Hands Off My Coverage! The Risks and Rewards of Allocating Risk Through Contracts and Additional Insured Endorsements

Transcription

1 Hands Off My Coverage! The Risks and Rewards of Allocating Risk Through Contracts and Additional Insured Endorsements SPEAKERS: Meghan Magruder King & Spalding Jennifer Rutecky Services Shelby Guilbert King & Spalding RIMS Educational Conference Friday, February 13,

2 Agenda I. Risk Transfer 101: Back to Basics II. III. IV. Pitfalls of Insurance Requirements in Contracts Challenges In Documenting Additional Insured Status 3 Case Studies V. Key Practice Pointers 2

3 I. Risk Transfer 101: Back to Basics 3

4 I. Risk Transfer 101: Back to Basics Two Primary Methods for Transferring Risk in Business Contracts: 1. Indemnity Agreements 2. Additional Insured Status 4

5 I. Risk Transfer 101: Back to Basics Indemnity agreements rarely cleared with the risk manager first! Form agreements or mistakenly viewed as boilerplate May be negotiated by deal lawyers May be tied to lending requirements 5

6 I. Risk Transfer 101: Back to Basics Indemnity agreements provide no guarantees. Sophisticated companies also look to indemnitor s insurance to fund its indemnity obligations: Insurance requirements in deal documents insured contracts language in policies additional insured status 6

7 I. Risk Transfer 101: Back to Basics Insured Contract coverage in CGL policies: CGL policies generally exclude coverage for damages arising out of bodily injury and property damage that the insured is obligated to pay by reason of liability in a contract or agreement. But, standard CGL policies contain an exception to the exclusion for 6 enumerated types of insured contracts, including: (f) That part of any other contract or agreement pertaining to your business... under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement. * Note that insured contract coverage generally is unavailable in property, cyber, and other types of policies. 7

8 I. Risk Transfer 101: Back to Basics Beware of endorsements like CG and that can strip away valuable insured contract coverage for indemnity agreements. Note absence of subparagraph (f) coverage for indemnity agreements 8

9 I. Risk Transfer 101: Back to Basics Limitations on Insured Contract coverage if you are relying on another party s insurance to fund an indemnity obligation: 1. No direct right against indemnitor s insurer 2. Coverage may not be available if the underlying indemnity obligation is void as a matter of law 3. Coverage may not be available if the Policy is canceled or exhausted 4. Policy exclusions 9

10 I. Risk Transfer 101: Back to Basics Possible solution: seek to obtain additional insured status under counterparty s insurance program. Why? How? What are the pitfalls? 10

11 II. Pitfalls of Insurance Requirements in Contracts 11

12 II. Pitfalls of Insurance Requirements in Contracts Additional Insured Status: What is it and why is it needed? Provides direct coverage as an insured Insurance provision must be independent from indemnity provisions to ensure if indemnity is void, coverage is afforded New policy provisions require written contract for AI blanket agreement to apply What are the pitfalls/problems? Dilution of Limits Potential defense conflicts Providing unintentional coverage 12

13 II. Pitfalls of Insurance Requirements in Contracts Failure to Match Insurance Provisions to Services Rendered Is the coverage required correct and appropriate (type of coverage)? Have the risks in the contract been appropriately evaluated? Is this a higher hazard that should require additional limits? Can coverage be limited to job or project? Understanding Coverage Limitations Assuming risk beyond intent and/or insurance coverage provisions Language such as any and all losses Exclusions/limitations in policy form punitive/exemplary damages 13

14 II. Pitfalls of Insurance Requirements in Contracts Limitations of Liability Does the contract limit by contract value/fee? Impact of Exhaustion of Limits Ambiguous Language such as parties agree to purchase insurance that may be required from time in a manner agreed to by parties Ensuring Additional Insured requirement stands independent from indemnity Understanding of Relationships and Coverage Implications Indemnities for subcontractors and vendors utilized and the subsequent indemnification and additional insured impact 14

15 Common Insurance Provisions Requested Provision Additional Insured Waiver of Subrogation Primary and Non-contributory Separation of Insureds Notice of Cancellation Purpose Blanket or Specific Basis Must name for coverage to apply. Will not be inferred relationship. Importance of independence of indemnity and insurance. Waives rights to recover loss in advance. Must be agreed to in written contract or agreement in advance otherwise carrier can invoke. To preserve the policy requested will respond and will not seek contribution from AI policy. Some policies contain language where this must be agreed to by written contract in advance. Policy provisions apply to separately to each insured for whom a claim is brought. Importance for using policy to respond for claim for damages from AI to Named Insured under contract. Specifies days notice for policy cancellation. Notice provided to Named Insured. Some carriers will endorse policy to provide notice to AI. 15

16 II. Pitfalls of Insurance Requirements in Contracts Special considerations in M&A Context: Understanding the deal Evaluate Need for Run Off Programs Tail Provisions for Claims Made Policies Legacy Liability Stand-alone Representation and Warranty Coverage 16

17 III. Challenges in Documenting Additional Insured Status 17

18 III. Challenges in Documenting Additional Insured Status Overreliance on the due diligence team or certificates of insurance Policies may be canceled or exhausted after the deal closes or after you obtain the certificate Certificates are informational only and do not create a contractual right to coverage To obtain additional insured status, the named insured must have a blanket endorsement or request and obtain a policy endorsement Agent/Broker could issue the certificate without following through and getting the endorsement 18

19 III. Challenges in Documenting Additional Insured Status Always ask to review the endorsement and the Policy and request changes if necessary. Always inquire about potential exhaustion. Not all additional insured endorsements are the same over 30 ISO AI endorsements you can always request changes or manuscript ISO AI forms increasingly limit the scope of additional insured coverage 19

20 III. Challenges in Documenting Additional Insured Status Read the fine print! This certificate is issued as a matter of information only and confers no rights on the certificate holder. If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed.... A statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s). Notwithstanding any... contract or other document...the insurance afforded by the policies described herein is subject to all the terms, exclusions and conditions of such policies. Limits shown may have been reduced by paid claims. 20

21 III. Challenges in Documenting Additional Insured Status Impact of 2013 ISO AI Endorsement CG : The insurance afforded to such additional insured only applies to the extent permitted by law. If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you [the insured] are required by the contract or agreement to provide for such additional insured. If coverage to the additional insured is required by a contract or agreement, the most [the insurer] will pay on behalf of the additional insured is the amount of insurance: 1. required by the contract or agreement; or 2. available under the applicable Limits of Insurance shown in the Declarations; whichever is less. 21

22 III. Challenges in Documenting Additional Insured Status Key takeaways: 2013 ISO endorsement makes it easier to align insurance requirements and additional insured endorsement to avoid giving away more coverage than intended. On the other hand, if you are seeking AI status under a program with the 2013 AI endorsement, ask for appropriate language in the insurance requirements 22

23 IV. Three Case Studies 23

24 IV. Case Study 1 Certificate of Insurance Contracting parties: Alabama Electric Cooperative and Bailey s Construction Company Contract: Bailey to remove of ash and sludge from AEC holding ponds Injury: Bailey s independent contractor dies on AEC property while working on project. His estate sues AEC. Is AEC covered under Bailey s insurance program. 24

25 IV. Case Study 1 Certificate of Insurance No insurance requirement in the ash and sludge contract between AEC and Bailey. However, evidence of an oral agreement that Bailey would name AEC as an additional insured. Bailey had performed other work for AEC and its broker had given certificates of insurance listing AEC as an additional insured under its CGL policies. 25

26 IV. Case Study 1 Certificate of Insurance Bailey s Insurer refused to pay, claiming that there was no AI endorsement. AEC and its insurer settled the underlying wrongful death claim with no contribution from Bailey or its insurers. AEC and its insurers subsequently sued Bailey, its insurer, and its broker because AEC was listed on certificates of insurance as an AI. 26

27 IV. Case Study 1 Certificates of Insurance Alabama Supreme Court: AEC s reliance on the certificate of insurance was unreasonable, especially given the disclaimers stating that the certificate is not evidence of insurance. Alabama Electric Coop., Inc. v. Bailey's Constr. Co., Inc., 950 So. 2d 280, (Ala. 2006) Other courts have reached the same conclusion: Mulvey Constr., Inc. v. Bituminous Cas. Corp., 2011 WL , *4 (S.D.W.Va. March 31, 2011) ( Any reliance on the certificates of insurance is unwarranted given that the certificates give clear notice that they cannot be relied upon for coverage under the Policy. ). Benjamin Shapiro Realty Services, LLC v. Kemper Nat l Ins. Cos., 756 N.Y.S.2d 45, 46 (N.Y.A.D. 2003) ( [W]here, as here, certificates of insurance contain disclaimers that they are for information only, they may not be used as predicates for a claim of negligent misrepresentation. ) 27

28 IV. Case Study 1 Certificate of Insurance In most jurisdictions, you can t blame the broker who gives you the certificate of insurance unless you specifically ask the broker to obtain additional insured status: Seal v. Hart, 50 P.3d 522, (Mont. 2002) (declining to impose liability where third party never contacted intermediary about procuring coverage and holding that [a] certificate of insurance alone does not constitute a contract to procure insurance or impose a duty upon the certificate issuer to procure the same ) Lu-An-Do, Inc. v. Kloots, 721 N.E.2d 507, (Ohio Ct. App. 1999) (rejecting malpractice claim on the grounds that as a matter of law, the issuance of a Certificate of Insurance to a certificate holder who is not the customer of the insurance agent issuing the certificate, fails to create a duty from the certificate issuer to the certificate holder and also rejecting negligent misrepresentation claim because a party cannot justifiably rely upon an alleged negligent misrepresentation by an insurance agent [in a Certificate of Insurance] when the party could have discovered the accuracy or validity of the representation by reviewing the insurance policy ) Federal Ins. Co. v. Spectrum Ins. Brokerage Servs., Inc., 758 N.Y.S.2d 21 (N.Y.A.D. 2003) (rejecting malpractice claim against insurance broker for allegedly failing to procure sufficient insurance coverage for additional insured because the broker s duty is to its customer (here, the contractor) and not to additional insureds ) 28

29 IV. Case Study 2: ISO 2013 AI Endorsement Fictional supply agreement between Wile E. Coyote and the Acme Corporation 29

30 IV. Case Study 2: ISO 2013 AI Endorsement Agreement requires Acme to provide evidence of the following additional insurance coverage for the benefit of Wile E. Coyote, up to the following amounts: CGL: $2 million Excess: $10 million excess of primary Acme already has $5 million in CGL and $25 million excess Acme obtains 2013 ISO AI endorsement for Wile E. Coyote, capping his coverage. 30

31 IV. Case Study 2: ISO 2013 AI Endorsement $10 million loss Under CG : If coverage to the additional insured is required by a contract or agreement, the most [the insurer] will pay on behalf of the additional insured is the amount of insurance: 1. required by the contract or agreement; or 2. available under the applicable Limits of Insurance shown in the Declarations; whichever is less. Contract only required $2 million in primary coverage. Thus, only $2 million in coverage available to Wile E. Coyote for the $10 million loss despite Acme s $30 million program. No ability to tap into excess coverage. 31

32 IV. Case Study 3 Oil in the Gulf 32

33 IV. Case Study 3 Oil in the Gulf Transocean owned the Deepwater Horizon drilling unit Deepwater Horizon was engaged in exploratory drilling under a drilling contract between BP and Transocean In April 2010, an onboard explosion caused the Deepwater Horizon to sink after burning for 2 days An oil spill occurred underwater Billions of dollars in third party claims Ongoing litigation relating to underlying responsibility Ongoing coverage litigation with huge potential implications for additional insured coverage 33

34 IV. Case Study 3 Oil in the Gulf Sophisticated parties with heavily negotiated indemnities and additional insured provisions in their contracts: BP plc Anadarko Petroleum Corp. Moex Offshore 2007 (Mitsui) Transocean Ltd Cameron International Weatherford International Ltd. Halliburton Energy Services Nalco Co. M-I SWACO Many other manufacturers and service providers 34

35 IV. Case Study 3 Oil in the Gulf In the indemnity provision in the BP Transocean Drilling Contract, Transocean agreed to indemnify BP for pollution above the water s surface, while BP was responsible for pollution below the water s surface Undisputed that BP had no right to indemnity from Transocean for underwater pollution. BP did not seek contractual indemnification from Transocean. Undisputed that BP was an additional insured, at least to some extent, under Transocean s policies. 35

36 IV. Case Study 3 Oil in the Gulf Insurance Provisions in Drilling Contract: Without limiting the indemnity obligations or liabilities of [Transocean] or its insurer, at all times during the term of this contract, [Transocean] shall maintain insurance covering the operations to be performed under the contract as set forth in Exhibit C. Exhibit C: The insurance required to be carried by [Transocean]... is as follows: (c) Comprehensive General Liability Insurance, including contractual liability insuring the indemnity agreement as set forth in the Contract. Exhibit C: [BP], its subsidiaries and affiliated companies, co-owners, and joint venturers, if any, and their employees, officers and agents shall be named as additional insureds in each of [Transocean s] policies, except Worker s Compensation for liabilities assumed by [Transocean] under the terms of this Contract. 36

37 IV. Case Study 3 Oil in the Gulf Insurance Provision in Drilling Contract [BP], its subsidiaries and affiliated companies, coowners, and joint venturers, if any, and their employees, officers and agents shall be named as additional insureds in each of [Transocean s] policies, except Worker s Compensation for liabilities assumed by [Transocean] under the terms of this Contract. AI Provision in Transocean s Policies The term Insured shall include:... (c) any person to whom the Insured is obliged by any oral or written Insured Contract... entered into before any relevant Occurrence, to provide insurance such as is afforded by this Policy. 37

38 IV. Case Study 3 Oil in the Gulf Transocean s Insurance Program: Primary: $50 million of general liability Excess: $700 million consisting of 4 excess policies The policies do not incorporate the limitations on AI coverage arguably set forth in the drilling contract. Is BP an additional insured? 38

39 IV. Case Study 3 Oil in the Gulf When BP demanded coverage as an additional insured, Transocean s insurers, filed a declaratory judgment action against BP in federal court. Trial court s holding: The indemnity provision and the insurance provision in the drilling contract must be read together and shape the scope of additional insured coverage. Because the oil spill originated underwater, and the contract unambiguously states that BP is responsible for underwater liabilities, BP had no right to pursue AI coverage. 39

40 IV. Case Study 3 Oil in the Gulf The Fifth Circuit Court of Appeal, at least initially, reverses, based on its reading of Texas law: Even if the clause [in the Drilling Contract] is construed as the Insurers desire, that is, even if it is understood to mean that BP is [to be] an additional insured under Transocean s policies only for liabilities Transocean specifically assumed in the drilling contract we are bound to look only to the policy itself to determine whether BP is covered in the current case. The policy language imposes no relevant limitations upon the extent to which BP is covered for its operations under the Drilling Contract. In re Deepwater Horizon, 710 F.3d 338 (5th Cir. 2013) Key takeaway: The insurance policy and the indemnity agreement are separate contracts. 40

41 IV. Case Study 3 Oil in the Gulf Subsequently, the Fifth Circuit withdrew its decision and asked the Texas Supreme Court to decide two questions: (1) Whether BP is covered as an additional insured, based solely on the language of the insurance policies, or whether the indemnity should shape the scope of AI coverage; (2) Whether the contra proferentem doctrine of requiring insurance policies to be interpreted against insurers and in favor of insureds applies to sophisticated parties. In re Deepwater Horizon, 728 F.3d 491 (5th Cir. 2013) 41

42 IV. Case Study 3 Oil in the Gulf Oral arguments were heard before the Texas Supreme Court September 16, Decision expected to have wide-ranging consequences: Regardless of outcome, insurers will be more careful about granting broad additional insured coverage Risk managers need to be more careful about potentially giving away their coverage, and should narrow the AI coverage being granted to liabilities specifically assumed in the underlying agreement Huge risk for captive programs 42

43 V. Key Practice Pointers 43

44 V. Key Practice Pointers 1. Indemnity and Additional Insurance Provisions: know what both say and how they operate together. 2. As part of your ERM/gap analysis, make sure you understand additional insured issues, how they affect your limits, and how additional insurance issues are managed in your organization. 3. Engage M&A executives / lawyers on the importance of aligning indemnities and AI provisions. 44

45 V. Key Practice Pointers 4. If additional insured coverage must be extended, limit scope of that coverage in the endorsement providing the coverage to avoid giving away too much insurance. 5. Don t rely on certificates of insurance. Insist on an additional insured endorsement, read the endorsement, and ask for a copy of the policy. 6. Carefully consider the pros and cons of scheduling additional insureds separately each time AI coverage is extended. 7. ISO endorsements are negotiable. 45

46 V. Key Practice Pointers 8. Require notice of cancellation to the additional insured in the contract if insurer won t allow. If you are asked for this in a contract negotiation, push back and make sure your organization can manage and deliver this notice. 9. Make sure priority of payment is consistent with insurance requirements and review other insurance provisions for primary/noncontributory langauge. 10. Remember special M&A considerations. 46

47 QUESTIONS? 47

48 Speaker Biography Meghan Magruder Meghan Magruder (404) Meghan Magruder is a Senior Partner in King & Spalding s Atlanta office and a member of the Business Litigation Practice Group. She has more than thirty years of experience handling complex litigation matters. Ms. Magruder is listed in The Best Lawyers In America, Georgia Super Lawyers, and Top Women Attorneys in Georgia. Ms. Magruder is a fellow in the American College of Coverage Counsel and she represents policyholders in connection with claims in negotiation, litigation and arbitration, including international arbitration. She is a fellow in the Litigation Counsel of America, an invitationonly honorary society representing one-half of one percent of American lawyers with excellence in litigation, trial work, and superior ethical reputation. Ms. Magruder advises clients with respect to all types of insurance policies and counsels clients with respect to their insurance needs. She currently serves on the Board of Directors for the Atlanta Symphony Orchestra, and is a past member of the Board of Directors for the Atlanta Women s Foundation, the Board of Directors of the Atlanta Children s Shelter, and the Board of Visitors for Emory University. 48

49 Speaker Biography Jennifer Rutecky Jennifer Rutecky (404) Jennifer Rutecky serves as the Commercial Lines Leader for Wells Fargo Insurance Services Atlanta office. She has more than twenty two (22) years consultative and brokerage experience associated with the development, design, broking, placement, implementation, evaluation and administration of risk financing, risk management and insurance programs. Her experience includes the analysis and utilization of various risk financing and transfer strategies including, contractual risk transfer and insurance products, captives, risk retention groups, self-insured trusts, and other tailored risk solutions. Ms. Rutecky has served in various capacities as consultant, broker and advisor to support clients with the assessment and strategic management of risk. Her previous roles have included Client Advocate, Healthcare Industry Practice Leader and Senior Consultant. Jennifer holds a Bachelor of Business Administration (BBA) in Risk Management from the University of Georgia. She also is an Accredited Advisor of Insurance and Certified Insurance Counselor. Jennifer also has been a speaker at various forums on casualty and risk management topics, and provides internal educational training for team member. 49

50 Speaker Biography Shelby Guilbert Shelby Guilbert (404) Shelby Guilbert is a Counsel in the Business Litigation Practice at King & Spalding. He represents large businesses and policyholders in insurance coverage disputes, complex commercial litigation, and appeals in state and federal courts and domestic and international arbitration. In addition to helping clients pursue all types of first and third party insurance claims, Mr. Guilbert also routinely advises companies on risk management needs arising out of policy renewals and M&A transactions. Mr. Guilbert is a member of the International/London Subcommittee of the ABA Insurance Coverage Litigation Committee, a vice-president of the Atlanta International Arbitration Society, the chair of the World Affairs Council of Atlanta Young Leaders, a former member of the United Way of Georgia Disaster Preparedness Board, and was recognized in 2012, 2013, and 2014 by Georgia Super Lawyers as a rising star in the area of insurance coverage. 50