I. Introduction and Sources of Indemnification

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1 A DAY ON CONTRACTS CORE CLAUSES INDEMNITY AND INSURANCE PROVISIONS Wesley R. Payne IV, Esquire White and Williams LLP 1650 Market Street One Liberty Place, Suite 1800 Philadelphia, PA (215) / DISCLAIMER The legal discussion and analysis prepared for this seminar is not intended to be an exhaustive survey of al applicable law in al jurisdictions. Rather, the legal research embodied in these materials is intended to assist the reader in spotting legal issues raised in the various contexts. No single absolute rule of law dictates the handling of a claim. Each claim is unique and must be evaluated in the context of the facts and circumstances surrounding that claim. A DAY ON CONTRACTS CORE CLAUSES INDEMNITY AND INSURANCE PROVISIONS I. Introduction and Sources of Indemnification A. Common Law Common law indemnification is based in tort law. Almost every Answer to a Complaint where the plaintiff alleges that one or more of the defendants are jointly liable or where an additional defendant is joined on a theory of joint liability, the cross claim, counter claims and/or joinder claims allege common law indemnification pursuant Pennsylvania Rule of Civil Procedure and 2252(d), respectively. 1

2 Common examples include: 1. Master Servant relationship based upon vicarious liability of an employer for the acts committed by its employees in the course of their employment McCabeSupra. 2. Principal Agent relationship based upon vicarious liability on the part of the principal. Vattimo v. Lower Bucks Hospital, 465 A.2d 1231 (Pa. 1951). 3. Manufacturer Retailer relationship where the retailer is strictly liable for a defect in a product even though retailer did not change or alter the product. Burch v. Sears, 457 A.2d 615 (Pa. Super. 1983). 4. Landlord Tenant relationship in which the out of possession landlord is liable due to the negligence of the tenant that is in possession of the property. Bruder v. Philadelphia, 153 A.725 (Pa., 1931). B. Statutory Indemnification A less common form of indemnification is statutory indemnification. A common example of statutory indemnification is a situation where a municipality is held liable for a condition on the sidewalk of the property owner who is ultimately responsible. Restifo v. Philadelphia, 617 A. 2d 818 (Pa. Commonwealth 1992). 2

3 The statute at issue is the judicial code, 42 Pa. C.S.A. 8542(b)(7) which in pertinent part states: Where a local agency is liable for damages under this paragraph by reason of its power and authority to require installation and repair of sidewalks under the care, custody and control of the person, the local agency shall be secondarily liable only if such other person shall be primarily liable. (Emphasis added). Another example of statutory indemnification is the MCARE Act. 40 P.S (a). Section 715(a) of the Act states in pertinent part: If a medical professional liability claim against a healthcare provider who was required to participate in the [MCARE Fund], is made more than 4 years after the breach of a contract or tort occurred and if the claim is filed within the applicable statute of limitations, the claims shall be defended by the department if the department receives a written request for indemnification and defense within 180 days of the date on which notice of the claim is first given to the participating healthcare provider or its insurer. (Emphasis added). C. Contractual Indemnification The final and most common form of indemnification in commercial relationships is indemnification through provisions contained in the contract. Agreements for indemnification with respect to loss or damages are enforceable in Pennsylvania. Schroeder v. Gulf Refining Co., 300 Pa. 405, 150 A. 665 (1930). An indemnification agreement is essentially a contract or a provision within a contract under which one party agrees to assume the tort liability of another in connection with claims of a third party stemming from the work performed from a particular project, from the services provided pursuant to a contract, from the indemnitor s occupancy or use for a particular property or some other form of negligence. 3

4 The agreements generally only provide for indemnification with respect to any damages owed by the indemnitee but most commonly also include language with respect to defense costs and attorney fees. As a result, indemnification agreements are not favored in the law and are normally strictly construed against the drafting party which is normally the party seeking protection under the provision. Coatman v. Lower Allen Leisure Enter, 42 Pa. D&C 3d 19 (1985). Strict Construction and Enforceability Even though indemnification agreements are enforceable in Pennsylvania and the extent of the liability under an indemnity agreement is to be determined by the intent of the parties, given application of the rule of strict construction, indemnification provisions are an exception to the general rule of contract interpretation in which words and phrases are given their plain and ordinary meaning. Deskiewicz v. Zenith Radio Corp., 561 A.2d 33, 34 (Pa. Super. Ct. 1989). 4

5 The indemnification provisions can run in different directions and at times be contrary to one another. This is especially the case when parties enter into form contracts without reviewing the provisions. But generally, Pennsylvania law recognizes that indemnity provisions in commercial constructions contracts that require that the owner be indemnified in the absence of the owner s active negligence are enforceable. Urban Redevelopment Authority of Pittsburgh v. Noralco, 281 Pa. Super. 466 (1980). In Noralco, no agent of the URA [owner] did any affirmative act which contributed to the collapse of the wall.[ ] [T]he URA s negligence at most consisted of failing to warn Noralco s [contractor] employees of a dangerous condition on the premises. In that case, the Superior Court held that such negligence is clearly no more than passive. Noralco, 281 Pa. Super at In defining passive negligence, the Court noted it denotes negligence which permits defects, obstacles or pitfalls to exist upon the premises. Noralcoat

6 E. Indemnification for a Party s Own Negligence Further, Pennsylvania does allow for indemnification provisions that would allow a party to be indemnified for its own act of negligence. However, agreements to indemnify another party for liability stemming from its own acts of negligence are strongly disfavored and are even more strictly construed against the party which drafted the provision and typically seeks to enforce them. Hershey Foods Corp. v. General Electric Service Co., 619 A.2d 285 (Pa. Super. 1992). The courts have ruled that there is no presumption that the indemnitor intended to assume a responsibility unless it is expressed in unequivocal terms within the indemnification agreement. For a party to obtain indemnification for its own negligent conduct, the Pennsylvania Courts have held that the contract must contain clear and unequivocal language to that effect. Words of general import such as broad construction language calling for indemnification with respect to any and all claims or any and all liabilities or even language called for indemnification to the fullest extent permitted by law are considered legally insufficient to shift liability to the indemnitor for the indemnitee s negligence under the so called Perry Ruzzi. Perry v. Payne, 217 Pa. 252, 66 A. 553 (Pa. 1907); Ruzzi v. Butler Petroleum Co., 527 Pa. 1, 588 A.2d 1 (Pa. 1991). F. Indemnification for Gross Negligence, Breach of Contract or Breach of Warranty While there is not a great deal of Pennsylvania case law on the subject, there are some additional limitations upon the effectiveness of indemnification agreements in cases involving such in particular hazards or misconduct arising beyond the level of negligence. For example, it has been held that an agreement calling for the indemnification of another party for its acts of negligence will not be construed as calling for indemnification with respect to that parties gross negligence unless gross negligence is specifically mentioned and even then, such an agreement might be considered contrary to public policy. Ritti v. Wheeling Pittsburgh Steel Corporation, 758 A.2d 695 (Pa. 2000). 6

7 With respect to breach of contract and breach of warranties, Pennsylvania Courts can use general rules of contract instruction in construing express indemnity provisions. Brovington Construction Company v. Patterson, 178 A.2d 696 (Pa. 1962). However, as previously stated these broadly written indemnification provisions will be narrowly construed. Deskiewicz v. Zenith Radio Corp., 561 A.2d 33, 35 (Pa. Super. 1989). Therefore, well drafted provisions that cover claims for gross negligence, contract or warranty losses are enforceable in Pennsylvania. The clauses may be used offensively and defensively. 7

8 A DAY ON CONTRACTS CORE CLAUSES INDEMNITY AND INSURANCE PROVISIONS II. Drafting Contracts to Maximize Indemnification A. Direct Contractual Indemnification I. Insufficient Language Under the Perry Ruzzi rule, an agreement broadly calling for indemnification with respect to any and all liens, charges, demands, losses, costs including... legal fees and court costs, causes of action or suits of any kind or nature, judgments, liabilities, and damages of any and every kind or nature whatsoever... arising by reason of or during the performance of both... covered by this contract was considered inadequate to require indemnification for the indemnitee s own negligence because it did not specifically express the intent to indemnify a connection with the indemnitee s own negligence in clear and unequivocal terms. City of Pittsburgh v. American Asbestos Control Company, 629 A.2d 265 (Pa. Commonwealth 1993). Usually, a clause calling for one party to indemnify the other party with respect to claims which are based in whole or in part upon any act or omission of the indemnitor was considered insufficient to require indemnification with respect to the other s party s own acts of negligence. Ocean Spray, Supra. 8

9 Further, if there are indemnification and limitation of liability provisions in the same contract, the provisions may not be internally consistent. If so, the provisions may be found to be ambiguous and not require indemnification for the indemnitees own negligence. The Supreme Court of Pennsylvania has held that an indemnification provision calling for indemnification for any injury or damages but only to the extent caused in whole or in part by negligent acts or omissions of the subcontractor, and regardless of whether such claims, damages, loss or expense is caused in part by a party indemnified hereunder was not sufficiently clear and did not express an intent on the part of the subcontractor to indemnify other parties for their own negligence. Greer, Supra. Although the regardless of language appearing at the end of the clause clearly called for indemnification regardless of whether the indemnitees themselves caused the injury in whole, or in part, the effectiveness of that phrase must defeat it through the use of a inconsistent language appearing at the start of the same sentence under which the subcontractor agreed to provide indemnification only to the extent of its own negligence. Therefore, the language must not only be express but the language contained in the provision must be internally consistent or the provision will be found to be ambiguous and insufficient. 2. Sufficient and Clear Language Courts have held that an agreement to indemnify a party as to all claims except those which the indemnitee is solely negligent was sufficiently specific to call for indemnification with respect to all claims of joint negligence on the part of a fellow defendant, other than those for which the indemnity was determined to have been 100% liable. Woodburn v. Consolidated Coal Co., 590 A.2d 1273 (Pa. Super. 1991). Additionally, it was held that contract language was sufficient to require indemnification for the indemnitee s own negligence in Hershey Foods, Supra, where the agreement stated that the party in question would be indemnified for any claim regardless of whether or not it is caused in part by a party identified hereunder. 9

10 3. Pass Through Provisions In situations where a general contractor may require a subcontractor not only to indemnify the general contractor but also to indemnify the owner, the Pennsylvania Supreme Court has held such pass through provisions, are subject to a very narrow construction and are ineffective unless the intent to assume such liability is clearly and specifically stated in subcontract. Accordingly, a standard incorporation clause, through which a subcontractor merely agrees to assume all of the general contractor s indemnification obligations to third parties under a separate contract, without specifically stating the indemnification obligations in the contract with the subcontractor will not be effective. 4. The Worker s Compensation Immunity Pursuant to the Worker s Compensation Act, Section 303(b), states that an injured plaintiff employer cannot be joined as a defendant or additional defendant to the employee s personal injury action by the plaintiff or another party in the absence of a written indemnification agreement entered into by the employer prior to the date of the injury. 77 P.S. 481(b). A sample provision of a waiver of the WCAin an indemnification provision is as follows: Statutory Indemnity With respect to Claims brought against Company Parties by or on behalf of Contractor Parties employees, or other third parties, arising from or in any manner relating to injuries to or death of Contractor Parties employees, including but not limited to Claims based upon allegations of negligence of Company Parties, Contractor shall indemnify Company Parties for any and all loss or liability resulting there from, including the costs of settlements, judgments, damages and direct expenses including reasonable attorney s fees (including reasonable attorney s fees incurred in establishing a right to indemnify hereunder). It is understood and agreed that the indemnity provided for in this section is applicable to claims to which Contractor has or may have immunity under the Pennsylvania Worker s Compensation Act or similar provisions in other jurisdictions. Contractor agrees and acknowledges that by undertaking to indemnify Company Parties under this section, Contractor is expresslyundertaking indemnification liability by written contract pursuant to Section 303(b) of the Pennsylvania Worker s Compensation Act, 77 PS Section 481(b) or similar provisions in other jurisdictions. 10

11 The Role of Indemnity and Insurance in But note that pursuant to the Bernotas decision the waiver of statutory employer s immunity through worker s compensation immunity cannot be done through a pass through provision but must be specifically stated within the subcontractor s subcontract. Integrated Product Services v. HMS Interiors, 2005 Phila. Ct. Comm. Pl. LEXIS 255 (C.P. Philadelphia 2005). A DAY ON CONTRACTS CORE CLAUSES INDEMNITY AND INSURANCE PROVISIONS III. The Insurance Coverage for Indemnification A. Incidental Contracts Generally an insured defendant is entitled to liability coverage in connection with contractual indemnification claims because most insurance policies carve out an exception from the contractual liability exclusion. With respect to liability assumed by the insurer under an incidental contract, these incidental contracts are considered to be insured contracts. See Brooks v. Colton, 760 A.2d 393 (Pa. Super. 2000). 11

12 It must be recognized that a contractual indemnee is not considered a third party beneficiary of the indemnitor s liability insurance policy and is not an insured under the policy, and has no legal standing to directly sue, or to maintain a bad faith claim against the indemnitor s insurer. Tremco, Inc. v. PMA Insurance Co., 832 A.2d 1120 (Pa. Super 2008). Further, it also must be remembered that the nature of the indemnification claim is conditional. Therefore the existence of the obligation for the claim simply cannot be determined until the underlying claim has been settled, or tried to verdict, and does not accrue until payment has actually been made. McClure v. Deerland Corp., 41 Pa. Super. 226, 585 A.2d (1991). However, note, just because the contract between the parties requires a party to cover both parties under its insurance does not mean that the insurance carrier is required to honor the contract. In fact unless the second party is properly added to the policy there is no coverage. Merely having the name of the party on the certificate of insurance is not enough. If the insured has agreed to obtain liability insurance coverage on behalf of another party, but fails to do so, the insured party is liable to the second party as it is one of the insurers but the insurance carrier is not liable. Bureau of Wilkinsburg v. Trumbull Denton Joint Ventures, 390 Pa. Super. 580, 568 A.2d 1325 (1990). 12

13 B. Additional Insureds An additional insured is a party that is not a named insured when the insurance policy/contract is purchased but added to the policy through some form of an endorsement. The additional insured endorsement modifies the who is an insured provision of the policy and the additional insured is an insured just like the name insured on the policy. The additional insureds constitute an insured but only with respect to liability arising out of operations performed by the named insured. The but for language may have been anticipated to be limited but has been interpreted by Pennsylvania Courts to acquire only but for as opposed to proximate causation between the named insured s work or operations and the injury involved. The Role of Indemnity and Insurance in Other Pennsylvania cases have taken a similar broad view of the scope of coverage provided to additional insureds. See, Maryland Casualty Company v. Regis Insurance Company, 1997 U.S. Dist. Lexis 4359 (E.D.PA. 1997) (Language affording coverage to additional insured but only with respect to liability... as a result of an alleged act or admission of the named insured or its employees ); Philadelphia Electric Company v. Nationwide Mutual Insurance Company, 721 F.Supp. 740 (E.D. Pa. 1989) (coverage provided to an additional insured when the endorsing agreement for coverage stated where any work performed by the policy holder); Pennsylvania Turnpike Commission v. TransContinental Insurance Company, 1995 U.S. District Lexis (E.D. Pa. 1995) (holding that endorsement granted coverage to additional insured but only with respect to liability arising out of your [i.e., the named insureds work] by additional insured for its own negligence). 13

14 The Role of Indemnity and Insurance in However, the Courts have recognized some logical limitation to the application of but for causation in determining whether an additional insureds liability arises from the named insureds work. Todd Warner Entertainment v. Travelers Casualty Insurance Company, 1998 W.L , 1998, U.S. Dist. Lexis (E.D. Pa. 1998). The Role of Indemnity and Insurance in Therefore, there must be some causal connection between the alleged negligence and the triggering of coverage for the additional insured. The Role of Indemnity and Insurance in 1. Fault Based Endorsements Some additional insured endorsements afford insureds status only with respect to injury or damage causes in whole, or in part, by the acts or omissions of the named insured, or those acting on its behalf. The language is typically followed by an exclusion with respect to claims arising from the sole negligence of the additional insured. The intended effect of such language is to eliminate coverage with respect to claims premised upon the sole negligence of the additional insured, while providing coverage for the additional insureds negligence, so long as the named insured is at least partially at fault. 14

15 The Role of Indemnity and Insurance in Additionally, other fault based endorsements for coverage to additional insureds on a more limited basis, providing that the additional insured is covered only for injury resulting from the acts or omissions of a named insured, which is usually interpreted as covering only an additional insured vicarious liability stemming from the policy holders negligence. Such endorsements have been found to be clear and unambiguous as well. Lafayette College v. Selective Insurance Company, 2007 U.S. Dist. Lexis 88001, 2007 W.L (E.D. Pa. 2007) (endorsement affording coverage only... with respect to liability caused by your [the named insured] acts or omissions applies only to claims of vicarious liability derived from the named insured s negligence). The Role of Indemnity and Insurance in 2. On Going vs. Completed Operations Additionally, some additional insure endorsements limit the duration or time for which coverage is provided. This is also accomplished through language to the effect that the additional insured is included as an additional insure on the policy but only with respect to liabilities arising out of your ongoing operations performed for that insured. The Courts have uniformly interpreted the phrase on going operations as providing coverage only for injury or damage occurring while the main insured is still conducting its operations, and as not providing coverage with respect to so called completed operations claims involving injury or damage occurring after the main insureds work has been completed, or put to its intended use. However, completed operations coverage is offered by many insurance carriers. 3. The Role of Indemnity and Insurance in Written Contract Requirement Any additional insured endorsements must make reference to the main insured having entered into a contract or agreement under which it is required to provide coverage for the additional insured. For example, a blanket additional insured endorsement might confer insured status upon any person or organization for which the policy holder is performing operations if the two have agreed in a written contract or written agreement executed prior to any loss that such person or organization will be added as an additional insured. Therefore, as a practical matter, to insure that additional insured status is provided, the parties should have a written executed agreement not an unsigned agreement or a verbal agreement or rely on prior costs and dealings between the parties because coverage may not be triggered without a written endorsement. 15

16 The Role of Indemnity and Insurance in 4. Rights Of An Additional Insured An additional insured through the additional insured endorsement language has the same status as an insured. As a result, an additional insured s rights are subject to the terms and limitations of the insurance policy. It has been said that the naming of an additional insured does not extend the nature of the coverage provided, but merely gives to others the same protection as the principal insurer. The scope of coverage afforded to additional insureds can be limited by the terms of the policy or endorsement. Miltenberg & Samton, Inc. v. Assicurazioni Generali, S.P.A., 2004 Phila. Court Common Pleas (C.P. Phila 2004) The Role of Indemnity and Insurance in 5. Certificates Of Insurance It is common practice for an insurance agent or broker to issue a Certificate of Insurance to a party which has contracted with the insured not only to verify that the insured is maintaining its own commercial liability, auto and/or worker s compensation coverage as specified in the contract, but also to verify that the certificate holder has been included as an additional insured. A DAY ON CONTRACTS CORE CLAUSES INDEMNITY AND INSURANCE PROVISIONS COMMENTS 16