INDEMNITIES AND INSURANCE: ARE YOU COVERED?

INDEMNITIES AND INSURANCE: ARE YOU COVERED? ABA Section of Real Property, Trust & Estate Law Leasing Group Conference Call March 4, 2010 Jon F. ( Chip ) Leyens, Jr. (jleyens@steeglaw.com) Steeg Law Firm, LLC New Orleans, LA Indemnity: Basic Concepts & Issues o A definition: A contract where one party agrees to protect another party against certain future claims or losses. o A comment: Indemnities are dangerous things. Friedman on Leases, 5 th Ed., 9:12 Subject to legal restrictions, an indemnity agreement can cover anything What should it cover in a lease? o Suit by a third party for personal injury (e.g., a slip and fall)? o Environmental damages (but this presentation does not specifically address environmental issues)? o Third party liens (e.g., the tenant does not pay its build-out contractor and the contractor files a lien against the building)? o Broker claims? o What else (remembering that subject to applicable law, an indemnity could cover anything)? 1

The Argument In a nutshell, indemnities are too broadly drafted The same rationale that applies to property damage claims (shift the risk to the parties respective casualty/property insurers) also should apply to personal (bodily) injury claims (i.e., shift the risk to the parties respective liability (CGL) insurers). Sidney G. Saltz, Allocation of Insurable Risks in Commercial Leases, ABA Real Property, Probate and Trust Journal, Fall 2002. Depending on how insurance clauses in a lease are drafted (and a party s rights under the insurance of the other party), an indemnity for personal injury claims might not be required, but indemnity clauses are omni-present, so below are examples of some indemnity clauses and a list of issues to consider. Issues to Consider How will your client pay for the indemnity? o Will the indemnity obligation be covered by insurance? o In this context, most relevant insurance policy is Commercial General Liability (CGL) o What does a CGL policy typically cover? Very briefly: bodily injury and damage to tangible property (but, e.g., the amount of coverage provided to a tenant that burns down the landlord s building is very low the CGL policy does not provide a substitute for property insurance) Also, the insurer is obligated to defend a suit seeking damages for bodily injury or property damage (regardless of whether the insured actually was at fault) In addition, the policy covers liability arising from an insured contract, which includes a lease (and the indemnity obligations in a lease), but the basis of the claim has to be for bodily injury or property damage. In other words, a CGL policy is not lease insurance. If a tenant agrees to indemnify the landlord in the event of a personal injury claim brought by someone who falls in the premises, the CGL policy will provide coverage; on the other hand, the CGL policy will not provide coverage to the tenant if the tenant defaults under the lease. 2

For additional explanation: Ira Meislik, A Liability Insurance Primer for the Real Property Lawyer, http://www.meislik.com/articles/liability_insurance_primer/ April 2007. What types of claims does the indemnity actually cover just third party claims against the indemnitees or also losses suffered directly by the indemnitees? o If your client agrees to hold the other party harmless against damage to property, did your client just become a property insurer? Should the indemnity apply only to the extent that the loss is not covered by insurance? Should the indemnity obligation be reduced by the degree of fault of the indemnitee (or does this just create more issues for the parties insurers to fight over)? Sample Clause [with some comments] Clause 1: Might not look to bad at first (but looks can be deceiving): 11.1 Claims. Claims means any and all liabilities, losses, claims, demands, damages or expenses that are suffered or incurred by a party, including attorneys fees reasonably incurred by that party in the defense or enforcement of the rights of that party. [Note: Not limited to personal injury or property damage and not limited to third party claims. Have the parties waived consequential damages elsewhere in the lease? If so, is this clause in conflict with the waiver?] 11.2 Tenant s Indemnity. (a) Landlord s Waivers. Landlord waives any Claims against Tenant and its Affiliates for perils insured or required to be insured by Landlord under subsections (2) and (3) of 9.2(a) [Note: this is a cross-reference to Landlord s property insurance], except to the extent caused by the gross negligence or willful misconduct of Tenant or its Affiliates [Note: The last clause is a large exception to the waiver of claims. Is it warranted? It certainly seems like it could provide some work for the litigators.]. (b) Claims Against Landlord. Unless waived by Landlord under (a), Tenant will indemnify and defend Landlord and its Affiliates and hold each of them harmless from and against Claims arising from: (1) Any accident or occurrence on or about the Premises, except to the extent caused by the negligence or willful misconduct of Landlord or its Affiliates; (2) Tenant s or its Affiliates negligence or willful misconduct; [Note: Should the tenant have to indemnify the landlord against the tenant s negligent failure to return an estoppel on time?] (3) Tenant s failure to comply with this Lease; or [Note: If the tenant does not pay rent and the landlord s lender forecloses, has the tenant just signed up as a guarantor on the landlord s loan?] 3

(4) Any claim for commission or other compensation by any person other than the Brokers for services rendered to Tenant in procuring this Lease. Clause 2: The ridiculously over-broad indemnity. 1.1 Tenant's Indemnification of Landlord (including Indemnity by Tenant for Landlord's Negligence). (a) TENANT SHALL INDEMNIFY, DEFEND, AND HOLD HARMLESS ALL LANDLORD PARTIES (AND WAIVES ANY CLAIM AGAINST ANY LANDLORD PARTY WITH RESPECT THERETO) FROM ALL FINES, SUITS, LOSSES, COSTS, LIABILITIES, CLAIMS, DEMANDS, ACTIONS AND JUDGMENTS OF EVERY KIND AND CHARACTER, WHETHER IN LAW OR IN EQUITY (COLLECTIVELY, "CLAIMS"), INCLUDING THOSE CLAIMS RESULTING SOLELY OR IN PART FROM THE NEGLIGENCE OF ANY LANDLORD PARTY, ARISING OUT OF OR RELATING (DIRECTLY OR INDIRECTLY) TO THIS LEASE, THE TENANCY CREATED UNDER THIS LEASE OR THE PREMISES, INCLUDING, WITHOUT LIMITATION: [Note: Tenant has just indemnified the Landlord for everything, including when the landlord violated its exclusivity agreement with its anchor by entering into this lease agreement] (i) ANY BREACH OR DEFAULT IN PERFORMANCE OF ANY OBLIGATION ON TENANT'S PART TO BE PERFORMED UNDER THIS LEASE, WHETHER BEFORE OR DURING THE LEASE TERM OR AFTER ITS EXPIRATION OR EARLIER TERMINATION; [Note: See comment to prior indemnity. Shouldn t lease defaults be covered by the default section?] (ii) ANY ACT, OMISSION, NEGLIGENCE, OR MISCONDUCT OF ANY TENANT PARTY, OR OF ANY OTHER PERSON ENTERING UPON THE PREMISES UNDER OR WITH THE EXPRESS OR IMPLIED INVITATION OR PERMISSION OF TENANT; [Note: The tenant is indemnifying the landlord for the landlord s misconduct (would that extend to intentional misconduct?) within the Premises.] (iii) ANY ALTERATIONS, ACTIVITIES, OCCURRENCES, WORK, OR THINGS DONE, PERMITTED, ALLOWED, OR SUFFERED BY TENANT PARTIES IN, AT, OR ABOUT THE PREMISES OR THE PROJECT, INCLUDING THE VIOLATION BY ANY TENANT PARTY OF ANY LAW, ORDINANCE, OR GOVERNMENTAL ORDER OF ANY KIND; AND [Note: In other words, the tenant is responsible for anything that occurs outside the premises if allowed or suffered by the tenant.] (iv) THE OCCUPANCY OR USE BY ANY TENANT PARTY OF THE PREMISES OR THE PROJECT. [Note: See comment above re: breach of exclusivity clause.] 4

(b) TENANT SHALL FURTHER INDEMNIFY, DEFEND, AND HOLD HARMLESS ALL LANDLORD PARTIES FROM ANY CLAIM FOR DAMAGE TO THE SPECIAL USE IMPROVEMENTS OR TENANT'S PERSONAL PROPERTY, FIXTURES, FURNITURE, AND EQUIPMENT IN THE PREMISES (INCLUDING THOSE CLAIMS RESULTING SOLELY OR IN PART FROM THE NEGLIGENCE, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY LANDLORD PARTY), TO THE EXTENT THAT THE DAMAGE IS COVERED BY PROPERTY INSURANCE (WITHOUT REGARD TO ANY DEDUCTIBLE) THAT TENANT IS REQUIRED TO CARRY UNDER THIS LEASE (OR WOULD HAVE BEEN COVERED HAD TENANT CARRIED THE INSURANCE REQUIRED UNDER THE PROVISIONS OF THIS LEASE), OR WHICH COULD HAVE REASONABLY BEEN COVERED BY INSURANCE; AND IF TENANT IS EXPRESSLY ALLOWED BY THIS LEASE TO SELF-INSURE FOR SUCH MATTERS, IT SHALL BE DEEMED TO BE CARRYING SUCH INSURANCE FOR THE PURPOSES OF THIS PARAGRAPH. 5