RISK TRANSFER PROVISIONS ARE YOU PROTECTED? ARE YOU EXPOSED? JONATHAN A. CASS JOHN A. GREENHALL TRAVIS SHAFFER OCTOBER 1, 2018
TOPICS The basics on contractual indemnifications and insurance requirements How risks get pushed downed the chain of contracting Risk transfer provisions and contract negotiations What role should your insurance broker have with risk transfer provisions? Mistakes we often see - the parade of horribles! 2
RISK ALLOCATION All contracts should be addressed from the standpoint of risk allocation. Certain risk are more properly borne by the owner while others more properly belong with the general contractor. 3
Indemnification Provisions 4
INDEMNIFICATION PROVISIONS Why are they important? How are they interpreted? Waiver of Workers Compensation immunity Insurance coverage for indemnity claims 5
WHAT ARE THEY? A contract under which one party (the indemnitor ) agrees to assume the tort liability of another (the indemnitee ) in connection with the claims of third parties arising from services provided pursuant to a contract. 6
WHY ARE THEY IMPORTANT? Risk Shifting permits one party (GC) to shift the risk associated with certain activities on to another party (SC) Indemnitor (SC) responsible for paying damages arising from its work 7
INDEMNIFICATION PROVISIONS: GC SUBCONTRACT Subcontractor assumes the entire responsibility and liability for any and all claims and/or damages of any nature or character whatever for which Contractor shall be liable under the Contract Documents or by operation of law with respect to the Subcontractor s Work, and agrees to defend, hold harmless and indemnify Contractor, Owner, Professional Consultants, Professional Consultants consultants, and all of their agents, employees, shareholders, and officers from and against all claims, demands, liabilities, interest, loss, damage, attorneys fees, costs and expenses of whatever kind or nature relating to, or in any manner connected with, the Subcontractor s Work, or in any way connected with the use, misuse, maintenance, operation or failure of any machinery or equipment whether or not such machinery or equipment was furnished, rented or loaned by any of the Indemnified Parties, whether or not due in whole or in part to any act, omission or negligence of the Contractor, Owner, Professional Consultants consultants and all of their agents, officers, shareholders and employees. The Subcontractor s obligation to defend, indemnify, hold harmless in this Paragraph 16 shall continue after completion of the Work, Final Payment and Termination of this Agreement, it being agreed that such rights and obligations are and shall be of a continuing nature and effect. The Subcontractor s obligations to defend, indemnify and hold harmless shall not be limited or restricted by the amount or type of damages, compensation or benefits payable under any worker s or workmen s compensation, disability benefit or other employee benefit acts. Not intending to limit the above, Subcontractor also agrees to defend, hold harmless and indemnify Contractor as stated above for any claim arising out of the use by Subcontractor s workmen or other personnel of any hoists or elevators. In addition, Subcontractor shall defend the Indemnified Parties against any claim which may potentially give rise to indemnification of the Indemnified Parties, even if such claim alleges that the Indemnified Parties are wholly or partially at fault for causing the loss. If indemnification for the Indemnified parties sole negligence is expressly prohibited by law, such defense shall continue until it is conclusively established by a court of competent jurisdiction that 1) the Indemnified Parties are solely liable for causing the bodily injury or property damage; and 2) that neither Subcontractor nor its employees nor any subcontractor to Subcontractor is liable; at which time the Indemnified Parties will absorb all costs of defense. It is further expressly agreed that Subcontractor assumes the fullest extent of all obligations to indemnify and defend Contractor and those stated above... 8
TYPES Three Types of Indemnification 1. Broad Form 2. Intermediate Form 3. Limited Form 9
1. BROAD FORM INDEMNITY Indemnifies a party for even that party s sole negligence...even if caused in whole or in part by any act, omission or negligence of the General Contractor For construction contracts: permitted in PA; prohibited in DE, MD & NJ Is it fair? 10
2. INTERMEDIATE FORM INDEMNITY Indemnifies a party for that party s own negligence except if that party is solely negligent... even if caused in part by any act, omission or negligence of the General Contractor For construction contracts: permitted in PA, MD & NJ; prohibited in DE 11
3. LIMITED FORM INDEMNITY Does not indemnify a party of that party s own negligence... But only to the extent caused by the negligence acts or omissions of the party providing indemnification. No better than common law indemnity Essentially worthless 12
DELAWARE LAW INTERPRETATION Statutory prohibition! Party A cannot require Party B to indemnify Party A for Party A s own negligence Ex: GC cannot require Subcontractor to pay for GC s own negligence Void as a matter of law 13
MARYLAND AND NEW JERSEY LAW INTERPRETATION Statutory limitation (but not as broad as DE)! Bars broad form indemnity (sole negligence) Permits intermediate form indemnity (partial negligence) GC cannot require Subcontractor to pay for GC s own sole negligence, but partial negligence is permitted Provision must clearly indicate that Party A is assuming Party B s negligence No magic words required 14
PENNSYLVANIA LAW INTERPRETATION Generally enforceable No statutory prohibition In construction projects Owner can be require GC to pay for Owner s own negligence (sole and partial) GC can require Subcontractor to pay for GC s own negligence (sole and partial) Strictly construed against drafting party 15
PENNSYLVANIA LAW INTERPRETATION No statutory prohibition (unlike DE, MD & NJ) Broad (sole) and intermediate (partial) form permitted Need clear & unequivocal language to be enforceable Standard broad contract language is not enough All claims Any and all liability 16
WORKERS COMPENSATION IMMUNITY What is Immunity Provided by Workers Compensation Act? Injured employee cannot, generally, sue employer in tort (remedy through WC system only) An injured plaintiff's employer cannot be joined as an additional defendant to its employee s personal injury action by another party in the absence of a written indemnification agreement entered into by the employer prior to the date of the injury 17
WAIVER OF WORKERS COMPENSATION IMMUNITY Waiver is permitted under PA, NJ, MD, and DE Need specific language General language is not enough (e.g., any and all claims ) 18
WAIVER OF WORKERS COMPENSATION IMMUNITY Waiver language must indicate that the employer intends to indemnify the third-party against claims on the part of its employees by: Expressly waiving the employer s immunity through reference to workers compensation statute, or By specifically referring to claims involving injuries to its employees 19
DRAFTING & INSURANCE ISSUES Strategies for negotiating provisions Assuming insured v. uninsured risk Role of insurance broker reviewing provisions in form contracts (pushing risk down) reviewing provisions in contracts (receiving risk) 20
Insurance Coverage 21
INSURANCE COVERAGE FOR INDEMNIFICATION OBLIGATIONS Contractual Liability Coverage Provides coverage for indemnity obligations that have been assumed in a contract Standard coverage provided by a CGL policy 22
CONTRACTUAL LIABILITY COVERAGE GENERALLY Indemnity claims covered by insurance are only as broad as the policy itself e.g. Bodily injury, Property Damage, Personal/Advertising Injury Will not address all indemnity obligations: no coverage for breach of contract/warranty or purely economic loss no contractual liability coverage for design professionals performing design work Employee injury claims or Third party over (arising from WC waiver) standard CGL policy exclusion has exception if triggered by insured contract (i.e. there is coverage) 23
CONTRACTUAL LIABILITY COVERAGE LIMITATIONS Is there coverage for sole negligence? Has carrier included Endorsements that limit coverage? CG2426- must be caused, in whole or in part, by you or those acting on your behalf (e.g., no sole negligence ) CG2139- eliminates contractual indemnity coverage completely 24
Insurance Requirements 25
WHY IMPORTANT? Construction is complicated and dangerous! People get hurt Property gets damaged Completed buildings can suffer from design and construction defects Risk gets pushed down in contracting process to entity actually doing the work 26
WHAT ARE YOU TRYING TO ACCOMPLISH? Owner- making sure that Design Professionals, GC and SCs have sufficient insurance coverage for work they are performing CGL, WC/EL, Auto, Pollution, E&O... GC- making sure that SCs have sufficient insurance coverage for work performed SC- making sure it complies with requirements that are being demanded 27
ADDITIONAL INSURED Additional Insured Coverage: Generally Coverage independent of any indemnity provision Belt and suspenders approach to risk transfer Direct access to policy v. indemnity which is indirect Additional Insured Considerations: If GC is an Additional Insured, GC can be involved/active in defense and settlement Coverage provided by insurance carrier v. indemnity obligation owed by contractor Courts more willing to interpret additional insured provisions to benefit insured 28
ADDITIONAL INSURED Additional Insured Coverage: Generally Scheduled v. automatic if required in contract Different endorsements provide different coverages: Carriers have been steadily narrowing AI coverage due to exposure Need to know what you are asking for, and what you are getting AI coverage should be in addition to your own coverages 29
ADDITIONAL INSURED Primary/Non-Contributory Requirement Additional Insured endorsements almost always require a written contract that provides that additional insured coverage be primary and noncontributory Important to clearly identify in insurance provision of construction contract that additional insured coverage is to be primary and noncontributory. 30
INSURANCE REQUIREMENTS WRAP-UPS Consolidated Insurance Programs OCIPs and CCIPs Enrollment Issues Rating information shared with Administrator Loss Sensitive programs Completed Operations exposure possible coverage gap? NJ Statute of Repose = 10 Years PA Statute of Repose = 12 Years DE Statute of Repose = 6 Years MD Statute of Repose = 20 Years 31
DRAFTING CONCERNS Importance of understanding project and risks When representing Owner and GCs, importance of having robust set of form insurance requirements that can be adapted for project When representing SCs, ensuring that broker reviews insurance requirements to address any issues/concerns Insured v. uninsured risk when to walk away? 32
When Things Go Wrong! (The Parade of Horribles...) 33
TYPICAL PROBLEMS FOR OWNERS & GENERAL CONTRACTORS Failure to include enforceable indemnity obligation Failure to require appropriate and specific additional insurance requirements Failure to require sufficient liability limits and impact on Owner & GC s exposure 34
TYPICAL PROBLEMS FOR SUBCONTRACTORS Failure to obtain appropriate insurance coverage for assumed indemnity obligation Failure to obtain required additional insurance coverage Failure to insure against applicable risks No pollution coverage No E&O coverage for design responsibility 35
QUESTIONS? 36