’s insurance.
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Additional Insured Endorsements
• Examples:
• Broad Endorsement: “Who is An Insured (section II) is amended to include as an insured the person(s), organization(s) or entity(s) shown in the Schedule above, but only with respect to liability arising out of the Named Insured’s operations or work performed by the Named Insured or others acting on the Named Insured’s behalf, or premises owned, managed or controlled by or rented to the Named Insured.”
• Limited Endorsement: “Who is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for Bodily Injury, Property Damage or Personal and Advertising Injury caused, in whole or in part, by your acts or omissions or the acts or omissions of those acting on your behalf.”
74
Limiting Additional Insured Status
• As with indemnification provisions, parties need to be very careful as to the additional insured terms to ensure that they do not unknowingly agree to transfer the other parties’ liability to its own insurance policies. Indeed, some Additional Insured Endorsements are very broad and cover the additional insured for liability “arising out of” the Named Insured’s operations, work, etc. . . . Some courts construe this language broadly to cover the additional insured’s own negligence.
• If the parties do not intend to transfer liability for the additional insured’s own negligence, the additional insured provision should specifically state that the additional insured may not seek coverage of incidents caused by its own negligence under the named insured’s insurance policies as an additional insured, but that its status as an additional insured is solely designed to provide it with direct rights to the named insured’s insurance policies to protect it from the named insured’s negligence and to enforce the indemnification provisions of the contract.
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Limiting Additional Insured Status
● Examples of Limiting Provisions:
• "Seller will agree to include Client as an additional insured on Seller’s commercial general liability policy up to a limit of $15,000,000 per occurrence. Any insurance coverage (additional insured or otherwise) that Seller provides for Client and its respective directors, officers and employees shall only cover liability caused by the negligence of Seller and is limited by the scope of coverage and limitations of liability agreed to by the parties in this Agreement; such insurance coverage shall not cover liability in connection with or arising out of the wrongful or negligent acts or omissions of Client and its respective directors, officers and employees, or any other third party. For the avoidance of doubt, Seller and its insurers shall not be responsible to reimburse or compensate Client for its negligence or for the negligence of any third party.”
• “Any insurance coverage (additional insured or otherwise) that Seller provides for Client(s) and their respective directors, officers and employees shall only cover liability assumed by Seller in this Agreement; such insurance coverage shall not cover liability in connection with or arising out of the wrongful or negligent acts or omissions of Client(s) and their respective directors, officers and employees.”
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Limiting Additional Insured Status
• If you are required to provide additional insured status to a party to a contract, consider including it in the Insurance Coverage provision and place it in the contract after the Indemnity provision so that a court will be more likely to construe this language narrowly and hold that additional insured status was only designed to enforce the indemnification provisions of the contract.
• Always be wary, however, of an allegation that you breached the contract at issue by failing to procure the required insurance.
77
Limiting Additional Insured Status
• Limitations of Liability – If the contract with the additional insured includes limitations of liability provisions, a general reference to those provisions should be included on the additional insured endorsement and the certificate of insurance.
• Example:
• “The coverage provided to the additional insured shall not exceed, and is limited by, the scope of coverage and limits of liability the Named Insured has agreed by contract to procure for the additional insured.”
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Insurance – Other Issues
● Waiver of Subrogation Provisions
• Example: “Service Provider agrees that it and its insurer(s) and anyone claiming by, through, under or on behalf of Service Provider shall have no claim, right of action or right of subrogation against Client based on any loss or liability insured against under the foregoing insurance.”
• Generally Enforceable - In many states, an insured’s waiver of the insurer's rights of subrogation against a third party for damages covered by the insured’s policy is enforceable against the insurer despite its lack of notice or consent and even though the insurer was not a party to the contract with the third party. In general, the insurer stands in the shoes of its insured and takes any claim against a third-party subject to the defenses which could be asserted against the insured.
• You should, of course, ensure that the relevant insurance policies allow such a waiver and you may also seek approval from the carrier in advance.
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Limitations on Liability
• General Types of Limitation of Liability
• Disclaimer of Consequential, Indirect and Special Damages
• Basic Direct Damage Cap – A cap on the dollar amount of a party’s liability exposure in terms of a stated dollar amount or tied to the purchase price or service fees.
• Example:
• "Service provider’s liability shall not under any circumstances exceed (i) the greater of the annual payment for services or (ii) the actual proceeds of insurance (not to exceed the maximum limits of insurance required under this agreement, less any applicable deductible). In no event will either party be liable to the other party for any loss of business, business interruption, consequential, special, indirect or punitive damages.”
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Limitations on Liability
• In general, limitation of liability provisions are enforced in both services and sale-of-goods contracts between sophisticated parties – “Freedom of Contract”
• Possible exceptions where public interest will render them unenforceable: (1) when the protected party intentionally causes harm or engages in acts that are reckless, wanton, or grossly negligent; (2) when the bargaining power of parties is grossly unequal; or
(3) when the transaction involves the public interest
81
Limitations on Liability -
Enforceability by Insurer Against Additional
Insured
• Will courts enforce limitation of liability provisions in the underlying contract against the Additional Insured and limit the scope of insurance coverage in favor of the insurer?
• Courts generally read the policy and the underlying contract together and should enforce the contractual limitations on coverage.
• In an attempt to insure enforceability, make sure all related documents are consistent
• Contract
• Additional Insured Endorsement
• Certificate of Insurance
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Limitations on Liability -
Enforceability by Insurer Against Additional
Insured
• Cases
• In Re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, 2011 WL 5547529 (E.D. La. Nov. 15, 2011). - The court, applying Texas law, held that because the policy referenced the underlying “Insured Contract,” coverage under the policy was subject to the parties’ agreement to hold each other harmless for certain liabilities as set forth in that contract.
• Saavedra v. Murphy Oil USA, Inc., 930 F.2d 1104 (5th Cir. 1991) – The court held that the policy language did not support the insured's argument that its coverage obligation to an additional insured was limited by the indemnity obligation assumed by the insured where the policy did not adopt the limiting language of the contract between the two.
83
Questions
Charles J. Reitmeyer
Vice President and Associate General Counsel
215-238-5979
reitmeyer-charles@aramark.com
84
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ADDITIONAL INSURED & CONTRACTUAL INDEMNITY COVERAGE
IN CONSTRUCTION CONTRACTS
Presented by:
Mitchell B. Reiter, Esq. – Partner
Goldberg & Connolly
66 North Village Avenue Rockville Centre, New York 11570
Phone: (516) 764-2800 Fax: (516) 764-2827
www.goldbergconnolly.com mbreiter@goldbergconnolly.com
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INSURANCE COVERAGE & INDEMNITY IN CONSTRUCTION CONTRACTS
• Explicitly required in all construction contracts, but what exactly is required?
• Exactly what is actually provided?
• Risk transfer and risk management tools.
• Place risk with the party most able to prevent and manage the loss.
• Litigation Coverage - Holdbacks
August 1, 2012 86
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August 1, 2012 87 .
I. TYPICAL INSURANCE REQUIREMENTS IN CONSTRUCTION
CONTRACTS
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I. TYPICAL INSURANCE REQUIREMENTS IN CONSTRUCTION CONTRACTS
• Specific coverages: commercial general liability, worker’s compensation, umbrella/excess, builder’s risk, completed operations, etc.
• Provide coverage to all upstream parties for the Named Insured’s activities (Owner, CM, GC, Subcontractor) – Risk Transfer.
• Challenge of maintaining and confirming proper coverage provided by all downstream parties (CM, GC, Subs).
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BASIC METHODS OF RISK SHIFTING
A. “Additional Insured” Endorsement
B. “Insured Contract” Coverage
C. Indemnification
III. SUBCONTRACTORS PROVIDE COVERAGE TO UPSTREAM PARTIES
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A. Additional Insured Coverage – Endorsement to the subcontractor’s CGL policy that specifically provides coverage to upstream parties for any liability arising out of the subcontractor’s activities.
1. Numerous different forms, different language, different meanings, different coverage.
2. Either identify the AI by name, in reference to a schedule of insureds, or in a broad form to any party where it is required by executed contract.
3. Must read to ensure coverage complies with prime and subcontracts.
III. SUBCONTRACTORS PROVIDE COVERAGE TO UPSTREAM PARTIES
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4. Variety of standard forms (blanket, scheduled, etc.)
a) Since 1985, most AI Endorsements require that the injury for which coverage is sought be “arising out of” the Named Insured’s “ongoing operations.” If the AI Endorsement only covers “ongoing operations”, the policy will need to contain a separate Completed Operations Endorsement.
b) Beginning in 2004, some AI Endorsements require that the injury be “caused, in whole or in part” by the Named Insured’s acts. Courts interpret the “arising out of” language more broadly and are thus more likely to find coverage.
5. Be careful of policy exclusions
III. SUBCONTRACTORS PROVIDE COVERAGE TO UPSTREAM PARTIES
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B. Insured Contract - Covers liability for damages
assumed in an “Insured Contract”, provided the bodily injury or property damage occurs subsequent to the execution of the contract (i.e., Indemnification provisions)
- coverage is actually found as an exception to the Contractual Liability Exclusion.
III. SUBCONTRACTORS PROVIDE COVERAGE TO UPSTREAM PARTIES
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2. An “Insured Contract” has three elements:
• a written contract;
• pertaining to your business;
• under which you assume the tort liability of another party.
III. SUBCONTRACTORS PROVIDE COVERAGE TO UPSTREAM PARTIES
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3. Proper handling is essential:
• Insurers have denied coverage under an “Insured Contract” where an actual copy of the signed contract cannot be produced.
III. SUBCONTRACTORS PROVIDE COVERAGE TO UPSTREAM PARTIES
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INDEMNIFICATION CLAUSE – TRIGGER FOR “INSURED CONTRACT”
1. NY General Obligation Law §5-322.1 prohibits a party from obtaining indemnity for its own fault.
2. Kansas Stat. S. 16-121 (2011) prohibits requiring insurance coverage for own negligence
3. Indemnification Agreements Typically Provide (Owners/CMs want this broadly drawn;
subcontractors narrowly):
• To the fullest extent permitted by law;
• the Subcontractor shall indemnify, defend and save/hold harmless the GC, Owner and/or CM from any and all losses, damages, claims, demands, payments, suits, actions, recoveries, judgments, and expenses of every kind;
• resulting from or caused by, in whole or in part, the performance of the Work by the Subcontractor or its subcontractors, agents and/or representatives.
III. SUBCONTRACTORS PROVIDE COVERAGE TO UPSTREAM PARTIES
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WHAT ABOUT PARTIAL INDEMNIFICATION?
Partial indemnification permits an indemnitee (despite its own negligence) to be reimbursed by the indemnitor for that portion of the fault allocated to the indemnitor or others.
III. SUBCONTRACTORS PROVIDE COVERAGE TO UPSTREAM PARTIES
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A. CONSTRUCTION CONTRACT
vs.
POLICY
V. PRIORITY OF COVERAGE
August 1, 2012 97
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B. INTRODUCING
HORIZONTAL
vs.
VERTICAL EXHAUSTION
V. PRIORITY OF COVERAGE
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V. PRIORITY OF COVERAGE
“THE TOWER & THE BATHTUB” VERTICAL EXHAUSTION
HORIZONTAL EXHAUSTION
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Owner’s Umbrella Policy
Owner’s Primary CGL Policy
GC’s/CM’s Umbrella Policy
GC’s/CM’s Primary CGL Policy
Subcontractor’s Umbrella Policy
Subcontractor’s Primary CGL Policy
THE TOWER & THE
BATHTUB
Construction Contracts Envision
“Vertical Exhaustion” - A
“Tower” of Coverage
V. PRIORITY OF COVERAGE
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V. PRIORITY OF COVERAGE
• Policies Envision “Horizontal Exhaustion” –Filling A Bathtub
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V. PRIORITY OF COVERAGE
C. WHICH PRIORITY OF POLICY METHOD APPLIES?
• Under New York law, horizontal exhaustion applies regardless of what your construction contract says.
• Policies typical language is “horizontal exhaustion.”
• The policy language controls over the contract language. Bovis v. Great American
Tishman v. Great American
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• Whether one CGL policy or all CGL policies contribute depends on the “Other Insurance” language of the policies and/or whether any policy(s) have a “Primary and Non-Contributory” endorsement.
• GCs and CMs want every subcontractor’s policy to contain amended “Other Insurance” clause establishing primary coverage (not excess) and a “Primary and Non-Contributory” endorsement to make the exhaustion “vertical.”
V. PRIORITY OF COVERAGE
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V. PRIORITY OF COVERAGE
E. PRIMARY AND NON-CONTRIBUTORY ENDORSEMENT:
• Coverage is solely to the extent required by a written contract which the Named Insured enters into prior to an “occurrence” or offense for which the Additional Insured is provided coverage under this policy.
• This policy shall apply as primary insurance in relation to any other policy issued to that Additional Insured.
• Any insurance or self-insurance maintained by the Additional Insured shall be excess of the insurance afforded to the Additional Insured by this policy and shall not contribute to it.
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• Example: Owner tenders claim down to 2 subs
• Without endorsement, both subs CGL policies may be triggered.
• With endorsement, only CGL of claimant’s employer is triggered.
V. PRIORITY OF COVERAGE
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V. PRIORITY OF COVERAGE
$10M Coverage $1M CGL and $9M Umbrella
Sub’s GC’s Owner’s
Umbrella Umbrella Umbrella
$9M $9M $9M
Sub’s $1M GC’s $1M Owner $1M
• Working together, the “Other Insurance” clause with a “Primary and Non-Contributory Endorsement” can make your “bathtub” of coverage act more like a “tower.”
G. HOW SUBCONTRACTORS CAN MAKE THEIR HORIZONTAL BATHTUB ACT MORE LIKE A VERTICAL TOWER
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V. PRIORITY OF COVERAGE
H. WHY DOES IT MATTER HOW THE COVERAGE IS SPLIT AS LONG AS THE SUBCONTRACTOR HAS $10M?
• Assume a $1.5M settlement.
– If the subcontractor has a $1M CGL, under horizontal exhaustion, the balance comes from an upstream CGL policy (possibly Owner/GC/CM), before the subcontractor’s umbrella/excess policy.
– With a $2M CGL and horizontal exhaustion, settlements are more likely covered under the subcontractor’s CGL policy.
– One way for GCs and CMs to mitigate the horizontal vs. vertical exhaustion problem.
– Better way is to read policies and get what the contract requires (vertical, not horizontal).
– Holdbacks! Not just Breach of Contract
– After the Tishman and Bovis cases, $1M/$2M is becoming $2M/$4M – the new “norm.”
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V. PRIORITY OF COVERAGE
I. RISK OF SUBCONTRACTOR FAILING TO MEET CONTRACT REQUIREMENTS.
• Assume a $4.5M judgment against GC/CM. The GC/CM is an Additional Insured on each of three subs’ policies. Additional Insured liability is split evenly against each of the subs. Each sub is responsible for $1.5M.
Problem:
• One subcontractor only has $1M primary/$9M excess coverage.
• The other two subs have $2M primary/$8M excess coverage. Their insurers each pay $1.5M.
• First Subcontractor CGL policy only pays $1M, but the umbrella refuses to pay the remaining $500,000. Why?
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Sub 1 Sub 2 Sub 3
Umbrella
CGL remaining
CGL payment
J. Typical Umbrella policies provide policy is excess over “any” other insurance and only pay its share of the exceeding total of all such other insurance.
In this scenario, each of the two other insurers has $500,000 left on each CGL policy. The umbrella insurer may deny coverage until both of these policies are exhausted.
3 potential outcomes:
1. Sub may have to pay $500,000 out of pocket;
2. GC/CM may pay the $500,000 and sue the sub for breach of contract; impose back-charges and holdbacks (most common result); or
3. Other insurers may pay $500,000 and sue the sub for contribution.
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CONCLUSION
• Get your construction contracts in order (review insurance requirements).
• Get your insurance policies in order.
• Make sure policies conform to contract requirements.
• Policies vary in quality of coverage, not just limits.
– Declarations vs. Exclusions
– “Other Insurance” Clause
– “A.I.” Clause
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• Read your downstream parties’ insurance documentation
carefully.
– Get the policy; don’t rely on ACORD Certificate of Insurance.
– Assume that every policy is different
• Make sure that downstream parties’ policies include adequate:
– “Additional Insured” Endorsement
• “arising out of” vs. “caused in whole or in part”
• Completed Ops
• Make sure there is “Insured Contract” coverage
– Properly worded indemnification clause
• Check governing law
CONCLUSION
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Questions
Mitchell B. Reiter mbreiter@goldbergconnolly.com
Goldberg & Connolly 66 North Village Avenue
Rockville Centre, New York 11570 Phone: (516) 764-2800
Fax: (516) 764-2827 www.goldbergconnolly.com
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August 1, 2012 113 .
This presentation has been prepared for informational purposes only. It is not a substitute for legal advice addressed to particular circumstances. You should not take or refrain from taking any legal action based upon the information contained herein
without first seeking professional and individualized counsel.
Disclaimer
66 North Village Avenue Rockville Centre, New York 11570
(516) 764-2800 Fax (516) 764-2827 www.goldbergconnolly.com
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