Recent Legislation On Indemnification Provisions And Additional Insured Coverage

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Tobias Stokes
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1 Cover Story Recent Legislation On Indemnification Provisions And Additional Insured Coverage By William A. Larson, Esq. (Editor s note: Will Larson is KAIA s general counsel as well as general counsel for the AGC and Kansas Contractors associations. He is Senior Partner of Larson & Blumreich, Chartered, formerly Gehrt & Roberts, Chartered, which specializes in insurance defense litigation and which represents Allied Nationwide, Ohio Casualty, Swiss Reinsurance, State Farm, Shelter, Columbia, AIG, Farmers Alliance and other insurance companies.) Many of the proponents of this legislation, while feeling that this was an excellent first step, were concerned that a party to a construction contract could avoid the effects of K.S.A by requiring one party to a construction contract to name the other party as an additional insured on its liability insurance policy. For example, where a contract between the owner and a general contractor requires the general contractor to name the owner as an additional insured on the general contractor s liability policy so that the general contractor s liability policy covers the owner s own negligence or fault. In fact, some bid specifications went so far as to require certain policy forms, which had been specifically construed to provide coverage for the additional insured s own negligence. In 2004, the Kansas Legislature enacted K.S.A , which prohibits certain types of indemnification provisions in construction contracts. The statute prohibits indemnification provisions in construction contracts which require the promisor to indemnify the promisee for the promisee s own negligence. For example, a provision in a construction contract between an owner and a general contractor which requires the general contractor to indemnify the owner for the owner s own negligence or fault is void and unenforceable if entered into after the enactment of K.S.A The statute applies not only to contracts between an owner and a general contractor but also to subcontracts or any contract that falls within the definition of a construction contract as provided in the statute. Features: Highlights: For More Information, Call Kansas PUBLIC ENTITY PAK Travis Oliver - State Director tjoliver@douglascountyins.com Policies are issued by Continental Western Insurance Company, a member of the Continental Western Group SM Page 10

SB 379 had been introduced in the 2007 session but stalled in the Senate.

2 In the 2008 legislative session, Senate Bill 379 was passed and subsequently signed into law to address the additional insured issue. The American Subcontractors Association was the principal proponent but the AGC, Kansas Contractors, Kansas City Builders, and KAIA all supported it as well. SB 379 had been introduced in the 2007 session but stalled in the Senate. Thanks to the efforts in particular of Senator John Vratil (R-Leawood), chair of the Senate Judiciary Committee and Representative Mike O Neal (R- Hutchinson), chair of the House Judiciary Committee, it finally passed late in the session despite concerns raised by Koch, and the aircraft companies. The amendments to the bill were intended to address the large employer s concerns. Generally speaking, Senate Bill 379 amends K.S.A to provide that contract provisions which require the promisor in a contract to name the promisee as an additional insured under the promisor s general liability policy to provide liability coverage for the promisse s own negligence or fault are void and unenforceable. In enacting Senate Bill 379, however, the Legislature expanded the scope of K.S.A and provided certain exceptions to the provisions of the statute which not only apply to additional insured provisions but also to the indemnity provisions affected by the 2004 legislation. I will attempt to explain the scope and limitations of Senate Bill 379. What Contracts Does Senate Bill 379 Affect K.S.A , before it was amended, applied to construction contracts. In Senate Bill 379 K.S.A was amended to expand the definition of affected contracts to include not only construction contracts, but also motor carrier transportation contracts, dealer agreements or franchise agreements. All of these types of contracts are defined under the Act. On the other hand, contracts for the design, construction, alteration, renovation, repair or maintenance of dirt or gravel roads used to access oil and gas wells and associated facilities, or oil flow lines or gas gathering lines used in association with the transportation of production from oil and gas wells from the well head to oil storage facilities or gas transmission lines were excluded from the definition of contracts covered by K.S.A The intent of expanding and then limiting the scope of contracts affected by K.S.A was to include certain contracts which commonly contain prohibited indemnification clauses and additional insured clauses but to exclude certain contracts associated with the oil and gas industry. The oil and gas industry asked to be excluded from the bill because they had worked out standard agreements that defined how their liability would be shared. During the consideration of Senate Bill 379 there was an effort to essentially include all contracts within the scope of K.S.A , but the Legislature chose not to do that. The only contracts that are affected are those that are defined in the Act. What Senate Bill 379 Does Not Prohibit It is extremely important to understand that even in the contracts that Senate Bill 379 affects, it does not prohibit all indemnity provisions or all additional insured requirements. It only prohibits provisions which require the promisor to indemnify the promisee for the promisee s Cover Story own negligence or fault, or which require the promisor to name the promisee as an additional insured on the promisor s liability policy for the promisee s own negligence or fault. Most indemnity provisions do not require the promisor to indemnify the promisee for the promisee s own fault. The more typical types of indemnity provisions require the promisor to indemnify the promisee for liability incurred by the promisee as a result of the negligence or fault of the promisor. These types of indemnity provisions remain valid and enforceable. Likewise, to the extent that there is an additional insured requirement that requires the promisor to name the promisee as an additional insured on the promisor s liability policy for liability of the promisee as a result of the fault or negligence of the promisor, Goodville Mutual New Holland, Pa. Looking for professional farm agents Contact Fred Macy, CPCU fred.macy@goodville.com affordable insurance from people you know Page 11

For example, if there is a contract between the owner and general contractor which simply states that the general contractor shall name the owner as an additional insured under the general contractor

3 Cover Story those provisions are likewise valid and enforceable. This distinction is particularly important to keep in mind as an insurance agent in trying to determine what coverage is required in an affected contract. For example, if there is a contract between the owner and general contractor which simply states that the general contractor shall name the owner as an additional insured under the general contractor s liability policy, that provision is still valid and enforceable to the extent it requires a general contractor to name the owner as an additional insured for any liability incurred by the owner as a result of the general contractor s fault. Another point should be kept in mind. Senate Bill 379 prohibits contract provisions. It does not prohibit insurance coverage. So, using the same example which requires only that the general contractor name the owner as an additional insured for liability the owner may incur as a result of the general contractor s negligence or fault, if the general contractor purchases coverage which either by endorsement or by the basic terms of the policy, in fact, provides coverage for the owner s own negligence or fault, it does not mean that coverage is void. Senate Bill 379 simply provides that a contractor in these circumstances cannot be required to provide coverage for the owner s own negligence or fault. Exceptions To What the Prohibits In subsection (d) of the act K.S.A is amended to include certain exceptions to the use of the types of indemnity and additional insured provisions that are prohibited in the act. These are outlined in subsections (d)(1) through (d)(6) of the act: Subsection (d)(1) provides that the Act will not affect or impair any contractual obligation of a contractor to provide railroad protective insurance or general liability insurance. Subsection (d)(2) provides that the act will not apply where an owner, responsible party or governmental entity agrees to indemnity a contractor for strict liability under environmental laws. Subsection (d)(3) provides that the act will not apply to a valid settlement agreement of disputed claims. Subsection (d)(4) provides that the act will not apply to insurance policies and related documents or to construction bonds or related documents. Without this exception, a general liability policy, which does assume responsibility for the insured s negligence, could have been outlawed. Subsection (d)(5) provides that the act will not apply to separately negotiated provisions where the parties mutually agree to a reasonable allocation of risk based on generally accepted industry loss experience and adequate consideration. This provision was included in reaction to testimony from the oil and gas industry representatives concerning highly specialized indemnity clauses called knock-for-knock provisions. Essentially the industry representatives testified that these provisions realistically allocated the risk in certain types of contractual relationships that exist in the oil and gas industry. It is problematic whether this exception will have any real effect outside of the oil and gas industry, which, for the most part, is not covered by the act in any event. The thought by the legislators who included this language was that if industries whose contracts are covered by this act want to come up with ways to allocate the risks inherent in their industry similar to what the oil and gas industry did with knock-forknock indemnity provisions, they ought to have the right to do that. Subsection (d)(6), highly summarized, seems to allow contractual indemnity provisions where each side agrees to provide liability coverage for the other or where one side agrees to provide liability coverage for the other through a separate liability policy which the other side agrees to pay for. This was language added at the last moment and is Coverage isn t one size fits all. Yes, at M. J. Kelly Company, our products put us ahead, and our approach sets us apart. You can write a lot of business (or a little) with us and still receive the high level of service that you expect. We re the right fit for personal service, professional expertise, and quality products. ASK ABOUT OUR IN- HOUSE FINANCING. Continued on page 16 Page 12

4 Governor Sebelius (seated) signs SB 379. From left to right- Larry Magill- KAIA, John Prather- Groendyke Transport Inc., Michael Topp- TT&T Salvage & Towing, Kevin Gregg- Kansas Motor Carriers, Tom Whitaker- Kansas Motor Carriers, Tom Burgess- Burgess and Associates, Bill Miller- American Subcontractors Association, Dan Morgan- The Builders Association, Representative Mike O Neal (R-Hutchinson)- Chair of the House Judiciary, Ken Daniel- Topeka Independent Business Association, Ken Keller- American Subcontractors Association. Continued from page 12 fairly complicated. What it actually means may be subject to judicial interpretation. One interpretation of the first provision is that it specifically authorizes mutual indemnification clauses where each party indemnifies the other for their negligence. In other words, the owner agrees to protect the general from the owner s negligence and the general does the same. The second part seems to allow both parties to agree to purchase an Owners & Contractors Protective policy if they choose. Where and When Does the Act Apply Subsection (e) of the act was added to insure that regardless of what a covered contract says the provisions of K.S.A as amended by Senate Bill 379 is intended to apply to all covered contracts performed in Kansas. For example, it would not be uncommon for an out of state contractor to enter into a subcontract for work to be performed in Kansas and for the subcontract to specify the subcontract must be construed under the laws of a state other than Kansas. In Kansas these sorts of choice of law provisions are generally valid and enforceable and Kansas courts will decide any claims that arise under the subcontract in accordance with the laws of the state specified in the subcontract, unless there is a strong Kansas public policy that is involved. Also some contracts provide that an action under the contract must be brought in a specific state. These provisions, known as choice of forum provisions, may also be Page 16

It was worded this way so that Kansas courts would enforce K.S.A.

5 enforceable unless there is a strong public policy to the contrary. The original version of K.S.A provided not only that prohibited indemnity provisions were void and unenforceable, but that they were void and unenforceable as a matter of public policy. It was worded this way so that Kansas courts would enforce K.S.A because of Kansas public policy even in the face of contractual choice of law and choice of forum provisions providing that another state s law was to apply. Subsection (e) of Senate Bill 379 spells this out more clearly and even goes on to provide that the act will apply to any effected contract which is performed in Kansas. Assuming this provision is enforceable in other states the effect of it would be that even if an action is brought in another state, if the contract was performed in Kansas K.S.A as amended by Senate Bill 379 would apply. Whether the provisions of subsection (e) would be enforceable in another state is something that might vary from state to state depending on the choice of law rules of that state. Normally a legislative act that is enacted into law will become effective when published, i.e. July 1 of the year in which it is enacted. The legislature can, however, make exceptions. In this case it chose to do so. The act provides that it will only affect indemnification provisions and additional insured provisions entered into after January 1, If you have questions about how SB 379 will be applied that I have not addressed, please contact Larry Magill or Kerri Spielman at KAIA and they will attempt to find answers. Amer Intern Grp 179, ACE INA Group 135, Great American PC 126, Progressive Grp 112, EMC Ins Group 107, Hartford Ins Grp 102, WR Berkley Grp 98, Zurich Fin Serv NA 88, SAFECO Ins Co 81, Old United Casualty 68, CNA Ins. Cos 65, Allianz of America 60, Chubb Grp of Ins 56, Old Republic 49, X L America Grp 45, Cincinnati Ins Grp 44, Farmers Alliance 43, QBE Americas Group 39, FMH Ins Group 38, Columbia Ins Grp State Farm Grp 521, Amer Family Ins 376, Ks Farm Bur Grp 300, Zurich/Farmers 243, Nationwide Grp 187, All Companies 4,738, Other Commercial Auto Liability Prem Adj Top 20 Independent Written Mkt Loss Agency Companies (000) Share Ratio St. Paul Travelers Grp 13, Old Republic 11, EMC Ins. Co. 10, W R Berkley Grp 10, Zurich Fin Serv NA 7, IAT Ins Grp 6, Progressive Grp 5, Amer Intern Grp 5, ACE INA Group 4, Great Amer P&C 3, Hartford Ins. Group 3, CAN Ins Companies 3, QBE Americas Group 3, Chubb Grp of Ins Co. 3, Allied World Group 2, Cincinnati Ins Cos 2, United Fire & Cas 2, Agronaut Group 1, SAFECO Ins Cos 1, Farmers Alliance 1, Winterthur Swiss Grp Kingsway America Grp 17 Nationwide Grp 13, Liberty Mutual 6, Berkshire Hathaway 4, State Farm Grp 2, Senetry Ins Group 2, Federated Mutual Grp 5 5 All Companies 160, PP Auto Physical Damage Prem Adj Top 20 Independent Written Mkt Loss Agency Companies (000) Share Ratio Progressive Grp 43, SAFECO Ins co 20, St Paul Travelers Grp 12, Hartford Ins Grp 9, Farmers Alliance 6, Columbia Ins Grp 4, Amer Sterling Ins 3, Amer Modern Ins 2, Buckeye Ins Grp 2, Cincinnati Ins Cos 2, State Auto Ins Co 2, QBE Re Group -US 2, Amer Intern Grp 1, Chubb Grp of Ins 1, EMC Ins Co 1, Allianz of America 1, GMAC Ins Grp 1, Assurant Solutions 1, Unitrin Inc Cornerstone Nat Ins Benchmark Ins Co 9 11 Ohio Casualty 13 State Farm Grp 132, Amer Family Ins 104, Farmers Ins Grp 67, Farm Bureau Mut Grp 59, Allstate Ins Group 39, All Companies 645, Page 17

Market Share of Direct Writers & Agency Companies Texas Personal Lines Insurance Sales (Homeowners and Personal Auto) $15,932 $14,909

Market Share of Direct Writers & Agency Companies Texas Personal Lines Insurance Sales (Homeowners and Personal Auto) $15,932 $14,909 By David Surles, CPCU, RPLU, AAI IIAT Director of Professional Liability Insurers for Regina Anderson, CIC in Texas IIAT Manager of Technical Services It was a ho-hum year! The Texas premium and loss data