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2019 Edition

Making Indemnity Clauses, Agreements to Procure Insurance, and Additional Insured

Endorsements Work in the Real World

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Making Indemnity Clauses, Agreements to Procure Insurance, and Additional Insured Endorsements Work in the Real World

Thomas A. Marrinson

Insurance

Reed Smith LLP

What Seems to Be the Problem Here?

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• Indemnity Clauses

• Scope of Indemnity

• Rules of Interpretation

• Anti-Indemnity Statutes and Public Policy Considerations

• Agreements to Procure Insurance

• Lack of Specificity

• Technical Jargon

• Anti-Indemnity Statutes and Public Policy Considerations

• Additional Insured Endorsements

• Multiplicity of Forms

• Inconsistency of Judicial Interpretations

Reed Smith LLP

Indemnity Clauses – Scope Issues

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• Silent as to Fault

• All claims arising out of or in any way related to Acme Corp.’s work hereunder.

• Counterparty Fault

• All claims arising out of the acts or omissions of Acme Corp., its employees or agents, or any others for whom Acme Corp. allegedly may be held liable.

• Third-Party Fault

• All claims arising out of the acts or omissions of any person other than Me Corp.

• Own Fault

• All claims arising out of or in any way related to Acme Corp’s work hereunder, including but not limited to any claims arising or allegedly arising out of the acts or omissions of Me Corp., its employees or agents, or any others for whom Me Corp. allegedly may be held liable.

Reed Smith LLP

Indemnity Clauses - Own Fault Scope Issues

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Many Variations

• Mixed Fault: Claims that allege fault by both the indemnitee and other parties.

• Sole Fault: Claims that allege fault solely on the part of the indemnitee.

• Types of Fault: Claims alleging negligence by indemnitee vs. claims alleging gross negligence and/or intentional conduct by the indemnitee.

Reed Smith LLP

Indemnity Clauses – Interpretation Issues

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• Do General Rules of Contract Interpretation Apply or Do Special Rules of Interpretation Apply?

o It depends….

• Rules of interpretation may vary by state (e.g., some states strictly construe certain types of indemnity agreements)

• Rules of interpretation may vary by type of contract (e.g., commercial vs. consumer)

• Rules of interpretation may vary by scope of indemnity agreement (e.g., third-party fault only vs. indemnitee’s own negligence)

Reed Smith LLP

Indemnity Clauses –Special Rules of Interpretation

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• In Many States, Indemnity against Indemnitee’s Own Negligence Must Be Stated “Clearly and Unequivocally”

• Use of “Magic Words” Generally Not Required

• “Any and All Claims” May Not Be Good Enough

• Some Courts Distinguish Between Clauses that Indemnify as to Indemnitee’s Sole Fault vs. Mixed Fault and/or Indemnitee’s Passive Negligence vs. Indemnitee’s Active Negligence

• Some Courts Distinguish Between Commercial Contracts and Consumer Contracts

Reed Smith LLP

Indemnity Clauses – Anti-Indemnity Statutes and Public Policy Considerations

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• “Construction-Related” Anti-Indemnity Statutes

• Scope Varies from State to State

o Construction only vs. other types of activities (e.g., construction, alteration, repair or maintenance)

o Use of “contained in, collateral to, or affecting” language to broaden scope of statute

o Buildings only vs. buildings, structures, piping, appurtenances, highways, viaducts, etc.

o Sole negligence only vs. part negligence

o Exceptions for certain types of contracts (e.g., statute inapplicable to government contracts)

o Exceptions for insurance agreements (explicit or judicially created)

Reed Smith LLP


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• “Transportation-Related” Anti-Indemnity Statutes

• Example: [A] provision, clause, covenant, or agreement contained in,

collateral to, or affecting a motor carrier transportation contract that purports to indemnify, defend or hold harmless, or has the effect of indemnifying, defending or holding harmless, the promisee from or against any liability for loss or damage resulting from the negligence or intentional acts or omissions of the promisee is against the public policy of this State and is void and unenforceable.

• Nearly Every State Now Has Similar Statute

• Statutes Are Relatively Recent (Last Decade)

o Lack of Precedent Interpreting and Applying the Statutes

o Scope Varies from State to State

Reed Smith LLP


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• Examples of Other Types of Anti-Indemnity Statutes and Public Policy Considerations• Oil-Field Anti-Indemnity Statutes

o Texas; Louisiana; New Mexico; Wyoming

• Design Professional Anti-Indemnity Statutes

o Example: For all contracts … entered into on or after January 1, 2018, for design professional services, all provisions … contained in, collateral to, or affecting any such contract … that purport to indemnify … the indemnitee by a design professional … are unenforceable, except to the extent that the claims … arise out of … the negligence, recklessness, or willful misconduct of the design professional.

• Judicially Created Public Policy

o Public policy against indemnity for one’s own willful or intentional acts.

Reed Smith LLP

So… What’s a Poor Lawyer To Do? Some Practice Tips

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• Seek Clarity as to Scope of Indemnity

• Specify Defense Costs/Defense Duty Obligations

o Hold Harmless May Not Be Enough

• Use Language of Inclusion (e.g., “including but not limited to claims arising from the sole negligence or other sole fault of indemnitee”)

• Include a Choice-of-Law Provision with “Most Favorable Jurisdiction” Language

• Example: Notwithstanding the extent to which the law of some other jurisdiction may apply to any other issues arising hereunder, the Parties agree that the enforceability of this provision shall be determined pursuant to the law of the jurisdiction most favorable to its enforcement in favor or indemnitee, so long as such jurisdiction bears a reasonable relationship to the parties and/or issues, as among any jurisdiction where: (a) indemnitor or indemnitee is organized or has it principal place of business; (b) any suit or proceeding against indemnitee is initiated, pending or any resulting damages or other relief against indemnitee are awarded; or (c) the acts or omissions giving rise to the claim allegedly took place.

Reed Smith LLP

Some Practice Tips (Cont’d)

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• Use Language of Enforceability/Severability/Reformation

• Enforceability

o “To the greatest extent permissible by law, indemnitor shall indemnify indemnitee against…”

o “Indemnitor shall indemnify indemnitee against …. but only to the extent permissible by law.”

• Severability

o To the extent enforceability may become an issue, put sections of clause with questionable enforceability into separate sentences (e.g., “The foregoing shall be interpreted to include indemnification against the indemnitee’s own negligence to the full extent permissible by law”)

o Include a severability clause (e.g., “to the extent that any portion of the foregoing indemnification clause is deemed unenforceable, then the same shall be deemed severed from this Agreement, but the remainder of the indemnification clause and this Agreement shall continue in effect.”)

• Reformation

o Include a reformation clause (e.g., “to the extent that any portion of the foregoing indemnification clause is deemed unenforceable, then it is the intention of the Parties that the indemnification clause may be modified or amended to render it enforceable to the maximum extent permitted by law.”)

Reed Smith LLP

Agreements to Procure Insurance –Introduction and Drafting Tips

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• What is An Agreement to Procure Insurance?

• Possible Way Around Indemnification Issues/Limitations, but More Pitfalls Ahead!!!

• Drafting and Compliance with Anti-Indemnity Statutes Are Crucial

• Specify the Types of Policies and Coverage Required

• What Types of Risks Are Involved?

o Workers Comp/Employers’ Liability, CGL, Auto, Watercraft, Aviation, First-Party, Crime, Cyber/Privacy, Professional Liability

o Products Liability/Completed Operations Risk

o Coverage for “Insured Contracts”

• Avoided Using Outdated Insurance Terminology (e.g., “Extended Coverage”)

• Determine Extent to Which You Want to Be Additional Insured, Loss Payee, Etc. on the Required Policies

• Avoid Operation of Insured vs. Insured Exclusions

• Specify the Form/Wording of the Additional Insured Endorsement You Require

• Specify the Required Limits, Permissible Retentions/Deductibles and Who Is Responsible for Them

Reed Smith LLP

Agreements to Procure Insurance – Drafting Tips (Cont’d)

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• Specify the Required Financial Ratings of Insurers

• Specify Primacy of Insurance (e.g., “all insurance required hereunder will be primary and non-contributory”)

• Determine Extent to Which You Need Specificity as to Other Insurance Provisions

• Claims-Made vs. Occurrence-Based Coverage

• Period of Time Coverage Must Be in Force

• Duty to Defend vs. Duty to Pay Defense Costs (and Whether Defense Costs Will Erode Limits)

• Compliance with Anti-Indemnity Statutes

o May dictate that separate policies must be purchased

o May dictate that contract provide for counterparty’s recovery of premium as part of contract payment

o May limit the scope of the insurance that can be provided (e.g., insurance for sole negligence may be prohibited)

Reed Smith LLP


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• Specify the Requirements for Documenting the Purchase of Required Insurance

• Require copies of policies and endorsements; do not rely on Certificates of Insurance

Reed Smith LLP


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• Include non-waiver provision stating that failure to insist on evidence of required insurance and/or acceptance of evidence of insurance not conforming to requirements is not a waiver of the insurance requirements

• Other Considerations

• Waiver of Subrogation

• Responsibility for Payment of Premiums

• Flexibility to Deal with Changing Requirements

• Statement of Intent

• Choice of Law (Most Favored Jurisdiction)

• Severability/Reformation

• Further Acts/Documents

Reed Smith LLP

Additional Insured Endorsements – The Good, the Bad, and the Ugly

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• The Good – Putting claims on someone else’s insurance always feels better than putting the claims on your own insurance.

• The Bad – Additional insured endorsements just aren’t what what they used to be (usually).

• The Ugly – Getting it right is a complicated, messy undertaking that requires understanding the available forms and how they have been interpreted.

Reed Smith LLP

Additional Insured Endorsements - So Many Forms…

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• Examples of ISO Standard Forms

• Engineers, Architects and Surveyors

• Vendors

• Managers and Lessors of Premises

• Lessors of Leased Equipment

• By Written Agreement

• Insurer Specific Forms

• Not all insurers utilize ISO Forms or use them with substantial modifications

• Manuscript Forms

• Some insurers will offer “bespoke” additional insured endorsements

Reed Smith LLP

The ISO 1984 Additional Insured Endorsement (ISO CG 20 10)

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WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the schedule, but only with respect to liability arising out of “your work” for that insured by or for you.

• Key Points

• “Your Work” Is Defined Broadly

o (1) work or operations performed by you or on your behalf; (2) materials, parts or equipment furnished in connection with such work or operations; (3) warranties or representations regarding the fitness quality, durability, performance or use of “your work;” and (4) the providing of or failure to provide warnings or instructions.

• No Reference to Negligence of Named Insured or Additional Insured

• No Distinction between Injury or Damage Taking Place While Named Insured Is Still in Process of Performing Work or Has Completed Work

RESULT: Most courts broadly interpret the 1984 form to cover claims, even if they arise from the additional insured’s negligence and even if they arise after the Named Insured’s work is complete. “But for” causation between the Named Insured’s work and the injury or damage is all that is required.

Reed Smith LLP


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WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the schedule, but only with respect to liability arising out of “your work” for that insured by or for you your ongoing operations performed for that insured.

• Key Point

• Most courts interpret the revised language to exclude coverage for completed operations, but some will find coverage so long as any aspect of the insured’s operations remain in progress.

o Perez v. N.Y. City Hous. Auth., 754 N.Y.S.2d 635 (N.Y. App. 2003) (contractor’s operations were “ongoing” because testing on system installed by contractor had not yet been completed).

o Wausau Underwriters Ins. Co. v. Cincinnati Ins. Co., 198 Fed. Appx. 148 (2d Cir. 2006) (where snowplow company had ongoing duty to remove snow and prevent ice build-up, its operations were “ongoing” even after it completed its plowing operations).

Reed Smith LLP


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WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the schedule, but only with respect to liability arising out of your ongoing operations performed for that insured for … [damage or injury] … caused, in whole or in part, by:

1. Your acts or omissions; or

2. The acts or omissions of those acting on your behalf

in the performance of your ongoing operations….

• Key Points

• Replacement of “arising out of” with “for” may tighten required causation connection.

• Reference to “acts or omissions” may be read to import fault requirement, thereby eliminating coverage for claims that do not allege negligence on the part of the Named Insured.

o Worth noting that the language does not say “negligent acts or omissions.”

o Creates problems in suits by Named Insured’s employees because they have no incentive to allege employer fault, so some courts have looked to the additional insured’s third-party complaint to determine if there is negligence by the Named Insured. Great Am. Ins. Co. v. West Bend Mut. Ins. Co., 723 N.E.2d 1174, 1179 (Ill. App. 2000).

Reed Smith LLP


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WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the schedule, but only with respect to liability for … [damage or injury] … caused, in whole or in part, by:

1. Your acts or omissions; or

2. The acts or omissions of those acting on your behalf

in the performance of your ongoing operations….

1. The insurance afforded to such additional insured only applies to the extent permitted by law; and

2. If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide such additional insured.

• Key Points

• Adds “to the extent permitted by law” condition

• Adds condition that insurance will be no broader than that required by agreement.

Reed Smith LLP

Other Considerations in Effective Use of Additional Insured Endorsements

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• Primacy• Example 1: If required by your agreement with the additional insured, this insurance shall be

primary insurance for the additional insured.

• Example 2: If required by your agreement with the additional insured, this insurance shall be primary insurance for the additional insured. If anyone who does work for you also provides similar insurance for the additional insured, however, then that insurance will be primary, and this insurance will be excess over, or secondary to, that insurance.

• ISO Example: This insurance is excess over . . . any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an additional insured by attachment of an endorsement.

CAUTION 1: There may limits on your ability to render your own coverage secondary if you are statutorily required to carry certain minimum amounts of insurance for certain types of activities. See Pekin Ins. Co. v. Fidelity & Guar. Ins. Co., 830 N.E.2d 10 (Ill. App. 2005)(involving mandatory liability insurance for tow trucks).

CAUTION 2: If you allow insurance to be provided through combination of primary insurance and excess insurance, you may not be able to render a “true” excess policy primary for any purpose.

Reed Smith LLP

Other Considerations in Effective Use of Additional Insured Endorsements (Cont’d)

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• Subrogation Issues

• Seek to pair requirement of being named additional insured with requirement that insurer waive any right of subrogation against you.

o Example 1: We waive any right of recovery we may have against the person or organization shown in the Schedule above because of payments we make for injury or damage arising out of your ongoing operations or "your work" done under a contract with that person or organization and included in the "products completed operations hazard". This waiver applies only to the person or organization shown in the Schedule above.

o Example 2: We have the right to recover our payments from anyone liable for an injury covered by this policy. We will not enforce our right against the person or organization named in the Schedule. (This agreement applies only to the extent that you perform work under a written contract that requires you to obtain this agreement from us.)

Reed Smith LLP

Other Considerations in Effective Use of Additional Insured Endorsements (Cont’d)

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• Cancellation Issues

• Seek to include requirement that policy be endorsed to require 30 days prior notice of cancellation to additional insured.

• Beware the Anti-Indemnity Statutes that Reach Agreements to Procure Insurance

• Example: “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.”

Reed Smith LLP

The Other Side – Being Asked to Procure Additional Insured Endorsements

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• Seek “Blanket” Additional Insured Coverage

• “Where required by written agreement.”

• Seek Language that Limits Coverage to That Required by Agreement

• Primary only if required by written agreement.

• Waiver of subrogation only if required by written agreement

• Lesser of actual limits or limits required by written agreement.

• “Only to the extent” or “no broader than” required by written contract or by permissible law qualifiers.

Reed Smith LLP

Questions and Answers

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Reed Smith LLP

Thomas A. Marrinson

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Partner

Chicago

312-207-3868

[email protected]

▪ Tom Marrinson is a partner in the Insurance Recovery Group of Reed Smith LLP, resident in the Chicago office.

▪ Tom's practice includes coverage litigation, complex commercial litigation and insurance-related counseling.

▪ His coverage litigation experience spans a broad array of insurance disputes, including those involving first-party property and business interruption, D&O, professional liability, asbestos and other mass tort claims, environmental clean-up, and lead paint exposure. He also frequently counsels Fortune 500 companies on many types of insurance-related matters.

▪ Tom's insurance coverage practice is nationwide and has involved litigation in jurisdictions throughout the United States.

▪ In addition to his insurance coverage experience, Tom's litigation practice has included products liability, commercial contracts and business fraud, and class action defense.

▪ Tom is a frequent lecturer, and has also authored numerous articles and publications, including Insurance Coverage Disputes, a comprehensive guide to the law of insurance coverage, and more recently Professional Liability Insurance, an in-the-trenches treatise for lawyers grappling with professional liability cases.