Insurance Subrogation, Indemnity and Hold Harmless Releases: Navigating the Complexities Protecting Subrogation Rights and Negotiating Subrogation Waivers, Indemnities and Settlement Releases 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, MARCH 19, 2014 Presenting a live 90-minute webinar with interactive Q&A Tarron Gartner, Shareholder, Cooper & Scully, Dallas Steven K. Gerber, Member, Cozen O'Connor, Philadelphia Stephen D. Palley, Founder, Palley Law, Washington, D.C.
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Insurance Subrogation, Indemnity and Hold
Harmless Releases: Navigating the Complexities Protecting Subrogation Rights and Negotiating
Subrogation Waivers, Indemnities and Settlement Releases
Extracontractual Liability to the Subrogating Carrier – Putting the company’s (client’s) interest ahead of the insured.
Class Action Potential for Subrogating Insurer – Failure to comply with law; aggregate property damage claims.
Market Conduct Exams – Fines, penalties and damage to reputation and rank.
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The Made Whole Rule
The insurer is not entitled to subrogation if the loss exceeds the amounts recovered
from the insurer and the third party covering the loss.
Ortiz v. Great Southern Fire & Cas. Ins. Co., 587 S.W.2d 342 (Tex. 1980).
13
What’s The Risk?
Putting the Subrogating Company’s financial interests ahead of the insured’s without Investigation
What if insured has significant uninsured loss?
What if insured has corresponding bodily injury claims?
What if insured and insurer are locked in a coverage dispute?
Could the insured put a constructive trust on thhe proceeds of recovery?
14
Best Practices
Increase client’s awareness of potential risks and inquire as to whether the client has communicated with the insured;
Encourage client communication to communicate with the insured and propose an allocation agreement; Disclose conflict of interest and obtain written waiver;
Encourage insured to seek the advice of counsel.
If the insured has an attorney, reach out to the attorney to negotiate a joint prosecution agreement allocating recovery and expenses.
15
Prorating Recovery, Deductibles
and Recovery Costs
Statutory rules in most states with regard
to recovery of auto physical damage
claims;
May require full reimbursement if staff
counsel is used;
All other lines of business subject to the
applicable common law made-whole rule.
16
Example
Deductible must be included in subrogated demands unless otherwise requested by
the insured. Proportionate sharing of attorneys’ fees is permitted provided
outside counsel is used.
2 A.A.C. §26.080
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Allocation Agreements
Determines priority of recovery.
Serves as an assignment of claims for new consideration recited – becomes, in essence, contractual subrogation.
Shores up amount of uninsured losses claimed.
Bridges gaps caused by claim/coverage investigation – great customer service tool.
Allocates unassignable recoveries associated with insured’s personal claims that might otherwise prevent recovery on the subrogated claim.
Serves to protect both the insured’s and carrier’s legal and financial interests.
Determines allocation of costs.
Diminishes extracontractual liability.
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Essential Elements
Recitals;
Statement as to policy terms;
Recital of amount of insured and
uninsured losses;
Consideration;
Identification of Joint Counsel;
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Cont’d…
Assignment of non-personal causes of
action and/or claim retention;
Allocation of money associated with
punitive damages claimed;
Express waiver by insured of right of
recovery;
Prosecution of Recovery Suit;
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Cont’d…
Advancement of Interim Costs;
Allocation of Interim Costs upon recovery
and expression of manner of calculation;
Allocation of net recovery and expression
of manner of calculation;
General terms and conditions.
21
Allocation Formula
Simple algebraic formula prorating the total
recovery to the deductible or uninsured
loss, and costs and attorney’s fees: Insured Loss = Percentage to which Insurer
Total Loss is entitled.
Uninsured Loss = Percentage to which Insured
Total Loss is entitled.
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Allocation of Recoveries,
Deductibles and Expenses
If the Insurer pays a claim of for $47,500.00
($50,000.00 policy limits less a $2,500.00
deductible), and expends $6,600.00 recovering
$20,000.00 from the responsible party, the
insured is entitled to .01% of the $20,000.00
($200.00), and the Insurer is entitled to
$19,800.00. From that, the insured must pay
.01% of the costs, or $66.00, while the Insurer
must bear $6,534.00 of the responsibility.
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Pursuing consumer protection
and punitive damages
Subrogating insurer may actually spend a lot of money supporting efforts at tort reform;
Some states do not allow for the assignment of certain types of claims;
Can the “real party” assert consumer protection claims? Is the insurer a “consumer”?
What happens if (however remotely), the subrogating insurer recovers more than what is paid under the policy? Assume that there is no uninsured loss and therefore no
allocation agreement;
Subrogating insurer’s policy likely provides subrogation only to “the extent of the payment made.”
Different rules may apply where litigated between insurers, as opposed to insured v. insured.
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Boilerplate
Language varies widely, but some common features issues can be identified.
Here’s an example from the AIA A201 general conditions (emphasis added):
11.3.1 Unless otherwise provided the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance written on a builder’s risk “all-risk” or equivalent policy form in the amount of the initial Contract Sum, plus value of subsequent Contract Modifications and cost of materials supplied or installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Section 9.10 or until no person or entity other than the Owner has an insurable interest in the property required by this Section 11.3 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Project.
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What Is Being Waived?
The right of the parties to sue to the extent of “available” insurance coverage?
A third party insurance company’s rights?
Is a waiver of a third party’s rights really enforceable?
Why is it called a “waiver of subrogation”
cf. Robert Frost, “Mending Wall” (because people find comfort in things that have been around for a long time, even if they don’t necessarily make sense) (available at http://www.sparknotes.com/poetry/frost/section3.rhtml).
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When Is The Waiver
Triggered?
Upon execution of the contract, before a claim even
arises?
When a claim arises but before it is paid?
After insurance is procured?
After a claim arises and an insurance company has paid?
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Is Insurer Consent Required?
Policies may permit pre-loss waiver
On a blanket-basis (where required by written contract)
Or on a scheduled basis?
A “best practice” to coordinate between contract requirements and policy contents?
What if the policy doesn’t include a waiver?
Generally, insurer stands in insured’s shoes and the waiver is enforceable.
See e.g., North American Specialty Insurance Company vs. Payton Construction Corp., 80 Mass. App. Ct. 367 (2011)
Does the insurer have a claim back against their own insured?
See e.g., Allstate Ins. Co. v. Palumbo, 994 A.2d 174 (Conn.
2010).
An agreement to provide insurance company may be
deemed an implied waiver.
See e.g., Walker v. Vanderpool, 225 Va. 266, 271 (1983) (Va.
1983)
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Third party beneficiaries?
If you’re not named in a contract that contains a waiver of
subrogation, can it still protect you?
Best practice is to get the waiver if you can, of course, but see cases like:
Gulf Ins. Co. v. Quality Bldg. Contractor, Inc., 58 A.D.3d 595 (N.Y. App. Div. 2009) (subcontractor protected by waiver of subrogation in prime contract where subcontract incorporated prime contract)
Best Friends Pet Care. Inc. v. Design Learned, Inc., 823 A.2d 329 (Conn. App. Ct. 2003) (subcontractor covered by waiver of subrogation in prime contract even where subcontract did not contain a waiver of subrogation provision).
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How Much Is Waived?
Construction project:
Claims arising from ongoing operations?
Completed operations?
Does the waiver apply to “over/under” liability?
Does the waiver apply to claims between insurers
(equitable contribution, for example).
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How Much Is Waived (cont)
Work v. non-work?
On the one hand . . . see, Copper Mountain. Inc. v.
On the other hand . . . See St. Paul Fire & Marine Ins. Co. v.
Turner Constr. Co., No. 08•2292, 2009 WL 738768, at *1
(3d Cir. 2009)
Workers compensation claims?
35
State Law Nuances
As always with insurance, there are many state law nuances. Here’s an example from Kansas:
K.S.A. 16-1803. . . .
(b) The following provisions in a contract for private construction shall be against public policy and shall be void and unenforceable:
. . .
(3) a provision that purports to waive, release or extinguish rights of subrogation for losses or claims covered or paid by liability or workers compensation insurance except that a contract may require waiver of subrogation for losses or claims paid by a consolidated or wrap-up insurance program, owners and contractors protective liability insurance, or project management protective liability insurance, unless otherwise prohibited under subsection (b)(5) of K.S.A. 2012 Supp. 40-5403, and amendments thereto.
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Take-aways
If you are drafting a waiver of subrogation clause, think of it as a WAIVER.
Focus on scope of waiver:
Time
Property
Claims
Excess/under liability
The same holds true in litigation.
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Some Light Reading
Subrogation Waivers, The Construction Lawyer, Vol. 31,
Number 4 (Fall 2011).
Insurance Update: 'Boilerplate,’ Subrogation Waivers and
Choice of Law, 14 Under Construction: The Newsletter
of the ABA Forum on the The Construction Industry
(Apr. 2012).
Available at: www.palleylaw.com/static_pages/publications.