CONTRACTUAL RISK TRANSFER SPONSORED BY

CONTRACTUAL RISK TRANSFER SPONSORED BY

Slide 1 Contractual Risk Transfer November 8, 2013 Bruce Thomas, CIC, CPCU, CRIS Slide 2 Exposure Manager 5 Steps 5. Monitor account 4. Implement technique 3. Select best technique 2. Evaluate techniques for dealing with loss exposures 1. Identify and analyze loss exposures Slide 3 Exposure Manager Identify and analyze loss exposures

Slide 4 The Largest Exposure a Contractor, or any customer for that matter has is Slide 5 Exposure Manager #2. Evaluate techniques for dealing with loss exposures Avoidance Prevention Reduction Financing Contractually Transfer Slide 6 Risk Management Techniques Insurance is always the last technique you discuss. This way, the need has sold itself, with no mention of price

Slide 7 Slide 8 "We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies." Slide 9 "We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies."

Slide 10 How do you become legally obligated to pay? Through the elements of negligence As the result of a judicial decisions By signing a contract Slide 11 Ideal Goal of Risk Allocation Transfer risk to the best party capable of controlling and financing the risk Slide 12 It depends

Slide 13 Three Key Provisions in Risk Transfer Indemnity provisions Limitations of liability Waiver of subrogation Slide 14 Upstream Downstream Slide 15 Indemnitee Indemnitor

Slide 16 Vicarious liability When one person or entity is, or can be, held legally liable for the results of another person's or entity's actions Slide 17 "For, and in exchange for, fair and equitable consideration, [Indemnitor] agrees to indemnify, hold harmless and waive any right of subrogation against [indemnitee] from any and all liability or cost arising from bodily injury or property damage caused in whole or in part by the (Indemnitor) Slide 18 THIRD-PARTY-OVER ACTION I am injured by when I fall in an uncovered hole at the job site I collect workers comp from My Company under their Workers Comp Policy I then sue the General Contractor; bypassing My Company, called third-party-over action Because My Company signed indemnification agreement with the GC, The GC s suit is covered by My Company s General Liability coverage as an insured contract

Slide 19 2013 ISO ADDITIONAL INSURED CHANGES Changed the coverage afforded to an Additional Insured to only that which is permitted by law Several anti-indemnification laws have restricted how much liability can be imputed by a contract Slide 20 2013 ISO ADDITIONAL INSURED CHANGES Such laws change almost daily, and differ greatly among the states This means that state law will restrict coverage available to the Additional Insured Slide 21 BROAD FORM Transfers entire risk of indemnitee to the indemnitor

Slide 22 INTERMEDIATE FORM Even one degree of fault of the indemnitor obligates the indemnitor to pay 100 percent of all damages Slide 23 LIMITED (OR COMPARATIVE) FORM Indemnitor s obligation for damages is limited to its degree of negligence; mirrors tort obligations Slide 24 Statutory Limitations Apply to Contracts, Not Insurance Policies However

Slide 25 MASSACHUSETTS CONSTRUCTION ANTI- INDEMNITY STATUTE The maximum allowed is an Intermediate Form, where indemnity is allowed for the indemnitor's own negligence and for concurrent negligence of the indemnitor and indemnitee. Slide 26 STATUTORY MAXIMUM ALLOWED INDEMNITY IN CONSTRUCTION CONTRACTS Limited: Connecticut, New Hampshire, New York, Rhode Island Intermediate: Massachusetts, New Jersey Broad: Maine, Vermont Slide 27

Slide 28 2013 ISO ADDITIONAL INSURED CHANGES The limit of coverage available to the Additional Insured is restricted to that which is required by the contract, or the limits shown on the declarations, whichever is less Slide 29 Contractual Limitations of Liability Maximum amount of liability for any one party to the contract Slide 30 Waivers of Recovery Rights

Slide 31 An indemnification agreement is only as good as the ability of the indemnitor to pay That s where we come in Slide 32 Builders Risk Purchased by owner usually All parties should be covered by the policy Limits start with projected completed value and increase as changes occur Coverage is typically open perils Slide 33 Leases The Damage & Destruction clause Lease requires tenant to name the owner as an AI for loss of rental income Solution: CP 15 03 Business Income - Landlord as Additional Insured (Rental Value) attached to both the Business Income coverage forms (CP 00 30 and CP 00 32).

Slide 34 CGL Fire Damage Legal Liability Tenant is responsible for more than fire losses May have to indemnify even if the tenant isn t liable Solutions: CP 00 40 Legal Liability Coverage Form (but pays only if tenant is legally liable) CP 00 10 (Building and Personal Property Coverage Form) with CP 12 18 Loss Payable Provisions, or CP 12 19 Additional Insured - Building Owner Slide 35 Triple Net Leases Types of Leases: Single net maintenance and operating costs Double add property taxes Triple net add insurance Slide 36 Triple Net Leases If fraud (arson?) by tenant No coverage for tenant No coverage for building owner (even with CP 12 19 / named insured status) No coverage for mortgagee

Slide 37 Entrusted Property CP 10 30 (Special Form Cause of Loss) Exclusion 2.h. Dishonest or criminal act by you, any of your partners, members, officers, managers, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any Slide 38 Landlords Beware Who owns improvements and betterments? What are I&B? Who insures their value? What can an owner do? Slide 39 Contractual Liability

Slide 40 EXCLUDED CONTRACTUAL LIABILITIES Damage to your own work Financial loss from breach of contract Third-party beneficiary claims Railroad indemnification agreements Assumptions of professional design liability Personal injury Slide 41 CGL Contractual Liability Exclusion Exception That liability the insured would have in the absence of a contract, i.e., tort liability That liability assumed by the insured in an insured contract Slide 42 Insured Contract (LEASE) Lease Easement Agreement with municipality Sidetrack agreement Elevator Maintenance Agreement Plus 1

Slide 43 Category: Insured Contract f. Any other contract related to the insured s business where the insured assumes the tort liability of another As is done when one signs a contract with an indemnity agreement Slide 44 Amendment of Insured Contract Definition (CG 24 26) Removes coverage for insured contracts with respect to an indemnitee s sole negligence Slide 45 Contractual Liability Limitation (CG 21 39) Eliminates part f. of the insured contract definition Leaves indemnitor with essentially no coverage for anything assumed under any indemnity agreement

Slide 46 Business Auto Coverage Contractual Exclusion Exception Insured Contract : REALS Contract related to liability from a Rental or leased vehicle Easement Agreement with Municipality Lease Sidetrack Agreement Slide 47 Indemnitees automatically get some defense coverage from the indemnitor s CGL policy Which is something they want, and expect by having the indemnitor sign the contract Slide 48 CONDITIONS FOR DEFENSE OF INDEMNITEE TO BE OUTSIDE OF THE POLICY LIMITS Must have been specified in the contract that the indemnitor will pay the defense costs of the indemnitee BI or PD must be covered by the policy Both indemnitor and indemnitee must be named in the suit Both agree to use same counsel Indemnitee must notify own insurer

Slide 49 CONDITIONS FOR DEFENSE OF INDEMNITEE TO BE OUTSIDE OF THE POLICY LIMITS Must have been specified in the contract that the indemnitor will pay the defense costs of the indemnitee BI or PD must be covered by the policy Both indemnitor and indemnitee must be named in the suit Both agree to use same counsel Indemnitee must notify own insurer Slide 50 Solution: Indemnitee Should Become an Additional Insured Slide 51 Types of Insureds Named Insureds Automatic Insureds Additional Insureds

Slide 52 ADDITIONAL INSURED OPTION Direct access to indemnitor s coverage via Additional insured (AI) status on indemnitor s CGL Slide 53 Standard GL Additional Insured Endorsement for Contractors Slide 54 Edition Dates Matter

Slide 55 Form numbering system CG 20 10 04 13 Slide 56 Form numbering system CG 20 10 04 13 Policy Form Slide 57 Form numbering system CG 20 10 07 04 Endorsement number

Slide 58 Form numbering system CG 20 10 04 13 Edition Date Slide 59 GL Additional Insured Endorsement GL 20 10 11 85 Edition: Broad Protection of Additional Insured 05 93 Edition: Removed Completed Ops 07 04 Edition: Removed Coverage for AI s Sole Negligence Slide 60 Additional Insured Endorsement 20 10 11 85 edition provided Completed ops and sole negligence

Slide 61 Additional Insured Endorsement 20 10 07 04, and after, edition provides neither Completed Ops nor Sole Negligence Slide 62 Additional Insured endorsement CG 20 33 provides Automatic Status for any Additional Insured the insured contracts with by way of a written contract Slide 63 Additional Insured Endorsement CG 20 37 provides Completed Operations to a scheduled Additional Insured

Slide 64 CG 20 37 does not work with CG 20 33 (Automatic Status AI) because 20 37 requires listing a schedule of Additional Insureds Slide 65 Engineers, Architects, or Surveyors Additional Insured for Design Professional Hired By Insured CG 20 07 Additional Insured for Design Professional Hired By Someone Other Than Insured CG 20 32 Slide 66 Proprietary Endorsements

Slide 67 Insurance Requirements Other Insurance Clause Contract: Indemnitor must be primary and Indemnitee must be excess Slide 68 Primary and Noncontributory Slide 69 Additional Insured still has to share policy limits and share defense costs

Slide 70 Business Auto Endorsements BAP Who Is An Insured provision CA 20 48 Designated Insured endorsement One insurer wanted to charge for the CA 20 48 Slide 71 WAIVERS OF RIGHTS OF RECOVERY An agreement among two parties to prevent an insurer of one party from recovering payments made because of the negligence of the other party Policies differ on if a waiver of subrogation is permitted Slide 72 CGL AND AUTO POLICIES Similar subrogation language is used in both forms Insured must do nothing after loss to impair insurer s rights Therefore, no endorsement is needed!

Slide 73 BUILDERS RISK INSURANCE Contract typically includes a mutual waiver of subrogation among all parties involved in the project Policy is designed to act as primary coverage in the event of a property loss Slide 74 WORKERS COMPENSATION Unlike the CGL and Auto policies: Waiver of Rights of Recovery Endorsement is required Waivers could increase the cost of a claim Waivers can be expensive Slide 75 Certificates of Insurance Issues The Rolling Stones Syndrome

Slide 76 What is a Certificate? Certificate holder viewpoint: It is a tale, told by an idiot, full of sound and fury, signifying nothing. Slide 77 What is a Certificate? A snapshot that shows a policy exists at certain limits at a certain time For general information purposes only, conferring no rights Subject to all the terms, exclusions, and conditions of the policy Slide 78 What ISN T a Certificate? Not a contract Does not modify the policy

Slide 79 ACORD 25 disclaimers This certificate is issued as a matter of information only and confers no rights upon the certificate holder. Slide 80 ACORD 25 disclaimers This certificate does not amend, extend or alter the coverage afforded by the policies below. Slide 81 ACORD 25 disclaimers Notwithstanding any requirement, term or condition of any contract or other document with respect to which this certificate may be used or may pertain, the insurance afforded by the policies described herein is subject to all of the terms, exclusions and conditions of such policies.

Slide 82 ACORD 25 disclaimers This Certificate of Insurance does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder, nor does it affirmatively or negatively amend, extend or alter the coverage afforded by the policies listed thereon. Slide 83 Occurrence spelled wrong since 1976! Slide 84 Scope of the Problem Onerous contractual or certificate requirements Notice of cancellation or other policy changes

Slide 85 Certificate vs. Policy Limits Should a certificate show the policy limits or the limits required by contract if less? ACORD Forms Instruction Guide: Enter limits corresponding to those found on the policy declarations page. Slide 86 Waivers of Rights of Recovery ACORD 25 policies may require an endorsement Slide 87 ACORD 24 Most often provided to lessors as proof of property insurance For information only Confers no rights Does not amend, extend or alter coverage The issuing company will endeavor to mail days written notice of cancellation but failure to notify imposes no obligations or liability of any kind on the company or agent

Slide 88 ACORD 27 & 28 Most often provided to lenders and mortgagees as proof of personal (27) or commercial (28) property insurance Evidences of Insurance and lenders Slide 89 Remember what The Rolling Stones sang You Can t Always Get What You Want But if You Try Some Time, You Just Find, You Can Get What You Need Slide 90?