Upload
others
View
4
Download
0
Embed Size (px)
Citation preview
August, 2004
IN THE SUPREME COURT
OF THE STATE OF OREGON
WALSH CONSTRUCTION CO.,
Appellant,
v.
MUTUAL OF ENUMCLAW,
Appellee.
SC No. S51104
CA No. A117368
TC No. 0104-03398
BRIEF ON THE MERITS OF AMICUS CURIAE
AMERICAN SUBCONTRACTORS ASSOCIATION
James C. Chaney 91191 THE CHANEY FIRM, LLC 777 High Street, Suite 280 Eugene, Oregon 97401 Telephone: (541) 683-3800 Attorney for Appellant Walsh Construction Co.
Christopher A. Rycewicz 86275 RYCEWICZ & CHENOWITH, LLP 601 S.W. Second Avenue, Suite 1940 Portland, Oregon 97204 Telephone: (503) 221-7958 Attorney for American Subcontractors Association, Inc.
Thomas M. Christ 83406 COSGRAVE VERGEER & KESTER LLP805 S.W. Broadway, 8th Floor Portland, Oregon 97205 Telephone: (503) 323-9000 Attorney for Respondent Mutual of Enumclaw
William H. Walters 82481 D. Gary Christensen 88180 MILLER NASH, LLP 3400 US Bancorp Tower 111 SW Fifth Avenue Portland, Oregon 97204-3699 Telephone: (503) 224-5858 Attorneys for Oregon-Columbia Chapter of Associated Oregon Industries, Pacific Northwest Regional Council of Carpenters, Oregon Building Industry Association, Columbia Corridor Association, Hoffman Construction Company, and Senator Frank Morse
i
TABLE OF CONTENTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I. Material Facts “Undisputed” by Walsh Construction on Summary Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
II. What it Means “To Indemnify” Under O.R.S. § 30.140 . . . . . . . . . . . . . . . . . . . . .
A. Distinctions Without a Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Oregon Law Avoids Moral Hazards That Cause Accidents and Construction Defects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Insurance Procured in Violation of Law and Public Policy Must Be Void . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
III. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . .1
. . .2
. . .4
. . .8
. .11
. .14
. .18
Appendix
A. Workplace Fatalities Labor Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Standard Form for Commercial General Liability Insurance: CG 00 01 07 98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. The Additional Insured Book, Chapter 1 “Executive Summary” . . . . . . . . . .
D. ASA’s Subcontractors’ Chart of State Anti-Indemnity Laws . . . . . . . . . . . . .
. . .App-1
. . .App-3
. .App-17
. .App-28
TABLE OF AUTHORITIES
Cases
Acceptance Insurance Company v. Syufy Enterprises 81 Cal.Rptr.2d 557 (Cal. App. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Country Ins. Co. v. Cline, 722 N.E.2d 755 (Ill.App. 1 Dist. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Barton-Malow v. Grunau, 835 So.2d 1164 (Fla.App.2nd Dist 2002) . . . . .
Babineaux v. McBroom Rig Building, 806 F.2d 1282 (5th Cir. 1987) . . . . .
. . . . . . . . . . . .6
. . . . . . . . 8, 17
. . . . . . . . . . 10
. . . . . . . . . . . 9
ii
Buckeye Union Ins. v. Zavarella Bros., 699 N.E.2d 127 (Ohio 8th App. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charter Oak Fire Insurance Co. v. Color Converting Industries Co., 45F.3d 1170 (7th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chevron v. Bragg Crane & Rigging, 180 Cal.App.3d 639, 225 Cal. Rptr. 742 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chrysler Corp. v. Merrell & Garaguso, Inc., 796 A.2d 648 (Del. 2002). . .
Davis v. Comm. Edison Co., 336 N.E.2d 881 (Ill. Supr. 1975) . . . . . . . . . .
Fitzgerald v. Neal, 113 Or. 103, 231 P. 645 (1924) . . . . . . . . . . . . . . . . . .
Gardner v. First Escrow Corp., 71 Or.App. 715, 696 P.2d 1172 (1985) . .
Gerow v. Rohm & Haas Company, 308 F.3d 721 (2002) . . . . . . . . . . . . . .
Greer v. City of Philadelphia, 795 A.2d 376, 381-382 (Pa. 2002) . . . . . . .
Hall v. Life Insurance Company of North America, 317 F.3d 773, 775 (7th
Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Harrell v. Travelers Indemnity Co., 279 Or. 199, 567 P.2d 1013 (1978) . .
Jacobs Constructors v. NPS Energy, 264 F.3d 365 (3d Cir. 2001) . . . . . . .
Jankele v. Texas Co., 54 P.2d 425 (Utah 1936) . . . . . . . . . . . . . . . . . . . . . .
Lamb v. Armco, Inc., 518 N.E.2d 53 (Ohio App. 1986) . . . . . . . . . . . . . . .
Mortenson v. National Union Fire Insurance Co. of Pittsburgh, Pa., 249 F.3d 667 (7th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Union Fire Insurance Co. v. Nationwide Insurance, 82 Cal.Rptr.2d 16 (Cal.App. 4 Dist. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pardee Construction v. Insurance Company of the West, 92 Cal. Rptr. 2d 443 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pickhover v. Smith’s Management Corp., 771 P.2d 664 (Utah App. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stickovich v. Cleveland, 757 N.E.2d 50 (Ohio 8th App. 2001) . . . . . . . . . .
Snyder v. Nelson, 278 Or. 409, 564 P.2d 681 (1977) . . . . . . . . . . . . . . . . .
. . . . . . . . .9-10
. . . . . . . . . . 12
. . . . . . . . . . . 6
. . . .6, 7, 16-17
. . . . . . . . 7, 14
. . . . . . . . . . 15
. . . . . . . . . . 15
. . . . . . . . . . 12
. . . . . . . . . . . 8
. . . . . . . . . . 12
. . . . . . . . . . 15
. . . . . . . . . . 16
. . . . . . . . .7, 14
. . . . . . . . .7, 14
. . . . . . . . . . .12
. . . 1, 7, 11, 14
. . . . . . . 2, 4, 5
. . . . . . . 14 n.2
. . . . . . . . . . .10
. . . . . . . . . . 15
iii
Structure Tone v. Component Assembly Sys., 713 N.Y.S.2d 161 (A.D. 1 Dept. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tishman Const. Corp. v. CNA Insurance, 652 N.Y.S.2d 742 (A.D. 1 Dept. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
W.M. Schlosser Co., Inc. v. Maryland Drywall Co., 673 A.2d 647 (D.C.App. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 6
. . . . . . . . . . .11
. . . . . . . . 6, 16
Statutes
15 U.S.C. § 1012(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fla. Stat. § 725.06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
La. Rev. Stat § 9:2780(G) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mont. Rev. Code Title 28, Ch. 2, Part 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri Rev. Stat. § 434-100(2)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N.M. Stat. § 56-7-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
O.R.S. § 30.140 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-5,
O.R.S. § 701.105 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
O.R.S. § 737.007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
O.R.S. § 737.225 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
O.R.S. § 737.255 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
O.R.S. § 737.526 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subcontractors’ Chart of State Anti-Indemnity Laws . . . . . . . . . . . . . . . . . . . . .
. . . . . .13
. . . . . .10
. . . . . . . 9
. . . . . . .9
. . . . . . 10
. . . . . . .9
14-15, 18
. . . . . .17
. . . . . .13
. . . . . . 13
. . . . . .13
. . . . . . 13
. .App-28
Texts, Treatises or Other Authorities
CG 00 01 07 98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
English, Kenneth G., Government Complicity and a Government
Contractor’s Liability in Qui Tam and Tort Cases, 33 Public Contract Law Journal 649 (American Bar Association 2004) . . . . . . . . . . . . . . . . . .
. . . . . 4, App-4
. . . . . . . 11-13
iv
Gibson, Ligeros & Malecki, The Additional Insured Book, Chapter 1, “Executive Summary” (IRMI 2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kaplow, Louis, An Economic Analysis of Legal Transitions, 99 Harv.L.Rev. 509 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mehta, Additional Insured Status In Construction Contracts And Moral
Hazard, 3 Conn.Ins.L.J. 169 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5,
Posner, Richard A., Economic Analysis of Law, Little, Brown & Company (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Seidenfeld, An Apology for the Administrative Law in The Contracting
State, 28 Fla.St.U.L.Rev. 215 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 5, App-17
. . . . . . . . . . 12
7, 9, 11, 13-14
. . . . . . . . . . 12
. . . . . . . . . . .11
1
INTRODUCTION
Amicus Curiae American Subcontractors Association, Inc. (“ASA”), urges this
Court to do two things. First, to affirm the decision of the Court of Appeals that plaintiff-
appellant, Walsh Construction Co. (“Walsh Construction”), failed to adduce evidence on
motions for summary judgment raising a genuine dispute about the extent, if any, of its
subcontractor’s negligence, as required by O.R.S. § 30.140(2). Second, to reject the
argument of defendant-respondent, Mutual of Enumclaw (“Mutual of Enumclaw”), that
the use of alternate policy forms to those employed in this case would have permitted
Walsh Construction to have coverage as an “additional insured” against its own
negligence, thereby circumventing Oregon’s public policy as expressed in O.R.S. §
30.140, Oregon’s anti-indemnity statute. See Response to Petition for Review at 3 (“The
Court of Appeals decision in this case applies only to blanket-style endorsements”).
Oregon’s anti-indemnity statute is designed to reduce the number of injuries to
construction workers, and also to reduce the number of construction defects plaguing the
construction industry, by forcing those who lead and supervise construction projects to
pay for the consequences of their own negligence using their own insurance and assets,
rather than using the assets and insurance of their subcontractors by way of “hold
harmless” clauses and “additional insured” contract requirements. See, e.g., National
Union Fire Insurance Co. v. Nationwide Insurance, 82 Cal.Rptr.2d 16, 22 (Cal.App. 4
Dist. 1999) (limited construction of an additional insured endorsement “furthers
California’s interest in preventing construction-related accidents”).
Oregon’s public policy on indemnification in construction contracts is a gravely
important matter: the construction industry accounted for twenty percent (20%) of
workplace fatalities in the United States in 2001 and 2002, according to the U.S. Bureau
2
of Labor Statistics, although it employed only five percent (5%) of the workforce in
either of those years. See Appendix at 1-3. Construction is not only plagued by worker
injury lawsuits such as that underlying the instant matter, but also by construction defect
lawsuits. These are the very issues addressed by Oregon’s anti-indemnity statute,
because lawsuits for worker injuries and construction defects are the primary subjects of
obligations to hold harmless and procure insurance in construction contracts.
This case, for instance, involves an injury to the employee of Ron Rust Drywall, a
subcontractor to Walsh Construction. For a construction defect example, see, e.g.,
Pardee Construction v. Insurance Company of the West, 92 Cal. Rptr. 2d 443, 454-456
(2000) (ruling that certain “additional insured” coverage forms include completed
operations coverage for the additional insured, while others do not, depending on their
language).
Oregon’s anti-indemnity statute is worded, and intended, to address the moral
hazards that arise when the leaders of a construction project can make claims on policies
that do not name them as named insureds, undermining the safety of construction
workers, as well as the quality of life for every citizen of Oregon who lives or works in a
building. This Court’s unambiguous ruling to effectuate the intent of the statute, and to
prohibit the enforcement of insurance procured in direct violation of Oregon law and
public policy, is vital to protect Oregon’s workers and other citizens.
I. MATERIAL FACTS “UNDISPUTED”
BY WALSH CONSTRUCTION ON SUMMARY JUDGMENT
The court of appeals did not “seemingly ignore” ORS § 30.140(2), as contended
in the Brief on the Merits of Amici Curiae Oregon-Coumbia Chapter of Associated
General Contractors, et al., at page 7. Quite to the contrary, the court of appeals directly
3
held that it was “undisputed” that subsection (2) of Oregon’s anti-indemnity statute did
not apply to this case. In other words, paraphrasing subsection (2), no evidence was
proffered by Walsh Construction to show “the extent that the … bodily injury [to an
employee of Walsh Construction’s subcontractor, Ron Rust Drywall, on December 8,
1998] … arises out of the fault of [Mutual of Enumclaw’s named insured, Ron Rust
Drywall],” even though the extent of Ron Rust’s negligence was a material fact on
motions for summary judgment. Any suggestion that the lower courts failed to afford
Walsh Construction with an opportunity to litigate the extent of the negligence of Ron
Rust Drywall is, therefore, unjustified. As noted in the Brief on the Merits of Amici
Curiae Oregon-Columbia Chapter of Associated General Contractors, et al., at 3,
“Walsh’s position did not include an alternative argument based on the relative fault of
itself and Rust, Enumclaw’s insured.” That’s precisely why the court of appeals
specifically found that the non-application of the exception for indemnity based on the
negligence of the indemnitor, as provided by ORS § 30.140(2), was “undisputed.”
ASA urges this Court to clarify that the court of appeals did not hold “that a
commonplace contract requirement is entirely void,” as Walsh Construction apparently
has convinced the legislative sponsor of ORS § 30.140, Senator Frank Morse. See
sentence beginning “Walsh, however, says …,” in the Senator’s letter dated February 12,
2004, attached to the February 2004 Brief of Amici Curiae Oregon-Columbia Chapter of
Associated General Contractors et al., at APP-7 thereof. As the Senator pointed out in
his letter, “ORS 30.140 is clear that contractual provisions are void only ‘to the extent’
that they in fact require one to bear another’s liability.” But, contrary to the Senator’s
contention, the court of appeals cannot be fairly said to have “called into question the
validity of risk-allocation clauses … regardless of who bears the liability,” because the
4
extent of Ron Rust Drywall’s negligence was never made the subject of a factual dispute
by Walsh Construction on motions for summary judgment. The point, that Walsh
Construction failed to adduce evidence raising a factual dispute, seems to have been lost
on learned observers like the Senator, and their lawyers, perhaps because the court of
appeals dealt with the issue so briefly, in a single sentence, where it wrote that the
inapplicability of ORS 30.140(2) was “undisputed.” ASA therefore urges the Court to
further elucidate the point, for sake of clarity, in laymen’s terms.
II. WHAT IT MEANS “TO INDEMNIFY” UNDER O.R.S. § 30.140
“Hold harmless” terms and “additional insured” requirements in construction
subcontracts each provide an alternate route to the same general liability insurance
coverage purchased by a named insured subcontractor. The standard form for
commercial general liability policies published by Insurance Services Office, Inc., (ISO),1
the CG 00 01 form (07/98 edition) (copy attached at App-4), for example, includes
coverage for the named insured’s obligations contained in contracts “pertaining to [the
named insured’s] business,” to defend and hold others harmless against “tort liability.”
See App-4 at Section I, ¶ 2.b.(2)(a) (exception to exclusion of assumed liabilities), and
App-14 at Section V, ¶ 9.f. (defining “insured contract”).
Other standard forms (notably the CG 20 10 forms discussed in Pardee
Construction, 92 Cal.Rptr2d at 454-456) exist for the purpose of adding “additional
insureds” to the same insurance policies, providing yet another means for a contracting
1 “ISO is a nonprofit trade association that provides rating, statistical, and actuarial policy forms and related drafting services to approximately 3,000 nationwide property or casualty insurers. Policy forms developed by ISO are approved by its constituent insurance carriers and then submitted to state agencies for review. Most carriers use the basic ISO forms, at least as the starting point for their general liability policies.” Pardee Construction, 92 Cal. Rptr. 2d at 456 n.15 (internal quotes omitted).
5
party to ensure coverage under a general liability insurance policy procured by someone
else. In fact:
Indemnitees sometimes require additional insured status in an attempt to circumvent statutes prohibiting the transfer of sole fault in indemnity provisions. This goal may be achieved with additional insured status if the endorsement used to provide additional insured status does not exclude the additional insured’s sole fault (most do not) and if the contract is drafted carefully (with the insurance requirements stated separately from the defense and indemnification provisions).
Malecki, Ligeros and Gibson, The Additional Insured Book, International Risk
Management Institute (2000) at 3, App-21, under “Coverage Scope” (an earlier edition of
this book was cited in Pardee Construction, 92 Cal. Rptr.2d at 456, along with other
IRMI publications); see also Mehta, Additional Insured Status & Moral Hazard, 3
Conn.Ins.L.J. 169, 183 (“Most courts have held that despite statutes prohibiting broad
form indemnity, where a party has been named an additional insured, this party is entitled
to receive indemnification from the indemnitor’s insurer”).
Thus, “hold harmless” terms and “additional insured” requirements are
indistinguishable in their purpose, which is to put the general liability insurance of the
contract obligor, or else the other assets of the contract obligor, at risk when a third-party
lawsuit is filed against the contract obligee. Webster’s Ninth New Collegiate Dictionary
defines “insurance” as “coverage by contract whereby one party undertakes to indemnify
or guarantee another against loss by a specified contingency or peril [emphasis
supplied].” Merriam-Webster, Inc., 1985; compare ORS § 30.140 (“to indemnify”).
Additionally, the remedy for breach of a requirement to purchase insurance and
name another as an “additional insured,” and for breach of an “additional insured”
endorsement by an insurance company, and for breach of a “hold harmless” requirement,
6
is the same: indemnity and defense. See, e.g., Chrysler Corp. v. Merrell & Garaguso,
Inc., 796 A.2d 648 (Del. 2002) (Chrysler’s claim that “under the terms of the contract
between Chrysler and Merrell, Merrell was required to indemnify and defend Chrysler
from all claims arising under the construction contract” was based on both “hold
harmless” terms (ruled void) and “additional insured” requirements in the contract;
remanded “to determine such rights as Chrysler may be able to assert under the Penn
National policy” purchased by Merrell); compare Chevron v. Bragg Crane & Rigging,
180 Cal.App.3d 639, 225 Cal. Rptr. 742 (1986) (prime contractor, Bragg, force to
indemnify project owner, Chevron, against Chevron’s own negligence based on breach of
“additional insured” requirement to the extent of Bragg’s deductible, because the
contractual insurance requirements did not mention a deductible); compare also W.M.
Schlosser Co., Inc. v. Maryland Drywall Co., 673 A.2d 647 (D.C.App. 1996) (“hold
harmless” indemnity for general contractor against $3,000,000 judgment in favor of
drywall subcontractor’s employee who fell three-stories through a door-sized opening in
the floor rendering him a quadriplegic) and Structure Tone v. Component Assembly Sys.,
713 N.Y.S.2d 161 (A.D. 1 Dept. 2000) (carpentry subcontractor’s general liability carrier
required “to indemnify” general contractor, who was named as an “additional insured,”
against a lawsuit by an employee of carpentry subcontractor’s sub-subcontractor) and
Acceptance Insurance Company v. Syufy Enterprises 81 Cal.Rptr.2d 557 (Cal. App.
1999) (declaratory judgment action by carrier against additional insured to determine “the
parties’ rights and obligations in the defense and indemnification of [the injured
subcontractor’s employee]’s claim”).
Contract terms that require one party to hold another harmless, and contract terms
that require one party to purchase a general liability insurance policy and name the other
7
party as an “additional insured” on that policy, both shift not only the same kinds of
losses, but also records of loss experience, to the general liability insurance purchased by
the indemnifying party (the “named insured”) who must pay the future insurance
premiums. See Mehta, Additional Insured Status In Construction Contracts And Moral
Hazard, 3 Conn.Ins.L.J. 169, 187 (1996); see also the sentence accompanying n.1, above.
As a consequence, both loss-shifting mechanisms have the same public policy
implications, i.e., they both create a “moral hazard” which undermines both worker safety
and quality in building construction. See, e.g., National Union Fire Insurance Co. v.
Nationwide Insurance, 82 Cal.Rptr.2d 16, 22 (Cal.App. 4 Dist. 1999) (limited
construction of an additional insured endorsement “furthers California’s interest in
preventing construction-related accidents”), and Lamb v. Armco, Inc., 518 N.E.2d 53, 55-
56 (Ohio App. 1986) (purpose of anti-indemnity legislation “is to require employers to
provide employees with a safe place to work [original emphasis]”), and Davis v. Comm.
Edison Co., 336 N.E.2d 881, 884 (Ill. Supr. 1975) (“Having arranged the avoidance of
the burdens of liability, they no longer have the same motivations to lessen the extent of
the danger... to the prejudice of the worker's safety and interest”), and Jankele v. Texas
Co., 54 P.2d 425, 427 (Utah 1936) (“contracts exempting persons from liability for
negligence induce a want of care…. It has therefore been declared to be good doctrine
that no person may contract against his own negligence” (internal quotes omitted));
compare Chrysler, 796 A.2d at 652 (acknowledging “the force of the policy argument
limiting enforcement of the insurance savings provision [of Delaware’s anti-indemnity
law], but finding “equally strong policy considerations supporting the opposite view”
after a worker has been injured, based on court’s assumption that putting additional
insurance policies at risk substantially increases the odds of full compensation).
8
Oregon’s anti-indemnity statute uses broad language in the service of important
public policy goals to reduce construction defect litigation, and to improve worker safety,
by ensuring that those responsible for selection of subcontractors to perform work, and
for supervising and inspecting that work, are responsible for the financial consequences
of their own negligence. The law still permits an additional insured, or indemnitee under
a hold harmless clause, to be covered for liability that is “imputed” or “vicarious,” i.e.,
due to the negligence of the named insured or indemnitee under a hold harmless clause,
as well as for liability arising in strict liability. See, e.g., American Country Ins. Co. v.
Cline, 722 N.E.2d 755, 763 (Ill.App. 1 Dist. 1999) (“additional insured” coverage form
which limited coverage to “liability specifically resulting from the conduct of the Named
Insured which may be imputed to the Additional Insured,” and which excluded “liability
arising out of the claimed negligence of the Additional Insured,” would cover vicarious
and strict liability only and was not void as “illusory”) and compare Greer v. City of
Philadelphia, 795 A.2d 376, 381-382 (Pa. 2002) (hold harmless terms covering
indemnitees’ liability and attorneys fees “only to the extent caused in whole or in part by
negligent acts or omissions of the Subcontractor, the Subcontractor’s Sub-Subcontractors,
anyone directly or indirectly employed by them or anyone for whose acts they may be
liable,” held to provide “a meaningful benefit” including, but not limited to, attorneys
fees, unlike Pennsylvania contribution statute).
A. DISTINCTIONS WITHOUT A DIFFERENCE
It is true that “hold harmless” terms are generally subject to judicial limits that do
not apply to insurance policies, because unlike insurance policies which are construed in
favor of coverage, “hold harmless” terms are construed against coverage. In addition, 36
state legislatures have enacted “anti-indemnity” statutes extending protections to
9
construction subcontractors, which widely vary in their terms and effectiveness and
which are generally held to distinguish “hold harmless” terms from requirements to
purchase insurance. See App-28-App-30, see also Mehta, 3 Conn.L.J. at 182-183 (“Most
courts have held that despite statutes prohibiting broad form indemnity, where a party has
been named an additional insured, this party is entitled to receive indemnification from
the indemnitor’s insurer”). These distinctions, however, do not address the economic
reality that a claim for breach of a contractual requirement to purchase insurance, or a
claim against the insurance company (where the requirement was complied with), or a
claim for breach of a hold harmless clause, all lead to the same remedy. Since insurance
is a contract for indemnity, the remedy for breach is indemnity, and vice versa. See cases
discussed above at 5-6.
Statutory anti-indemnity language varies widely from state to state, making any
distinction between “hold harmless” terms and “additional insured” requirements with
regard to anti-indemnity legislation arguably more defensible in some jurisdictions than
others. It is worthy of note that Louisiana has barred the use of both broad “hold
harmless” and “additional insured” coverages in connection with oil drilling contracts for
decades, apparently without shutting down the oil drilling industry in that state. See
Babineaux v. McBroom Rig Building, 806 F.2d 1282 (5th Cir. 1987) (applying Louisiana
Oilfield Indemnity Act, La.Rev.Stat. § 9:2780(G)). Oregon also appears to have started a
trend to apply anti-indemnity limits to “additional insured” requirements in construction
contracts, recently followed by legislatures in Montana (Montana Revised Code Title 28,
Chapter 2, Part 21 (HB 482 (2003))) and New Mexico (N.M. Stat. §56-7-1 (SB 280
(2003)). Ohio courts have interpreted that state’s anti-indemnity law both ways, as either
extending, or not extending, to “additional insured” requirements. Compare Buckeye
10
Union Ins. v. Zavarella Bros., 699 N.E.2d 127 (Ohio 8th App. 1997) (additional insured
barred) and Stickovich v. Cleveland, 757 N.E.2d 50, 61 (Ohio 8th App. 2001) (additional
insured permitted).
Walsh Construction argued before the appeals court that insurance can be legally
distinguished from indemnification because indemnity is never subject to dollar limits,
while insurance is always subject to dollar limits. However, indemnity often is subject to
dollar limits. Current and former versions of Florida law, for example, bar, and have
barred, the use of unlimited indemnity terms in construction contracts without dollar
limits. See Fla. Stat. § 725.06. (A law passed in 2000 briefly removed the previous
statute’s requirement to use a dollar limit, however, the dollar limit requirement was
reinstated a short time later. See, e.g., Barton-Malow v. Grunau, 835 So.2d 1164
(Fla.App.2nd Dist. 2002)). Another example is provided by Missouri law, which puts
limits on hold harmless terms in any construction contracts which also include insurance
requirements, by limiting the hold harmless obligations to the limits of the required
insurance. Mo. Rev. Stat. § 434-100(2)(8).
Further, Walsh Construction’s argument leads to absurd results. If indemnity
terms could not have dollar limits, then the mere artifice of a dollar limit would serve to
undermine both statutory and judicial restrictions on the use of indemnity terms in
construction contracts throughout the country: anti-indemnity laws, after all, apply to
indemnity obligations. According to Walsh Construction, none of those laws (see App-
28-App-30 for a list) can apply to a hold harmless clause containing a dollar limit, since a
contract clause with a dollar limit cannot be an “indemnity clause.” Presumably not even
judicial rules of construction of indemnity clauses would apply, so long as a dollar limit
is included.
11
Finally, neither Walsh nor amicus has cited legislative history suggesting that
Oregon’s legislature intended to use the term appearing in the anti-indemnity statute, “to
indemnify,” to mean anything other than what it means in ordinary usage. See, e.g.,
Tishman Const. Corp. v. CNA Insurance, 652 N.Y.S.2d 742 (A.D. 1 Dept. 1997)
(majority and dissenting opinions discussing whether insurance carrier, CNA, “must
indemnify Tishman [an additional insured] to the extent of the policy limits [emphasis
supplied]”).
B. OREGON LAW AVOIDS MORAL HAZARDS
THAT CAUSE ACCIDENTS AND CONSTRUCTION DEFECTS
Insurance companies assign loss experience to the “named insured” on an affected
insurance policy, not to “hold harmless” or “additional insured” indemnitees who also
have claims paid by the policy. See Mehta, Additional Insured Status In Construction
Contracts And Moral Hazard, 3 Conn.Ins.L.J. at 187 (1996) (“In the ordinary insurance
relationship, the insured is also deterred from engaging in risky activity by the notion that
an accident or occurrence will result in the insurer raising its premiums,” however, “the
additional insured is insulated against this prospect by the fact that it is not responsible
for premium payments to the insurer and is unaffected by the raising of premiums”),
quoted in Nat. Union Fire Ins. Co. v. Nationwide Ins., 82 Cal.Rptr.2d 16, 22 (Cal. App. 4
Dist. 1999) (limited construction of additional insured policy endorsement “furthers
California’s interest in preventing construction-related accidents.”). The result is a
“moral hazard” problem, where “a party to a transaction can engage in behavior that
changes the risks to the other party associated with the transaction.” Seidenfeld, An
Apology for the Administrative Law in The Contracting State, 28 Fla.St.U.L.Rev. 215,
225 n.44 (2000), quoted in English, Kenneth G., Government Complicity and a
12
Government Contractor’s Liability in Qui Tam and Tort Cases, 33 Public Contract Law
Journal 649, 658 (American Bar Association 2004).
“[T]he moral hazard of insurance [is] the chance that the existence of insurance
will increase the likelihood of the insured event.” Hall v. Life Insurance Company of
North America, 317 F.3d 773, 775 (7th Cir. 2003); see also Charter Oak Fire Insurance
Co. v. Color Converting Industries Co., 45 F.3d 1170, 1174 (7th Cir. 1995) (“moral
hazard” arises when insurance companies “insure against risks that the insured controls.
Such insurance would give the insured an incentive to increase risk, since he would have
shifted the cost of the increased risk to the insurance company”), see also Kaplow, Louis,
An Economic Analysis of Legal Transitions, 99 Harv.L.Rev. 509, 537 (1986). Acute
moral hazards justify many public policy limits on the use of insurance, such as the
“familiar example [of] taking out a life insurance policy on another person’s life without
his consent,” or “the rule that forbids insuring against criminal fines.” Mortenson v.
National Union Fire Insurance Co. of Pittsburgh, Pa., 249 F.3d 667, 671 (7th Cir. 2001).
The “moral hazard” of insurance is a common tool of economic analysis that has been
analogized to many issues not directly related to insurance, such as: (i) bankruptcy (“One
can buy and consume all sorts of nice things on debt and then default. The problem (a
particularly serious form of the general moral hazard problem of insurance) could be
solved only by distinguishing between voluntary and involuntary defaults and limiting
the privilege to the latter.” Posner, Richard A., Economic Analysis of Law, Little, Brown
& Company (1986) at 376-377); (ii) contractual attorneys fees provisions (“An
opportunity to litigate on the adversary’s dime, without any need to prevail in order to
collect, creates a moral hazard ….” Gerow v. Rohm & Haas Company, 308 F.3d 721,
725-6 (2002)); and (iii) the scienter element of qui tam litigation (see English, 33 Public
13
Contract Law Journal at 658). “Moral hazard” has also been applied to international
monetary policy (see, e.g., http://www.morganstanley.com/GEFdata/digests/20000724-
mon.html#anchor0), banking policy (see, e.g., http://www.gametheory.net/
News/Items/002.html), and even topics like the designated hitter rule in Major League
Baseball, and whether skiers should wear helmets (see generally http://www.
gametheory.net/cgi-bin/viewnewsdate.pl).
In the context of insurance, the moral hazard problem is ordinarily alleviated by
“monitoring” of the named insured by the insurance carrier. See Mehta, 3 Conn.L.J. at
185-6. Insurance carriers can provide affirmative incentives to their named insureds to
reduce the risk of loss, and they can also monitor the loss experience of their named
insureds and adjust premiums accordingly. Mehta, 3 Conn.L.J. at 186-187. In fact,
insurance carriers share loss experience information with each other through “rating
organizations” (see O.R.S. §§ 737.007, .225, .255, .526), which are explicitly exempted
from federal anti-trust laws by the McCarran-Ferguson Act of 1945 (15 U.S.C. §§ 1011-
1015). See 15 U.S.C. § 1012(b). The ability to share loss experience information solves
the moral hazard problem for most common forms of insurance, but an “additional
insured” is “not responsible for direct premium payments to the insurer,” and “is
unaffected by the raising of premiums.” Mehta, 3 Conn. L.J. at 186-187. “[W]hile the
primary insured, by way of its direct contractual relationship with the insurer, has a
continuing motivation to exercise high standards of care, the additional insured has no
such motivation once the contract has been executed. Without this continuing
14
motivation, the additional insured’s standard of care will expose third parties to the
increased likelihood of harm.” 2 Mehta, 3 Conn.L.J. at 187.
Thus, narrow construction of additional insured coverage “further’s California’s
interest in preventing construction-related accidents.” National Union Fire Insurance
Co. v. Nationwide Insurance, 82 Cal.Rptr.2d 16, 22 (Cal.App. 4 Dist. 1999). See also
Lamb v. Armco, Inc., 518 N.E.2d 53, 55-56 (Ohio App. 1986) (purpose of anti-indemnity
legislation “is to require employers to provide employees with a safe place to work
[original emphasis]”), and Davis v. Comm. Edison Co., 336 N.E.2d 881, 884 (Ill. Supr.
1975) (“Having arranged the avoidance of the burdens of liability, they no longer have
the same motivations to lessen the extent of the danger ... to the prejudice of the worker's
safety and interest”), and Jankele v. Texas Co., 54 P.2d 425, 427 (Utah 1936) (“contracts
exempting persons from liability for negligence induce a want of care …. It has therefore
been declared to be good doctrine that no person may contract against his own
negligence.”);
Oregon’s anti-indemnity statute, by extending not only to the parties to a
construction contract but also to their sureties and insurers, implicitly recognizes that
“The same moral hazard public policy argument which disfavors broad form indemnities
also disfavors additional insured arrangements.” Mehta, 3 Conn.Ins.L.J. at 181.
C. INSURANCE PROCURED IN VIOLATION
OF LAW AND PUBLIC POLICY MUST BE VOID
In its Response to Petition for Review, Mutual of Enumclaw downplayed the
grave public policy concerns addressed by Oregon’s anti-indemnity law and suggested
2 The contrary conclusion of the Utah Court of Appeals in Pickhover v. Smith’s Management Corp., 771 P.2d 664 (Utah App. 1989), quoted on page 7 of Walsh Construction’s Brief on the Merits, that “a contractual entitlement to insurance provided by another does not encourage the beneficiary of that agreement to act any more irresponsibly than the insurance policy itself would,” is incorrect, because it fails to account for either the moral hazard problem of insurance, or the solution of monitoring.
15
that, by using forms other than “blanket forms” to add additional insureds to a
construction subcontractor’s general liability policy, different results could have still been
obtained by Walsh Construction and its insurer, Zurich. See Response to Petition for
Review at 2-4. Such a construction of the statute would render it prospectively
ineffective, because it would allow the statute to be easily circumvented by those willing
to bully their subcontractors into compliance with illegal insurance requirements.
Statutes enacted for the benefit of the public should be liberally construed to
effectuate the purpose for which they were enacted. Fitzgerald v. Neal, 113 Or. 103, 110,
231 P. 645, 648 (1924) cited in Gardner v. First Escrow Corp., 72 Or.App. 715, 696 P.2d
1172, 1179 (1985). O.R.S. § 30.140 is such a statute, designed to prevent harm to
workers during construction, and to protect inhabitants of the built environment from
construction defects after the work is completed.
Insurance coverage has been held void where an insured acts purposefully to
cause injuries and damage. In Snyder v. Nelson, 278 Or. 409, 451-416, 564 P.2d 681,
684-685 (1977), this Court remanded a claim for automobile insurance coverage to the
trial court to determine a “legitimate question of fact as to whether [the insured] intended
the injuries and damage,” because public policy prohibits insurance coverage for damage
that the insured causes on purpose. The drafting of contractual requirements for
“additional insured” coverage that is not limited to the extent of the negligence of the
named insured is quite deliberate, and does not involve merely a reckless conduct as in
Harrell v. Travelers Indemnity Company, 279 Or. 199, 567 P.2d 1013 (1978) (punitive
damages, awarded against an insured for an automobile collision caused by the insured’s
“reckless driving after drinking,” were a permissible subject of insurance coverage). It
follows that where a contract requires insurance for the negligent acts of an “additional
16
insured,” and the contract was drafted and signed intentionally, then the coverage
procured to satisfy the illegal contractual requirement must be void.
Mutual of Enumclaw’s position, which would permit coverage for the negligence
of the “additional insured” by means of different forms, is arguably supported by policy
arguments discussed by the Delaware Supreme Court in its Chrysler opinion. Although
the Delaware Supreme Court acknowledged “the force of the policy argument limiting
enforcement of the insurance savings provision [of Delaware’s anti-indemnity law],” it
nonetheless found that “equally strong policy considerations supporting the opposite view
[that ‘additional insured’ coverage should be permitted],” because, by multiplying the
number of insurance policies at risk, the odds of full compensation for victims are, the
court assumed, substantially increased. Chrysler, 796 A.2d at 652.
Naturally, the Delaware Supreme Court’s reasoning is based on statutory
language quite different from the statute in question here. But its reasoning is also
flawed, because it is based on the premise that dollar compensation is full compensation
for an injury, and because it fails to consider other transactional costs. The Delaware
Court’s logic presupposes that, for example, the victim Robertson, in the W.M. Schlosser
case was just as well off as a quadriplegic but $3,000,000 richer, as he would have been
had the general contractor discovered and remedied the unsafe condition before the
accident, preventing its occurrence. Or that the families of the victims in Jacobs
Constructors v. NPS Energy, 264 F.3d 365 (3d Cir. 2001), were just as well off with
millions of dollars, but without their loved ones who perished while working as
construction laborers, as they would have been had the Pennzoil plant, to which the
laborers were constructing an addition, never exploded into flames. Surely such extreme,
materialistic assumptions are incorrect. Life and health are valued more highly than
17
money in any society of proper perspective and good morals, as well as by any sane
individual. It is preferable to not be a victim in the first place, than to be a well-
compensated victim.
Moreover, the Delaware Court failed to consider ancillary costs to society, which
is burdened with a larger population of quadriplegics and orphaned children than in a
world with fewer accidents. Nor did that court consider the costs imposed on a county
depending on property tax revenue from a development of defective homes, or from a
defective office building. Nor did the court consider the time of judges and juries who
must weigh the appropriate levels of compensation for each victim.
Even more fundamental to its reasoning, the Delaware Court’s analysis assumes
that general contracting firms will not have adequate insurance in some significant
number of cases. Such an assumption is grossly flawed. For one thing, general
contractors are required to have $500,000 in general liability coverage just to be licensed
in Oregon. O.R.S. § 701.105(a). Additionally, construction contracts ordinarily contain
insurance requirements of their own, as in this case. See American Country Ins. Co. v.
Cline, 722 N.E.2d 755, 761-762 (court assumed that “businesses in the construction
industry carry coverage for liability arising out their own work,” and that an additional
insured general contractor “would have its own general liability coverage”); see also the
February 23, 2004, letter from the Executive Director for the Oregon-Columbia Chapter
of the Associated General Contractors of America, attached to the February 2004 Brief of
Amici Curiae Oregon-Columbia Chapter of the Associated General Contractors of
America, et al., at APP-10 thereof: (“In order to do business in today’s market, general
contractors and subcontractors through contractual requirements must carry significantly
more insurance than is required by law”).
18
Here, the Oregon legislature has recognized, and moved to correct, by
amendment, the loophole that had permitted a construction contractor’s “insurer” to
indemnify losses that the contractor could not be required to indemnify directly. This
Court should not fashion yet another loophole that would encourage contractors
throughout Oregon to withhold work from subcontractors who will not comply with
illegal contract requirements. To the contrary, the Court should make clear, as this
controversy is bound to arise again, that no coverage for an “additional insured” that is
provided pursuant to a construction contract will be permitted in Oregon except “to the
extent that the death or bodily injury to persons or damage to property arises out of the
fault of the indemnitor, or the fault of the indemnitor's agents, representatives or
subcontractors." O.R.S. § 30.140(2). Parties seeking coverage as “additional insureds”
should be prepared to adduce some evidence proving “the extent … of … fault” of the
named insured, or else they should be prepared to lose their case on motions for summary
judgment, as Walsh Construction did in this case.
Contractors should compete for general liability insurance coverage based on their
records for negligence and loss, not on their ability to enforce illegal contractual
insurance requirements through bullying tactics. Insurance procured pursuant to illegal
and void contractual requirements must also be void, or else the law’s purpose will be
utterly frustrated.
III. CONCLUSION
This Court should affirm the decision of the Court of Appeals, clarifying that it
was incumbent upon Walsh Construction, as the trial court plaintiff, to proffer evidence
on summary judgment motions showing the extent of the negligence of the named
insured of the trial court defendant, Mutual of Enumclaw. This Court should also
19
expressly reject the contentions of Mutual of Enumclaw that insurance procured in
violation of the law and public policy of Oregon may be enforced depending on the
policy form that is used.
Respectfully submitted, AMERICAN SUBCONTRACTORS ASSOCIATION, INC., by and through its counsel,
___________________________________Christopher A. Rycewicz 86275 RYCEWICZ & CHENOWETH 601 S.W. Second Avenue, Suite 1940 Portland, Oregon 97204 Telephone: (503) 221-7958
Brian W. Cubbage, Construction Law & Contracts Counsel, AMERICAN SUBCONTRACTORS ASSOCIATION, INC., assisted the preparation of this brief
App-1
APPENDIX
A. Workplace Fatalities Labor Statistics
Excerpts from a report by the U.S. Department of Labor, Bureau of Labor Statistics
(“BLS), at http://www.bls.gov/iif/oshwc/cfoi/cfch0001.pdf (July 1, 2004), show U.S.
workplace fatalities for 2001 and 2002, as well as workplace fatalities for the
construction industry in 2002:
App-2
Another report available at http://data.bls.gov/cgi-bin/surveymost?cf shows fatalities in
the construction industry for both 2001 and 2002:
Census of Fatal Occupational Injuries
Series Id: CFU00M20081
Case Type: Fatalities by detailed private industry
Category: Total
Industry: Construction
Year Annual
2001 1226(n)
2002 1121(p)
n : Excludes Sept. 11th terrorist attacks
p : preliminary
The reports show that the construction industry accounted for 1121 out of 5524
workplace fatalities in 2002, or 20.3%, and 1226 out of 5915 workplace fatalities in
2001, or 20.7%.
App-3
BLS reports on its “Industry at a Glance” Web page for the construction industry
(http://www.bls.gov/iag/construction.htm) that “construction employs about 5.2 percent
of all workers,” and its Quarterly Census of Employment and Wages, available at
http://data.bls.gov/cgi-bin/dsrv?en, confirms that the construction industry employed
6,716,000 out of 128,233,919 in 2002 (or 5.2%) and 6,683,000 out of 129,635,800 in
2001 (or 5.2%):
Quarterly Census of Employment and Wages
Series Id: ENUUS00010010
State: U.S. TOTAL
Area: U.S. TOTAL
Industry: Total, all industries
Owner: Total Covered
Size: All establishment sizes
Type: All Employees
Year Annual
2001 129635800
2002 128233919
Series Id: ENUUS0001051012
State: U.S. TOTAL
Area: U.S. TOTAL
Industry: Construction
Owner: Private
Size: All establishment sizes
Type: All Employees
Year Annual
2001 6773512
2002 6683553
B. Standard Form for Commercial General Liability Insurance: CG 00 01 07 98
The following form for Commercial General Liability Insurance is published by the
Insurance Services Office, Inc. (“ISO”). ISO’s activities are described in Pardee
Construction, 92 Cal. Rptr. 2d at 456 n.15 (internal quotes omitted).