I SIGNED THAT? SCARY STORIES & SOLUTIONS

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Marylou Logan
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1 I SIGNED THAT? SCARY STORIES & SOLUTIONS Contract Clauses and Practices That Impact Your Insurance Costs and Bottom Line Geoffrey S. Gavett Gavett, Datt & Barish, P.C. Presented by Chesapeake Region Safety Council October 2, Indemnity Deconstructing Indemnity Clauses 1

2 The AIA Standard Form AIA Form 201 General Conditions (1997 & 2007) 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, damage, loss or expense is caused in part by a party indemnified hereunder. 3 Deconstructing Part 1 To the fullest extent permitted by law... necessary to accept limitation of anti-indemnity statutes discussed below.... Contractor shall indemnify and hold harmless the Owner, Architect, Architect's consultants, and agents and employees of any of them... Who is receiving the benefit of the indemnity? 4 2

3 Deconstructing Part 2... from and against claims, damages, losses and expenses, including but not limited to attorneys' fees... What is the indemnity clause protecting the beneficiaries from?... arising out of or resulting from performance of the Work... There must be a relationship between the claim and the Work to be performed under the contract. 5 Deconstructing Part 3... 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)... The clause is limited to these types of losses note the exclusion of the Work, which means that indemnity does not equal warranty. 6 3

4 Deconstructing Part 4... 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... Requires a showing of negligence by the contractor or subcontractor, but the inclusion of only to the extent caused by creates confusion see below.... regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. The beneficiary can be negligent in part, but not solely negligent. But if the Contractor or Subcontractor is liable for claims only to the extent caused by them, how is the beneficiary to receive full indemnity. 7 SCARY STORY #1 The case of THE INDEMNITY CLAUSE SIGNED AFTER THE WORK WAS DONE 8 4

5 The Scenario: Contractor submits proposal GC or Customer verbally accepts proposal but does not issue written contract Contractor does work and signs subcontract with indemnity agreement after work is done No coverage under the policy for indemnity liability if signed after the work is done 9 How indemnity clauses may be covered under an insurance policy Policy covers you for bodily injury and property damage Policy usually does not cover you for contractual liability BUT policy will cover you for an Insured Contract Insured Contract = indemnity clause liability for personal injury and property damage 10 5

6 Requirements to Get Coverage of an Indemnity Clause Requirement #1 the indemnity clause has to be in a written contract executed before the work is done Requirement #2 the indemnity clause has to relate to the performance of your work Requirement #3 there has to be some showing of negligence by the insured giving rise to the liability 11 Indemnification: GC s Position: I just coordinate the work I should be protected against claims caused by the forces actually performing the work: the subcontractor Sub s Position: Bodily injury and property damages often arise from the acts and omissions of the GC and subcontractors it is unfair to put all of this on me. 12 6

7 Indemnification Types: Broad form indemnity currently legal only in DC Contractor provides indemnity to GC and Owner for claims arising from its work regardless of whether there has been a showing of fault. Intermediate indemnity Contractor indemnifies GC and Owner so long as claim arises from Contractor s work and Contractor was at least partially negligent. Sole negligence indemnity only if caused by the sole negligence of contractor good for contractor but bad for GC and Owner. 13 Indemnification Anti Indemnity Statutes Anti-indemnity statutes in MD and VA Does recent decision of Va. Supreme Ct. in Uniwest spell the end of indemnity in VA? Are the indemnity clauses to be interpreted as written or as applied? Anti-indemnity clauses do NOT affect additional insured provisions. 14 7

8 Indemnification Other Issues Multiple indemnification clauses all such clauses should be in one place and should primarily address: bodily injury, property damage Mutual indemnity what s the point? 15 Indemnification More Issues Be sure to understand that getting insurance and agreeing to indemnification are two distinct issues do not ignore the insurance requirements! If you don t get a written agreement (including indemnity clause) signed, you may not be able to assert a claim against a negligent employer in a case where his employee sues you for damages 16 8

9 SCARY STORY #2 The case of THE INSURANCE COVERAGE THAT WAS NEVER NEGOTIATED BEFORE THE WORK WAS DONE 17 Insurance Coverage Demanded After the Fact the Scenario Contractor supplies proposal for the work GC or the Customer signs the proposal OR verbally authorizes the work Contractor performs the work GC or Customer requires insurance certificate naming them as additional insured before making payment 18 9

10 The Problem Created by Seeking to Add Coverage After a Job is Over Adding coverage for a risk after the risk is over Insurance industry cracking down on such certificates and refusing to acknowledge coverage Running risk of no coverage 19 The Required Sequence for Additional Insured Status: Step 1 Enter into written agreement to add GC or Customer as Additional Insured Step 2 Notify insurance agency of agreement to name GC or Customer Step 3 Perform the work 20 10

11 The Problem Legal v. Practical: Legal problem GC or Customer is not entitled to condition payment on proof of coverage or additional insured status this was not part of the bargain when the work was performed Practical problem the Golden Rule means that a Customer or GC can hold onto the money and leverage payment against issuance of an insurance certificate Puts the insurance agent in a bind wants to help their customer get paid but cannot issue an improper certificate 21 Solutions for Avoiding the Problem Customers and GCs should always make insurance coverage and additional insured status a condition of awarding the contract Always get agreement in writing! Review the contractual insurance requirements with your agent to make certain your coverage complies Contractors can protect themselves by writing proposals agreeing to provide such coverage and status in a manner which complies with their own policy 22 11

12 Reviewing the Acord Form Certificate Reviewing the Boilerplate (front and back) Identifying the companies Identifying the coverages Spelling out special provisions

13 25 SCARY STORY #3 The case of THE ADDITIONAL INSURED COVERAGE THAT DOES NOT MATCH THE CONTRACT 26 13

14 Insurance Specifications in Construction Contracts - See Attachment 6 for example Commercial General Liability ( CGL ) issues: Requirement of Products and Completed Operations coverage; Contractual Liability coverage; Coverage limits: Occurrence v. Aggregate; Per project limits. 27 Insurance Specifications in Construction Contracts - See Attachment 6 for example Additional Insured issues: Coverage of Additional Insured for Products and Completed Operations - see below; Priority of coverage - which policy comes first? Beware: primary and non-contributory makes no sense whatsoever; There is no such thing as an Additional Named Insured! 28 14

15 What is the difference between indemnification and proving an Additional Insured Endorsement? Indemnification: Only triggered after the party claiming indemnification obtains a judgment that indemnity is owed - after the fact protection. Costs of defense are not paid until the end of the case. Indemnification is harder to prove and enforce. Greater probability of default by party providing indemnity. 29 What is the difference between indemnification and proving an Additional Insured Endorsement? Additional Insured status: The duty to defend is triggered when there is a potentiality of coverage. Duty to defend kicks in immediately. Proving coverage is easier. Insurance carriers are more likely to be around to pay

16 Significant and recent changes to the ISO Form Additional Insured Endorsements used in contracting: In 1984, ISO issued two significant forms of additional insured endorsements for contractors: CG (Form A) - used when contractor had no contractual liability coverage under its primary policy. CG (Form B) - used when there was contractual liability coverage - provided the following scope of coverage. WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your work for that insured by or for you. 31 Significant and recent changes to the ISO Form Additional Insured Endorsements used in contracting: In 1992 and 1996, ISO changed the language of the CG (Form B) to read: WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured. ISO interpreted this change to effectively provide additional insured status for operations, but not for completed operations. However, the courts did not always go along with this interpretation

17 Significant and recent changes to the ISO Form Additional Insured Endorsements used in contracting: In 2000, ISO changed the CG further to make it very clear that completed operations coverage was not included under that form. The form proceeds to add an explicit exclusion for bodily injury or property damage occurring after the contractor s work for the additional insured has been completed or the work has been put to its intended use (i.e., completed operations phase): WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured. ISO interpreted this change to effectively provide additional insured status for operations, but not for completed operations. However, the courts did not always go along with this interpretation. 33 Insurance Specifications in Construction Contracts - See Attachment 6 for example To avoid the problem, need to make certain liability policy is endorsed to permit Additional Insured status for completed operations coverage. Contractors need to make certain Completed Operations coverage stays in effect as long as they remain liable under a contract: Completed operations liability can continue for 10 years in MD and DC, 5 years in Virginia (the periods for the statutes of repose). If Completed Operations coverage is not included in the Additional Insured endorsements of later years, the client may be in breach of contract

18 SCARY STORY #4 The case of THE WRAP UP INSURANCE PROGRAM WITH NO COVERAGE 35 Definition of Wrap Up Insurance Comprehensive insurance to protect multiple parties (owner, investors, general contractor, subcontractors, etc.) under one policy or set of policies Sponsored by key player usually owner or general contractor Broad uniform coverage with adequate liability limits Coordinated safety and claims programs to control costs and limit job-site injuries

19 Types of Wrap Up Insurance CCIP Contractor Controlled Insurance Program OCIP Owner Controlled Insurance Program ROCIP Rolling Owner Controlled Insurance Program 37 When Wrap Up Insurance Applies CCIPs & OCIPs on a project basis ROCIP to a series of projects 38 19

20 Most Important Thing to Remember About Wrap Up Insurance Programs: No two wrap up programs are the same Typically written to serve the interests of the sponsor 39 The Scenario: Recent OCIP & CCIP programs are carrying very large deductibles ($10,000 to $50,000 per occurrence). Contractor has a loss falling within deductible Question does your own coverage apply to that portion of loss that is not covered due to the deductible? 40 20

21 Issue # 1 How do your own policies address coverage under a Wrap Up program? Does your policy exclude coverage for any loss that is covered under a OCIP or CCIP? Does your policy designate itself as gap coverage? What are the other insurance provisions in both the OCIP/CCIP and your own policy? 41 Issue # 2 Has the subcontract been coordinated with the Wrap Up program? Is indemnity limited to those situations that are not covered by the OCIP or CCIP? Are you required to carry your own coverage and name the Owner or GC as additional insureds? Is it limited to the situations not covered by the OCIP or CCIP? 42 21

22 Issue # 3 What are the limits of coverage available to the subcontractor? Must review each line of coverage is it at least as good as your own? Does the program provide for Separation of Insureds so that the limits of coverage apply as if each insured were the only insured? Are the limits annual or the life of the policy? 43 Issue # 4 How long do you have coverage for completed operations claims? OCIP & CCIP programs usually have time limits for completed operations coverage that are shorter than statutes of repose Question does your own coverage apply when the OCIP or CCIP completed operations coverage expires? [See timeline] 44 22

23 Issue # 5 Where are the cost savings to the Subcontractor in Wrap Up Insurance? Cost of workers compensation coverage for employees covered by OCIP and CCIP should not be part of labor burden. Dollar volume of OCIP/CCIP projects excluded from calculation of premium for liability coverage? Important Was the existence of an OCIP/CCIP disclosed when you bid the project? 45 Issue # 6 Where are the hidden administrative costs of Wrap Up insurance programs? Cost of preparing multiple payroll reports for purposes of calculating premium. Cost of retaining insurance consultants to coordinate your coverage with the OCIP or CCIP program? Cost of managing the claims process - different from referring to your own carriers Delay in final payment pending audit of payroll by OCIP/CCIP administrator

24 Steps you can take to avoid pitfalls of Wrap Up Insurance Programs: Make sure you limit the amount of credit you are granting in your bid. Include your administrative costs to comply with the OCIP/CCIP reporting. Contact your insurance broker to coordinate your insurance program with the OCIP/CCIP to address potential gaps. 47 Steps you can take to avoid pitfalls of Wrap Up Insurance Programs [continued]: Make certain subcontract requirements for insurance address existence of OCIP/CCIP on project. Pay attention to how the subcontract addresses final payment vis-à-vis the requirement to await audit of your payroll. Object immediately if you learn after your bid that a project is covered by an OCIP or CCIP

25 SCARY STORY #5 The case of THE BUILDER S RISK POLICY THAT DID NOT MATCH WAIVER OF SUBROGATION 49 The treatment of Builder s Risk policies AIA A201 forms: Owner is required to obtain Builder s Risk coverage under which covers the entire project. Under is intended to cover perils of fire theft, vandalism, malicious mischief, collapse, earthquake, flood, windstorm, falsework, testing and startup, temporary buildings and debris... If Owner does not intend to get insurance, must give written notice to Contractor and Contractor may procure and charge cost as change order. Owner pays deductibles! 50 25

26 The treatment of waiver of subrogation under AIA A201 forms: Per , all parties waive subrogation against one another: The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, subsubcontractors, agents and employees, each of the other, and (2) the Architect, Architect s consultants... for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Paragraph 11.4 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary. 51 Problems with Builder s Risk and Waivers of Subrogation: Problems for Owner with use of AIA forms: Owner Problem #1 if you fail to get Builder s Risk and fail to notify contractor, you may have a loss and cannot recover from insurance OR from contractor/subcontractor. Owner Problem #2 if you get a Builder s Risk policy with large deductibles (e.g., $50,000, $100,000, $250,000), you will be liable for the deductibles Owner Problem #3 if your Builder s Risk policy is not endorsed to waive subrogation, you may lose coverage for the loss that is otherwise covered

27 Problems with Builder s Risk and Waivers of Subrogation: Problems for Contractors & Subs: GC/Sub Problem #1 if Owner fails to get coverage, you will need to rely on your own coverage will your property carrier subrogate for breach of contract under AIA? GC/Sub Problem #2 Owner deletes waiver of subrogation from prime contract. Builder s Risk carrier can proceed against the GC and Subs. GC/Sub Problem #3 Owner deletes waiver of subrogation from prime contract, but GC provides for waiver of subrogation in subcontract. Leaves GC potentially exposed for subrogation with no recourse to subcontractors. 53 Problems with Builder s Risk and Waivers of Subrogation: Problems for Contractors & Subs: GC/Sub Problem #4 Owner waives subrogation for claims covered under Builder s Risk but does not waive subrogation as to deductibles. Owner gets a large deductible policy (e.g. $50,000; $100,000; $250,000) GC/Sub Problem #5 Definition of occurrence may mean that multiple instances of defect mean multiple occurrences with separate deductibles. (e.g., multiple leaks caused by the same defect one or more occurrences? 54 27

28 Contracts 101 Factors in Obtaining Adequate Protection The 1 st rule of obtaining adequate protection: bargaining position! Usually, the purchaser of the goods or service has the superior bargaining position e.g. Contractor is in superior position to Subcontractor Exception to the rule: when the provider of the good or service has a rare commodity that others want enough to accept a reverse in the flow of indemnity and insurance (e.g., crane rentals). Do you have the willingness to walk away if the indemnity and insurance requirements are too onerous? 56 28

29 The 2 nd rule of obtaining adequate protection: diligence! If you are in the superior bargaining position, are you requiring your contract form to be used, rather than the bidder s? Standard form contracts should be developed by the party in the superior bargaining position in consultation with counsel. Each form contract should be customized to the client s particular needs and position in the marketplace. If you are in lower tier, does your insurance program match the contract? 57 The 3 rd rule of obtaining adequate protection: communication! Keep your insurance broker informed of contractual obligations undertaken by you, especially with respect to insurance obligations. Review the scope of your available protection with your broker on a periodic basis. Let broker know of any significant change in business

30 Thank you! Geoffrey S. Gavett Gavett, Datt & Barish, P.C Crabbs Branch Way Suite 330 Rockville, MD (o)

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