Liability Issues to Worry About. Indemnity Agreements and Additional Insured s Coverage

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1 Liability Issues to Worry About Indemnity Agreements and Additional Insured s Coverage Presented by E. Stuart Powell, Jr. CPCU, CIC, CLU, ChFC, ARM, AMIM, AAI, ARe, CRIS Vice President of Insurance Operations and Technical Affairs Independent Insurance Agents of North Carolina, Inc.

2 1. What is an Indemnity Agreement? a. Definition A contractual or equitable right under which the entire loss is shifted from a tortfeasor who is only technically or passively at fault to another who is primarily or actively responsible. Black s Law b. Indemnitor party to whom the financial responsibility is transferred c. Indemnitee party from whom the financial responsibility is transferred d. Types of Agreements i. Three categories 1. Limited indemnitor accepts financial responsibility for damages against the indemnitee arising out of the sole negligence of the indemnitor 2. Broad indemnitor accepts financial responsibility for damages against the indemnitee arising out of a. The negligence of indemnitor b. The joint negligence of the indemnitor and indemnitee and, c. The sole negligence of the indemnitee i. Prohibited or limited in many states by either common law, exculpatory agreements, or by statute 3. Intermediate indemnitor accepts financial responsibility for damages against the indemnitee arising out of a. The negligence of indemnitor, and b. The joint negligence of the indemnitor and indemnitee e. Limitations on Indemnifications i. Exculpatory clauses 1. A contract clause which releases one of the parties from liability for his or her wrongful acts. Black s Law Dictionary 2. A common law principal 3. Against public policy ii. Anti-indemnity Statutes states broad negligence states intermediate negligence states limited negligence (includes North Carolina)

3 iii. North Carolina General Statute 22B-1 Chapter f. 22B. Contracts Against Public Policy. Article 1. Invalid Agreements. 22B-1. Construction indemnity agreements invalid. Any promise or agreement in, or in connection with, a contract or agreement relative to the design, planning, construction, alteration, repair or maintenance of a building, structure, highway, road, appurtenance or appliance, including moving, demolition and excavating connected therewith, purporting to indemnify or hold harmless the promisee, the promisee's independent contractors, agents, employees, or indemnitees against liability for damages arising out of bodily injury to persons or damage to property proximately caused by or resulting from the negligence, in whole or in part, of the promisee, its independent contractors, agents, employees, or indemnitees, is against public policy and is void and unenforceable. Nothing contained in this section shall prevent or prohibit a contract, promise or agreement whereby a promisor shall indemnify or hold harmless any promisee or the promisee's independent contractors, agents, employees or indemnities against liability for damages resulting from the sole negligence of the promisor, its agents or employees. This section shall not affect an insurance contract, workers' compensation, or any other agreement issued by an insurer, nor shall this section apply to promises or agreements under which a public utility as defined in G.S. 62-3(23) including a railroad corporation as an indemnitee. This section shall not apply to contracts entered into by the Department of transportation pursuant to G.S (1979, c. 597, s. 1; 1991, c. 636, s. 3; 1993, c. 553, s. 12.)

4 An Example of an Indemnity Provision i. AIA A INDEMNIFCATION To the fullest extent permitted by law... the Contractor shall indemnify and hold harmless the Owner, Architect, Architect s Consultants, and agents and employees of any of them from and against claims, damages, losses, and expenses, including but not limited to attorney s fees, arising out of or resulting from performance of the Work, provided that such claims, damages, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone from whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights and obligations of indemnity which would otherwise exist as to a party or person described in this Paragraph [Emphasis added.} American Institute of Architects, General Conditions of the Contract of Construction (Document A201), Art , 1997 edition. 2. What does Contractual Liability cover? a. The CGL Contractual Liability Exclusion i. There is a difference between insuring breach of contract and insuring contractual indemnifications 1. Breach of Contact is covered by surety bonds 2. Contractual indemnification is covered by liability policies ii. The CGL has an absolute contractual assumption exclusion b.contractual Liability "Bodily injury" or "property damage" for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. iii. Coverage is granted by exception to the exclusion 1. Liability in absence of a contract This exclusion does not apply to liability for damages: (1) That the insured would have in the absence of the contract or agreement;

5 2. Insured contracts This exclusion does not apply to liability for damages: (2)Assumed in a contract or agreement that is an "insured contract", provided the "bodily injury" or "property damage" occurs subsequent to the execution of the contract or agreement. Solely for the purposes of liability assumed in an "insured contract", reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of "bodily injury" or "property damage", provided: (a) Liability to such party for, or for the cost of, that party's defense has also been assumed in the same "insured contract"; and (b) Such attorney fees and litigation expenses are for defense of that party against a civil or alternative dispute resolution proceeding in which damages to which this insurance applies are alleged. a. Definition of insured contracts f.that part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) 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. b. Beware of CG Contractual Liability Limitation i. Restores contractual liability to pre-simplified wording ii. Removes paragraph f. from the definition of insured contracts c. Beware of CG Amendment of Insured Contract Definition (to be discussed in the endorsement section)

6 b. Indemnity Agreement vs. CGL Contractual Coverage i. How broad is the indemnity agreement? ii. How broad is the contractual liability coverage? iii. Contractual liability disclaimer IMPORTANT NOTICE ABOUT HOLD HARMLESS AND INDEMNIFICATION AGREEMENTS While insurance policies may respond to certain contractual assumption of liability or responsibility (Hold Harmless/Indemnification Agreements/Clauses), such policies are not broad enough to transfer or fund all assumed exposures. Most assumption of risk agreements/clauses are broader than the terms and conditions of insurance policies. In addition, insurance policies have monetary limits that apply to covered claims. We do not interpret or provide advice on Hold Harmless/Indemnification agreements/clauses. Please consult a qualified attorney for advice on all legal matters. Our practice is limited to insurance specific areas. Break 3. Coverage for Additional Insureds a. Types of insureds i. Named insureds ii. Insured by definition iii. Additional Insureds b. ISO CGL Additional Insured Endorsements i. 30+ endorsements ii. Reason for multiple endorsements

7 c. CG Additional Insureds Owners, Lessees or Contractors Scheduled Person or Organizations

8 d. CG Amendment of Insured Contract Definition

9 e. CG Additional Insured Owners, Lessees or Contractors Automatic Status When Required in Construction Agreement with You

10 f. CG Additional Insured Owners, Lessees, or Contractors Completed Operations

11 9. "Insured contract" means: a. A contract for a lease of premises. However, that portion of the contract for a lease of premises that indemnifies any person or organization for damage by fire to premises while rented to you or temporarily occupied by you with permission of the owner is not an "insured contract"; b. A sidetrack agreement; c. Any easement or license agreement, except in connection with construction or demolition operations on or within 50 feet of a railroad; d. An obligation, as required by ordinance, to indemnify a municipality, except in connection with work for a municipality; e. An elevator maintenance agreement; f. That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) 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. Paragraph f. does not include that part of any contract or agreement: (1) That indemnifies a railroad for "bodily injury" or "property damage" arising out of construction or demolition operations, within 50 feet of any railroad property and affecting any railroad bridge or trestle, tracks, road-beds, tunnel, underpass or crossing; (2) That indemnifies an architect, engineer or surveyor for injury or damage arising out of: (a) Preparing, approving, or failing to prepare or approve, maps, shop drawings, opinions, reports, surveys, field orders, change orders or drawings and specifications; or (b) Giving directions or instructions, or failing to give them, if that is the primary cause of the injury or damage; or (3) Under which the insured, if an architect, engineer or surveyor, assumes liability for an injury or damage arising out of the insured's rendering or failure to render professional services, including those listed in (2) above and supervisory, inspection, architectural or engineering activities.

12 IMPORTANT NOTICE ABOUT HOLD HARMLESS AND INDEMNIFICATION AGREEMENTS While insurance policies may respond to certain contractual assumption of liability or responsibility (Hold Harmless/Indemnification Agreements/Clauses), such policies are not broad enough to transfer or fund all assumed exposures. Most assumption of risk agreements/clauses are broader than the terms and conditions of insurance policies. In addition, insurance policies have monetary limits that apply to covered claims. We do not interpret or provide advice on Hold Harmless/Indemnification agreements/clauses. Please consult a qualified attorney for advice on all legal matters. Our practice is limited to insurance specific areas.