Additional Insured and Contractual Indemnity Coverage in Commercial and Construction Contracts Reconciling Contractual Obligations With Policy Terms to Maximize Coverage Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. 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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Additional Insured and Contractual Indemnity
Coverage in Commercial and Construction Contracts Reconciling Contractual Obligations With Policy Terms to Maximize Coverage
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.
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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
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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).
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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.
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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
$________?
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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?
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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.
• 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.
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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.”
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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.
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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.”)
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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.”
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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.
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Indemnification
● Other Limited Indemnification Standards
• Gross Negligence
• Sole Negligence
● Generally, a limited indemnification offers no greater protection than afforded by common law.
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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."
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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.”
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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.
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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.
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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.”
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Insurance Provisions
● Types of Required Coverages
• Commercial General Liability
• Workers’ Compensation
• Automobile Liability
• Employee Dishonesty/Crime
• Professional Liability
• Employment Practices Liability
● Limits
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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.”
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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.”
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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.
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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
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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.
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
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
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
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
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
• 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.”
• 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.
• 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
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.”
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?
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.
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
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