Insurance and Contractual Indemnification: Reconciling Competing Indemnity Obligations With Insurance Coverage

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Insurance and Contractual Indemnification: Reconciling Competing Indemnity Obligations With Insurance Coverage Drafting Indemnification Provisions and Ensuring Adequate Coverage for Contractual Liabilities WEDNESDAY, OCTOBER 7, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Jessica E. Brown, Attorney, Reed Smith, Chicago Robert M. Fineman, Esq., CNA Insurance, San Francisco Jason R. Schulze, Partner, Hinshaw & Culbertson, Chicago 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, Indemnity and Contribution: The Complex Interplay in Commercial Transactions: Fundamental Issues In Contribution & Indemnity Jason R. Schulze Hinshaw & Culbertson LLP 222 N. LaSalle Street, Suite 300 Chicago, IL (312)

6 Contribution and Indemnity (and Subrogation) It is hard to imagine another set of legal terms with more soporific effect than indemnity, subrogation, contribution, co-obligation and joint tortfeasorship. Perhaps because the words describe legal relationships between multiple parties, they are vaguely reminiscent of complex mathematical equations which, after all, also describe relationships, except in numbers rather than words and for most of us, they are about as easy to understand. Even lawyers find words like indemnity and subrogation ring of an obscure Martian dialect. Herrick Corp. v. Canadian Ins. Co. of Cal., 29 Cal. App. 4th 753, 34 Cal. Rptr. 2d 844 (4th Dist. 1994). 6

7 When It s Simple: No Contracts At Issue 7

8 Still Pretty Simple: Parties Purchased Their Own Insurance 8

9 Getting Complicated: Multiple Insurers, Multiple Lines of Coverage, Multiple Layers 9

10 Downright Complicated: Indemnity/Additional Insured Arrangement Between Company A and Company B 10

11 Interplay Between Contribution and Indemnity (and Subrogation) Contribution: Where one party pays more than its fair share on behalf of its insured, it is entitled to recovery from another party in similar position owing the same obligation Indemnity: Where one party pays the obligation of the insured where another party should have paid the entire obligation, the party is entitled to recover from the party that failed to pay (Subrogation): Where one party pays on behalf of an insured, it can recover (in the name of that insured) against the responsible party or another party obligated to pay 11

12 General Standards for Contribution & Indemnity Equitable Contribution: Based in equity, not in contract and founded on a common obligation Home Ins. Co. v. Cincinnati Ins. Co., 821 N.E.2d 269, 276 (Ill. 2004): Contribution is an equitable principle arising among coinsurers which permits one insurer who has paid the entire loss, or greater than its share of the loss, to be reimbursed from other insurers who are also liable for the same loss. Must insure the same entities, the same interests, and the same risks. 12

13 General Standards for Contribution & Indemnity Implied Indemnity: when a person discharges a duty that is owed by him but which, as between that person and another, should have been discharged by the other Contractual indemnity: pursuant to a specific agreement between the parties (See Part III) Unlike subrogation, which can be had against the original tortfeasor, indemnity is generally found against two insurers and/or indemnitors with relationship to insured/indemnitee Distinction can be significant for statute of limitations 13

14 General Standards for Contribution & Indemnity Indemnity situations can arise: Indemnity agreement specifying priority of obligation found in contracts dealing with employer/employee liability; lessor/lessee liability; vendor liability; contractor/subcontractor liability Excess coverage/primary coverage 14

15 General Standards for Contribution & Indemnity Paying insurer seeking indemnity must be aware of volunteer doctrine (subrogation concept) paying claim when it was not obligated to do so Right to indemnity appropriate where the paying insurer had a reasonable belief that its payment was necessary for its protection. An insurer settling on behalf of insured that contests liability should not make an insurer a volunteer because of possibility of judgment. Equally, where an insurer defends or settles despite coverage defenses (subject to appropriately raised reservations), the insurer should not be considered a volunteer. 15

16 Different Standards For Contribution Claims Focus before allowing contribution can be placed on whether the terms and conditions of the policies have been met. In essence, returns the analysis to whether both insurers have the same interests with respect to the same risks. Examples: failure to provide notice of claim or occurrence as condition precedent; known loss 16

17 Different Standards For Contribution Claims Pro rata other insurance clauses also may limit a party s right to contribution. Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765 (Tex. 2007) (holding that pro rata other insurance clauses give rise to a several obligation for the indemnification of a loss). 17

18 Getting Complicated: Multiple Insurers, Multiple Lines of Coverage, Multiple Layers 18

19 Different Standards For Contribution Claims Once right to contribution is granted, various methods to determine what was the fair share owed by the parties: Equal shares Maximum loss rule (each pays equally until limits are reached) Pro rata by limits (concurrent coverage), pro rata by time on the risk (consecutive coverage) or a combination of both. See, e.g., Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (N.J. 1994). Courts turn to the other insurance clauses to determine the fair allocation (See Part II). 19

20 Exceptions To General Rule Allowing Contribution Some courts find no right to contribution for payment of defense costs and expenses. See e.g., Cont l Cas. Co. v. United Pac. Ins. Co., 637 So. 2d 270, 272 (Fla. Dist. Ct. App. 1994); Barton & Ludwig, Inc. v. Fidelity & Deposit Co. of Maryland, 570 F. Supp (N.D. Ga. 1983). Theory is that each insurer has its individual obligation to policyholder to defend. Thus, although insurers can elect to join together to provide this defense, each insurer is merely satisfying its contractual obligation by defending. But see Cargill, Inc. v. Ace American Ins. Co., 784 N.W.2d 341 (Minn. 2010) overruling this minority position found in Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161, 167 (Minn. 1986). 20

21 Exceptions To General Rule Allowing Contribution Fifth Circuit has rejected this argument, addressing the Texas Supreme Court s decision in Mid-Continent and limiting that case to contribution rights relating to indemnity. The Fifth Circuit allowed contribution of defense costs, holding that other insurance clauses apply only to indemnity and that defense obligation creates a debt which is equally and concurrently due by all insurers, thereby meeting contribution standards. Trinity Universal Ins. Co. v. Employers Mut. Cas. Co., 592 F.3d 687 (5th Cir. 2010). 21

22 Exceptions To General Rule Allowing Contribution At least one Texas State court disagrees: Truck Ins. Exchange v. Mid-Continent Cas. Co., 320 S.W.3d 613 (Tex. App.-Austin 2010). Court disagreed with Fifth Circuit in Trinity, holding that the Texas Supreme Court in Mid- Continent also cited to cases involving defense costs and, thus, equitable contribution is barred under that authority for both indemnity and defense costs. Venue particularly important in Texas 22

23 Getting Complicated: Multiple Insurers, Multiple Lines of Coverage, Multiple Layers 23

24 Exceptions To General Rule Allowing Contribution The Selective Tender or Targeted Tender Rule in Illinois: allows a policyholder to unilaterally determine which triggered insurer is to defend and indemnify a claim. See John Burns Constr. Co. v. Indiana Ins. Co., 727 N.E.2d 211 (Ill. 2001). Supreme Court of Washington has endorsed the concept. See Mutual of Enumclaw Ins. Co. v. USF Ins. Co., 191 P.3d 866 (Wash. 2008). 24

25 Exceptions To General Rule Allowing Contribution Montana courts arguably endorse selective tender as well. See XL Specialty Ins. Co. v. Progressive Cas. Ins. Co., 411 Fed. App x 78, 81 (9th Cir. 2011) (citing Cas. Indem. Exchange Ins. Co. v. Liberty Mutual Fire Ins. Co., 902 F.Supp. 1235, at n.3 (D. Mont. 1995). 25

26 Exceptions To General Rule Allowing Contribution Policyholder can deactivate its selection of an insurer for coverage and can put an insurer on notice for standby coverage in the event the selected insurer refuses or exhausts. See Chicago Hosp. Risk Pooling Program v. Illinois State Medical Inter-Insurance Exchange, 925 N.E.2d 1216 (Ill. App. 2010); Statewide Ins. Co. v. Houston General Ins. Co., 920 N.E.2d 611 (Ill. App. 2009). 26

27 Exceptions To General Rule Allowing Contribution Policyholder can make these decisions at any time, including after settlement of the underlying claim. See Statewide. But see AMCO Ins. Co. v. Cincinnati Ins. Co., 10 N.E.3d 374 (Ill. App. 2014) (holding that a selected insurer cannot de-select itself and recover from another insurer). 27

28 Exceptions To General Rule Allowing Contribution Generally no contribution between primary and excess insurer. The fundamental concepts of equitable contribution not met. The insurers do not insure the same interests and the same risks. Primary has a different interest than excess insurer. This distinction has been acknowledged even in Illinois under selective tender rule. See Kajima Const. Services, Inc. v. St. Paul Fire & Marine Ins. Co., 879 N.E.2d 305 (Ill. 2007). 28

29 Downright Complicated: Indemnity/Additional Insured Arrangement Between Company A and Company B 29

30 Indemnity Agreements Can Create Different Risks and Interests Some courts hold that indemnity agreements between parties placing the obligation of one party to indemnify the other establish priority of coverage and create a barrier to contribution. See, e.g., American Indem. Lloyds v. Travelers Prop. & Cas. Ins. Co., 335 F.3d 429 (5th Cir. 2003) (holding that an indemnity agreement between the insureds or a contract with an indemnification clause, such as is commonly found in the construction industry, may shift an entire loss to a particular insurer notwithstanding the existence of an other insurance clause in its policy. ); Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8th Cir. 2002) (applying Arkansas law); St. Paul Fire & Marine Ins. Co. v. American Intern. Specialty Lines Ins. Co., 365 F.3d 263 (4th Cir. 2004) (applying Virginia law). 30

31 Contribution Burden of Proof Party seeking to establish right to contribution must carry burden of proof that it has paid more than its fair share. In Scottsdale Ins. Co. v. Century Sur. Co., 182 Cal. App. 4th 1023, 105 Cal. Rptr. 3d 896 (2d Dist. 2010), Scottsdale sought contribution and requested split between itself and Century for defense and indemnity paid on 80 different underlying claims by Scottsdale. 31

32 Contribution Burden of Proof Scottsdale court noted that in nearly every case, Scottsdale was joined by other insurers in defending and paying claims. Thus, the court held that the first step is to determine what Scottsdale s and Century s proper shares should have been. Example: Scottsdale contributed with three other insurers for defense. Under Scottsdale s theory, it was entitled to 12.5% of defense costs from Century (50% of 25%). But Century s fair share should have been 20% (5 insurers at 20% each) and, thus, Scottsdale is entitled to the difference between the 25% it paid and the 20% it should have paid. 32

33 Example of Interplay Between Contribution & Indemnity GC Tishman required subcontractor Herrick (supplier of steel) to indemnify it for any liability for the sole negligence of Tishman and acquire primary insurance in the amount of $10M (adding Tishman as additional insured). Herrick is insured by Classic Ins. Co. GC Tishman required subcontractor Buggy (supplier of metal decking) to enter into same agreement. Buggy acquired $5M in primary insurance with Canadian Ins. Co. One of Herrick s employees is injured on site and he and his wife sue all three. 33

34 Example of Interplay Between Contribution & Indemnity Tishman tendered defense to Herrick s insurer, Classic. Classic defended for 3 years but when Tishman also tendered to Buggy s insurer, Canadian, Classic withdrew its defense. Tishman sued Herrick for contractual indemnity and Herrick (and Classic) took the position it had no duty to defend or indemnify Tishman. Canadian, Buggy s insurer settled the case, paying $125,000 on behalf of Tishman and $25,000 on behalf of Buggy. Neither Herrick nor Classic participated in settlement. 34

35 Example of Interplay Between Contribution & Indemnity Tishman was awarded $125,000 in contractual indemnity from Herrick on its cross-claim. Classic paid the judgment on Herrick s behalf. Herrick and its insurer Classic sued Buggy and its insurer Canadian seeking contribution and/or indemnity to recover the $125,000 in indemnity paid to Tishman and its defense costs for the 3 years it defended Tishman. 35

36 Example of Interplay Between Contribution & Indemnity The $125,000 in indemnity paid by Classic: The court held that Classic was not entitled to contribution for the indemnity payment made by Classic to Tishman because it was paid as part of an indemnity agreement to Tishman and not on behalf of Tishman (its additional insured) to the claimant. Thus, Classic and Canadian did not make payments on the same risks as required for contribution. Classic s defense fees and costs: The court held that Classic could recover its defense costs from Canadian because they were incurred in defense of mutual insured and both insurers had identical defense obligation. Herrick Corp. v. Canadian Ins. Co. of Cal., 29 Cal. App. 4th 753, 34 Cal. Rptr. 2d 844 (4th Dist. 1994). 36

37 Insurance and Contractual Indemnification: Reconciling Competing Indemnity Obligations With Insurance Coverage Strafford Publications Webinar October 7, 2015 Robert M. Fineman, Esq. Senior Litigation Counsel CNA Insurance 555 Mission St. Suite 330 San Francisco, CA

38 The Relationship Between Contractual Indemnity and Insurance McCrary Construction Co. v. Metal Deck Specialists, Inc. 133 Cal.App.4th 1528 (2005) An indemnity provision that does not refer to the issue of the indemnitee s negligence will be considered to be a general indemnity clause under which the indemnitee is not entitled to indemnity for its active negligence, unless the circumstances of the case and the language of the contract evince a different intent by the parties. American Casualty v. General Star Indemnity Co., 125 Cal.App.4th 1510 (2005) Coverage for additional insured continues even if indemnity agreement is unenforceable under Civil Code section 2782(a)) JPI Westcoast Construction v. RJS Assoc., et al., 156 Cal.App.4th 1448 (2007) Subcontractor s excess policy not triggered until subcontractor s and general contractor s primary policies are exhausted, notwithstanding indemnity agreement 38

39 Overview of Other Insurance Clauses Three General Types of Other Insurance Clauses Pro Rata Clauses If there is other valid and collectible insurance, the insurer shall not be liable for more than its pro-rata share of the loss (i.e. the proportion that its policy limits bear to the total coverage available to the insured Excess Only Clauses If there is other valid and collectible insurance, the insurer is liable only to the extent that the loss exceeds such other insurance This insurance is excess over any other insurance, whether primary or excess, contingent or on any other basis Escape Clauses The existence of other valid and collectible insurance extinguishes the insurer s liability to the extent of such other insurance Such clauses can be valid as long as the insured is protected but such escape clauses are generally disfavored 39

40 Overview of Other Insurance Clauses Determination of whether a policy provides primary or secondary coverage is generally determined by the policy provisions including any other insurance clause Primary policies may contain other insurance condition stating that the coverage afforded by the primary policy is excess to other valid and collectible insurance. If several primary policies contain the same excess other insurance provisions, the clauses are disregarded and the insurers on the risk must share the defense and indemnity costs Primary insurers with conflicting excess other insurance clauses can have immediate defense obligations if the policies are not true excess Conflicts in competing other insurance clauses typically result in proration of limits rather than permitting an insurer to avoid contributing to the defense or indemnity of the underlying claim 40

41 Whose Coverage Is Primary? The 2001 and later versions of the ISO CGL Policy (CG ) contain an amended Other Insurance Clause (Section IV) States that the Named Insured s policy is excess over any other policy on which You have been added as an additional insured by way of endorsement Issues still arise when the other party s insurance purports to provide only excess coverage 41

42 Whose Coverage Is Primary? Primary and Noncontributory Requirements Amendments to Other Insurance Clauses This insurance is primary to and will not seek contribution from any other insurance available to an additional insured under your policy provided that: 1. The additional insured is a named insured under such other insurance 2. You have agreed in writing in a contract or agreement that this insurance would be primary and would not seek contribution from any other insurance available to the additional insured 42

43 Whose Coverage Is Primary? Additional Insured Endorsements May Also Impact Other Insurance. This insurance is excess over: Any other insurance naming the additional insured as an insured whether primary, excess, contingent or on any other basis unless a written contract or agreement specifically requires that this insurance be either primary or primary and noncontributing. Where required by written contract or agreement, we will consider any other insurance maintained by the additional insured for injury or damage covered by this endorsement to be excess and noncontributing with this insurance 43

44 Priority of Coverage Between Contract and Policy Language Rossmoor Sanitation Inc. v. Pylon, 13 Cal. 3d 622 (1975) To apportion the loss pursuant to the other insurance clause would effectively negate the indemnity agreement and impose liability on [the owner s insurer] when [the owner] bargained with [the Contractor] to avoid that very result as part of the consideration for the construction agreement. Reliance National Indemnity Co. v. General Star Indemnity Co., 72 Cal.App.4th 1063 (1999) Rossmoor did not purport to establish a general rule that a contractual indemnification agreement between an insured and a third party takes precedence over well-established general rules of primary and excess coverage in an action between insurers Hartford Casualty Ins. Co. v. Mt. Hawley Ins. Co., 123 Cal.App.4th 278 (2004) General contractor s insurer cannot be liable to a subcontractor s insurer for any costs of defense or indemnity where the subcontractor agreed to indemnify the general contractor for all liabilities which arise out of or are in any way related to the relevant construction project. 44

45 Priority of Coverage Between Contract and Policy Language Hartford Fire Ins. Co. v. LoBrutto, 275 A.D.2d. 525 (NY 2000) It is the absence of any specific requirement of primary coverage in the subcontract that is relevant rather than the absence of any specific provision that the coverage be excess Regal Homes Inc. v. CNA Insurance, 171 P.3d. 610 (AZ 2007) Endorsement to policy stated Any coverage provided hereunder shall be excess over any other valid and collectible insurance available to the additional insured whether primary, excess, contingent or on any other basis unless a contract specifically requires that this insurance be primary or you request that it apply on a primary basis Testimony from company president did not establish requirement of primary insurance for purposes of endorsement and contract did not specify whether insurance was to apply on a primary basis Pecker Iron Works v. Travelers, 99 N.Y. 2d 391 (2003) Coverage for additional insured held to by primary unless unambiguously stated otherwise and subcontract was silent on the issue 45

46 Priority of Coverage Between Contract and Policy Language Cases Giving Priority to Indemnity Agreement Federal Ins. Co. v. Gulf Ins. Co., 162 S.W.3d 160 (Mo. Ct. App. 2005) St. Paul Fire & Marine Ins. Co. v. Am. Int l Specialty Lines Ins. Co., 365 F.3d 263 (4 th Cir. 2004) Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8th Cir. 2002) American Indem. Lloyds v. Travelers Prop. & Cas. Co., 189 F.Supp.2d 630 (S.D. Tex. 2002) Chubb Insurance Co of Canada v. Mid-Continent Cas. Co., 982 F.Supp.435 (S.D. Miss. 1997) J. Walters Constr. Inc. v. Gilman Paper Co., 620 So.2d 219 (Fla. App. Ct. 1993) Truck Ins. Exchange v. Liberty Mut. Ins. Co., 428 N.E.2d 1183 (Ill. App. Ct. 1981) 46

47 Priority of Coverage Between Contract and Policy Language Cases Giving Priority to Insurance Provisions JPI v. Westcoast Construction L.P. v. RJS & Assoc., Inc. 156 Cal.App.4 th 1448 (2007) (distinguishing Rossmoor as a case involving two primary insurers and this case involved a primary versus excess priority dispute) Cincinnati Ins. Co. v. Boller Constr. Co., 2006 WL (N.D. Ill. 2006)(using principal of horizontal exhaustion, primary insurer had to exhaust prior to excess policy having obligation to contribute) U.S. Liability Insurance Co. v. Mountain Valley Indem. Co., 371 F.Supp.2d 554 (S.D.N.Y. 2005) (holding risk-shifting agreement between lessor and lessee did not supersede other insurance clause) Liberty Mut. Ins. Co. v. Tokio Marine & Fire Ins. Co. Ltd., 2004 WL (N.D. Ill. 2004) (subcontractor s excess policy is not reached until primary policies of general contractor and subcontractor are exhausted) USF&G Co. v. CNA Ins. Cos., 618 N.Y.S.2d 465 (N.Y. App. Div. 1994) (holding risk-shifting agreement between contractor and sub-contractor did not supersede other insurance clause). 47

48 Priority of Coverage Between Contract and Policy Language 2013 Amendments to AI Language AI coverage linked to the additional-insured requirements in an underlying transactional document. The policy limits applicable to the additional-insured s coverage are deemed to be the lesser of the amount: (1) Required by the contract or agreement ; or (2) Available under the applicable Limits of Insurance shown in the Declarations (i.e., the policy limit). Insurance afforded to the additional insured will not be broader than that which [the named insured] is required by contract or agreement to provide such additional insured. The court s Feb. 13 decision in Deepwater Horizon validates the contractual connection made by ISO s additional-insured endorsements linking the policy s coverage to the limitations of an underlying contract. In Re Deepwater Horizon, No (TX. Sup. Ct. Feb. 2015)(additional insured coverage limited by insurance policy language) 48

49 Is There An Insured Contract? Issue: Is obligation to indemnify covered under the indemnitor s CGL policy? Coverage for the indemnity claim turns on whether the indemnity agreement is an insured contract as defined by the subcontractor s CGL policy. 49

50 Insurance Coverage for Contractual Indemnity Claims: Significant CGL Provisions Typical CGL Coverage Grant: The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies caused by an occurrence. 50

51 Insurance Coverage for Contractual Indemnity Claims: Significant CGL Provisions (cont.) Typical CGL Contractual Liability Exclusion: This insurance does not apply to... bodily injury or property damages for which the insured is obligated to pay as damages by reason of the assumption of liability in a contract or agreement. This exclusion would appear to eliminate coverage for claims arising out of a contractual indemnification agreement. However... 51

52 Exception to the Contractual Liability Exclusion Typical CGL Exception to the Contractual Liability Exclusion: This exclusion does not apply to liability for damages: (1) that the insured would have in the absence of the contract or agreement; or (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 agreement. What is an insured contract? 52

53 The Crucial Inquiry: Is the Indemnification Agreement an Insured Contract? Insured Contract: Defined in the typical CGL policy to include, among other things, that part of any other contract or agreement pertaining to [the insured s] business under which [the insured] assumes the tort liability of another party to pay for bodily injury or property damage to a third person. Tort liability means a liability that would be imposed in the absence of any contract or agreement. 53

54 The Crucial Inquiry: Is the Indemnification Agreement an Insured Contract? (cont.) Revised Definition of Insured Contract Language added to address anti-indemnity statutes However, such part of a contract or agreement shall only be considered an insured contract to the extent your assumption of the tort liability is permitted by law This may impact whether or not a party to a contractual indemnity agreement also qualifies as an additional insured, despite intent of the parties. 54

55 The Crucial Inquiry: Is the Indemnification Agreement an Insured Contract? (cont.) Thus, to qualify as an insured contract, the contract must: Pertain to the insured s business Have been entered into before the underlying liability (a tort liability) occurs Assume the tort liability of another Not violate anti-indemnity statutes 55

56 Insured Contract Litigation Outcomes Virginia Surety Co., Inc. v. Northern Ins. Co. of New York, et al., 224 Ill.2d 550 (2007) (Illinois) Indemnity agreement was not an insured contract where indemnitor had only agreed to provide indemnification for its own negligence and not the negligence of the indemnitee Garnet Const. Co., Inc. v. Acadia Ins. Co., 61 Mass.App. 705 (2004) Indemnity obligation implied by industry practice did not meet the requirements of an insured contract Progressive Cas. Ins. Co. v. Brown s Crew Car of Wyoming, Inc., 27 F.Supp.2d 1288 (D. Wyoming 1998) Contract qualified as an insured contract, but did not extend to coverage for defense costs of the indemnitee 56

57 Insured Contract Litigation Outcomes Golden Eagle Ins. Co. v. Ins. Co. of the West, 99 Cal. App. 4th 837 (2002) (California) The insured must assume the other contracting party s tort liability to third parties in order for insured contract coverage to attach Lubrizol Corp. v. National Fire Ins. Co. of Pittsburgh, PA., 200 Fed.Appx. 555 (6 th Cir. 2006)(unpublished) Indemnity agreement was not an insured contract under the National Union policy, because it did not require the assumption by Lubrizol of the tort liability of another party. Lubrizol was only required to indemnify Valvoline for Lubrizol s own negligence or willful misconduct. Certain London Market Ins. Cos. v. PA Nat. Mut. Cas. Ins. Co., 106 Fed. Appx. 884 (5 th Cir. 2004) Contract in violation of Mississippi s anti-indemnity law would not fit the insured contract exception 57

58 Insurance, Indemnity and Contribution: The Complex Interplay in Commercial Transactions: Negotiating the Agreement Jessica E. Brown

59 59 Unequal Bargaining Power

60 The Armstrong Scenario We-Sell a national retail chain headquartered in Illinois contracted with Grill Co. to manufacture a grill to be sold under its own brand the Armstrong Rocket We-Sell had Grill Co. manufacture a new special fuel grill the Armstrong Rocket per We- Sell s specifications including patented fuel type The Armstrong Rocket became a bestseller and millions were sold 60

61 We-Sell s Perspective WHAT WE-WELL WANTS We-Sell wants Grill Co. to provide it with an indemnity that covers any claim that could possibly arise out of the Armstrong Rocket even if We-Sell is solely negligent. We-Sell also wants to make sure that Grill Co. will defend it on any claim. Finally, to protect itself against Grill Co s possible bankruptcy, We-Sell wants to be an additional insured under Grill Co. s liability insurance. WE-SELL S BARGAINING POWER We-Sell can always find another manufacturer somewhere else if it cannot get what it wants, but Grill Co. is its only U.S. option. 61

62 We-Sell Proposed Indemnity Provision [Manufacturer] agrees to indemnify and hold harmless We-Sell and its agents from and against any and all claims or suits for: (i) bodily injury to all persons whether employees of We-Sell or otherwise, and (ii) damage to property -- arising out of the [Product], and all other damage, direct or indirect, of whatsoever nature, resulting from We- Sell s use, sale or distribution of the [Product], however caused including We-Sell s sole or partial negligence. It is expressly agreed that this provision shall survive the performance of this Agreement. 62

63 We-Sell Proposed Defense Provision [Manufacturer] agrees to defend We-Sell for any claim, suit or loss allegedly attributable to bodily injury or damage to property, arising out of We-Sell s use of the [Product], even if We-Sell is solely at fault for such bodily injury or property damage. 63

64 We-Sell Proposed Provisions WHAT WOULD BE THE EFFECT? By including the specific and explicit phrase including We-Sell s sole or partial negligence, We- Sell has covered its own negligence even where We-Sell is found to be solely at fault. We-Sell s defense provision also explicitly covers it if it is alleged that We-Sell is solely at fault Note that the defense provision requires that Grill Co. do more than simply pay defense costs Grill Co. must provide We-Sell with a defense. 64

65 Grill Co. s Perspective WHAT GRILL CO. WANTS Grill Co. wants to provide as little indemnity to We-Sell as possible preferably strictly limited to its own negligence for certain acts Grill Co. is fine with making Grill Co. an additional insured as long as it does not increase Grill Co. s premiums. (Would the coverage We-Sell is requesting cost more? Why?) GRILL CO. S BARGAINING POSITION Grill Co. needs the contract with We-Sell because it has been hurt by competition and the economic decline. Also it has developed a reputation for poor quality due to several recalls involving explosions and deaths. 65

66 Grill Co. Proposed Indemnity Grill Co. agrees to indemnify [Purchaser] for sums [Purchaser] becomes legally obligated to pay as damages for bodily injury or properly damage caused by " Grill Co. s fault. Grill Co. s fault means: (i) a manufacturing defect, design defect or negligent failure to warn with respect to products designed by Grill Co. and supplied to [Purchaser] by Grill Co. Grill Co. further agrees to indemnify [Purchaser] for reasonable legal expenses it incurs defending itself against any suits seeking such damages. Grill Co. shall have no obligation to indemnify [Purchaser] for any damages caused by [Purchaser s] fault or for any legal expenses incurred by [Purchasers] in defending itself against suits seeking damages caused by [Purchaser s] fault. 66

67 Grill Co. Proposed Provision WHAT WOULD BE THE EFFECT? Grill Co. s provision is a very weak indemnity, limited to where it is at fault It is unlikely to cover design defects in the proposed scenario because We-Sell designed the Armstrong Grill Grill Co. was only the manufacturer It does not include a duty to defend only a duty to indemnify covered defense costs 67

68 Negotiations We-Sell rejects Grill Co. s indemnity However, We-Sell prefers to have the Armstrong Grill manufactured in the U.S. so it agrees to alter its provision to a similar back-up provision Grill Co. needs the business so it agrees to We- Sell s new proposal including a duty to defend 68

69 Final We-Sell Grill Co. Indemnity WHAT S THE RESULT? Grill Co. agrees to indemnify and hold harmless We- Sell and its agents from and against any and all claims or suits for: (i) bodily injury to all persons whether employees of We-Sell or otherwise, and (ii) damage to property arising out of the Armstrong Grill, and all other damage, direct or indirect, of whatsoever nature, resulting from We-Sell s use of the Armstrong Grill, however caused. It is expressly agreed that this provision shall survive the performance of this agreement. 69

70 Final We-Sell Grill Co. Defense Provision Grill Co. agrees to defend We-Sell for any claim, suit or loss allegedly attributable to bodily injury or damage to property, arising out of We-Sell s use of the Armstrong Grill, even if We-Sell is partly at fault for such bodily injury or property damage. 70

71 We-Sell s Additional Insured Provision Grill Co. shall obtain and maintain in full force during the performance of this Contract and six months thereafter: (a) Commercial General Liability Insurance endorsed to include products/completed operations, independent contractors, contractual liability (covering We- Sell s indemnity obligations in this contract), broad form property damage and fire liability coverage with a combined single limit of $1,000,000 per occurrence and $2,000,000 in the aggregate. All such policies shall name We-Sell and its agents as additional insureds. Grill Co. shall furnish to a Certificate of Insurance evidencing such coverage. 71

72 Insurance WHAT HAPPENS WITH THE INSURANCE Grill Co. agrees to We-Sell s additional insured provision and provides We-Sell with a certificate of insurance that shows that it has insurance with $2 million per occurrence and $4 million aggregate limits We-Sell does not ask for a copy of the insurance policy itself Grill Co s policy has the following provisions, which of course We-Sell doesn t know about: $500,000 self-insured retention The additional insured provision limits coverage to the extent required by contract 72

73 Unfortunately. The Armstrong Rocket had a tendency to really take off exploding right out of consumers backyards This resulted in numerous lawsuits for property damage, bodily injury and injury to wildlife (geese) against We-Sell and Grill Co. The suits alleged only design defects 73

74 Who Pays? We-Sell seeks protection from Grill Co. and its insurer Grill Co. asserts that it does not owe We-Sell either indemnity or defense because the lawsuits allege design defects and We-Sell designed the Armstrong Rocket so is solely negligent Grill Co s Insurer asserts that there is no coverage because (1) the $500,000 SIR and (2) the insurance is limited to the indemnity provision and We-Sell is solely negligent 74

75 Result For suits that allege only a design defect: We-Sell probably won t be indemnified by Grill Co. or covered for indemnity under its insurance because We-Sell is the designer. However, if Grill Co. is also alleged to be the designer, We-Sell may be entitled to a defense For suits that allege manufacturing as well as design defects: We-Sell is probably covered by Grill Co. s indemnity We-Sell is also probably covered by insurance, but only after the SIR is exhausted Grill Co. may be required to pay the amounts in the SIR 75

76 76 Equal Bargaining Power

77 The Super Lawn Scenario Eco-Solutions, a small company based in Ohio, has developed Super Lawn a lawn supplement that fertilizes and takes care of all weeds leaving a perfect healthy lawn. It is non-toxic and actually binds with toxins eliminating them. Eco-Solutions holds a patent on Super-Lawn that does not expire until Super Lawn is a very hot product and We-Sell would like to sell it at its stores. Eco-Solutions would like to distribute super Lawn through We-Sell because of its market share, but does have many other retailers who would like to distribute its as well 77

78 Negotiations We-Sell would like to have its standard indemnity and defense provisions discussed previously WHAT HAPPENS Eco-Solutions rejects the We-Sell indemnity and defense provisions and states that it would like to be indemnified by We-Sell Although Eco-Solutions is a much smaller company, We-Sell has to bargain to get this one of kind product in its stores 78

79 Reciprocal Indemnity Provision (a) Eco-Solutions agrees to indemnify We-Sell for sums We- Sell becomes legally obligated to pay as damages for bodily injury or properly damage caused by solely by "Eco-Solutions negligence. "Eco-Solutions negligence means: (i) a manufacturing defect, design defect or negligent failure to warn with respect to products designed by Eco-Solutions and supplied to We-Sell by Eco-Solutions. Eco-Solutions further agrees to indemnify We-Sell for reasonable legal expenses it incurs defending itself against any suits seeking such damages. Eco-Solutions shall have no obligation to indemnify We-Sell for any damages caused by We-Sell s fault or for any legal expenses incurred by We-Sell in defending itself against suits seeking damages caused by We-Sell s fault. Eco- Solutions shall also have no duty to indemnify We-Sell, if its product is changed or altered in any way. 79

80 Reciprocal Indemnity Provision (b) We-Sell agrees to indemnify Eco-Solutions for sums Eco- Solutions becomes legally obligated to pay as damages for bodily injury or properly damage caused by solely by We- Sell s negligence. We-Sell s negligence means: (i) any negligence by We-Sell in the distribution, sale or use of Eco- Solution s products, including failure to warn and (ii) any change or alteration to Eco-Solution s product by We-Sell. We- Sell further agrees to indemnify Eco-Solutions for reasonable legal expenses it incurs defending itself against any suits seeking such damages. We-Sell shall have no obligation to indemnify Eco-Solutions for any damages caused by Eco- Solutions fault or for any legal expenses incurred by Eco- Solutions in defending itself against suits seeking damages caused by Eco-Solutions fault. 80

81 Reciprocal Indemnity Provision EFFECT OF PROVISIONS Under the reciprocal indemnity, neither party indemnifies the other unless the suit is based on the sole negligence of one party for specific acts Additionally, neither party has a duty to defend the other at most each party must pay the other s reasonable defense costs if a suit is based on its sole negligence 81

82 Which Goes First? Indemnity or Insurance? The law is sparse and unclear on this point The insurance policy won t say Usually the indemnity won t say but it should. Suggested Provision: It is the express intent of the parties that the insurance identified in Paragraph X, naming We-Sell as an additional insured, respond first and defend and indemnify We-Sell and its agents with respect to any and all claims or suits arising out of the performance or breach of this Agreement by Grill Co. If and only if such insurance does not apply or is otherwise not available with respect to a particular matter, the indemnity provisions in this paragraph will apply 82