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Additional Insured and Contractual Indemnity

Coverage in Commercial and Construction Contracts Reconciling Contractual Obligations With Policy Terms to Maximize Coverage

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WEDNESDAY, AUGUST 1, 2012

Presenting a live 90-minute webinar with interactive Q&A

Joann M. Lytle, Partner, McCarter English, Philadelphia

Charles J. Reitmeyer, Vice President and Associate General Counsel, Aramark, Philadelphia

Mitchell B. Reiter, Partner, Goldberg & Connolly, Rockville Centre, N.Y.

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OTHER PEOPLE’S INSURANCE:

Additional Insured Coverage

By

Joann M. Lytle, Esq.

McCarter & English, LLP BNY Mellon Center

1735 Market Street, Suite 700

Philadelphia, PA 19103

215-979-3800

[email protected]

Information which is copyrighted by and proprietary to Insurance Services Office,

Inc. ("ISO Material") is included in this publication. Use of the ISO Material is

limited to ISO Participating Insurers and their Authorized Representatives. Use by

ISO Participating Insurers is limited to use in those jurisdictions for which the

insurer has an appropriate participation with ISO. Use of the ISO Material by

Authorized Representatives is limited to use solely on behalf of one or more ISO

Participating Insurers.

August 1, 2012

mailto:[email protected]

6

What is Additional Insured Coverage?

Risk transfer method that allows one party

to a business relationship to obtain

coverage under another party’s policy.

7

Who Are The Players?

Additional Insured – the party seeking to

take advantage of another party’s

coverage.

Named Insured – the party whose policy

is providing coverage to the Additional

Insured.

8

Additional Insured vs. Additional “Named Insured”

Not the same thing.

“Additional Named Insured” has no generally

accepted meaning.

9

Additional Named Insured

“A person or organization, other than the first

named insured, identified as an insured in the

policy declarations or an addendum to the policy

declarations.”

“A person or organization added to a policy after

the policy is written with the status of named

insured. This entity would have the same rights

and responsibilities as an entity named as an

insured in the policy declarations….”

Irmi Online - Glossary of Insurance and Risk Management Terms

10

Additional Insured

“A person or organization not

automatically included as an insured

under an insurance policy, but for whom

insured status is arranged, usually by

endorsement. …”

Irmi Online - Glossary of Insurance and Risk Management Terms

11

Benefits for Additional Insured

Coverage without premium.

Doesn’t erode additional insured’s own limits

of liability.

No responsibility for deductibles.

Particularly important for companies who are

self-insured or who have retentions on their

own policies.

12

Benefits for Additional Insured

Supports indemnity obligation, which only has

value if the indemnitor has assets to fulfill it.

Defense coverage, without having to wait for a

resolution of the indemnity obligation.

Can be independent of, and provide broader

protection than, the indemnity obligation, i.e.,

for the additional insured’s negligence.

– Important where applicable state’s law prohibits

indemnification for one’s own negligence.

13

Disadvantages for Additional Insured:

No control over the defense.

– Significant where both the Named Insured and Additional

Insured are sued.

Limits must be shared among all insureds.

Often no business relationship with carrier.

14

Implications for Named Insured

Pros

– Allows transfer of the obligation to defend and

indemnify the indemnitee to the insurer.

Cons

– Erosion of limits.

– Limits shared by all insureds.

– Limits used to pay claims for which the Additional

Insured may be partly or entirely at fault.

– Responsibility for deductible.

– Higher premiums down the road based on loss

experience.

15

Relationships Giving Rise to Additional Insured Coverage

Construction

– General contractor requires additional insured status on

subcontractors’ policies.

Vendor/Vendee

– Vendor requires additional insured coverage on

manufacturer’s policy.

Service Agreement

– Customer requires additional insured status on service

provider’s policy.

Building maintenance

Cafeteria operation

16

Relationships Giving Rise to Additional Insured Coverage

Equipment Lease

– Lessor requires additional insured status on lessee’s

insurance.

17

Real Life Example

Manufacturer leases equipment to Customer.

Customer installs equipment in its plant and uses equipment to

manufacture insulation.

Explosion on one of the lines.

Very serious injuries to Customer’s employees, including

multiple deaths.

Customer’s employees sue Manufacturer.

Manufacturer has multi-million dollar retention for products

claims on its own policy, and Manufacturer’s policy does not

impose a duty to defend.

Manufacturer makes claim as an Additional Insured against

Customer’s policy for both defense and indemnification.

18

How Does One Become An Additional Insured?

Generally requires both contract between the

parties and an additional insured provision in an

insurance policy.

19

The Contract

An obligation to indemnify does not confer

additional insured status.

Does the contract contain an insurance

provision?

– Does it require that the other party name your client

as an additional insured?

– Does it specify the type and amount of insurance

coverage to be provided?

CGL, Umbrella?

Primary or Excess?

Limits?

20

The Insurance Policy

A contractual obligation to provide insurance is

ineffective unless the Named Insured’s policy

contains an Additional Insured Clause.

Usually in an endorsement.

21

Types of Additional Insured Endorsements

Both ISO endorsements and manuscript endorsements

– Two varieties

Blanket additional insured endorsements – grant

additional insured status to categories of

Additional Insureds or to those whom the Named

Insured has a contractual obligation to insure.

– Sometimes called automatic additional

insureds.

– If the contract does not specifically require

insurance, the endorsement is ineffective.

Scheduled additional insured endorsements – lists

the name of the additional insured.

22

Verifying Additional Insured Coverage

A certificate of insurance is not proof of

insurance

The Acord form specifically states that

additional insured coverage requires an

endorsement

23

24

Verifying Additional Insured Coverage

Ideally, request a full copy of the Named

Insured’s policy.

May not be that simple.

– For some large companies, the extent of their

insurance program, including limits and

deductibles, is a closely-guarded secret.

– In that situation, review the additional insured

endorsement(s), at a minimum.

– Review the Other Insurance Clause, if possible.

25

Additional Insured – Timely Notice Obligation?

A typical CGL policy will generally state that

an insured must give notice as soon as

“practicable” of an occurrence that may result

in a claim under the policy.

26


In some jurisdictions, a named insured’s

timely notice will also constitute adequate

notice on the additional insured’s behalf.

27


In Casualty Insurance Co. v. E.W. Corrigan Construction Co.,

Inc., 247 Ill. App. 3d 326 (Ill. App. Ct. 1993), the court rejected

the carrier’s attempts to argue that notice to the workers’

compensation department is insufficient to provide adequate

notice to the liability department for the same carrier.

“[I]f an insured notifies its insurer of an occurrence and

references its workers’ compensation policy, it should be

considered notice in regards to any general liability policy the

insured might have with the same insurer. Consequently, it

should also be adequate notice to the insurer for any

additional insured named on the general liability policy.”

Id. at 333.

28


In some jurisdictions, however, the additional

insured must provide notice on its own behalf

in a manner consistent with the policy’s

specific terms and conditions.

29


In Liberty Ins. Underwriters Inc. v. Great American Ins.

Co., No. 09 Civ. 4912(DLC), 2010 WL 3629470 (S.D.N.Y.

Sept. 17, 2010), the court determined an additional

insured has an implied duty to provide its own notice to

the insurance carrier even if the policy does not explicitly

require separate notice by the additional insured or the

insurer received actual notice of the claim from the

named insured or a separate source.

30


Why is this a problem?

– In many cases, the only policy information an additional

insured has is a Certificate of Insurance

– Even assuming it contains current policy information, it’s

unlikely to contain the policy’s specific notice requirements

31

Whose Coverage is Primary?

Formerly a hotly-disputed issue.

ISO attempted to resolve the dispute in the CGL

policy itself.

The 2001 and later versions of the ISO CGL Policy

(CG 00 01 10 01) contain an amended Other

Insurance Clause (Section IV).

33

ISO Other Insurance Clause

• States that the Named Insured’s policy is excess

over any other policy on which “You” have been

added as an additional insured by way of

endorsement.

• Issues still arise when the other party’s

insurance purports to provide only excess

coverage.

• Issues also arise concerning whose policy pays

after the limits of the policy providing additional

insured coverage are exhausted.

34

Scope Of Additional Insured Coverage

How broad is it?

Does it essentially back-stop the Named Insured’s

contractual indemnity obligation?

– Which clause appears first in the contract – indemnity or

insurance?

Does it cover more than the Additional Insured would be

able to recover under the Indemnity Agreement?

– What if the indemnity agreement contains a monetary cap?

– What if the insurance provision states that the Additional

Insured will receive coverage in the minimum amount of

$________?

35

Scope of Additional Insured Coverage

What if the indemnity agreement is

unenforceable?

– For example, an agreement that purports to

indemnify the indemnitee for its own negligence?

– In a state where such an agreement is void as

against public policy?

36

Gilbane Building Co. v. Empire Steel Erectors, L.P., 691 F. Supp. 2d 712 (S.D.Tex. 2010), aff’d in part, rev’d in part, 664 F.

3d 589 (5th Cir. 2011)

Parr, an employee of Empire Steel, a

Subcontractor, fell off a ladder at a

construction site and sued Gilbane Building

Co., the General Contractor.

Gilbane Building Co. v. Empire Steel Erectors, L.P., 691 F. Supp. 2d 712 (S.D.Tex. 2010), aff’d in part, rev’d in part, 664 F. 3d 589 (5th Cir. 2011) (cont.)

Admiral Ins. Co. argued that because the indemnity agreement in the

Trade Contractor Agreement was unenforceable under TX law,

Gilbane was not covered as an additional insured.

The District Court rejected this argument, finding that the indemnity

and insurance provisions were separate clauses that do not reference

each other, are not intertwined or interrelated, and on their face stand

independently as separate obligations.

The 5th Circuit affirmed, finding that the indemnity agreement, even

though unenforceable, met the policy’s definition of an “insured

contract” and that Gilbane was an additional insured.

37

38

Norfolk & Dedham Mut. Fire Ins. Co. v. Morrison, 456 Mass. 463(2010), aff’d, 79 Mass. App. Ct. 1128 (Mass. App. Ct. 2011)

Dr. Beverly Shafer rented office space from

Cummings.

– The lease agreement required Dr. Shafer to

indemnify Cummings against liability to third

parties and to purchase insurance adding

Cummings as an additional insured.

39

Norfolk & Dedham Mut. Fire Ins. Co. v. Morrison

One of Dr. Shafer’s patients tripped in the

parking lot and sued both Dr. Shafer and

Cummings.

– Cummings (landlord) demanded that both Dr.

Shafer and Norfolk (Shafer’s insurer) indemnify it.

– Norfolk refused, citing a Massachusetts statute

voiding a tenant’s obligation to indemnify a

landlord.

40

Norfolk & Dedham Mut. Fire Ins. Co. v. Morrison

The Court held that the statutory prohibition

against indemnity agreements did not apply

to the insurance provision of the lease

agreement:

– “An agreement in a lease that the tenant

indemnify or hold harmless the landlord is distinct

from an agreement to purchase insurance on the

landlord’s behalf, which covers the liability of both

in the event of a negligently caused injury.”

41

Impact of Anti-Indemnity Statutes on Additional Insured Coverage

Recently, some states (e.g., California, Colorado, Kansas,

Louisiana and New Mexico) have enacted legislation prohibiting

coverage for the additional insured’s own negligence where

that negligence could not be transferred via an indemnity

agreement

In states where additional insured status is within the

jurisdiction of the anti-indemnity statute, an additional insured’s

coverage cannot be broader than its protection as an

indemnitee

42

Kansas Stat. S. 16-121

For example, Kansas Stat. (“KSA”) S. 16-121 (2011) in

relevant part provides:

– (b) “An indemnification provision in a contract which

requires the promisor to indemnify the promisee for the

promisee’s negligence or intentional acts or omissions is

against public policy and is void and unenforceable.”

– (c) “A provision in a contract which requires a party to

provide liability coverage to another party, as an

additional insured, for such party’s own negligence or

intentional acts is against public policy and is void and

unenforceable.”

43

Kansas Stat. S. 16-121

S. 16-121(f) indicates, “This section applies

only to indemnification provisions and

additional insured provisions entered into

after January 1, 2009.”

44

New Mexico Stat. Ann. S. 56-7.1

New Mexico Stat. Ann. (“N.M.S.A.”) S. 56-7.1 (2011) similarly

provides:

– A. A provision in a construction contract that requires one party to

the contract to indemnify, hold harmless, insure or defend the

other party to the contract, including the other party’s employees

or agents, against liability, claims, damages, losses or expenses,

including attorney fees, arising out of bodily injury to persons or

damage to property caused by or resulting from, in whole or in

part, the negligence, act or omission of the indemnitee, its

officers, employees or agents, is void, unenforceable and against

the public policy of the state.

45

New Mexico Stat. Ann. S. 56-7.1

Section 56-7.1(B) states further:

– B. A construction contract may contain a provision that, or shall be

enforced only to the extent that, it:

(1) requires one party to the contract to indemnify, hold harmless or

insure the other party to the contract, including its officers, employees

or agents, against liability, claims, damages, losses or expenses,

including attorney fees, only to the extent to that the liability,

damages, losses or costs are caused by, or arise out of, the acts

or omissions of the indemnitor or its officers, employees or agents.

Section 56-7.1(F) indicates “indemnify” or “hold harmless” “includes

any requirement to name the indemnified party as an additional

insured in the indemnitor’s insurance coverage for the purpose of

providing indemnification for any liability not otherwise allowed in this

section.

46

Typical Additional Insured Claim

Contract requiring that general contractor

be added as additional insured.

Subcontractor’s

Insurance

Company

Lawsuit alleging sole negligence of general contractor

Does additional insured’s liability to named insured’s

employee “arise out of” named insured’s ongoing

operations?

Injured Employee

Subcontractor

(Named Insured)

General Contractor

(Additional Insured)

47

Coverage for Additional Insured’s Own Negligence

Prior to 2004, a number of ISO additional insured

endorsements provided coverage for liability

“arising out of” the Named Insured’s operations

for the Additional Insured.

A number of courts construed “arising out of” to

be the same as “but for” causation.

If the liability would not have arisen “but for” the

named insured’s involvement, the additional

insured has coverage.

48


Township of Springfield v. Ersek, 660 A.2d 672 (Pa. Commw.

1995) (township was added to pro shop’s policy as additional

insured “with respect to liability arising out of operations

performed by” pro shop; policy covered damages for injuries to

pro shop’s employee, caused by township’s negligence, because

“arising out of” means causally connected with, not proximately

caused by).

Aetna Cas. & Surety Guar. Corp. v. Ocean Acc. & Guarantee

Corp., 386 F.2d 413 (3d Cir. 1967) (coverage provided for injuries

to named insured’s employee, caused by additional insured’s

sole negligence, where the additional insured’s liability would not

have arisen “but for” its engagement by or association with the

named insured).

49


McIntosh v. Scottsdale Ins. Co., 992 F.2d 251 (10th Cir. 1993) (festival

patron injured on fairgrounds brought suit against

township/additional insured. Festival operator’s insurer obligated to

cover township, even though township stipulated that it was 100%

negligent, since injuries “arose out of” Festival’s operations).

Allen-Stevenson School v. Burlington Ins. Co., 2008 N.Y. Misc. LEXIS

10587 (N.Y. Sup. Ct. Mar. 31, 2008) (“The additional insured

language…defines coverage…based on the scope of the named

insured’s work. As long as the claim against the additional insured

arises out of the named insured’s work, coverage is provided under

the Endorsement.”).

Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487 (5th Cir.

2000) (finding that injuries to named insured’s employee “arose out

of” named insured’s operations, even if the cause of the injuries was

the sole negligence of the additional insured).

50

The 2004 Amendments to ISO’s Endorsements

In response to these cases, in 2004, ISO

amended some of its most commonly-used

additional insured endorsements to make clear

that the additional insured’s sole negligence is

not covered.

Additional Insured only has coverage with

respect to liability for BI or PD caused, in whole

or in part, by the Named Insured’s conduct.

Includes copyrighted material of

Insurance Services Office, Inc.,

with its permission. 51

Comparison Of Pre- And Post-2004 Versions Of ISO CG 20 10

Did ISO’s Amendment Resolve The Issue?

Maybe not --

– In Gilbane, Admiral argued that since the complaint

contained no allegations of negligence on the part of Empire

(the Subcontractor/Named Insured), or anyone acting on its

behalf, the General Contractor, Gilbane, was not covered as

an additional insured

Gilbane Building Co. v. Empire Steel Erectors, L.P., 691 F. Supp. 2d 712

(S.D.Tex. 2010), aff’d in part, rev’d in part, 664 F. 3d 589 (5th Cir. 2011)

52

Did ISO’s Amendment Resolve The Issue? (cont.)

The District Court speculated that the named

insured’s negligence had not been pled because of

the statutory immunity of the Workers’

Compensation bar, but

Concluded that the claimant’s negligence could be

presumed and imputed to the named insured, thus

triggering Admiral’s duty to defend.

53


The Fifth Circuit reversed the district court’s ruling on

the duty to defend, finding that Parr’s negligence

could not be presumed.

– Applying the eight-corners rule, the Fifth Circuit concluded

that Admiral was only obligated to defend the GC/additional

insured “if the underlying pleadings allege[d] that Empire, or

someone acting on its behalf, proximately caused Parr’s

injuries.” 664 F.3d at 598.

54


The Fifth Circuit affirmed the district court’s finding

that Admiral was required to indemnify the

additional insured:

– A co-worker’s recount of Parr’s statement, immediately after he

fell, that his “‘feet got wrapped up in the extension cord’” was

persuasive. 664 F.3d at 601.

– The District Court properly “consider[ed] facts outside of those

alleged in the petition in determining the duty to indemnify.” Id.

55

56

Revised CG 20 10 Does Not Limit Coverage To Vicarious Liability

American Empire Surplus Lines Ins. Co. v. Crum

& Forster Specialty Ins. Co., No. H-06-004, 2006

U.S. Dist. LEXIS 33556 (S.D. Tex. May 23, 2006)

(language of endorsement requiring that Additional

Insured’s liability arise, in whole or in part, out of

Named Insured’s conduct, does not limit coverage to

vicarious liability, but provides coverage where both

Named Insured and Additional Insured are

negligent).

57

Final Thoughts

Additional insured coverage may provide more – or

less – coverage than the parties anticipated.

Review the actual insurance policy or the additional

insured endorsements.

Review indemnity and insurance provisions before

contracts are signed.

Consider any applicable legislation which may

impact the additional insured’s right to coverage.

Caution the business units about signing contracts

containing indemnity and/or additional insured

clauses.

ADDITIONAL INSURED AND CONTRACTUAL

INDEMNITY COVERAGE IN COMMERCIAL

CONTRACTS

August 1, 2012

Charles J. Reitmeyer 215-238-5979

[email protected]

Indemnification

● General Principles

• Disfavored by Courts

• Many states have anti-indemnification statutes, especially as to construction and transportation contracts.

• Intent of the parties must be clear.

• Port Authority v. Honeywell Prot. Serv., 222 N.J. Super. II, 535 A.2d 974 (1987)(“Strong public policy considerations along with the general rules governing the construction of contracts dictate that when the meaning of the indemnification clause is ambiguous, it should be strictly construed against the indemnitee.”)

• The law regarding indemnification as to certain issues may vary from state to state.

59

Indemnification

● Broad or Total Indemnification • Example: “To the maximum extent permitted by applicable law

and whether or not caused, directly or indirectly, in whole or in part, by the negligence, willful misconduct or other fault of the party to be indemnified, Supplier will indemnify and hold harmless Client and its respective officers, directors, employees and agents, from and against any and all claims, causes of action, suits, investigations, and administrative or other proceedings, and all related demands, damages, liabilities, fines, penalties, assessments, costs, expenses (including attorney’s fees) of every kind and nature, related to or arising out of the sale of products by Supplier, any breach of this Agreement by Supplier and any act or omission of the Supplier.”

60

Indemnification

• Under a broad or total indemnification provision, the indemnitor may be required to indemnify the indemnitee for its own negligence.

• Examples of such broad indemnification standards are where a party indemnifies another for any loss “arising out of Service Provider’s operations,” “arising out of the sale of products by Supplier” or “arising out of or incident to the contract.”

• Under most states' laws, an indemnification provision generally must address the indemnitee's negligence specifically before the indemnitor will be required to indemnify the indemnitee for an injury caused in whole or in part by the indemnitee. In this regard, indemnification provision phrases such as “to the full extent permitted by law,” “whether or not caused, directly or indirectly, in whole or in part, by the negligence, willful misconduct or other fault of a party indemnified hereunder” or “regardless of the negligence or fault of the CLIENT” generally indicate a very broad indemnification provision, whereby the indemnitor may be forced to indemnify the other party for its own negligence.

61

Indemnification

• Waiver of Workers Compensation Defenses - Many states also require specific language in an indemnity provision to obligate an employer to defend and indemnify a party for an injury sustained by that employer’s employee. The language in the indemnity provision must either expressly waive the employer’s immunity based on the exclusive remedy of the Workers Compensation laws or it must specifically state that an employer will indemnity a third party against claims made by its own employees. General or all inclusive indemnity language may be insufficient to act as a waiver of the immunity.

• Bester v. Essex Crane Rental Corp., 422 Pa. Super. 178, 619 A.2d 304 (1993) ( “A court will not materially rewrite the contract of the parties and insert terms which are not there in the absence of an explicit expression to waive the protection afforded by the Workmen’s Compensation Act.”)

62

Indemnification

● Limiting a Broad Indemnification Obligation • Where a potential indemnitor is being forced to agree to a broad

indemnification obligation, it may seek to limit its exposure by requesting a broad indemnification from the other side mirroring its indemnification obligations.

• Alternatively, a potential indemnitor may seek a qualifier demonstrating that it does not agree to indemnify the other party for losses clearly within its control. Examples of such qualifiers include: “except those losses caused by the sole negligence of the Client” or “except those losses caused by the gross negligence or intentional acts of the Purchaser.”

63

Indemnification

• Limited Indemnification

• Example:

• Service Provider shall defend (if requested by Client and with counsel approved by Client), indemnify and hold harmless Client, Client’s Affiliates and the officers, directors, agents, employees, shareholders, attorneys and assigns of each, from and against any and all claims, demands, suits, judgments, losses, liabilities, damages, costs or expenses of any nature whatsoever (including, without limitation, attorneys' fees, costs of litigation, consultants' fees, fines, penalties, settlements, or liens), caused by any: (i) negligent act or omission of Service Provider, its officers, directors, agents or employees; (ii) failure of Service Provider to perform the Services in accordance with generally accepted professional standards; or (iii) breach of Service Provider’s representations and warranties, agreements, duties or obligations as set forth in this Agreement.

64

Indemnification

● Other Limited Indemnification Standards

• Gross Negligence

• Sole Negligence

● Generally, a limited indemnification offers no greater protection than afforded by common law.

65

Indemnification

● Cross Claims for Indemnification • As many incidents involve allegations of fault against both

parties to a contract, to confirm the intent of the parties that each side is indemnifying the other only for its own negligence, consider the following indemnification provision:

– "If the damages, injury, loss or claim is caused by the negligence of both parties, the apportionment of said damages, injury, loss or claim shall be shared between both parties based upon the comparative degree of each party's negligence and each party shall be responsible for its own defense and its own costs, including but not limited to the cost of defense, attorney's fees and witnesses' fees and expenses incident thereto."

66

Indemnification

● Indemnification Triggers

• Please pay special attention to the clause that triggers the indemnification obligation. In this regard, broad triggers include phrases such as:

• “arising out of”

• “related to”

• “incident to”

• Limited triggers, on the other hand, include phrases such as “directly caused by.”

67

Indemnification

● Scope of the Indemnification Obligation

• Please also pay special attention to the clause that defines the scope of the indemnification obligation.

• Phrases that indicate a broad scope include “any and all losses, damages, claims, causes of action, demands, etc….”

• Phrases that indicate a more limited scope include “all third party personal injuries.”

• Indemnification provisions also sometime include specific exclusions for property damage, hazardous substances, and claims by the indemnitee as to damages to itself.

68

Indemnification

● Coverage Issues

• When agreeing to indemnify another party, you should review any relevant insurance policies as to issues or exclusions concerning an “Insured Contract” so that you are not exposed to an uninsured risk.

69

Insurance Provisions

● Example of an Insurance Provision • “Service Provider shall, at its own expense, obtain and maintain

for itself the kinds and minimum amounts of insurance required in this Agreement with insurers having an A.M. Best rating of at least A -. All insurers shall be licensed to do business in the state where the services are to be performed, and all insurance shall contain clauses providing Client not less than 30 days prior written notice of cancellation, nonrenewal or material change in such coverage. Failure to carry the required insurance coverages hereunder shall not relieve Service Provider of its responsibility for losses hereunder, and Service Provider’s obligations under this Agreement are not limited by any insurance that Service Provider carries.”

70

Insurance Provisions

● Types of Required Coverages

• Commercial General Liability

• Workers’ Compensation

• Automobile Liability

• Employee Dishonesty/Crime

• Professional Liability

• Employment Practices Liability

● Limits

71

Additional Insured Provisions

• Examples:

• “Service Provider shall include Client and its affiliated entities as additional insureds on its respective insurance coverage, excepting Workers’ Compensation insurance, employer’s liability coverage and commercial crime fidelity coverage.”

• “Each insurance policy shall include Buyer, its parent, subsidiary, affiliated and related companies and the officers, directors, agents and employees of said companies as additional insured parties, as their respective interests may appear.”

72

General Additional Insured Issues

• Most parties should grudgingly agree to provide additional insured status, as it allows the other party direct rights to its insurance policies.

• Depending on the Additional Insured Endorsement at issue, providing another party additional insured status may be worse than providing indemnification.

• Whose Insurance is Primary?

• The Insurance coverage provision should make clear whose insurance policies are "primary." Of course, most parties will seek to have their own coverage be excess of the other party’s insurance.

73

Additional Insured Endorsements

• Examples:

• Broad Endorsement: “Who is An Insured (section II) is amended to include as an insured the person(s), organization(s) or entity(s) shown in the Schedule above, but only with respect to liability arising out of the Named Insured’s operations or work performed by the Named Insured or others acting on the Named Insured’s behalf, or premises owned, managed or controlled by or rented to the Named Insured.”

• Limited Endorsement: “Who is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for Bodily Injury, Property Damage or Personal and Advertising Injury caused, in whole or in part, by your acts or omissions or the acts or omissions of those acting on your behalf.”

74

Limiting Additional Insured Status

• As with indemnification provisions, parties need to be very careful as to the additional insured terms to ensure that they do not unknowingly agree to transfer the other parties’ liability to its own insurance policies. Indeed, some Additional Insured Endorsements are very broad and cover the additional insured for liability “arising out of” the Named Insured’s operations, work, etc. . . . Some courts construe this language broadly to cover the additional insured’s own negligence.

• If the parties do not intend to transfer liability for the additional insured’s own negligence, the additional insured provision should specifically state that the additional insured may not seek coverage of incidents caused by its own negligence under the named insured’s insurance policies as an additional insured, but that its status as an additional insured is solely designed to provide it with direct rights to the named insured’s insurance policies to protect it from the named insured’s negligence and to enforce the indemnification provisions of the contract.

75


● 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.”

76


• If you are required to provide additional insured status to a party to a contract, consider including it in the Insurance Coverage provision and place it in the contract after the Indemnity provision so that a court will be more likely to construe this language narrowly and hold that additional insured status was only designed to enforce the indemnification provisions of the contract.

• Always be wary, however, of an allegation that you breached the contract at issue by failing to procure the required insurance.

77


• 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.”

78

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.

79

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.”

80

Limitations on Liability

• In general, limitation of liability provisions are enforced in both services and sale-of-goods contracts between sophisticated parties – “Freedom of Contract”

• Possible exceptions where public interest will render them unenforceable: (1) when the protected party intentionally causes harm or engages in acts that are reckless, wanton, or grossly negligent; (2) when the bargaining power of parties is grossly unequal; or

(3) when the transaction involves the public interest

81

Limitations on Liability -

Enforceability by Insurer Against Additional

Insured

• Will courts enforce limitation of liability provisions in the underlying contract against the Additional Insured and limit the scope of insurance coverage in favor of the insurer?

• Courts generally read the policy and the underlying contract together and should enforce the contractual limitations on coverage.

• In an attempt to insure enforceability, make sure all related documents are consistent

• Contract

• Additional Insured Endorsement

• Certificate of Insurance

82

Limitations on Liability -

Enforceability by Insurer Against Additional

Insured

• Cases

• In Re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, 2011 WL 5547529 (E.D. La. Nov. 15, 2011). - The court, applying Texas law, held that because the policy referenced the underlying “Insured Contract,” coverage under the policy was subject to the parties’ agreement to hold each other harmless for certain liabilities as set forth in that contract.

• Saavedra v. Murphy Oil USA, Inc., 930 F.2d 1104 (5th Cir. 1991) – The court held that the policy language did not support the insured's argument that its coverage obligation to an additional insured was limited by the indemnity obligation assumed by the insured where the policy did not adopt the limiting language of the contract between the two.

83

Questions

Charles J. Reitmeyer

Vice President and Associate General Counsel

215-238-5979

[email protected]

84

www.goldbergconnolly.com © Goldberg & Connolly 2012. All Rights Reserved

ADDITIONAL INSURED & CONTRACTUAL INDEMNITY COVERAGE

IN CONSTRUCTION CONTRACTS

Presented by:

Mitchell B. Reiter, Esq. – Partner

Goldberg & Connolly

66 North Village Avenue Rockville Centre, New York 11570

Phone: (516) 764-2800 Fax: (516) 764-2827

www.goldbergconnolly.com [email protected]

http://www.goldbergconnolly.com/



INSURANCE COVERAGE & INDEMNITY IN CONSTRUCTION CONTRACTS

• Explicitly required in all construction contracts, but what exactly is required?

• Exactly what is actually provided?

• Risk transfer and risk management tools.

• Place risk with the party most able to prevent and manage the loss.

• Litigation Coverage - Holdbacks

August 1, 2012 86


August 1, 2012 87 .

I. TYPICAL INSURANCE REQUIREMENTS IN CONSTRUCTION

CONTRACTS


August 1, 2012 88 .

I. TYPICAL INSURANCE REQUIREMENTS IN CONSTRUCTION CONTRACTS

• Specific coverages: commercial general liability, worker’s compensation, umbrella/excess, builder’s risk, completed operations, etc.

• Provide coverage to all upstream parties for the Named Insured’s activities (Owner, CM, GC, Subcontractor) – Risk Transfer.

• Challenge of maintaining and confirming proper coverage provided by all downstream parties (CM, GC, Subs).


August 1, 2012 89 .

BASIC METHODS OF RISK SHIFTING

A. “Additional Insured” Endorsement

B. “Insured Contract” Coverage

C. Indemnification

III. SUBCONTRACTORS PROVIDE COVERAGE TO UPSTREAM PARTIES


August 1, 2012 90 .

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.



August 1, 2012 91 .

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



August 1, 2012 92 .

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.



August 1, 2012 93 .

2. An “Insured Contract” has three elements:

• a written contract;

• pertaining to your business;

• under which you assume the tort liability of another party.



August 1, 2012 94 .

3. Proper handling is essential:

• Insurers have denied coverage under an “Insured Contract” where an actual copy of the signed contract cannot be produced.



August 1, 2012 95 .

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.



August 1, 2012 96 .

WHAT ABOUT PARTIAL INDEMNIFICATION?

Partial indemnification permits an indemnitee (despite its own negligence) to be reimbursed by the indemnitor for that portion of the fault allocated to the indemnitor or others.



A. CONSTRUCTION CONTRACT

vs.

POLICY

V. PRIORITY OF COVERAGE

August 1, 2012 97


August 1, 2012 98 .

B. INTRODUCING

HORIZONTAL

vs.

VERTICAL EXHAUSTION



August 1, 2012 99 .


“THE TOWER & THE BATHTUB” VERTICAL EXHAUSTION

HORIZONTAL EXHAUSTION


100 August 1, 2012

Owner’s Umbrella Policy

Owner’s Primary CGL Policy

GC’s/CM’s Umbrella Policy

GC’s/CM’s Primary CGL Policy

Subcontractor’s Umbrella Policy

Subcontractor’s Primary CGL Policy

THE TOWER & THE

BATHTUB

Construction Contracts Envision

“Vertical Exhaustion” - A

“Tower” of Coverage



101 August 1, 2012


• Policies Envision “Horizontal Exhaustion” –Filling A Bathtub


August 1, 2012 102 .


C. WHICH PRIORITY OF POLICY METHOD APPLIES?

• Under New York law, horizontal exhaustion applies regardless of what your construction contract says.

• Policies typical language is “horizontal exhaustion.”

• The policy language controls over the contract language. Bovis v. Great American

Tishman v. Great American


August 1, 2012 103 .

• 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.”



August 1, 2012 104 .


E. PRIMARY AND NON-CONTRIBUTORY ENDORSEMENT:

• Coverage is solely to the extent required by a written contract which the Named Insured enters into prior to an “occurrence” or offense for which the Additional Insured is provided coverage under this policy.

• This policy shall apply as primary insurance in relation to any other policy issued to that Additional Insured.

• Any insurance or self-insurance maintained by the Additional Insured shall be excess of the insurance afforded to the Additional Insured by this policy and shall not contribute to it.


August 1, 2012 105 .

• Example: Owner tenders claim down to 2 subs

• Without endorsement, both subs CGL policies may be triggered.

• With endorsement, only CGL of claimant’s employer is triggered.



106 August 1, 2012


$10M Coverage $1M CGL and $9M Umbrella

Sub’s GC’s Owner’s

Umbrella Umbrella Umbrella

$9M $9M $9M

Sub’s $1M GC’s $1M Owner $1M

• Working together, the “Other Insurance” clause with a “Primary and Non-Contributory Endorsement” can make your “bathtub” of coverage act more like a “tower.”

G. HOW SUBCONTRACTORS CAN MAKE THEIR HORIZONTAL BATHTUB ACT MORE LIKE A VERTICAL TOWER


August 1, 2012 107 .


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.”


August 1, 2012 108 .


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?


109 August 1, 2012

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sub 1 Sub 2 Sub 3

Umbrella

CGL remaining

CGL payment

J. Typical Umbrella policies provide policy is excess over “any” other insurance and only pay its share of the exceeding total of all such other insurance.

In this scenario, each of the two other insurers has $500,000 left on each CGL policy. The umbrella insurer may deny coverage until both of these policies are exhausted.

3 potential outcomes:

1. Sub may have to pay $500,000 out of pocket;

2. GC/CM may pay the $500,000 and sue the sub for breach of contract; impose back-charges and holdbacks (most common result); or

3. Other insurers may pay $500,000 and sue the sub for contribution.


August 1, 2012 110 .

CONCLUSION

• Get your construction contracts in order (review insurance requirements).

• Get your insurance policies in order.

• Make sure policies conform to contract requirements.

• Policies vary in quality of coverage, not just limits.

– Declarations vs. Exclusions

– “Other Insurance” Clause

– “A.I.” Clause


August 1, 2012 111 .

• Read your downstream parties’ insurance documentation

carefully.

– Get the policy; don’t rely on ACORD Certificate of Insurance.

– Assume that every policy is different

• Make sure that downstream parties’ policies include adequate:

– “Additional Insured” Endorsement

• “arising out of” vs. “caused in whole or in part”

• Completed Ops

• Make sure there is “Insured Contract” coverage

– Properly worded indemnification clause

• Check governing law

CONCLUSION


August 1, 2012 112 .

Questions

Mitchell B. Reiter [email protected]

Goldberg & Connolly 66 North Village Avenue

Rockville Centre, New York 11570 Phone: (516) 764-2800

Fax: (516) 764-2827 www.goldbergconnolly.com


http://www.goldbergconnolly.com/


August 1, 2012 113 .

This presentation has been prepared for informational purposes only. It is not a substitute for legal advice addressed to particular circumstances. You should not take or refrain from taking any legal action based upon the information contained herein

without first seeking professional and individualized counsel.

Disclaimer

66 North Village Avenue Rockville Centre, New York 11570

(516) 764-2800 Fax (516) 764-2827 www.goldbergconnolly.com

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