Allocating Risk in Real Estate Leases: Contractual Indemnities, Additional Insured Endorsements and Waivers of Subrogation

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1 Presenting a live 90-minute webinar with interactive Q&A Allocating Risk in Real Estate Leases: Contractual Indemnities, Additional Insured Endorsements and Waivers of Subrogation Structuring Lease Provisions and Coordinating With Insurance Coverage to Mitigate Landlord and Tenant Liability Risks THURSDAY, JUNE 25, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Lyndon F. Bittle, Partner, Carrington Coleman Sloman & Blumenthal, Dallas Neal J. Suit, Partner, Carrington Coleman Sloman & Blumenthal, Dallas 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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4 Shifting Risk in Real Estate Leases: Indemnity and Insurance Provisions Lyndon F. Bittle Neal J. Suit Carrington, Coleman, Sloman & Blumenthal, L.L.P. 901 Main Street, Suite 5500 Dallas, Texas

5 PROGRAM OVERVIEW Focus: Commercial Real Estate Leases Representing Lessor or Tenant Provisions to Allocate Risk 5

6 Risk-Shifting Mechanisms Indemnity Provisions Insurance Requirements Additional Insured Status Waiver of Subrogation 6

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8 Overview of Indemnity Clauses Broad form Indemnitor assumes obligation to indemnify regardless of fault. Intermediate form Indemnitor assumes obligation to indemnify as long as any fault rests with indemnitor. Limited form Indemnitor obligated to indemnify only to the extent of its own fault in contributing to loss. 8

9 Broad Form Indemnity Clause Tenant indemnifies Lessor against: claims, damages, losses and expenses... arising out of or resulting from the ownership, maintenance or use of the leased premises, whether it is caused in whole or in part by the negligence of Tenant or Lessor. The indemnification obligation shall extend to injuries and damages caused, or alleged to be caused, by the sole or concurrent negligence of Lessor. 9

10 Intermediate Form Indemnity Clause Tenant indemnifies Lessor against: claims, damages, losses and expenses... arising out of or resulting, in whole or in part, from the negligence, errors, omissions, or failure to perform by Tenant. 10

11 Limited Form Indemnity Clause Tenant indemnifies Lessor against: claims, damages, losses and expenses... arising out of or resulting from the work, but only to the extent caused by the negligent acts or omissions of Tenant. 11

12 Broad or Intermediate Indemnity FAIR NOTICE REQUIREMENTS Express Negligence Doctrine Must expressly state the intent to require indemnification for the indemnitee s own negligence. Conspicuousness Test Indemnity clause must be conspicuous within the contract, i.e., bold, large font, all caps, underline, etc. 12

13 Anti-Indemnity Statutes An increasing number of states have anti-indemnity statutes that bar or limit scope of indemnity Generally prohibit or limit broad and intermediate form indemnity 13

14 Anti-Indemnity Statutes Scope varies by state Texas statute limited to construction Other states--broader statutes or case law May have employee-injury exception ( third-party over claims) May also limit additional insured coverage 14

15 Indemnity Include Defense? Duty to defend is independent of duty to indemnify. Indemnity for defense costs might not create duty to defend. Include and defend in indemnity contract to create such duty. (Do you want it?) 15

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17 Review Insurance Requirements Beware cut and paste agreements. Beware old form insurance requirements. Confirm insurance requirements can be satisfied talk to broker before signing. If you re not a coverage lawyer, find one. Consider requesting specific ISO/AAIS forms, and review any requested forms. 17

18 Insurance Forms ISO = Insurance Services Office AAIS = American Ass n of Insurance Services Not mandatory insurers can use, modify, or write their own Manuscript policy not based on form 18

19 ISO Form Numbers Type Series Form Month Year CG CGL, AI series # 11 (Managers/Lessors) published April 2013 BP Businessowner, AI series # 2 (Managers/Lessors) published July

20 Insurance Requirements in Leases Insurance requirements in lease agreement should parallel allocation of responsibility between landlord and tenant. Compare Tenant s Obligations sections with Tenant s Insurance Requirements. Compare Indemnity sections with Insurance Requirements. Beware of adjusters agreement without binding parties to allocation. 20

21 Insurance Requirements in Leases General Liability Limits aggregate per location? Owner as additional insured Property: physical damage Full replacement cost Causes of loss include flood, earthquake, etc.? Owner as Loss Payee or Additional Insured? 21

22 Insurance Requirements in Leases Business Interruption (time element coverage) Causes of loss? Physical damage to property Other causes? Scope of coverage? Monthly limit? Aggregate sublimit? Period of Restoration Extra expense Extended Business Insurance (ramp-up) 22

23 Insurance Requirements in Leases Owner cannot be additional insured: Workers Compensation Professional Liability 30-day notice of cancellation Will insurer or broker agree? Endorsed in policy or separate agreement with broker 23

24 BEWARE UNDUE RELIANCE ON CERTIFICATES OF INSURANCE 24

25 ACORD CERTIFICATE OF INSURANCE THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. THIS CERTIFICATE DOES NOT AFFIRMATIVELY OR NEGATIVELY AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW. 25

26 ACORD CERTIFICATE OF INSURANCE THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. CANCELLATION Should any of the above described policies be cancelled before the expiration date thereof, notice will be delivered in accordance with the policy provisions. 26

27 ACORD CERTIFICATE OF INSURANCE IMPORTANT: If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed. If SUBROGATION IS WAIVED, subject to the terms and conditions of the policy, certain policies may require an endorsement. A statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s). 27

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29 Additional Insured Coverage Transfers risk to insurance purchased by another party. Generally provides defense. Most contracts require both indemnity and AI status. 29

30 SUBTLE DIFFERENCES Additional Named Insured is not the same as Named as Additional Insured Additional Named Insured generally limited to affiliated companies, officers, etc. Named as Additional Insured means given AI status by category or scheduled endorsement. 30

31 SUBTLE DIFFERENCES Additional Insured generally does not include employees, officers, agents, etc. Contractual promise does not alter the policy. 31

32 Additional Insured SUBTLE DIFFERENCES is not the same as Loss Payee Loss Payee is not an insured, but entitled to be paid for losses to its property interest (landlord, mortgagee, secured lender, etc.) 32

33 Additional Insured Coverage Owners & Lessors obtain additional insured status on Tenants liability policies. Additional insureds often request broad AI coverage, including for their own negligence. Can Tenant comply with this request? 33

34 Limitations On Additional Insured Coverage Anti-Indemnity Act may limit AI coverage. Texas: AI provision in contract is void and unenforceable to the extent that it requires or provides coverage the scope of which is prohibited under [this statute] for an agreement to indemnify.... Employee injury claim exception may apply. 34

35 CGL-AI Coverage Eroded Over Time 2001 form: liability arising out of your operations for the additional insured form: caused, in whole or in part, by your acts or omissions or... those acting on your behalf in performing operations for AI form: Not broader than required by K. Lessor AI endorsements did not change that much until

36 Additional Insured Endorsements Two broad types: Scheduled (or named) Common for Lessors Automatic (by Contract) More common in construction 36

37 Additional Insured Endorsements Scheduled:... Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule.... [BP or CG ] 37

38 Additional Insured Endorsements Automatic (by Contract):... any person or organization for whom you are performing operations when you and such person or organization have agreed in writing... that such person or organization be added as an additional insured on your policy... [CG (and later versions)] 38

39 New ISO Endorsement Fills Gap Owner covered by subcontractor s policy? Courts split New CG adds: 2. Any other person or organization you are required to add as an additional insured under the contract or agreement described... above. Alternative to CG

40 Owners AI Liability Coverage Business Owners Policy Endorsement: Additional Insurance Managers or Lessors of Premises [BP or CG ] Amends liability section to add: The person(s) or organization(s) shown in the Schedule is also an additional insured, but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to you and shown in the schedule. Arising out of interpreted broadly. 40

41 Owners AI Liability Coverage... liability arising out of the ownership, maintenance or use of... the [leased] premises Cover accidents off leased premises? Depends on jurisdiction and facts Strict construction = NO Gillis v. Damarkles (Mass. Super. Ct. 1998) (citing cases) 41

42 Owners AI Liability Coverage Cover accidents off leased premises? Other states construe arising out of use : Means of Access Test Ambrosio v. Newburgh Sch. Dist. (NY A.D. 2004) But-for Causation Test Travelers v. Farmers (Colo. App. 2010) Nexus Test Liberty Village v. W. Amer. Ins. (NJ A.D. 1998) 42

43 Owners AI Liability Endorsement Additional Insurance Managers or Lessors of Premises [BP or CG ] Exclusions: 1. Any occurrence that takes place after you cease to be a tenant in the premises... Includes holdover tenants Beware of period just before lease begins Richard v. Metro Bingo (La. App. 2006) 43

44 Owners AI Liability Endorsement Additional Insurance Managers or Lessors of Premises [BP or CG ] Exclusions: 2. Structural alterations, new construction or demolition operations performed by or for the [additional insured]. Structural alteration = substantial change Century Indem. v. Hanover (D. Utah 2007) Consider Builders Risk policy 44

45 Owners AI Liability Endorsement Additional Insurance Managers or Lessors of Premises [BP or CG ] Coverage Limitations (new in 2013): a. The insurance afforded to such additional insured only applies to the extent permitted by law; and b. If coverage provided to the additional insured is required by contract..., the insurance afforded to such additional insured will not be broader than... required by the contract. 45

46 Owners AI Liability Endorsement Additional Insurance Managers or Lessors of Premises [BP or CG ] Policy Limits (new in 2013): C.... The most we will pay on behalf of the additional insured is the amount of insurance: 1. Required by the contract... with the additional insured; or 2. Available under the applicable Limits of Insurance... ; whichever is less. 46

47 Does Contractual Indemnity Provision Limit Additional Insured Coverage? 47

48 Indemnity Limit AI Coverage? Evanston Ins. v. ATOFINA Petrochems. (Tex. 2008) No contractual indemnity for ATOFINA s negligence. AI = A person or organization for whom you have agreed to provide insurance as is afforded by this policy,... with respect to operations performed by you or on your behalf.... Q: AI covered for claims for bodily injury/death of contractor s employee attributed to AI s sole negligence? A: Yes. [W]here an additional insured provision is separate from and additional to an indemnity provision, the scope of the insurance requirement is not limited by the indemnity clause. Court allowed AI coverage for ATOFINA s sole negligence based on the terms of the policy alone. 48

49 BP Deepwater Insurance Case Ranger Ins. v. Transocean (5th Cir. 2013) Drilling Contract allocated liability for subsurface pollution to BP BP was AI under Transocean s policy, which did not distinguish between subsurface / above surface damages. Court held only the policy can limit coverage, if contract s indemnity and insurance provisions are separate and independent. 49

50 Fifth Circuit Withdraws and Certifies On rehearing, 5 th Circuit withdrew its earlier opinion and certified this question to the Texas Supreme Court: Whether Evanston Ins. Co. v. ATOFINA... compelled the finding that BP is covered for the damages at issue, because the language of the umbrella policies alone determines the extent of BP s coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the Drilling Contract are separate and independent? 50

51 Texas Supreme Court s Answer In re (Deepwater) Horizon (Tex. 2015) Transocean s policy required reference to Drilling Contract to determine AI status Drilling Contract allocated liability BP not covered as AI for liability it assumed under Drilling Contract 51

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53 Other Limitations on AI Coverage Insured Conduct or Employee Injury Exclusion. Additional insured may have no coverage for wrongful conduct by, or injuries to employees of, any insured or an insured. Broader coverage if exclusion limited to the insured or named insured. 53

54 Other Insurance Provisions What if a party is potentially covered under more than one policy? E.g., a named insured under one policy and an additional insured under another policy. 54

55 Other Insurance Provisions Pro-rata Clause. Apportions liability among concurrent insureds. Excess Clause. The policy is only triggered when another insurer has paid up to its policy limits. Escape Clause. Attempts to avoid all liability if there is another insurance policy. 55

56 Other Insurance Provisions But what if both policies contain an escape clause or an excess clause? Courts are left to analyze the language in an effort to harmonize conflict. Key: request primary and non-contributory AI coverage. [CG ] 56

57 Insured Contract Coverage Contractual Liability 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 or agreement. [CG ] 57

58 Insured Contract Defined Insured contract means: f. That part of any other contract or agreement pertaining to your business... under which you assume the tort liability of another to pay for bodily injury or property damage to a third party..., provided [it] is caused, in whole or in part, by you or by those acting on your behalf. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement. 58

59 Insured Contract Effect Insured contract provision covers named insured for its indemnity obligations. Does not make indemnitee an additional insured. But can pay indemnitee s defense costs --if no conflict and other conditions met. Beware: can be deleted by endorsement [BP or CG ] 59

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61 WAIVER OF SUBROGATION What is subrogation? Insurer pays claim, recovers from third party Steps into shoes of policyholder Policyholder must do all that is necessary to secure insurer s subrogation right, or risk losing coverage Property or Liability Policy 61

62 WAIVER OF SUBROGATION How waive subrogation? May be inferred in policy: You may waive your right to recover from others in writing before a loss occurs. May be explicit by endorsement. We waive any right of recovery we may have against the person or organization shown in the Schedule above.... quote endorsement] [CG ] 62

63 WAIVER OF SUBROGATION Anti-subrogation rule Cannot subrogate against own insured (including AI) Why waive subrogation? Shifts risks to insurance Why not waive it? May not be necessary Releases insured s claim against other party 63

64 RECOMMENDATIONS Know what each party is promising. Beware old form insurance requirements. Confirm insurance requirements can be satisfied talk to broker before signing. If you re not a coverage lawyer, find one. Request policy, not just certificate. 64