Richard B. Friedman McKenna Long & Aldridge LLP, New York, New York David G. Jordan Saxe Doernberger & Vita, P.C., Hamden, Connecticut Rebecca DiMasi Van Osselaer & Buchanan, LLP, Austin, Texas Strafford Webinar September 24. 2013
Coverage Overlap GC s Corporate Excess Insurance Sub s Excess Insurance (GC s AI Excess Insurance) GC s Corporate Primary Insurance Sub s Primary Insurance (GC s AI Carrier) General Contractor ( GC ) Promise to Indemnify Promise to Procure Insurance www.sdvlaw.com Sub-Contractor ( Sub )
Multiple parties Relevant Issues Multiple layers of coverage in AI context Loss exceeds limits of a single primary policy 3
Which Insurer Responds First? Typically primary insurer of downstream party (Additional Insured Carrier) has initial obligation to defend and indemnify the claim. Priority is established by Other Insurance language commonly found in most CGL Policies e.g. This insurance is excess over: Any other primary insurance available to you covering you for damages added as an additional insured by attachment of an endorsement. for which you have been When such language is not present, primary carriers of Upstream and Downstream Parties may dispute priority. See e.g. Briarwoods Farm, Inc. v. Cent. Mut. Ins. Co., 22 Misc. 3d 427, 428, 866 N.Y.S.2d 847, 848 (Sup. Ct. 2008). Which Insurer Responds Second? The AI Excess carrier OR the corporate primary policy? Disputes arise when, as is often the case, the subcontractor s primary CGL policy is insufficient to cover the loss to the injured party.
Priority of Coverage 2 schools of thought: 1. Priority determined by provisions of Insurance Policies: Review language of competing policies other insurance clauses; 2. Priority determined by the provisions of the Trade Contract: Determine intent of parties regarding risk transfer by reviewing the indemnity and insuring provisions of the underlying contract. 5
Priority of Coverage Horizontal Exhaustion All available primary policies must exhaust first Focus on policy language, not underlying contract Excess policy is a payer of last resort 6
Priority of Coverage Vertical Exhaustion AI policies (primary & excess) exhaust before upstream party s primary policy Focus on underlying contract s indemnity obligation, not policy language Reflects intent of parties Avoids circuity of litigation 7
Priority of Coverage Horizontal Cases Illinois California New York Vertical Cases 4 th Circuit (Virginia) 5 th Circuit (Texas) 8 th Circuit (Arkansas) Missouri Kentucky 8
Horizontal Exhaustion Long Established New York View 1. Traditional Approach Allocation was determined without regard to any indemnification provisions in trade contracts. Courts compared the language of each policy to ascertain the priority of coverage. 2. Traditional Conclusion Courts almost always applied Horizontal Exhaustion resulting in the exhaustion of the subcontractors, general contractors, and owners primary CGL policies prior to the triggering of any excess or umbrella coverage. 3. Leading Case: State Farm Fire & Casualty Company v. LiMauro, 65 N.Y.2d 369 (1985) New York Court of Appeals held that insurers have the right to rely upon the terms of their contracts with their insureds and that the terms of such contracts dictate the priority of coverage. In most subsequent New York Appellate Division cases, when determinations of coverage have involved primary and excess insurance, the result has been Horizontal Exhaustion of all primary policies prior to the triggering of the subcontractor s excess policies. See the following First Department cases: Bovis Lend Lease LMB, Inc. v. Great American Ins. Co., 53 A.D.3d 140 (N.Y. App. Div. 1st Dept. 2008) Tishman Construction Corp. v. Great American Ins. Co., 53 A.D.3d 416 (N.Y. App. 1st Dept. 2008) 9
Horizontal Exhaustion - Bovis Horizontal Exhaustion: The Bovis Case Owner (DASNY) Const. Mgr. (BOVIS) Illinois $1M Primary Policy Gen. Ctr. (STONEWALL) Liberty $1M Primary Policy Westchester $10M Umbrella Steel Ctr. (SMI-OWEN) Elevator Sub. (AJ MCNULTY) Great American Concrete Sub. (J&A) QBE $1M Primary United $5M Umbrella Decedent
Horizontal Exhaustion: The Bovis Case Trial Court Apportionment of AI Coverage for Bovis QBE $1,000,000 J&A Primary UNITED $5,000,000 J&A Umbrella LIBERTY $1,000,000 Stonewall Primary WESTCHESTER $10,000,000 Stonewall Umbrella ILLINOIS $1,000,000 BOVIS Primary 11
Horizontal Exhaustion: The Bovis Case Appellate Court Apportionment of AI Coverage for Bovis QBE $1,000,000 J&A Primary LIBERTY $1,000,000 Stonewall Primary ILLINOIS $1,000,000 BOVIS Primary UNITED $5,000,000 J&A Umbrella Sharing pro rata WESTCHESTER $10,000,000 Stonewall Umbrella 12
Vertical Exhaustion Indemnity/Circuity of Litigation Wal-Mart Stores, Inc. v RLI Ins. Co., 292 F.3d 583 (8th Cir 2002) American Indemnity Lloyds v Travelers Property Casualty Ins. Co., 335 F.3d 429 (5th Cir 2003) 13
Vertical Exhaustion: The Wal-Mart Case 3 National Union $10M Primary Wal-Mart Retailer AI Status Indemnity 2 1 RLI $10M Excess St. Paul $1M Primary Cheyenne - Manuf. Contract required $2M Primary Obtained - $1M Primary/$10M Excess Settlement - $11M: St. Paul $1M/RLI $10M DJ Wal-Mart and National Union sought to avoid contributing to $10M paid by RLI Result St. Paul $1M/RLI $10M 14
Circuity of Litigation Vertical exhaustion avoids Circuity of Litigation : unnecessary legal steps which result in AI excess carrier paying for loss Horizontal Approach GC Sued GC tenders to AI primary and AI Excess carrier AI primary pays but AI Excess asserts GC s corporate primary must pay next GC s primary pays AI excess carrier pays (GC corporate limits replenished) Subcontractor tenders indemnity lawsuit to its excess carrier (b/c primary carrier exhausted) GC s primary subrogates to GC s interests and sues Subcontractor for indemnity
Circuity of Litigation Vertical Approach GC Sued GC tenders to AI primary and AI Excess AI primary pays first, then AI Excess carrier pays Upstream insurers argue against circuity of litigation, i.e., that it is a waste of judicial resources to require them to pay for their portion of the allocated loss and then have to recoup, via subrogation, that payment from the subcontractor s excess carrier.
Vertical Exhaustion: St. Paul Mercury Indemnity Insurance Company of North America v. St. Paul Mercury Insurance Company, 74 A.D. 3d 21 (N.Y. App Div. 1st Dept. 2010) In 2010, the Appellate Division First Department in Manhattan held that a priority determination in a construction case is irrelevant if: 1. a court has found that the upstream additional insured s, i.e., the owner s or general contractor s, liability is strictly vicarious to that of the named insured subcontractor, and 2. the subcontractor's insurers agreed to defend and indemnify the upstream party without reservation or qualification. 17
St. Paul Mercury YONKERS (GC) Contractual Indemnity Additional Insured ROMANO (Sub) Primary $1 M St. Paul Horizontal Exhaustion Primary $1 M Royal Excess $5 M St. Paul Excess $10 M Indemnity Ins. CIRCUITY Indemnity Ins. can force St. Paul Primary to pay first under principle of horizontal exhaustion but Yonkers could then pass that liability back to Romano via contractual indemnity, which would flow back to Indemnity Ins. Court shortcuts that result by simply holding that horizontal exhaustion does not apply.
Action Points For General Contractors And Owners and Their Insurers in light of St. Paul Mercury 1. General contractors and owners with contractual indemnity rights against subcontractors should seek to establish as soon as possible their right to contractual indemnity against subcontractors. This can be done via a third party claim in the underlying action brought by the injured party. If a right to contractual indemnity is established prior to a determination regarding the priority of coverage, the upstream insurers should argue that, under St. Paul Mercury, the upstream parties liability passes to the subcontractors and its insurer, and thus the priority of coverage is irrelevant. 2. Upstream insurers should also be aware that St. Paul Mercury is not binding in New York other than in the First Appellate Department. And, even in the First Department, Bovis and Tishman are still good law. 3. Although Horizontal Exhaustion remains generally the law In New York, St. Paul Mercury provides insurers with the ammunition to argue for greater use of Vertical Exhaustion in certain circumstances. 19
Changing Landscape Anti-Indemnity Statutes Impact upon Priority of Coverage Statutory limitations upon scope of diminish circuity of litigation argument indemnity obligation, Statutory Limitations upon Additional Insured Coverage restricts vertical exhaustion
Anti-Indemnity Statutes Legislative limitation on contractual indemnity agreements +/- 44 states recognize some form of anti- indemnity limitation in construction contracts Exceptions: AL, DC, ME, NV, ND, PA, WI Insofar as the claim against the upstream party implicates such party s own negligence, the argument that the sub s excess carrier will ultimately pay whether vertical or horizontal exhaustion is applied may not be accurate!
Anti-Indemnity Statutes: Insurance Implications A number of states preclude GC from Requiring Sub to obtain AI coverage which protects GC from its own negligence e.g., California, Colorado, Kansas, Louisiana, Michigan, Montana, New Mexico, Oklahoma, Oregon and Texas A few states have given some (but not a clear) indication that the anti-indemnity prohibition extends to insurance e.g., Delaware, Georgia and Ohio To the extent claims against the additional insured implicate its own negligence, the AI Coverage and GC s own coverage may both be required to provide indemnity
Changing Landscape Evolution of ISO AI Coverage Limitations upon the Scope of AI coverage directly impact the Horizontal / Vertical Exhaustion Debate.
Additional Insured Changes Limits: No more than contract provides Policy Limits Contract Requirements $10 Million $5 Million $1 Million GAP $1 $1 Million $2 Million
What happens when the insured settles with the primary carrier for less than policy limits? It depends on your jurisdiction and policy language... 25
Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928) Settlement by insured with primary carrier did not eliminate excess coverage Excess carrier no rational interest in whether insured collected full primary limits Public policy: delay, promotion of litigation, chilling effect on settlements But parties could impose conditions precedent if they chose to do so 26
Cases following the Zeig rationale: Koppers Company, Inc. v. Aetna Casualty and Surety Company, 98 F.3d 1440 (3d Cir. 1996) (Pennsylvania law) (court did not focus on policy language; settlement with primary carrier functionally exhausted primary policy) Trinity Homes, LLC v. Ohio Casualty Insurance Company, 629 F.3d 653 (7 th Cir. 2010) (Indiana law) (policy was ambiguous; did not clearly require payment of full CGL limit) Rummel v. Lexington Insurance Company, 123 N.M. 752, 945 P.2d 970 (N.M. 1997) (policy language liability of the Company under this policy shall not attach unless and until the Insured s Underlying insurance has been paid or has been held liable to pay the total applicable underlying limits did not preclude underlying insurer from settling for less than its limits and being credited for the balance) 27
Comercia Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007) Distinguished Zeig - lack of specificity in excess policy language Different result with specific policy language Public policy favors settlements, but can not supersede unambiguous policy language Policy required actual payment of losses by the underlying insurer 28
Cases following the Comercia rationale: Citigroup, Inc. v. Federal Insurance Company, 649 F.3d 367 (5 th Cir. 2011) (excess policies not ambiguous; plain language dictated primary carrier pay full limits before excess coverage was triggered) Qualcomm, Incorporated v. Certain Underwriters at Lloyd s, 161 Cal.App.4 th 184, 73 Cal.Rptr.3d 770 (Cal. Ct. App. 2008) (policy language was not ambiguous; did not apply Zeig because it placed policy considerations above plain language, employed a strained interpretation of payment, and stated that parties could use express language) 29
Policy language supporting no excess coverage: Citigroup, Inc. v. Federal Ins. Co., 649 F.3d 367, 372-73 (5 th Cir. 2011) (emphasis added) (a) all Underlying Insurance carriers have paid in cash the full amount of their respective liabilities, (b) the full amount of the Underlying Insurance policies have been collected by the plaintiffs, the Insureds or the Insureds counsel, and (c) all Underlying Insurance has been exhausted. The insurer shall only be liable to make payment under this policy after the total amount of the Underlying Limit of Liability has been paid in legal currency by the insurers of the Underlying Insurance. only after any Insurer subscribing to any Underlying Policy shall have agreed to pay or have been held liable to pay the full amount of its respective limits... in the event of the exhaustion of all of the limit(s) of liability of such Underlying Insurance solely as a result of payment of loss thereunder. 30
Policy language supporting no excess coverage: Qualcomm, Inc. v. Certain Underwriters at Lloyd s, 161 Cal.App.4 th 184, 73 Cal.Rptr.3d 770 (Cal. Ct. App. 2008) Underwriters shall be liable only after the insurers under each of the Underlying Policies have paid or have been held liable to pay the full amount of the Underlying Limit of Liability. Comercia Inc. v. Zurich American Insurance Co., 498 F.Supp.2d 1019 (E.D. Mich. 2007) Policy required actual payment of losses by underlying insurer, and stated that the policy does not provide coverage for any loss not covered by the Underlying Insurance solely by reason of the reduction or exhaustion of the available Underlying Insurance through payments of loss thereunder.
CGL Ins. Emerging Issue - Allocation When Losses Span Multiple Policy Periods Joint and Several Approach Insurer responsible for complete defense / indemnity up to policy limits Pro-Rata Approach Insurer only responsible for time on the risk
Consolidated Ins. Programs: A.K.A Wrap Ups Helps avoid much of the finger pointing and allocation arguments involved when projects are insured by traditional programs
TAKE AWAYS Review all relevant policies to assess scope, limits, and other insurance provisions Determine applicable state/jurisdiction that may govern the policies and the trade contract(s) Upstream Parties (e.g., General Contractors and Owners) should insist upon primary and non-contributory language in downstream parties (e.g., Subcontractors ) insurance policies Upstream Parties should seek to include a vertical exhaustion provision in their own insurance policies Consider whether a consolidated insurance (a/k/a wrap-up ) program is cost-effective and otherwise appropriate for your project
Questions?
Contact Us Rich Friedman rfriedman@mlalaw.com David Jordan dgj@sdvlaw.com Rebecca DiMasi rdimasi@vbllp.com