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

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Allocating Risk in Real Estate Leases: Contractual Indemnities, Additional Insured Endorsements and Waivers of Subrogation Structuring Lease Provisions and Coordinating With Insurance Coverage to Mitigate Landlord and Tenant Liability Risks THURSDAY, SEPTEMBER 8, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Amanda K. Holcomb, Esq., Jackson Walker, Houston Michael K. Kuhn, Partner, Jackson Walker, Houston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Michael K. Kuhn Jackson Walker L.L.P Amanda K. Holcomb Jackson Walker L.L.P Allocating Risk in Real Estate Leases: Contractual Indemnities, Additional Insured Endorsements and Waivers of Subrogation Structuring Lease Provisions and Coordinating With Insurance Coverage to Mitigate Landlord and Tenant Liability Risks Thursday, September 8, pm Eastern l 12 pm Central l 11 am Mountain l 10 am Pacific Jackson Walker L.L.P

6 Program Outline 1 Indemnification Provisions 2 2 Insurance 3 Additional Insured 4 Waiver of Recovery & Subrogation 6

7 Background: Factors for Risk Allocation Trade Practice Bargaining Power Control Fault Efficiency 7

8 A. TRADE PRACTICE Typically Tenant responsible for damages caused by it or within the Premises, and for responsibility for damage to its own property Custom for the Landlord to be responsible for common areas 8

9 B. Bargaining Power Larger space Smaller space National Tenant Regional Tenant Owners with larger vs. Single Property properties or port- Owners folios of properties 9

10 C. Control Landlord involvement in Premises Office > Retail > Industrial > Ground Party in best position to mitigate Party maintaining or constructing a space 10

11 D. Fault Party creating cause of action by act or omission, or created merely by existence of Lease Party constructing or repairing space leading to incident Principles of negligence duty owed to third party, breach of duty creates liability 11

12 E. Efficiency Practical and cost effective way Tenant in best position with regard to its own property Landlord wishes to adjust and handle all losses related to common areas 12

13 1 Indemnification Provisions 2 Insurance 3 Additional Insured 4 Waiver of Recovery & Subrogation 13

14 Indemnification Clauses Due to Negligence Liability of Property Owners Non-Fault Based Fault Based 14

15 Indemnification Clauses Considerations on drafting and choosing a form of indemnification clause: Type of Property Degree of control over property Interplay with Insurance Provisions 15

16 Types of Indemnification in Commercial Leases General Indemnification Promise Based Reps & Warranties Environmental Conditions Construction Exercise of self-help 16

17 Non-Fault: Broad Form All risk of loss - regardless of fault of parties Even if due partly or solely to negligence of indemnitee All risk without express reference to negligence Broad Form 17

18 Non-Fault: Broad Form Language: including but not limited to claims arising from or relating to the sole or concurrent negligence of the Landlord Parties or whether or not those injuries resulted from the Landlord s own negligence 18

19 Non-Fault: Control Based All risks for certain areas regardless of fault Example: Tenant: in Premises Landlord: in Common Areas 19

20 Non-Fault: Control Based Language: The Tenant shall indemnify the Landlord for injuries sustained in the Premises, whether or not the Tenant exercised exclusive control over the area and whether or not the injuries resulted from the Landlord s own negligence 20

21 Fault Based Common Law - negligence principles Language: to the extent caused by any negligent or intentional act or omission of the Tenant or Tenant s agents, contractors, servants, invitees, customers, or employees 21

22 Intermediate Form All risk, except if due to the sole negligence of the indemnitee. Indemnification liability triggered if any fault rests with indemnitor Intermediate Form excludes gross negligence or willful misconduct of indemnified party 22

23 Intermediate Form Language The Tenant indemnifies the Landlord for claims arising out of or resulting, in whole or in part, from the actions or omissions of the Tenant or except for claims caused by or relating solely to the negligence of the Landlord Parties or except caused by the gross negligence or willful misconduct of the Landlord 23

24 Limited Form All risks, except to the extent of the negligence of the indemnitee Only covers the percentage caused by the indemnitor itself Pros/Cons 24

25 Limited Form Language Language: except to the extent such claims are caused by or relate to the negligence of any Landlord Party or In the event of joint, concurrent, or comparative negligence or fault on the part of the party to be indemnified, the Tenant s liability with respect to such indemnity obligation shall be limited to its relative degree of fault. 25

26 26 Summary of Fault Based Indemnification Provisions

27 State Limitations Anti-Indemnity Statutes bar or limit scope of indemnity Prohibit or limit Broad and Intermediate Form 27

28 Additional State Limitations Texas Express Negligence Doctrine and Conspicuousness Requirement Illinois No indemnification for Personal Injury NY No indemnification for own acts of negligence California No indemnification for Active Negligence relating to construction 28

29 Components of Indemnification Provision Agreement to pay Liability Defense Costs Parties Control Limitation Property Covered Survival Provision 29

30 1. Liability 1. Liability/Damages pay losses or damages incurred Consequential, special or indirect 30

31 2. Defense 2. Defense Broader than duty to indemnify Allegations alone If liability is determined then defense costs could be included in Item 1. Expenses of defense may exceed liability Duplicate costs of defense will reduce policy limit 31

32 3. Parties Indemnitor: responsible for whom? Agents, servants, contractors, and employees Should it extend to customers and invitees? Indemnitee: who benefits? Agents, officers, directors, employees, contractors, and property managers 32

33 4. Control Limitation 4. Control Limitation Limited to a particular area Limited to the action of indemnitor parties 33

34 5. Property 5. Property Covered Property, such as the Tenant s property, anywhere loss occurs Bodily injury and property damage 34

35 5. Survival Indemnification provision to survive expiration of the Lease Occurrences during the term Defects arising after the term for work conducted during the term 35

36 Unilateral/Bilateral Landlord lease forms are generally unilateral Negotiated forms Landlord providing carve-out for gross negligence and willful misconduct due to State Limitations 5 Factors for Risk Allocation generally do not lead to reciprocal provisions 36

37 Risks for Indemnification Provisions Alone Insolvent Party Risks Unenforceability Disputes over degree of fault 37

38 1 Indemnification Provisions 2 Insurance 3 4 Additional Insured Waiver of Recovery & Subrogation 38

39 Insurance Provisions Mechanism to finance payment of indemnification Assurances to Indemnitee Provisions negotiated with 5 Factors for Risk Allocation 39

40 Should a Party be Required to Carry Insurance? For Landlord Insurance: Exculpation Clause limits liability to property SPE entity without other assets Property is only asset, which could be depleted after a loss Against Tenant Insurance: Assets with ability to fund its indemnification obligations by selfinsurance Sophistication to manage its own risk of loss 40

41 Types of Insurance Property Insurance First Party Coverage Form Causes of Loss Amount of Coverage Liability Insurance Third party Occurrence Basis 41

42 Endorsements Reduce or enhance coverage of policy Specific Endorsements: Flood Building Ordinance Endorsement Loss of Utility Service Endorsement Loss of Leasehold Interest Endorsement 42

43 Insurance Forms Standard forms - ISO forms Consult a coverage lawyer and insurance agent Insurers not bound by ISO forms manuscript policies 43

44 Lease Drafting Tips Interplay with Lease Provisions take care to create a covered loss instead of a breach of contract Evolving forms and terms include or its equivalent Regardless of lack of insurance or selfinsurance all provisions apply as if carrying insurance 44

45 Evidence of Insurance ACORD most common forms of certificates Certificates of Insurance by its terms for information purposes only. Do not rely! Best Practice: Obtain certified copy of policy At minimum obtain Declarations Page, Schedule of Forms, and specific Endorsements 45

46 1 Indemnification Provisions 2 Insurance 3 Additional Insured 4 Waiver of Recovery & Subrogation 46

47 Parties to Insurance Named Insured / Additional Named Insured Additional Insured Loss Payee 47

48 Comparison Named Insured: Can Enforce Must Comply Subject to Defenses Risk Record Considered Additional Insured: Can Enforce No obligation to comply Not subject to defenses Risk record not considered 48

49 Establishing AI Status Lease must expressly provide for additional insured Endorsement as Additional Insured 49

50 2013 Changes in Additional Insured Additional Insured Owners, Lessees or Contractors, ISO form CG Construction activities or Landlord names Tenant as additional insured Additional Insured Managers or Lessors of Premises, ISO form CG Landlord or Manager is the additional insured 50

51 However: 2013: Limit to Extent Permitted by Law 1. The insurance afforded to such additional insured only applies to the extent permitted by law; 51

52 2013: Limited to Terms of Lease However: 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 for such additional insured. 52

53 2013: Limit to Extent Permitted by Law & Terms of Lease Prior to Additional Insured could be broader than Indemnity and circumvent Anti-Indemnity Travelers Lloyds Insurance Company v. Pacific Employers Insurance Company and Best Buy Stores, L.P., 602 F.3d 677 (5 th Cir : Anti-Indemnity Applies & Scope of Indemnity Applies 53

54 2013: Limited to Amounts in Lease If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance: 1. Required by the contract or agreement; or 2. Available under the applicable Limits of Insurance shown on the Declarations; whichever is less. 54

55 2013: Limited to Amounts in Lease Most set a minimum of insurance only Draft to provide the full benefit of the insurance - add language that the additional insured receives the full benefit of the coverage limits available to the named insured and the coverage is not limited by the minimum coverage limits specified in the lease but will be deemed increased by the amounts carried by the named insured 55

56 1 Indemnification Provisions 2 Insurance 3 Additional Insured 4 Waiver of Recovery & Subrogation 56

57 Subrogation Rule: Insurer pays claim, can recover from third party responsible for damage/injury Negates Risk Allocation Risk of loss of coverage for failure to do all things necessary to secure insurer s subrogation right 57

58 Waiver of Subrogation A party may only waive its own rights Establishing Waiver: Waive claims compensated by insurer In some states: obtain agreement from insurer to waive 58

59 Waiver of Subrogation Language: So long as their respective insurers so permit, the Tenant and the Landlord hereby mutually waive their respective rights of recovery against each other for any loss insured by [property/liability] insurance now or hereafter existing for the benefit of the respective party but only to the extent of the net insurance proceeds payable under such policies. 59

60 Waiver of Agreement to release party from loss Protections Against: Deductible, self-insured retention Inadequate coverage 60

61 Waiver of Claims Language: The Tenant waives all claims for, loss or damage, including but not limited to consequential damages, to person, property or otherwise, sustained by the Tenant or any person claiming through the Tenant resulting from any accident, casualty or occurrence in or upon any part of the Shopping Center including 61

62 Limits of Waiver of Claims To the extent of insurance proceeds actually received To all risks or only risks required to be insured under the Lease 62

63 MICHAEL K. KUHN JACKSON WALKER L.L.P AMANDA K. HOLCOMB JACKSON WALKER L.L.P