Construction Contract Insurance, Indemnification and Limitations on Liability Clauses Structuring and Negotiating Key Provisions to Allocate Risk and Minimize Exposure 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, DECEMBER 3, 2014 Presenting a live 90-minute webinar with interactive Q&A Joann M. Lytle, Partner, McCarter & English, Philadelphia Katie Pfeifer, Partner, Dorsey & Whitney, Minneapolis David Taubenfeld, Partner, Haynes & Boone, Dallas
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Construction Contract Insurance,
Indemnification and Limitations
on Liability Clauses Structuring and Negotiating Key Provisions to Allocate Risk and Minimize Exposure
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.
December 3, 2014
Contractual Insurance Requirements
§ 11.1.1 The Contractor shall purchase from and maintain in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located such insurance as will protect the Contractor from claims set forth below which may arise out of or result from the Contractor’s operations and completed operations under the Contract and for which the Contractor may be legally liable, whether such operations be by the Contractor or by a Subcontractor or by anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be liable:
.1 Claims under workers’ compensation, disability benefit and other similar employee benefit acts that are applicable to the Work to be performed;
.2 Claims for damages because of bodily injury, occupational sickness or disease, or death of the Contractor’s employees;
.3 Claims for damages because of bodily injury, sickness or disease, or death of any person other than the Contractor’s employees;
.4 Claims for damages insured by usual personal injury liability coverage;
.5 Claims for damages, other than to the Work itself, because of injury to or destruction of tangible property, including loss of use resulting therefrom;
.6 Claims for damages because of bodily injury, death of a person or property damage arising out of ownership, maintenance or use of a motor vehicle;
.7 Claims for bodily injury or property damage arising out of completed operations; and
.8 Claims involving contractual liability insurance applicable to the Contractor’s obligations under Section 3.18.
AIA A-201 2007
8
Contractual Insurance Requirements
§ 11.1.2 The insurance required by Section 11.1.1 shall be written for not less than limits of liability specified in the Contract Documents or required by law, whichever coverage is greater. Coverages, whether written on an occurrence or claims-made basis, shall be maintained without interruption from the date of commencement of the Work until the date of final payment and termination of any coverage required to be maintained after final payment, and, with respect to the Contractor’s completed operations coverage, until the expiration of the period for correction of Work or for such other period for maintenance of completed operations coverage as specified in the Contract Documents.
AIA A-201 2007
9
Contractual Insurance Requirements
§ 11.1.3 Certificates of insurance acceptable to the Owner shall be filed with the Owner prior to commencement of the Work and thereafter upon renewal or replacement of each required policy of insurance. These certificates and the insurance policies required by this Section 11.1 shall contain a provision that coverages afforded under the policies will not be canceled or allowed to expire until at least 30 days’ prior written notice has been given to the Owner. An additional certificate evidencing continuation of liability coverage, including coverage for completed operations, shall be submitted with the final Application for Payment as required by Section 9.10.2 and thereafter upon renewal or replacement of such coverage until the expiration of the time required by Section 11.1.2. Information concerning reduction of coverage on account of revised limits or claims paid under the General Aggregate, or both, shall be furnished by the Contractor with reasonable promptness.
§ 11.1.4 The Contractor shall cause the commercial liability coverage required by the Contract Documents to include (1) the Owner, the Architect and the Architect’s Consultants as additional insureds for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s operations; and (2) the Owner as an additional insured for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s completed operations.
AIA A-201 2007
11
What is Additional Insured Coverage?
Risk transfer method that allows one party
to a business relationship to obtain
coverage under another party’s policy.
12
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.
13
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.
14
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.
15
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. 16
How Does One Become An Additional Insured?
Generally requires both a contract between the
parties and an additional insured provision in an
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.
17
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? Was it caused “in whole or in part” by named insured’s acts or omissions?
Injured Employee
Subcontractor
(Named Insured)
General Contractor
(Additional Insured)
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Common Additional Insured Disputes
Scope of coverage
– Does it cover additional insured’s sole
negligence?
How much coverage is the additional insured
entitled to?
Whose coverage is primary?
ISO has attempted to address these issues
19
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
Considerations in Drafting the Indemnification Clause
• Purposes of Indemnification Agreements
• Indemnification Terms
• Common Indemnification Agreement Forms in the Construction Industry
• Additional Considerations When Drafting/Modifying Indemnification Agreements
37
Purposes of Indemnification Agreements in Construction Contracts
• Allocation and transfer risk (important element of the bid itself)
• Avoid application of strict contributory negligence doctrines in some states
• Avoid (or attempt to avoid) fight amongst participants on the project
• Obtain benefit of (typically) longer contract statute of limitations (versus tort statute of limitations)
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Indemnification Terms
• Who are the indemnitee and the indemnitor?
• When is the indemnification triggered?
• What types of claims/allegations are to be indemnified?
• What is the scope of the indemnification?
• Other considerations
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Sample Indemnification Provision
“To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damages, loss or expense is caused in part by a party indemnified hereunder. . . .”
AIA A201 (2007) General Conditions § 3.18.1.
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Indemnitee and Indemnitor
• Indemnitor: The party who owes the obligation to indemnify
• Indemnitee: The party who receives the indemnification
“To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damages, loss or expense is caused in part by a party indemnified hereunder.”
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Trigger
“To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damages, loss or expense is caused in part by a party indemnified hereunder.”
– What is a “claim”?
– When is indemnification triggered?
• Claims – immediately
• “Damages, losses and expenses” – once incurred
• Consider adding “liabilities” 42
Types of Claims/Allegations to be Indemnified
“To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damages, loss or expense is caused in part by a party indemnified hereunder.”
– Construction contracts generally include indemnification to bodily injury or property damage type claims
• Insurance coverage more likely for these types of claims
– Some contracts also include indemnification for intellectual property type claims
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Types of Claims/Allegations to be Indemnified (con’t)
• What about other claims? – E.g., claims for breach of contract claims? Economic loss
claims?
– Sample language: “arising, directly or indirectly, from the performance of the Work, breach of this Contract, or a Contractor Party’s negligence or willful misconduct with respect to the Project”
– Sample language: “Contractor shall indemnify, defend, and hold harmless the Indemnified Parties from and against Indemnified Claims for economic loss (i.e., Indemnified Claims not attributable to bodily injury, sickness, disease or death or to injury to or destruction of tangible property), but only to the extent such economic loss was caused by a breach of this Contract or a Contractor Party’s negligence or willful misconduct with respect to the Project.”
– Keep in mind that such language can create problems for insurance coverage
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Scope of Indemnification
• Three types
– Narrow/Limited
– Intermediate
– Broad
• Indemnity agreements are going to be strictly construed
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Scope of Indemnification (con’t)
• Narrow or Limited Form Indemnity
– Allows indemnification for losses exclusively caused by the indemnitor’s negligence
– Any negligence by indemnitee will bar indemnification
– Mirrors the obligations imposed by tort law
46
Scope of Indemnification (con’t)
• Intermediate Form Indemnity
– Allows indemnification for loss caused by indemnitor’s fault or negligence
– Also allows indemnification for which indemnitor and indemnitee are jointly at fault
– No indemnification for indemnitee’s sole fault or negligence
47
Scope of Indemnification (con’t)
• Broad Form Indemnity
– Broadest protection for indemnitee
– Requires indemnitor to indemnify indemnitee for all liabilities, regardless of which party’s negligence caused the liability
– Most states limit or prohibit the use of broad form indemnity provisions in construction contracts
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Scope of Indemnification (con’t)
“To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damages, loss or expense is caused in part by a party indemnified hereunder.”
– Unedited, AIA is a narrow form of indemnity
– Under the AIA, when does obligation to pay (to indemnify) kick in? Finding of negligence?
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Other Provisions
“To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damages, loss or expense is caused in part by a party indemnified hereunder.”
– Parties’ intent to limit the scope of indemnification to that permitted by law
– Important to try to draft against voiding the entire indemnification obligation if you run afoul of an anti-indemnification statute
– Alternative sample language: “It is agreed that with respect to any legal limitations now or hereafter in effect and affecting the validity and enforceability of the indemnification obligation under this Section [ ], such legal limitations are made a part of the indemnification obligation to the minimum extent necessary to bring Section [ ] into conformity with the requirements of such limitations and, as so modified, the indemnification obligation shall continue in full force and effect.”
50
Other Provisions
“To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damages, loss or expense is caused in part by a party indemnified hereunder.”
– Duty to defend v. reimbursement of attorneys’ fees
– Difference between “indemnify” and “hold harmless”
51
Indemnify versus Hold Harmless
• Most courts hold that “indemnity” and “hold harmless” are synonymous or duplicative
– E.g., Medcom Holding Co. v. Baxter Travelnol Lab., Inc., 200 F.3d 518 (7th Cir. 1999); Praetorian Ins. Co v. Site Inspection, LLC, 604 F.3d 509 (8th Cir. 2010)
• Some see a distinction though
– “Hold harmless” acts as an exculpatory provision that releases the indemnitee from liability to the indemnitor
• E.g., Exxon Mobil Corp. v. New W. Petroleum, LP, 369 Fed. Appx. 805 (9th Cir. 2010) Fernandez v. K-M Indus. Holding Co., 646 F. Supp.2d 1150 (N.D. Cal 2009)
– Not safe to just use “hold harmless” if seeking indemnification for third party claims
52
Duty to Defend
• Some indemnification clauses will also specify a “duty to defend”
– E.g., “the Indemnitor shall defend, indemnify and hold harmless the Indemnitee from any and all claims arising out of the Work”
– Imposes obligation on Indemnitor to • Hire the attorneys
• Hire the experts
• Pay court costs
For itself and the indemnitee
– Who controls defense?
– Can be a big undertaking, especially in construction cases (defense costs can easily exceed the amount in dispute)
53
Common Indemnification Agreement Forms in the Construction Industry
54
AIA A201 (2007) General Conditions
§ 3.18.1. To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damages, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section 3.18.
§3.18.2. In claims against any person or entity indemnified under this Section 3.18 by an employee of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, the indemnification obligation under Section 3.18.1 shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for the Contractor or a Subcontractor under workers’ compensation acts, disability benefit acts or other employee benefit acts.
55
AIA A201 (2007) General Conditions
• Prepared by Architects
• Widely used on vertical projects
• AIA Package also includes other indemnification provisions, including a provision for indemnification by the Owner related to hazardous waste risks (§10.3.3), a provision providing indemnification by the Architect to the Owner (AIA B103) and a provision similar to §3.18 providing indemnification by the subcontractor to the Owner, Architect, Contractor, etc. (AIA A401)
56
AIA A201 (2007) General Conditions
• § 3.18.2 necessary in some states if you want to ensure indemnification obligation is not affected by the worker’s compensation limitations
– See, e.g., Gatley v. UPS, Inc., 662 F. Supp. 200 (D. Me. 1987) (noting that a waiver of worker’s compensation immunity must be clear and specific)
– Often called a “Kotecki Waiver,” named after Kotecki v. Cyclops Welding Corp., 585 N.E.2d 1023 (Ill. 1991)
– But Montana and Oregon workers’ compensation statutes bar indemnification completely
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EJCDC C-700 (2007)
6.20 Indemnification
A. To the fullest extent permitted by Laws and Regulations, Contractor shall indemnify and hold harmless Owner and Engineer, and the officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them from and against all claims, costs, losses, and damages (including but not limited to all fees and charges of engineers, architects, attorneys, and other professionals and all court or arbitration or other dispute resolution costs) arising out of or relating to the performance of the Work, provided that any such claim, cost, loss or damage is attributable to bodily injury, sickness, disease, or death, or to injury to or destruction of tangible property (other than the Work itself), including the loss of use resulting therefrom but only to the extent caused by any negligent act or omission of Contractor, any Subcontractor, any Supplier, or any individual or entity directly or indirectly employed by any of them to perform any of the Work or anyone for whose acts any of them may be liable.
B. In any and all claims against Owner or Engineer or any of their officers, directors, members, partners, employees, agents, consultants, or subcontractors by any employee (or the survivor or personal representative of such employee) of Contractor, any Subcontractor, any Supplier, or any individual or entity directly or indirectly employed by any of them to perform any of the Work, or anyone for whose acts any of them may be liable, the indemnification obligation under Paragraph 6.20.A shall not be limited in any way by any limitation on the amount or type of damages, compensation, or benefits payable by or for Contractor or any such Subcontractor, Supplier, or other individual or entity under workers’ compensation acts, disability benefit acts, or other employee benefit acts.
C. The Indemnification obligations of Contractor under Paragraph 6.20.A shall not extend to the liability of Engineer and Engineer’s officers, directors, members, partners, employees, agents, consultants and subcontractors arising out of:
1. the preparation or approval of, or the failure to prepare or approve maps, Drawings, opinions, reports, surveys, Change Orders, designs, or Specifications; or
2. giving directors or instructions, or failing to give them, if that is the primary cause of the injury or damage.
58
EJCDC C-700 (2007)
• Engineers Joint Contract Document Committee
• ACEC, ASCE, AGC, NSPE
• More typically used on horizontal projects
• Applies to owner/contractor agreements
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ConsensusDOCS
10.1 Indemnity
10.1.1 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, the Owner’s officers, directors, members, consultants, agents and employees, the Architect/Engineer and Others (the Indemnitee) from all claims for bodily injury and property damage, other than to the Work itself and other property insured under Subparagraph 10.3.1, including reasonable attorneys’ fees, costs and expenses, that may arise from the performance of the Work, but only to the extent caused by the negligent acts or omissions of the Contractor, Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Contractor shall be entitled to reimbursement of any defense costs paid above Contractor's percentage of liability for the underlying claim to the extent provided for under Subparagraph 10.1.2.
10.1.2 To the fullest extent permitted by law, the Owner shall indemnify and hold harmless the Contractor, its officers, directors, members, consultants, agents, and employees, Subcontractors or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable from all claims for bodily injury and property damage, other than property insured under Subparagraph 10.3.1, including reasonable attorneys’ fees, costs and expenses, that may arise from the performance of work by Owner, Architect/Engineer or Others, but only to the extent caused by the negligent acts or omissions of the Owner, Architect/Engineer or Others. The Owner shall be entitled to reimbursement of any defense costs paid above Owner’s percentage of liability for the underlying claim to the extent provided for under Subparagraph 10.1.1.
10.1.3 NO LIMITATION ON LIAIBLITY In any and all claims against the Indemnitees by an employee of the Contractor, anyone directly or indirectly employed by the Contractor or anyone for whose acts the Contractor may be liable, the indemnification obligation shall not be limited in any way by any limitation on the amount or type of damages, compensation or benefits payable by or for the Contractor under Workers’ Compensation acts, disability benefit acts or other employment benefit acts.
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ConsensusDOCS
• Endorsed by 40+ organizations
• Includes mutual indemnity
• Based in part off the Associated General Contractors of America (AGC) contract documents
• Perceived to be more contractor friendly
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Additional Considerations for Drafting/Modifying Indemnification Agreements
• Third-Party Beneficiaries
• First versus third party claims
• Notice
• Damages limitations/limitations of liability
• Survival Clauses
• Attorneys’ fees for enforcing indemnification
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Ms. Pfeifer is a trial attorney and a partner in the Minneapolis office of Dorsey & Whitney and the co-
Chair of the Insurance Law practice group. She represents clients in all types of complex commercial
litigation, with a particular emphasis on insurance coverage disputes, construction litigation, and health
care litigation. Her clients include public and private corporations, for-profit and non-profit entities,
financial institutions, and individuals.
Through her work with the Tort Trial and Insurance Practice Section (TIPS) of the ABA, Ms. Pfeifer
also serves as a Senior Editor of the CGL Reporter Editorial Board. Written by practicing attorneys,
the CGL Reporter, published by IRMI, provides annotations of important coverage decisions from
across the nation involving general liability and other business-related policies, and provides
commentary on cases and their implications to risk management, insurance, and legal professionals.
• Arizona, California, Colorado, Kansas, Louisiana, Montana, New Mexico, Oklahoma, Oregon, Texas, and Utah have all enacted legislation that addresses this additional insured loophole.
Mississippi Case Law – Deviney Constr. Co. v. Ace Util. Boring & Trenching, No. 3:13cv60-DPJ-FKB, 2014 U.S. Dist. LEXIS 88658, at *27-28 (S.D. Miss. June 30, 2014).
• Under Mississippi’s anti-indemnity statute, any promise to “indemnify
or hold harmless another person from that person’s own negligence is
void as against public policy and wholly unenforceable.” Miss. Code.
Ann. § 31-5-41.
Anti-Indemnity Statutes In Action
INTERPLAY BETWEEN INSURANCE AND INDEMNIFICATION PROVISIONS
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.
December 3, 2014
ADDITIONAL INSURED COVERAGE vs. INDEMNITY
How broad is additional insured coverage?
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
$________?
98
Contractual Limitations on Additional Insured Coverage
• Examples: – “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.”
– “Owner shall be included under Contractor’s insurance as
an additional insured with respect to claims and/or liability
arising out of Work performed for Owner by Contractor, but
only to the extent of Contractor’s indemnity obligation in
Section 13.b. herein. In no event shall Owner be an
additional insured with respect to claims and/or liability
that do not arise out of the sole negligence or other
actionable fault of Contractor.”
99
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?
100
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.
101
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.
102
Impact of Anti-Indemnity Statutes on Additional Insured Coverage
Recently, some states (e.g., California, Colorado, Kansas 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.
103
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.”
104
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. 105
Joann M. Lytle Partner Philadelphia
Joann Lytle is a partner in McCarter & English, LLP’s policyholder