Structuring Construction Contract Insurance, Indemnification and Limitations on Liability Clauses

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Structuring Construction Contract Insurance, Indemnification and Limitations on Liability Clauses THURSDAY, AUGUST 9, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Katie Pfeifer, Of Counsel, Dorsey & Whitney, Minneapolis David Taubenfeld, Partner, Haynes & Boone, 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. 1.

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5 Drafting Insurance Provisions in Contracts: What Does It Do, What Does It Mean, and How Does It Work? Katie C. Pfeifer Dorsey & Whitney LLP (612)

6 Insurance Provisions Insurance requirements may provide a potential pool of money to pay a claim (i.e., back-up an indemnification obligation) Insurance requirements can also require a party be named an Additional Insured (AI) on a policy Most commonly the CGL policy 6

7 Drafting Insurance Requirements: Initial Steps Identify the risks associated with the transaction Identify the insurance products available to cover those risks Discuss / negotiate allocation of the risks Get the brokers involved 7

8 Drafting Insurance Requirements: What to Include Required types / lines of insurance Who will be covered Limits of liability (how much is covered) Minimum carrier rating Right to receive coverage documents, carrier notices Other terms of coverage Bottom line: Specificity in drafting facilitates a clear path to enforce and recover in case of breach 8

9 Drafting Insurance Requirements: Lines of Coverage The Typical Requirements Commercial General Liability (CGL) Workers Compensation Automobile Liability 9

10 Sample Insurance Requirements Language Party A agrees to provide and maintain, at Party s A own cost and at all times during its performance under this Agreement and for the additional periods of time specified in section X below, insurance of the following types and amounts, written by insurance companies satisfactory to Company, authorized to do business in the state where the work is being performed, and having an A.M. Best s Rating of not less than. 1. General Liability. CGL Insurance, providing coverage on an occurrence, rather than on a claims-made basis, under a policy form that provides coverage at least as broad in all material respects as that provided under a standard Insurance Services Office ( ISO ) form CG Such policy shall include, but not be limited to, coverage for Bodily Injury, Property Damage, Personal and Advertising Injury, Contractual Liability (applying to this Agreement), and Products-Completed Operations Liability. Party A agrees to maintain at all times specified above a policy limit of at least $[XXXX] per occurrence, $[XXXX] Personal & Advertising Injury, $[XXXX] Products Completed Operations, and $[XXXX] Aggregate. 10

11 Sample Insurance Requirements Language (con t) 2. Workers Compensation. Statutory workers compensation insurance covering Party A s employees in compliance with all requirements of the Workers Compensation laws of all states in which Party A performs work under this Agreement. In addition, Party A shall carry Employer s Liability insurance covering all operations and work hereunder in an amount not less than $[XXXX] for each coverage provided thereunder. 3. Automobile Liability. Automobile Liability insurance covering liability for Bodily Injury and Property Damage arising out of the ownership, maintenance or use of all owned, nonowned and hired automobiles and other motor vehicles utilized by Party A in connection with its performance under this Agreement. Such insurance shall provide a total liability limit for combined Bodily Injury and/or Property Damage in the amount of at least $[XXXX] per accident. Such policy shall include coverage for motor vehicle liability assumed under contract. 11

12 Property Drafting Insurance Requirements: Getting More Specialized Fidelity Bond / Crime Coverage Errors & Omissions Liability Directors & Officers Liability Employment Practices Liability Cyber Risk Coverage Intellectual Property Key Person Insurance 12

13 Practical Considerations for Drafting Insurance Requirements Remove impossible insurance requirements Requiring coverage for any and all claims or coverage without limitation Remove impractical insurance requirements Requiring policy lines that are not applicable Requiring outdated endorsements / forms 13

14 Drafting (More Specific) Insurance Requirements Language: AI Coverage What is it? Risk transfer device that allows one party to obtain coverage under another party s policy Benefits for AI: Requires Named Insured s insurer to bear primary risk of loss Provides coverage without a premium Backs-up indemnity obligation Provides immediate defense Preserves AI s own liability limits Particularly beneficial for companies who are selfinsured or who have large retentions on their own policies 14

15 Drafting (More Specific) Insurance Requirements Language: AI Coverage Implications for Named Insured Could provide broader coverage for AI than required by indemnity obligation (e.g., insuring AI s sole negligence) Covered claim could be only tangentially connected to Named Insured s operations, resulting in disproportionate risk transfer Claims by AI will erode the policy limits (less available for Named Insured) Increased insurance costs 15

16 Drafting (More Specific) Insurance Requirements Language: AI Coverage Certain policies not amenable or suited to AI coverage D&O (possible, but need to understand potential implications) E&O / Professional Workers Compensation Do not use a blanket statement such as Company is to be named as an additional insured on all policies required hereunder 16

17 AI Coverage v. Coverage for Indemnity Obligations Named Insured response (sometimes): Required to have contractual liability coverage under CGL, isn t that enough? 17

18 AI Coverage v. Coverage for Indemnity Obligations CGL does include some contractual liability coverage Contractual liability exclusion Standard ISO form provides limited give-back coverage for Named Insured s assumption of another s tort liability Indemnitee becomes another claimant under policy Defense to indemnitee can be outside of limits (Supplementary Payments coverage) Claim against indemnitee for damages that insured has assumed the liability for in an insured contract Insured contract includes a defense obligation Can be no conflict between indemnitor and indemnitee Indemnitor and indemnitee must use same attorney Indemnitee has no insured status 18

19 AI Coverage v. Coverage for Indemnity Obligations AI receives direct policy rights Right to defense in addition to limits (most policies) Separation of insureds clause Separate counsel Insurer owes duties to the AI 19

20 How To Become an AI Generally requires both a contract between the parties and an AI provision in an insurance policy A contractual obligation to provide insurance is ineffective unless the Named Insured s policy contains an AI clause Usually in an endorsement Many different AI endorsements The endorsement matters 20

21 Evolution of AI Coverage: Pre-2004 CG [L]iability arising out of your work Courts applied a broad standard If the liability would not have arisen but for the named insured s involvement, the AI has coverage Insurers unhappy with court-interpreted scope of coverage Still required by some contracts Can be hard to obtain 21

22 Evolution of AI Coverage: 2004 In response to cases providing AI coverage for the AI s own negligence, ISO amended commonly-used AI endorsements Designed to make clear that AI s sole negligence is not covered Result: AI has coverage only with respect to liability caused, in whole or in part, by the Named Insured s conduct Also amendments (beginning in 1993) to limit AI coverage to ongoing operations ; now requires a separate endorsement for completed operations coverage 22

23 Evolution of AI Coverage: 2004 Includes copyrighted material of Insurance Services Office, Inc., with its permission. 23

24 Evolution of AI Coverage: 2013 Three new restrictions Coverage provided only to the extent permitted by law Relates to anti-indemnity statutes Coverage will not be broader than which you are required by the contract or agreement to provide Ties AI coverage to contractual requirements Limits are lesser of contract requirement or policy declarations 24

25 Evolution of AI Coverage: CG A. Section II. Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for bodily injury, property damage or personal and advertising injury caused, in whole or in part, by: 2013 CG A. Section II Who is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for bodily injury, property damage or personal and advertising injury caused, in whole or in part, by: 1. Your acts or omissions; or 2. The acts or omissions of those acting on your behalf; in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above. 1. Your acts or omissions; or 2. The acts or omissions of those acting on your behalf; In the performance of your ongoing operations for the additional insured(s) at the location(s) designated above. However: 1. The insurance afforded to such additional insured only applies to the extent permitted by law; and 2. If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide such additional insured. Includes copyrighted material of Insurance Services Office, Inc., with its permission. 25

26 Sample AI Language Party A s CGL and Automobile Liability Insurance policies shall include Company, its directors, officers, and employees as Additional Insureds thereunder. Each such policy shall waive or otherwise prohibit insurer subrogation against Company and all such other Additional Insureds. Each such policy shall also include a severability of interests (or separation of insureds ) provision. Party A shall require any subcontractors it hires to afford Company and other parties described above similar Additional Insured status, and to similarly waive or otherwise prohibit insurer subrogation against such Additional Insureds. The Additional Insured status under Party A s CGL policy shall be provided by a combination of Insurance Services Office (ISO) forms CG and CG 20 37, or by other equivalent Additional Insured endorsement form(s) that provide both Premises and Operations and Completed Operations liability coverage that is at least as broad as that afforded by the above-referenced forms. 26

27 AI Requirements: Drafting Considerations Temporal Ongoing operations and completed operations Request the 1985 form (unlikely) or (more likely) combination of forms CG and CG Monetary Lesser or greater of contract requirement or policy limits? Will depend on your intention 27

28 AI Requirements: Drafting Considerations Degree of liability Limited to vicarious liability for Named Insured s conduct, or includes AI s sole or concurrent negligence? Request 1985 form or other pre-2004 form (if possible) Specify that AI coverage be at least as broad as Named Insured s coverage under its policies Consider application of anti-indemnity statutes 28

29 AI Requirements: Drafting Considerations Contractual privity Many contracts require Named Insured to name strangers as AI on policies, e.g., affiliated parties, consultants, etc. Can be problem with older additional insured forms, e.g., CG provides cover only to party with whom Named Insured contracts Specify use of newer forms, or issuance of separate AI endorsements for each required party 29

30 Drafting (More Specific) Insurance Requirements Language: Notice of Cancellation What is it: Notice from the insurer that the policy will be cancelled or terminated in XX days Different periods for different types of cancellation or termination (e.g., non-payment) Is it advisable to require such notice? Is it feasible? (Potential) Sample Language: The policy shall include a requirement that the insurer provide at least thirty (30) days written notice to Company prior to the effective date of policy cancellation (ten (10) days notice in the event of cancellation due to nonpayment of premium). 30

31 Are the Requirements Met? Certificates of Insurance Disputes can arise when a Certificate of Insurance provides something different from the insurance policy, and in particular when a Certificate of Insurance incorrectly identifies an AI But, several states in recent years have attempted to address these issues See, e.g., Minn. Stat. 60A.39 Provides that a certificate of insurance, when issued to any person other than the policyholder, must contain the following or similar statement: This certificate or memorandum of insurance does not affirmatively or negatively amend, extend, or alter the coverage afforded by the insurance policy. Also requires that a certificate provided to a third party must not provide for notice of cancellation that exceeds the statutory notice of cancellation provided to the policyholder or a period of notice specified in the policy 31

32 Are the Requirements Met? Certificates of Insurance Certificates of Insurance: Generally cannot create or alter coverage in policies Merely a temporally limited snapshot representation by agent or broker Many courts have declined to find justifiable reliance based on the language of the certificate Should not rely on them as sole source of verification 32

33 SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE EXPIRATION DATE THEREOF, NOTICE WILL BE DELIVERED IN ACCORDANCE WITH THE POLICY PROVISIONS

34 Are the Requirements Met? Certificates of Insurance Ideally, request a full copy of the Named Insured s policy May not be that simple: For some companies, the extent of their insurance program, including limits and deductibles, is closelyheld information Obtain and review the AI endorsement(s), at a minimum Review the Declarations / Other Insurance Clause, if possible 34

35 Sample Compliance Language Prior to the commencement of any performance under this Agreement, Party A will provide Company with evidence that the insurance coverage required of Party A hereunder is in full force and effect. In the event any such insurance renews or is terminated during the course of Party A s performance, Party A will promptly provide Company with evidence that such coverage will be renewed or replaced upon termination with insurance that complies with these provisions. Such evidence of insurance will be in the form of a standard Certificate of Insurance or other form of evidence of insurance acceptable to Company, and shall contain sufficient information to allow Company to determine whether there is compliance with these provisions. Such evidence of insurance shall be accompanied by copies of any Additional Insured endorsements or automatic Additional Insured policy provisions necessary to achieve compliance with the Additional Insured requirements of this Agreement. Company reserves the right to require complete, certified copies of all required insurance policies, including endorsements, required by this Agreement, at any time. 35

36 Anti-Indemnification Acts and Drafting Indemnity Provisions David Taubenfeld, Esq Haynes and Boone, LLP

37 Anti-Indemnity Acts, generally Anti-indemnity statutes prohibit certain types of indemnification agreements in certain contexts Most states have enacted some type of anti-indemnity statute Most commonly impact oil & gas and construction-related contracts These statutes can also impact contractual insurance obligations Haynes and Boone, LLP

38 Oilfield Anti-Indemnity Acts Haynes and Boone, LLP

39 Anti-Indemnity Acts Oilfield Anti-Indemnity Acts Texas (Tex. Civ. Prac. & Rem. Code , et seq.); Louisiana (La. R.S. 9:2780); New Mexico (N.M. Stat. Ann ); and Wyoming (Wyo. Stat to ) Haynes and Boone, LLP

40 Oilfield Anti-Indemnity Acts Texas Oilfield Anti-Indemnity Act The Texas Legislature enacted the Texas Oilfield Anti- Indemnity Act (Tex. Civ. P. & Rem. Code ) (the TOAIA ) after finding that some contractual indemnity provisions foster an inequity on contractors who enter agreements relating to oil and gas. Applies to agreements pertaining to, collateral to, or affecting a well for oil, gas, or water, or to mine for a mineral Haynes and Boone, LLP

41 Oilfield Anti-Indemnity Acts Texas Oilfield Anti-Indemnity Act Generally, the TOAIA provides that an indemnity provision in an oilfield contract is void and unenforceable if it attempts to indemnify a person against loss or liability for damage that: (1) is caused by or results from the sole or concurrent negligence of the indemnitee, his agent or employee, or an individual contractor directly responsible to the indemnitee; and (2) arises from personal injury, death, property injury, or any other loss, damage, or expense that results from those things. Tex. Civ. P. & Rem. Code Haynes and Boone, LLP

42 Haynes and Boone, LLP Oilfield Anti-Indemnity Acts Exceptions Under the Texas Oilfield Anti-Indemnity Act Loss or liability for damages or an expense arising from: (1) personal injury, death, or property injury that results from radioactivity; (2) property injury that results from pollution, including cleanup and control of the pollutant; (3) property injury that results from reservoir or underground damage, including loss of oil, gas, other mineral substance, or water or the well bore itself; (4) personal injury, death, or property injury that results from the performance of services to control a wild well to protect the safety of the general public or to prevent depletion of vital natural resources; or (5) cost of control of a wild well, underground or above the surface.

43 Oilfield Anti-Indemnity Acts Exceptions Under the Texas Oilfield Anti-Indemnity Act Section Safe Harbor Provision Act does not apply to an indemnity agreement if the parties agree in writing that the indemnity obligation will be supported by liability insurance coverage to be furnished by the indemnitor, subject to limitations enumerated in the statute. The provision of the statute relating to insurance considers two types of indemnity obligations: mutual indemnity obligations and unilateral indemnity obligations Haynes and Boone, LLP

44 Other States Oilfield Anti-Indemnity Acts Louisiana Oilfield Anti-Indemnity Act ( LOIA ) Invalidates certain indemnification agreements contained in contracts pertaining to wells for oil, gas or water. La. Rev. Stat. 9:2780. Unlike the TOAIA, the LOIA does not apply to property damage, but is limited to death or bodily injury to persons. Id. at 9:2780(A)-(B). LOIA also generally excepts out claims related to pollution, radioactivity, oil spill cleanup and wild well costs. Id. at 9:2780(F). If an indemnity provision as written violates the statute, it will be entirely void. Meloy v. Conoco, Inc., 504 So. 2d 833, 839 (La. 1987) Haynes and Boone, LLP

45 Other States Oilfield Anti-Indemnity Acts New Mexico Oilfield Anti-Indemnity Act ( NMOAIA ) Prohibits indemnity provisions in agreements pertaining to a well for oil, gas or water, or mine for a mineral that purport to indemnify an indemnitee for his or her own negligence. N.M. Stat. Ann (A). Such an agreement means one: (1) concerning any operations related to drilling, deepening, reworking, repairing, improving, testing, treating, perforating, acidizing, logging, conditioning, altering, plugging or otherwise rendering services in connection with a well drilled for the purpose of producing or disposing of oil, gas or other minerals or water; (2) for rendering services in connection with a mine shaft, drift or other structure intended for use in the exploration for or production of a mineral; or (3) to perform a portion of the work or services [above]. Id. at (B) Haynes and Boone, LLP

46 Other States Oilfield Anti-Indemnity Acts New Mexico Oilfield Anti-Indemnity Act ( NMOAIA ) Does not apply to distribution, processing, or transportation activities. See Holguin v Fulco Oil Servs., LLC, 245 P.3d 42, (N.M. App. 2010). Covers death, personal injury, property damage, as well as situations involving radioactivity, pollution and wild-well control. A provision naming a person as an additional insured that would, if it were a direct or collateral agreement described in this section, be void, is against public policy and void. N.M. Stat. Ann Even if agreement violates statute, courts will enforce the indemnity clauses to the extent the clauses require indemnification for the indemnitor s own fault Haynes and Boone, LLP

47 Other States Oilfield Anti-Indemnity Acts Wyoming Oilfield Anti-Indemnity Act ( WOAIA ) Applies to agreements pertaining to any well for oil, gas or water, or mine for any mineral. W.S Covers almost any kind of damage (bodily injury, property damage, etc.). Wyoming case law limits the statute to agreements that involve work closely related to well drilling. See Reliance Ins Co. v. Chevron USA Inc., 713 P.2d 766, 770 (Wyo. 1986). Provisions violating the statute are only void and unenforceable to the extent that such contract of indemnity by its terms purports to relieve the indemnitee of from loss or liability for his own negligence. See Wyo. Stat No prohibition on insurance coverage Haynes and Boone, LLP

48 Construction Anti-Indemnity Acts Haynes and Boone, LLP

49 Anti-Indemnity Acts Construction Anti-Indemnity Acts Majority of states have enacted anti-indemnity acts, generally applying to construction-related contracts or agreements. The statutes vary state by state. Some statutes prohibit broad form indemnity agreements while other statutes prohibit intermediate form indemnity agreements. All states allow limited form indemnity agreements Haynes and Boone, LLP

50 Types of Indemnity Clauses There are 3 forms of Indemnity Broad Form Intermediate Form Limited Form Haynes and Boone, LLP

51 Broad Form Types of Indemnity Clauses Indemnitor assume responsibility for indemnitee s negligence, regardless whether the indemnitor was at fault, at partial fault, or at no fault at all. The entire risk of the loss is transferred to the indemnitor. This type of indemnity clause is most often unenforceable under states anti-indemnity statutes Haynes and Boone, LLP

52 Types of Indemnity Clauses Intermediate Form Full Indemnity Indemnitor assumes responsibility for its own negligence, if it is solely at fault or partially at fault. If the indemnitee is solely at fault, there is not indemnity responsibility for the indemnitor. Full Indemnity: If the indemnitor is partially at fault, he pays all the damages Haynes and Boone, LLP

53 Types of Indemnity Clauses Intermediate Form Partial Indemnity Indemnitor assumes responsibility for its own negligence, if it is solely at fault or partially at fault. If the indemnitee is solely at fault, there is not indemnity responsibility for the indemnitor. Partial Indemnity: Indemnitor only pays damages to the extent the indemnitor was at fall. For example, if the indemnitor is 30% at fault, he will only indemnify the indemnitee for 30% of the damages Haynes and Boone, LLP

54 Limited Form Types of Indemnity Clauses Indemnitor assumes only the responsibility for its own negligence, if it is solely at fault. There is no protection if the indemnitee is even partially at fault. All fifty states allow limited indemnity provisions Haynes and Boone, LLP

55 Anti-Indemnity Acts Construction Anti-Indemnity Acts States with Acts Prohibiting Broad Form Indemnity: Alaska, Arizona, Arkansas, California, Georgia, Hawaii, Idaho, Indiana, Louisiana*, Maryland, Massachusetts, Michigan, Nevada, New Hampshire, New Jersey, South Carolina, South Dakota, Tennessee, Virginia, and West Virginia * specifically refers to public contracts Haynes and Boone, LLP

56 Anti-Indemnity Acts Construction Anti-Indemnity Acts States with Acts Prohibiting Intermediate Form Indemnity: Arizona*, California, Colorado, Connecticut, Delaware, Florida*, Illinois, Iowa, Kansas, Kentucky, Louisiana*, Minnesota, Mississippi, Missouri, Montana, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, Texas, Utah, Washington, and Wisconsin. *specifically refers to public contracts Haynes and Boone, LLP

57 Anti-Indemnity Acts: Additional Insured Loophole Some of These Statutes Close the Loophole Arizona*, Colorado, Georgia, Kansas, Montana, Nebraska, New Mexico, Oklahoma, and Texas have all enacted legislation that addresses this additional insured loophole Haynes and Boone, LLP

58 Anti-Indemnity Acts Construction Anti-Indemnity Acts States Without an Anti-Indemnity Act: Alabama, District of Columbia, Maine, North Dakota, Pennsylvania, Vermont, and Wyoming (although Wyoming has enacted an Oilfield Anti-Indemnity Act) Haynes and Boone, LLP

59 Texas Construction Anti-Indemnity Act Texas Insurance Code 151 et. seq. Tex. Ins. Code : Applicability Applies to a construction contract for a construction project for which an indemnitor is provided or procures insurance subject to this chapter or Title 10. This applicability requirement applies regardless whether the insurance is provided or procured before or after execution of the contract Haynes and Boone, LLP

60 Texas Construction Anti-Indemnity Act Texas Insurance Code 151 et. seq. Tex. Ins. Code A provision in a construction contract, or in an agreement collateral to or affecting a construction contract, is void and unenforceable as against public policy to the extent that it requires an indemnitor to indemnify, hold harmless, or defend a party, including a third party, against a claim caused by the negligence or fault, the breach or violation of a statute, ordinance, governmental regulation, standard, or rule, or the breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier Haynes and Boone, LLP

61 61 Texas Construction Anti-Indemnity Act Texas Insurance Code 151 et. seq. Definition of Construction Contract (Tex. Ins. Code (5)) A contract, subcontract, or agreement, or a performance bond 2013 Haynes and Boone, LLP Entered into or made by an owner, architect, engineer, contractor, construction manager, subcontractor, supplier, or material or equipment lessor for the design, construction, alteration, renovation, remodeling, repair, or maintenance of, or for the furnishing of material or equipment for, a building, structure, appurtenance, or other improvement to or on public or private real property, including moving, demolition, and excavation connected with the real property.

62 Texas Construction Anti-Indemnity Act Texas Insurance Code 151 et. seq. Definition of Construction Project (Tex. Ins. Code (2)) Construction, remodeling, maintenance, or repair of improvements to real property. The term includes the immediate construction location and areas incidental and necessary to the work as defined in the construction contract documents. A construction project under this chapter does not include a single family house, townhouse, duplex, or land development directly related thereto Haynes and Boone, LLP

63 Texas Construction Anti-Indemnity Act Texas Insurance Code 151 et. seq. EXCEPTIONS Employee Claims (Tex. Ins. Code ) Named Insured to an Insurance Policy (Tex. Ins. Code (b)) Haynes and Boone, LLP

64 64 Texas Construction Anti-Indemnity Act Texas Insurance Code 151 et. seq. Section Exclusions Consolidated Insurance Programs Breach of contract or warranty actions Loan and financing documents (other than construction contracts to which lenders are parties) General agreements of indemnity required by sureties Workers compensation benefits and protections Agreements subject to Ch. 127 of Tex. Civ. P. & Rem. Code License or access agreements with railroad companies Indemnity provisions pertaining to copyright infringement claims Construction contracts pertaining to residences Public works projects of municipalities Joint defense agreements entered into after claim is made 2013 Haynes and Boone, LLP

65 Anti-Indemnity Statutes In Action Wyoming Case Law Mid-Continent Cas. Co. v. True Oil Co., 767 F.3d 1000, 1006 (10th Cir. 2014). The Wyoming Anti-Indemnity Statute Wyo. Stat. Ann voided an agreement that attempted to require a contractor to indemnify an oil and gas well owner for the owner s own negligence. However, a contract may include a clause requiring an indemnitor to indemnify an indemnitee for the indemnitor s own negligence Haynes and Boone, LLP

66 Anti-Indemnity Statutes In Action North Dakota Case Law - Chapman v. Hiland Partners GP Holdings, No. 1:13-cv-052, 2014 U.S. Dist. LEXIS , at *16-18 (D.N.D. Sept. 10, 2014). North Dakota s anti-indemnification statute N.D.C.C (2) voided a master service contract that required a subcontractor to indemnify an owner of a natural gas processing facility for the owner s own negligence. The North Dakota legislature enacted of the North Dakota Century Code in Haynes and Boone, LLP

67 Anti-Indemnity Statutes In Action Mississippi Case Law Deviney Constr. Co. v. Ace Util. Boring & Trenching, No. 3:13cv60-DPJ- FKB, 2014 U.S. Dist. LEXIS 88658, at *27-28 (S.D. Miss. June 30, 2014). Under Mississippi s anti-indemnity statute, any promise to indemnify or hold harmless another person from that person s own negligence is void as against public policy and wholly unenforceable. Miss. Code. Ann Haynes and Boone, LLP

68 Indemnification Terms Purpose of Indemnification Agreements Allocation and transfer risk (important element of the bid itself) Avoid application of strict contributory negligence doctrines in some states Avoid (or attempt to avoid) fight amongst participants on the project Obtain benefit of (typically) longer contract statute of limitations (versus tort statute of limitations) Haynes and Boone, LLP

69 Basic Terms Indemnification Terms Who is the indemnitee and indemnitor? When is the indemnification triggered? What types of claims/allegations are to be indemnified? What is the scope of the indemnification? Haynes and Boone, LLP

70 Indemnification Terms Indemnitee and Indemnitor Indemnitor: party who owes the obligation to indemnify Indemnitee: party who receives the indemnification To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner from and against claims, damages, losses and expenses, including but not limited to attorneys fees, arising out of or resulting from performance of the Work Haynes and Boone, LLP

71 Trigger Indemnification Terms To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damages, loss or expense is caused in part by a party indemnified hereunder. What is a claim? When is indemnification triggered? Claims immediately Damages, losses and expenses once incurred Consider adding liabilities Haynes and Boone, LLP

72 Indemnification Terms Types of Claims/Allegations to be Indemnified To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damages, loss or expense is caused in part by a party indemnified hereunder. Construction contracts generally include indemnification to bodily injury or property damage type claims Insurance coverage more likely for these types of claims Some contracts also include indemnification for intellectual property type claims Haynes and Boone, LLP

73 Types of Claims/Allegations to be Indemnified (con t) What about other claims? Indemnification Terms E.g., claims for breach of contract claims? Economic loss claims? Sample language: arising, directly or indirectly, from the performance of the Work, breach of this Contract, or a Contractor Party s negligence or willful misconduct with respect to the Project Sample language: Contractor shall indemnify, defend, and hold harmless the Indemnified Parties from and against Indemnified Claims for economic loss (i.e., Indemnified Claims not attributable to bodily injury, sickness, disease or death or to injury to or destruction of tangible property), but only to the extent such economic loss was caused by a breach of this Contract or a Contractor Party s negligence or willful misconduct with respect to the Project. Keep in mind that such language can create problems for insurance coverage Haynes and Boone, LLP

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75 The Interplay Between Insurance and Indemnification Katie C. Pfeifer Dorsey & Whitney LLP (612)

76 Insurance and Indemnification Insurance and indemnity provisions are often construed together Purchasing required insurance may bar common law claims for contribution or indemnity See, e.g., Morsches Lumber, Inc. v. Probst, 388 N.E.2d 284 (Ind. App. 1979) 76

77 How Broad Is AI Coverage, or Which Document Do I Need to Review? Does the insurance obligation essentially back-stop the contractual indemnity obligation, or Does it cover more than the AI would be able to recover under the indemnity agreement? In other words, does the language of the relevant contract control the scope of coverage afforded to the AI, or does the insurance policy stand on its own? Answer: It Depends. 77

78 Case study: In re Deepwater Horizon, 470 S.W.3d 452 (Tex. 2015) April 2010 explosion and sinking of the Deepwater Horizon oil-drilling rig (owned by Transocean), and the resulting discharge of oil into the Gulf of Mexico BP was the oilfield developer Damage resulted in much litigation, including an insurance coverage dispute 78

79 Deepwater Horizon: The Indemnification Obligation Knock-for-knock allocation of risk Transocean to indemnify BP for above-surface pollution, regardless of fault BP to indemnify Transocean for all pollution risk Transocean did not assume, i.e., subsurface pollution 79

80 Deepwater Horizon: The AI Obligation in the Drilling Contract [BP], its subsidiaries and affiliated companies, coowners, and joint venturers, if any, and their employees, officers and agents shall be named as additional insureds in each of [Transocean s] policies, except Workers Compensation for liabilities assumed by [Transocean] under the terms of this Contract. 80

81 Deepwater Horizon: The AI Coverage in the Relevant Policy Extended Insured status to include [a]ny person or entity to whom the Insured is obligated by oral or written Insured Contract to provide insurance such as afforded by [the] Policy. Insured Contract : [A]ny written or oral contract or agreement entered into by the Insured and pertaining to your business under which the Insured assumes the tort liability of another party to pay for Bodily Injury [or] Property Damage to a Third Party or organization. 81

82 Deepwater Horizon: The Issue BP sought coverage under Transocean s primary and excess policies, claiming AI status BP was self-insured for much of its liability Transocean had a potential of $750M of coverage Insurers (supported by Transocean) denied coverage, claiming the Drilling Contract made clear that Transocean was not responsible for liability for subsurface pollution and BP could not claim AI status for such claims Question: Does the Court look only to the Policy to determine BP s AI status, or to the Drilling Contract as well? 82

83 Deepwater Horizon: The Decision Texas Supreme Court (on certified question from the 5 th Circuit) Because the grant of AI status incorporates definition of Insured Contract, it is necessary to look to the Insured Contract to determine the scope of coverage [W]e determine the scope of coverage from the language employed in the insurance policy, and if the policy directs us elsewhere, we will refer to an incorporated document to the extent required by the policy. Lesson: The policy controls in the first instance, but can direct you to look elsewhere 83

84 Questions? Katie Pfeifer Dorsey & Whitney LLP 50 South Sixth Street, Suite 1500 Minneapolis, MN (612)