Insurance Subrogation, Indemnity and Hold Harmless Releases: Navigating the Complexities

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Insurance Subrogation, Indemnity and Hold Harmless Releases: Navigating the Complexities Protecting Subrogation Rights, Negotiating Subrogation Waivers, Indemnities and Settlement Releases TUESDAY, MAY 2, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Tarron Gartner-Ilai, Shareholder, Cooper & Scully, Dallas Steven K. Gerber, Member, Cozen O'Connor, Philadelphia Stephen D. Palley, Of Counsel, Anderson Kill, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Insurance Subrogation, Indemnity and Hold Harmless Releases: Navigating the Complexities Tarron Gartner-Ilai Cooper & Scully P.C

6 What Is Subrogation? The Substitution of one party for another whose debt the party pays, entitling the paying party to the rights, remedies or securities that would otherwise belong to the debtor. Black s Law Dictionary, 9 th Ed. (2004). 6

7 Why Is It Important? Subrogation allocates loss to the party who should actually bear the responsibility. Subrogation offsets the Company s overall indemnity payout. Subrogation is a valuable claim service that is part of the value-added proposition afforded by the Company. 7

8 How Is Subrogation Recognized In Law? Conventional Subrogation: Arises by contract. Equitable Subrogation: Arises by operation of law. Statutory Subrogation: Legislatively mandated, such as in worker s compensation statutory schemes. 8

9 How Does Subrogation Apply To Insurance? Insurer makes a payment under the policy (typically first party property, auto physical damage and/or UM/UIM physicsl damage claims). Insurer is entitled to seek reimbursement from the tortfeasor? 9

10 Two Types Of Subrogation Clauses Transfer of Right Clause: Typically provides that the all rights are transferred to the insurer upon payment under the policy to the extent of the payment made. Reimbursement Clause: Requires the insured to reimburse all sums paid under policy from any recovery realized. 10

11 What s The Difference? A Reimbursement Clause is not subject to the made whole rule. A Transfer Clause is. 11

12 The Made Whole Rule The insurer is not entitled to subrogation if the loss exceeds the amounts recovered from the insurer and the third party covering the loss. Ortiz v. Great Southern Fire & Cas. Ins. Co., 587 S.W.2d 342 (Tex. 1980). 12

13 What s The Risk? Putting the Subrogating Company s financial interests ahead of the insured s without Investigation What if insured has significant uninsured loss? What if insured has corresponding bodily injury claims? What if insured and insurer are locked in a coverage dispute? Could the insured put a constructive trust on thhe proceeds of recovery? 13

14 Best Practices Increase client s awareness of potential risks and inquire as to whether the client has communicated with the insured; Encourage client communication to communicate with the insured and propose an allocation agreement; Disclose conflict of interest and obtain written waiver; Encourage insured to seek the advice of counsel. If the insured has an attorney, reach out to the attorney to negotiate a joint prosecution agreement allocating recovery and expenses. 14

15 Pursuing consumer protection and punitive damages Subrogating insurer may actually spend a lot of money supporting efforts at tort reform; Some states do not allow for the assignment of certain types of claims; What happens if (however remotely), the subrogating insurer recovers more than what is paid under the policy? 15

16 Prorating Recovery, Deductibles and Recovery Costs Statutory rules in most states with regard to recovery of auto physical damage claims; May require full reimbursement if staff counsel is used; All other lines of business subject to the applicable common law made-whole rule. 16

17 Example Deductible must be included in subrogated demands unless otherwise requested by the insured. Proportionate sharing of attorneys fees is permitted provided outside counsel is used. 2 A.A.C

18 Allocation Agreements Determines priority of recovery and cost allocation. Serves as an assignment of claims for new consideration recited becomes, in essence, contractual subrogation. Bridges gaps caused by claim/coverage investigation great customer service tool. Allocates unassignable recoveries associated with insured s personal claims that might otherwise prevent recovery on the subrogated claim. Serves to protect both the insured s and carrier s legal and financial interests. 18

19 Essential Elements See program materials 19

20 Allocation Formula Simple algebraic formula prorating the total recovery to the deductible or uninsured loss, and costs and attorney s fees: Insured Loss = Percentage to which Insurer Total Loss is entitled. Uninsured Loss = Percentage to which Insured Total Loss is entitled. 20

21 Allocation of Recoveries, Deductibles and Expenses If the Insurer pays a claim of for $47, ($50, policy limits less a $2, deductible), and expends $6, recovering $20, from the responsible party, the insured is entitled to.01% of the $20, ($200.00), and the Insurer is entitled to $19, From that, the insured must pay.01% of the costs, or $66.00, while the Insurer must bear $6, of the responsibility. 21

22 STRAFFORD PUBLICATIONS Webinar May 2, :00 pm (EST) Waivers of Subrogation

23 Presenter: Stephen D. Palley, Esq. (202) v Anderson Kill P.C. All Rights Reserved.

24 Disclaimer The views expressed by the participants in this program are not those of the participants employers, their clients, or any other organization. The opinions expressed do not constitute legal advice, or risk management advice. The views discussed are for educational purposes only, and provided only for use during this session v Anderson Kill P.C. All Rights Reserved.

25 Basic principles: Waivers of Subrogation Common feature in commercial contracts. Often ignored until after all a claim arises. Scope can be broader than anyone realizes. They are WAIVERS ( of subrogation ) State law varies widely Different rules may apply where litigated between insurers, as opposed to insured v. insured v Anderson Kill P.C. All Rights Reserved.

26 Boilerplate Language varies widely, but some common features issues can be identified. Here s an example from the AIA A201 general conditions (emphasis added): Unless otherwise provided the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance written on a builder s risk allrisk or equivalent policy form in the amount of the initial Contract Sum, plus value of subsequent Contract Modifications and cost of materials supplied or installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Section 9.10 or until no person or entity other than the Owner has an insurable interest in the property required by this Section 11.3 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Project v Anderson Kill P.C. All Rights Reserved.

27 What Is Being Waived? The right of the parties to sue to the extent of available insurance coverage? A third party insurance company s rights? Is a waiver of a third party s rights really enforceable? Why is it called a waiver of subrogation cf. Robert Frost, Mending Wall (because people find comfort in things that have been around for a long time, even if they don t necessarily make sense) (available at v Anderson Kill P.C. All Rights Reserved.

28 When Is The Waiver Triggered? Upon execution of the contract, before a claim even arises? When a claim arises but before it is paid? After insurance is procured? After a claim arises and an insurance company has paid? v Anderson Kill P.C. All Rights Reserved.

29 Is Insurer Consent Required? Policies may permit pre-loss waiver On a blanket-basis (where required by written contract) Or on a scheduled basis? A best practice to coordinate between contract requirements and policy contents? What if the policy doesn t include a waiver? Generally, insurer stands in insured s shoes and the waiver is enforceable. See e.g., North American Specialty Insurance Company vs. Payton Construction Corp., 80 Mass. App. Ct. 367 (2011) Does the insurer have a claim back against their own insured? v Anderson Kill P.C. All Rights Reserved.

30 In Insurer Consent Required? If you re an insured, does it matter? Impact of anti-subrogation rules See e.g., Allstate Ins. Co. v. Palumbo, 994 A.2d 174 (Conn. 2010). An agreement to provide insurance company may be deemed an implied waiver. See e.g., Walker v. Vanderpool, 225 Va. 266, 271 (1983) (Va. 1983) v Anderson Kill P.C. All Rights Reserved.

31 Third party beneficiaries? If you re not named in a contract that contains a waiver of subrogation, can it still protect you? Best practice is to get the waiver if you can, of course, but see cases like: Gulf Ins. Co. v. Quality Bldg. Contractor, Inc., 58 A.D.3d 595 (N.Y. App. Div. 2009) (subcontractor protected by waiver of subrogation in prime contract where subcontract incorporated prime contract) Best Friends Pet Care. Inc. v. Design Learned, Inc., 823 A.2d 329 (Conn. App. Ct. 2003) (subcontractor covered by waiver of subrogation in prime contract even where subcontract did not contain a waiver of subrogation provision) v Anderson Kill P.C. All Rights Reserved.

32 Construction project: How Much Is Waived? Claims arising from ongoing operations? Completed operations? Does the waiver apply to over/under liability? Does the waiver apply to claims between insurers (equitable contribution, for example) v Anderson Kill P.C. All Rights Reserved.

33 How Much Is Waived (cont d) Work v. non-work? On the one hand... see, Copper Mountain. Inc. v. Industrial Systems, Inc., 208 P.3d 692, 696 (Colo. 2009). On the other hand... See, Lexington Insurance Co. v. Entrex Communication Services, Inc., 749 N.W.2d 124 (Neb. 2008) v Anderson Kill P.C. All Rights Reserved.

34 Are All Waivers Enforceable? Waiver that extends to claims arising from sole negligence On the one hand... See Lexington Ins. Co. v. Entrex Commc n Servs., Inc., 749 N.W.2d 124, 130 (Neb. 2008). On the other hand... See St. Paul Fire & Marine Ins. Co. v. Turner Constr. Co., No , 2009 WL , at *1 (3d Cir. 2009) Workers compensation claims? v Anderson Kill P.C. All Rights Reserved.

35 State Law Nuances As always with insurance, there are many state law nuances. Here s an example from Kansas: K.S.A (b) The following provisions in a contract for private construction shall be against public policy and shall be void and unenforceable: (3) a provision that purports to waive, release or extinguish rights of subrogation for losses or claims covered or paid by liability or workers compensation insurance except that a contract may require waiver of subrogation for losses or claims paid by a consolidated or wrap-up insurance program, owners and contractors protective liability insurance, or project management protective liability insurance, unless otherwise prohibited under subsection (b)(5) of K.S.A Supp , and amendments thereto v Anderson Kill P.C. All Rights Reserved.

36 Take-aways If you are drafting a waiver of subrogation clause, think of it as a WAIVER. Focus on scope of waiver: Time Property Claims Excess/under liability The same holds true in litigation v Anderson Kill P.C. All Rights Reserved.

37 Some Light Reading Subrogation Waivers, The Construction Lawyer, Vol. 31, Number 4 (Fall 2011). Insurance Update: 'Boilerplate, Subrogation Waivers and Choice of Law, 14 Under Construction: The Newsletter of the ABA Forum on the The Construction Industry (Apr. 2012). Available at: v Anderson Kill P.C. All Rights Reserved.

38 Thank You. Stephen D. Palley, Esq. (202) v Anderson Kill P.C. All Rights Reserved.

39 Steven K. Gerber Cozen O Connor sgerber@cozen.com (215) Strafford Publications Webinar

40 The Issue In dealing with property damage subrogation claims, reaching agreement on other issues, especially indemnity, hold harmless and confidentiality provisions, can be as difficult as reaching agreement on the amount of the Settlement. 40

41 What is Indemnity? According to Black s Law Dictionary indemnity is: A collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or of some third person. Term pertains to liability for loss shifted from one person held legally responsible to another person. 41

42 What is an Indemnity Contract? Black s defines an Indemnity Contract as: A contract between two parties whereby the one undertakes and agrees to indemnify the other against loss or damage arising from some contemplated act on the part of the indemnitor, or from some responsibility assumed by the idemnitee, or from the claim or demand of a third person, that is, to make good to him such pecuniary damage as he may suffer. 42

43 What is a Hold Harmless Agreement? Black s defines a Hold Harmless Agreement as: A contractual arrangement whereby one party assumes the liability inherent in a situation, thereby relieving the other party of responsibility. Such agreements are typically found in leases, and easements. Agreement or contract in which one party agrees to hold the other without responsibility for damage or other liability arising out of the transaction involved. 43

44 Purpose? The essential purpose of indemnity and hold harmless provisions in a release is to protect the settling party from future claims, costs, expenses and/or attorneys fees after settling a claim or lawsuit. 44

45 Reality of indemnity language In reality, indemnity and hold harmless language is whatever the releasing party agrees to in the Release. It is therefore critical that you know exactly what you have agreed to on behalf of the recovering subrogating insurer. 45

46 Who wants what? Defendants and liability insurers typically want to make the protection and language provided by a release as broad as they can. Conversely, subrogating insurers, and plaintiffs in general, prefer to have no indemnity language, and otherwise desire language that is as narrow as possible. Reaching agreement on language that bridges the gap between these opposite positions can be challenging. 46

47 Know what you agree to! When you are in the position of the party releasing claims, and the Defendant insists on indemnity and/or hold harmless language, you must make sure you read the language carefully and understand exactly what you are agreeing to do and provide indemnity for. 47

48 Some Key questions Who is being protected? Who is providing the protection? What protection is included? Is it only future indemnity payments or does it include attorney s fees and other costs or expenses? Are you agreeing to indemnify for actions of third parties or strangers? Are you agreeing to indemnify actions you control? Has the statute of limitations run? Has the statute of repose run? Does it matter if the statute of limitations or statute of repose has run? 48

49 The Scope of the Language For example, language which reads Releasor agrees to indemnify, hold harmless and defend Releasee from and against any and all claims or actions of any kind that might be brought against the Releasee arising out of or incidental to the occurrence is exceedingly broad in scope and potentially leaves the subrogating insurer at risk should anyone ever file suit or make a claim against the defendant arising out of the occurrence which is the subject of the pending action. 49

50 Problem with the Broader Language The broad scope language raises the potential for problems for the settling subrogating insurer because the settling subrogating insurer does not have any control over whether someone else files a lawsuit or claim. For example, suppose a firefighter who fought the fire at the insured s premises files suit against the settling defendant for injuries sustained in the fire. Under the broad scope language, the subrogating insurer may be required to indemnify the defendant. 50

51 More Narrow Language An example of more narrow language is if Releasor files a lawsuit or otherwise makes a claim against anyone other than the released parties as a result of the Occurrence, and if as a result of that suit or claim, claims and/or demands are made against any of the released parties, releasor agrees to indemnify, hold harmless and defend Releasee from and against any such claims or demands. 51

52 Effect of the More Narrow Language The more narrow language permits the subrogating insurer to control whether the indemnity becomes operable. The indemnity is only triggered if the subrogating insurer affirmatively chooses to make a claim or file an action which results in a claim or suit being made against the releasee. 52

53 Confidentiality Provisions Defendants and liability insurers, especially product manufacturers, frequently include confidentiality provisions in releases in order to keep information from the lawsuit or settlement confidential. 53

54 Purpose There are legitimate reasons for keeping sensitive information confidential or the amount of the settlement confidential. The defendants and liability insurers typically do not want publicity or other potential plaintiffs and their lawyers to be able to use information against them. 54

55 What to Look for as a Subrogating Insurer Subrogating insurers, and plaintiffs in general, are typically more interested in getting their cases settled and are not concerned about a reasonable confidentiality provision. Nevertheless, confidentiality provisions must be carefully reviewed to make sure you know exactly what you are agreeing to and to make sure you do not create a problem down the road. 55

56 An Issue for the Subrogating Insurer An issue raised by confidentiality provisions for the subrogating insurer is ensuring that the subrogating insurer may still use information relating to the settlement both within the company and outside of the company as necessary in the ordinary course of business as an insurer without violating the terms of the release. 56

57 A Possible Solution Adding the following language to a confidentiality provision may provide a possible solution: Notwithstanding anything to the contrary, nothing in this Release shall prevent the disclosure of confidential information nor the terms thereunder to lawyers, accountants, auditors, insurers, and re-insurers, together with such insurers and re-insurers third-party providers, actuaries or intermediaries, or regulators, provided the disclosure of the information is reasonably necessary to effectuate the terms of this Release, or is required for tax, financial reporting or government compliance purposes, or is otherwise necessary to transact the business of insurance. 57

58 Conclusion Settling parties should be able to reach agreement on reasonable indemnity, hold harmless and confidentiality provisions in conjunction with the settlement of a property damage subrogation claim which represents an effective compromise of the respective positions and provides reasonable protection to both the releasors and releasees. 58

59 Contact Information Steven K. Gerber (215)