I. The Scope of Indemnification. The Role of Indemnity And Insurance In Business Transactions And Litigation

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1 The Role of Indemnity And Insurance In Business Transactions And Litigation 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. The Role of Indemnity And Insurance In Business Transactions And Litigation I. The Scope of Indemnification Scope 1. In Pennsylvania, no prohibition against this type of indemnification. Pennsylvania is in the minority. 2. Courts, however, disfavor such indemnification. The theory is that it lessens incentive to act with care. 3. Courts apply the Perry Ruzzirule, which provides that an agreement must expressly, clearly and unequivocally provide for such indemnification. Otherwise, not available. 4. Discussion Scope of potential indemnification broad, intermediate, and limited. 1

2 Scope Perry v. Payne, 66 A. 553 (Pa. 1907) Facts: Contractor [Payne] gave bond to building owner [Perry], which required that contractor shall protect and keep harmless the [owner]... from damages arising from accidents to persons employed in the construction of, or passing near, the said work. Employees of Payne s subcontractor painting elevator shaft. The painters used the elevator as a movable stage for painting, and a Perry employee operated the elevator. While painting, Perry s employee s negligent operation of elevator crushed and killed one of the painters. Scope Perry v. Payne, 66 A. 553 (Pa. 1907) Painter s widow recovered judgment against Perry for Perry s employee s negligent operation of the elevator. Perry sued Payne on the bond, seeking indemnification for the judgment. Perry urged court to hold that bond provided for indemnification against all injuries to any person working on the project, regardless of who caused the injury. Pennsylvania Supreme Court Held: The party s agreement failed to sufficiently set forth an obligation by Payne to indemnify Perry for Perry s own negligence. Scope Perry v. Payne, 66 A. 553 (Pa. 1907) Rule: We think it clear, on reason and authority, that a contract of indemnity against personal injuries should not be construed to indemnify against the negligence of the indemnitee, unless it is so expressed in unequivocal terms. The liability on such indemnity is so hazardous, and the character of the indemnity so unusual and extraordinary, that there can be no presumption that the indemnitor intended to assume responsibility unless the contract puts it beyond doubt by express stipulation. No inference from words of general import can establish it. The manifest purpose, in such cases, to indemnify against the injury which, under the circumstances, could reasonably be apprehended only from the action of the indemnitor or his servant, is a weighty consideration in construing indemnity contracts. The circumstances surrounding the parties, the one, the owner for whom the building is to be erected, and the other, the contractor who is to construct the building and hence from whose acts injury to persons and property may be anticipated, would seem to make the conclusion irresistible, that unless expressly stipulated in the contract the owner is not to be indemnified against his own negligence. 2

3 Scope Ruzzi v. Butler Petroleum Co., 588 A.2d 1 (Pa. 1991) The Pennsylvania Supreme Court reaffirmed the rule set forth in Perry v. Payne. Scope Ruzzi v. Butler Petroleum Co., 588 A.2d 1 (Pa. 1991) Facts: Agreement between petroleum company, Butler, and gas station owners, the Zinssers, under which Butler agreed to refurbish the Zinssers station in exchange for their purchase of petroleum products. The agreement provided that the Zinsserswould exonerate, discharge, and agree to protect and save harmless and indemnify [Butler Petroleum] from any and all liability for claims for loss, damage, injury or other casualty to persons or property [] caused or occasioned by any leakage, fire, explosion or other casualty occurring through any imperfection in, injury or damage to, or by reason of the installation, use, operation and/or repair of the said equipment or of the premises. Scope Ruzzi v. Butler Petroleum Co., 588 A.2d 1 (Pa. 1991) Petroleum company, Butler, hired a sign company to erect a sign at the station. Ruzzi, an employee of the sign company, suffered injury when his torch ignited fumes from a nearby gasoline tank. Ruzzisued Butler, among others, and obtained a verdict against Butler. Butler sued the station owners for indemnification under the indemnification agreement. The Supreme Court affirmed the trial court s rejection of the claim. 3

4 Ruzzi v. Butler Petroleum Co., 588 A.2d 1 (Pa. 1991) Rule: The law has been well settled in this Commonwealth for 87 years that if parties intend to include within the scope of their indemnity agreement a provision that covers losses due to the indemnitee s own negligence, they must do so in clear and unequivocal language. No inference from words of general import can establish such indemnification. Analysis: Must assume that the parties contracted with this rule in mind. Held: [W]e conclude that the only intent that can be gleaned from this document [the indemnity agreement] is that the parties did not intend to indemnify for acts of the indemnitee s negligence, since words of general import were used. Broad Indemnification The broadest indemnification agreement obligates the indemnitor to hold the indemnitee harmless for liabilities that include those flowing from the indemnitee s own negligence. Hershey Foods Corporation v. General Electric Service Co., 619 A.2d 285 (Pa. Super. 1992) Facts: Plant owner Hershey and GESCOentered into a contract under which GESCOwould provide electrical services to Hershey. The contract contained the following indemnification provision: [GESCO] shall indemnify and hold harmless [Hershey] and their agents and employees from and against all claims, damages, losses and expenses including attorneys fees arising out of or resulting from the performance of the Work, provided that any such claim, damage, loss or expense(a) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself) including the loss or[sic] use resulting therefrom, and (b) is caused in whole or in part by any negligent act or omission of [GESCO],... anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder. 4

5 Hershey Foods Corporation v. General Electric Service Co., 619 A.2d 285 (Pa. Super. 1992) April 1978 GESCO employee Robert Roland was working at the Hershey plant. While on lunch break, Roland sat down on an conveyor that pulled him towards an elevator that struck and killed him. Roland s estate obtained a verdict against Hershey for negligently failing to warn of the danger posed by the conveyor/elevator system. Hershey sought contractual indemnification from GESCO. GESCO prevailed on summary judgment. Hershey Foods Corporation v. General Electric Service Co., 619 A.2d 285 (Pa. Super. 1992) Held: The contract of the parties unambiguously provides for indemnification even where the indemnitee [Hershey] was negligent. Thus, the contract language provides an example of how a contract can provide for broad indemnification of the indemnitee s negligent conduct. Hershey Foods Corporation v. General Electric Service Co., 619 A.2d 285 (Pa. Super. 1992) However, the Superior Court held that even though the contract permitted the indemnitee to be indemnified even for its own negligence, indemnification was unavailable under the facts because Roland s injury did not aris[e] out of or result[] from the performance of the Work, with the Work being defined as electrical work throughout the plant. Specifically, because Roland was taking a break when the fatal accident occurred, the court construed the indemnification provision against Hershey, the drafter, and held that it did not apply. 5

6 Intermediate Indemnification An intermediate indemnification agreement obligates the indemnitor to hold the indemnitee harmless against all liability, except that which arises out of the indemnitee s sole negligence. Lane v. Commonwealth, 954 A.2d 615 (Pa. Super. Ct. 2008) Facts: In Lane, a police trainee suffered injury at a construction site when her bicycle veered off a path and struck a steel reinforcement bar. The injured party sued Neshaminy Constructors, Inc., the general contractor at the site, and James J. Anderson Construction Company, Neshaminy s subcontractor, alleging that they created the conditions that caused her to fall. The case went to trial, and the jury found the general contractor 100% liable and exonerated the subcontractor. Lane v. Commonwealth, 954 A.2d 615 (Pa. Super. Ct. 2008) The general contractor/indemnitee sought indemnity from the subcontractor/indemnitor under the indemnification provisions of their contract, which provided in part that the subcontractor/indemnitee [a]ssumesand agrees to be liable for, and shall defend, indemnify and hold the [general contractor/indemnitee] harmless from and against any and all Damages and Claims arising or resulting from, relating to, or in connection with, [] injuries to persons including death, regardless of whether any such Damages and Claims are based on or caused by any of the Indemnified Parties active or passive negligence or participation in the wrong upon which the Damages and Claims are based, and from and against any and all Damages and Claims arising or resulting from, relating to, or in connection with, any act, breach or omission of the Indemnifying Parties in connection with the performance of this Subcontract and any work performed hereunder. 6

7 Lane v. Commonwealth, 954 A.2d 615 (Pa. Super. Ct. 2008) Held: [T]he contract language provides for Appellee s [subcontractor s] indemnification of Appellant [general contractor] for Appellant s own negligence and is enforceable. Why? Because the contract provided that indemnification damages/claims would be available regardless of whether any such Damages and Claims are based on or caused by any of the Indemnified Parties active or passive negligence or participation in the wrong upon which the Damages and Claims are based[.] Lane v. Commonwealth, 954 A.2d 615 (Pa. Super. Ct. 2008) However, because the jury determined that the subcontractor was not negligent and nothing the subcontractor did in connection with the project resulted in the general contractor s liability, the court held that the general contractor was not entitled to indemnification under the parties contract because the general contractor was not held liable due to the subcontractor s work. Specifically, the contract language unequivocally require[d] [general contractor s] liability to be attendant to [subcontractor s] work, and because the jury found that only the general contractor was responsible for the trainee s injuries, the court held that there was no contractual indemnification obligation owed by the subcontractor. Thus, this presents an instance indemnity being available for the indemnitee s own negligence, just not when the indemnitee is the sole negligent actor. Limited Indemnification A limited indemnification agreement obligates the indemnitor to hold the indemnitee harmless only for the indemnitor s negligence. 7

8 Greer v. City of Philadelphia, 795 A.2d 376 (Pa. 2002) Facts: J.H. Green Electric Company had a contract with PennDOT under which it agreed to take down overhead signs on Interstate 95. Green subcontracted with CTS to handle traffic management. On April 30, 1993, Jason Greer was sitting in traffic stopped due to the sign removal project and suffered severe injuries when he was rear ended. Greer obtained a verdict against PennDOT, Green and CTS, and PennDOTand Green sought indemnification from CTS under the Green/CTS subcontract. Greer v. City of Philadelphia, 795 A.2d 376 (Pa. 2002) The contract provided that CTS would indemnify PennDOTand Green from and against claims, damages, losses, and expenses, including but not limited to attorney s fees, arising out of or resulting from the performance of the Subcontractor s Work under this Subcontract... but only to the extent caused in whole or in part by negligent acts or omissions of the Subcontractor, the Subcontractor s Sub Subcontractors, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Greer v. City of Philadelphia, 795 A.2d 376 (Pa. 2002) Held: The Supreme Court held that the indemnification agreement did not provide indemnification to PennDOTand Green for damages resulting from their own negligent conduct. The Court expressly held that by agreeing to language stating that PennDOTand Green were indemnified for damages only to the extent that the damages were caused by the negligence of CTS [,] the parties communicated their intent to limit any indemnification to that portion of damages attributed to the negligence of CTS and those under its supervision. 8

9 Common Law, Statutory and Contract Law Introduction 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. 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). 9

10 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). 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). 10

11 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). Indemnification of Corporate Directors, Officers, and Employees 15 Pa. C.S. 1741, et seq. Pennsylvania law provides for permissive and mandatory indemnification. Good faith conduct may be indemnified, but not willful misconduct or recklessness Third party actions. Unless otherwise restricted in its bylaws, a business corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a representative of the corporation, or is or was serving at the request of the corporation as a representative of another domestic or foreign corporation for profit or not for profit, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporationand, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. 11

12 1745. Advancing expenses. Expenses (including attorneys' fees) incurred in defending any action or proceeding referred to in this subchapter may be paid by a business corporation in advance of the final disposition of the action or proceeding upon receipt of an undertaking by or on behalf of the representative to repay the amount if it is ultimately determined that he is not entitled to be indemnified by the corporation as authorized in this subchapter or otherwise. Except as otherwise provided in the bylaws, advancement of expenses shall be authorized by the board of directors Derivative and corporate actions. Unless otherwise restricted in its bylaws, a business corporation shall have power to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a representative of the corporation or is or was serving at the request of the corporation as a representative of another domestic or foreign corporation for profit or not for profit, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of the action if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation. Indemnification shall not be made under this section in respect of any claim, issue or matter as to which the person has been adjudged to be liable to the corporation unless and only to the extent that the court of common pleas of the judicial district embracing the county in which the registered office of the corporation is located or the court in which the action was brought determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court of common pleas or other court deems proper Mandatory indemnification. To the extent that a representative of a business corporation has been successful on the merits or otherwise in defense of any action or proceeding referred to in section 1741 (relating to third party actions) or 1742 (relating to derivative and corporate actions) or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorney fees) actually and reasonably incurred by him in connection therewith. 12

13 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. 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). 13

14 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). 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). 14

15 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. Noralco at 473. 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 termswithin 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). 15

16 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). 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). 16

17 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. A DAY ON CONTRACTS CORE CLAUSES INDEMNITY AND INSURANCE PROVISIONS III. 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). 17

18 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. 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. 18

19 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. 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). 19

20 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. The Role of Indemnity and Insurance in Business Transactions and Litigation 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 IV. The Insurance Coverage for Indemnification 20

21 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). 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). 21

22 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). 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. 22

23 The Role of Indemnity and Insurance in Business Transactions and Litigation 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). The Role of Indemnity and Insurance in Business Transactions and Litigation 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 Business Transactions and Litigation Therefore, there must be some causal connection between the alleged negligence and the triggering of coverage for the additional insured. 23

24 The Role of Indemnity and Insurance in Business Transactions and Litigation 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. The Role of Indemnity and Insurance in Business Transactions and Litigation 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 Business Transactions and Litigation 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. 24

25 3. The Role of Indemnity and Insurance in Business Transactions and Litigation 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. The Role of Indemnity and Insurance in Business Transactions and Litigation 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 Business Transactions and Litigation 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. 25

26 Duty to Defend The best practice to prevent any ambiguity with respect to the applicability of the indemnification provision and to quickly invoke the duty to defend is to establish within the contract the procedures to request indemnification, the procedures to Veto indemnification request and the procedure to have the issue resolved quickly. Duty to Defend (1) Indemnity Procedures. Each person seeking indemnification under this Section (10.) (an Indemnified Party ) shall give the Party from which indemnification is sought (the Indemnifying Party ) prompt notice of any Third Party Claim as to which the Indemnified Party proposes to demand indemnification hereunder. The Indemnifying Party shall forthwith assume the good faith defense of such Third Party Claim at its own expense and may settle such Third Party Claim, but may not, without the consent of the Indemnified Party, agree to (i) any injunctive relief affecting the Indemnified Party or (ii) any settlement which would adversely affect the business or operations of the Indemnified Party. For purposes hereof, good faith defense means legal defense conducted by reputable counsel of good standing. If a good faith defense is not commenced within thirty (30) days following receipt of notice of such Third Party Claim from the Indemnified Party (or such shorter period, if any, during which a defense must be commenced in order for the defendant to preserve its rights), then the Indemnified Party may undertake the defense, compromise or settlement of the Third Party Claim or consent to the entry of a judgment with respect to the Third Party Claim, but may not, except as set forth in Subsection (10.C.) below, agree, without the consent of the Indemnifying Party, to (iii) any injunctive relief affecting the Indemnifying Party or (iv) any settlement which would adversely affect the business or operations of the Indemnifying Party (the conditions described in subsections (iii) and (iv) are referred to below as the Veto Conditions ). Duty to Defend (2) If (i) the Indemnifying Party does not assume the good faith defense of a Third Party Claim, and (ii) the Indemnified Party thereafter assumes the defense, and (iii) the Indemnified Party desires to dispose of the Third Party Claim in a manner involving a Veto Condition, and (iv) the Indemnifying Party does not agree to the Veto Condition, then the Parties will promptly submit the question of whether the Indemnifying Party is in fact responsible for defense and settlement of the Third Party Claim (the Indemnity Question ) to final, binding arbitration conducted in Washington, D.C. under the Streamlined Arbitration Rules and Procedures of the Judicial Arbitration and Mediation Services Inc. ( JAMS ) before a single, neutral arbitrator who is a former or retired federal court judge with experience in complex commercial matters who shall follow XXX law and the XXX Rules of Evidence and have no authority to award punitive damages. The JAMS arbitrator shall not have the authority to render a decision on any matter other than the Indemnity Question. If the JAMS arbitrator rules against the Indemnifying Party on the Indemnity Question then the Indemnified Party shall have the right to dispose of the Third Party Claim in a manner involving the Veto Condition. Either party may enforce a final arbitration award in any court of competent jurisdiction, including an award of costs, fees and expenses incurred in enforcing the award. 26

27 Duty to Defend The provision literally cuts the indemnification and duty to defend issues away from the litigation, and provides a mechanism for the hearing of the sole issue to go forward outside of the Third Party litigation. It also may deter a recalcitrant party from refusing to accept the tender by expediting the process for the indemnification issue to be address and placing the burden of the expenses on the party. Thus, the party seeking indemnification does not have to wait until after the litigation and if successful its attorney s fees and expenses for the arbitration are covered as well. Anti Subrogation Rule General Rule The Anti Subrogation Rule ( ASR ) is a common law defense to subrogation. It states that a subrogated insurance company standing in the shoes of its insured cannot bring a subrogation action against or sue its own insured. Sometimes known as the suing your own insured defense, the ASR was originally developed based on the logical premise that because the carrier stands in the shoes of it s insured, it would essentially be suing itself. Therefore, no right of subrogation can arise in favor of an insurance company against its own insured. Wager v. Providence Ins. Co., 150 U.S. 99 (1893); The John Russell, 68 F.2d 901 (2nd Cir. 1934); Sherwood Trucking, Inc. v. Carolina Cas. Ins. Co., 552 F.2d 568 (4th Cir. 1977); Peavey Co. v. M/V ANPA, 971 F.2d 1168 (5th Cir. 1992) (insured or additional insured); Prestige Cas. Co. v. Michigan Mut. Ins. Co., 99 F.3d 1340 (6th Cir. 1996). This seemingly simple concept has many tentacles and each state has developed their own bodies of law with regard to how and when the ASR will be applied, setting forth numerous exceptions and rules regarding its application. Anti Subrogation Rule Economic Waste Doctrine In some jurisdictions, it is considered to protect against the same risk of loss. An example is Connecticut, where the Connecticut Supreme Court in a case where the landlord s insurer tried to subrogate against a tenant has held that where a lease did not remotely inform the defendant that they would be liable to their landlord s insurer for fire damages to the landlord s building, nor did it inform the defendant of the need to obtain fire insurance to cover the value of the entire multi unit WORK PRODUCT OF MATTHIESEN, WICKERT& LEHRER, S.C. Page 2 Last Updated 1/3/18 apartment building, the tenant would be considered to be an implied co insured and could not be subrogated against due to the ASR. One of the reasons for establishing this default rule was to avoid the economic waste of forcing each individual tenant in a multi unit apartment to insure the whole building. 27

28 Anti Subrogation Rule Implied Co Insured Doctrine The ability of a landlord s property insurer to subrogate against a tenant for property damage caused by the negligence of the tenant depends on which state the loss occurs in and the nature and language of the lease involved. There are generally three different approaches: (1) A minority of courts hold that, absent a clear contractual expression to the contrary, the insurance carrier will be permitted to sue a tenant in subrogation. (2) Seeking to avoid a per se rule, in some states the ability to subrogate must be assessed on a case by case basis and governed by the intent and reasonable expectations of the parties under the terms of the lease and the facts of case. (3) Known as the Sutton Rule, some states hold that, absent a clearly expressed agreement to the contrary, the tenant is presumed to be a co insured on the landlord s insurance policy and, therefore, the landlord s insurance carrier has no right of subrogation against the negligent tenant. The rule of subrogation known as the Sutton Rule states that a tenant and landlord are automatically considered co insureds under a fire insurance policy as a matter of law and, therefore, the insurer of the landlord who pays for the fire damage caused by the negligence of a tenant may not sue the tenant in subrogation because it would be tantamount to suing its own insured. Anti Subrogation Rule Contract between parties can amend the Sutton Rule Be Aware that insurance agreements comport with contract! Anti Subrogation Rule Pennsylvania An insurer cannot recover by means of subrogation against its own insured. Remy v. Michael D s Carpet Outlets, 571 A.2d 446 (Pa. Super. 1990). An insurer cannot pay a general contractor for its losses and then attempt to recover from a subcontractor who is named, directly, or indirectly, as an additional insured in the same policy. Keystone Paper Converters, Inc. v Neemar, Inc., 562 F. Supp (E.D. Pa. 1983). 28

29 A DAY ON CONTRACTS CORE CLAUSES INDEMNITY AND INSURANCE PROVISIONS COMMENTS 29