And the CHAOS Continues: The Evolving World of Contracts, Hold Harmless, Additional Insureds & Other Stuff

And the CHAOS Continues: The Evolving World of Contracts, Hold Harmless, Additional Insureds & Other Stuff Presented By: Jerry Hargrove J.D., CIC, CPIA, SCLA, FCLA, PICS, LICS CHAOS CONTINUES: Contracts, Hold Harmless, Additional Insured & Other Stuff 2

Indemnification Basics Indemnification agreements are used in all types of contracts in line with general contract law. The law generally allows parties to contract for any legal purpose when no fraud or coercion is involved. In contracts for construction activity, most states apply anti-indemnity law to avoid unfair power plays. (May apply to other contracts) 3 Business As Usual Shifting The Burden Hold Harmless Indemnification Agreement A clause in a contract requiring one party (Indemnitor) to assume the legal obligations of another party/s (Indemnitee). Assumed obligations often include damages, duty to defend and other costs associated with claims and lawsuits. 4

Getting The Parties Right! Indemnitor The OR is the party at risk by agreement. Can be subcontractor, tenant, lessee, etc. (Promisor) Indemnitee The EE is the party with protection by agreement. Can be general contractor, owner, landlord, etc. (Promisee) Typically follows the power tower! 5 The Power Tower Project Developer / Owner or Landlord General / Prime Contractor or Tenant Subcontractor / Sub- Tenant 6

Active vs. Passive Negligence Active Negligence An act (or failure to act) of the party primarily responsible for causing the loss or injury. Passive Negligence A liability imposed by law/contract because the passive party's conduct did not cause the loss directly. Example: A general contractor hires a framing sub who then performs negligently. The party claiming damage will usually sue both parties. The general could be entitled to indemnity from the framing sub, assuming there is a properly drawn indemnity agreement between the two, on the grounds that the general only is passively negligent. While both parties may be legally responsible, only one party the framing sub actively brought about the injury through defective work. 7 Key Concerns Indemnity 1. Assumption often demonstrates weak position (The Power Tower) 2. Often handled in a laissez-faire manner 3. Language likely over-reaching 4. Agreement is only as good as assets backing it or insurance contract promise 5. Indemnitor often takes responsibility for parties it has little or no control over 6. Inextricably tied indemnification and insurance provisions may be harmful to the indemnitee and favorable to the indemnitor. 8

Indemnification Issues To Consider 1. Who is indemnifying whom? 2. Does the contract clearly express an intent to indemnify a party against its own negligence? 3. Do the terms of the agreement determine whether the indemnitor is obligated to reimburse the indemnitee for a particular claim/s or all claims? 4. What is being indemnified: Personal injury, property damage, attorneys fees, defense costs, duty to defend, economic loss? 5. Is there a monetary limitation OR a provision requiring that the risk be covered by insurance such that the indemnity is limited to the amount of the insurance coverage? 9 Three Basic Agreements 1. Limited Form Type III 2. Intermediate Form Type II 3. Broad Form Type I Ø 10

Limited Form Type III Provides the least protection for the EE Most equitable for the OR OR only assumes risk for its own active negligence Assumes passive (vicarious) negligence of the OR s employees, agents, subcontractors, vendors sub-subcontractors, and invitees. 11 2. Intermediate Form Type II Indemnification is on a sliding scale based on specific percentages of negligence or total assumption. This type of indemnity exists when the OR promises to indemnify the EE for the EE s concurrent negligence. (When both parties have contributed to the loss.) There are two types of concurrent indemnity. 12

Full Indemnification The OR will indemnify the EE for the EE s own negligence if the injury was not caused solely by EE. This would allow a contractor (EE) who was 99% negligent to receive full indemnity (100%) from the sub (OR) who was only 1% negligent. 13 Partial Indemnification The OR promises to indemnify EE only for the percentage of negligence caused by the OR. Sets a limit on amount of indemnification. If the sub was 49% negligent and the general was 51%, the general will only be indemnified for 49% of the total damages. 14

Broad Form Type I The OR assumes the entire risk of loss, regardless of whether or not the loss is due to the sole negligence of the EE. Total Negligence Assumed Unenforceable in many states. Unconscionable! Broad Form reflects the pure power position! 15 Indemnification Simplified Basic: I pick up what liability you are responsible for because of my acts (or others for whom I am responsible) on your behalf. Intermediate: I pick up all liability, mine and yours OR I pick up only my allocated liability of total liability. (Statutory Law Determines) Broad Form: I pick up all liability, even your sole negligence. 16

No Broad Form Anti-Indemnity Statute Those states having no anti-indemnity statutes allow the Broad Form when the contract expresses, without ambiguity, the assumption of the EE s own negligence. 17 Wise Advice For Your Clients If the client signs a contract with a legally binding indemnification clause, to the extent that they have assets or applicable insurance, the client will be liable. If the client agreed to do too much, the client probably will not have broad enough insurance/limits to cover the full scope of indemnification. 18

What Type of Clause 6.30. To the fullest extent permitted by law, SUBCONTRACTOR shall indemnify and hold harmless CONTRACTOR and their agents and employees from and against all claims, damages, losses, and expenses including but not limited to attorneys fees arising out of or resulting from the performance of the work, provided that such claim, damage, loss or expense (a) is attributable to bodily injury, sickness, disease, death or property damage and (b) is caused in whole or part by any negligent act or omission of SUBCONTRACTOR, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder. 19 Perfect Indemnity Clause Party A will defend, protect, indemnify & Hold Party B harmless if anything bad happens, in which event the underwriters of each party will hire lawyers who will bicker, argue & motion each other to death about the meaning & understanding between the parties of this indemnity clause until the cost of litigating the issues exceeds the cost of defending the original claim asserted by plaintiff! 20

Jurisdictional Laws Restricting Intermediate & Broad Form Use Anti-Indemnity Statutes Case Law* 1. 44 jurisdictions have law related to certain construction activities 2. Some states prohibit only sole negligence while others include concurrent / joint 3. Statutes normally apply only to improvement to real property* 21 No Statute Bars Sole Fault Bars Intermediate And Sole Fault Continued.. States Without Statutes Alabama Alaska California 3 Nebraska D.C. 8 Arizona 2 Colorado New Hampshire 9 Maine Arkansas Connecticut New Mexico Nevada Georgia Delaware New York North Dakota Hawaii Florida 4 North Carolina Pennsylvania 1 Idaho Illinois Ohio Vermont Indiana Iowa (07-01-11) 7 Oklahoma Wisconsin* Michigan Kansas Oregon Wyoming Maryland Kentucky Rhode Island Last Updated: January, 2015 New Jersey Louisiana 5 Texas 6 South Carolina Massachusetts Utah South Dakota Minnesota Washington Tennessee Mississippi Virginia Missouri West Virginia Montana 22

The End Run Getting Around Anti-Indemnity Laws 1. Purpose of laws is to eliminate the power play and avoid unreasonable demands. 2. Sole negligence assumption is allowed in many jurisdictions through the use of additional insured endorsements. 3. Theory: Transfer is to other than the indemnitor and therefore proper. If insurer willing to take risk for premium, why should state be opposed? 23 The Additional Insured Loophole Closed in: 1. Arizona Public Contracts Only 2. Colorado 3. Georgia (Certain types of insurance exception) 4. Kansas 5. Montana 6. Nebraska (Certain types of insurance exception) 7. New Hampshire 8. New Mexico 9. Oklahoma (Not applicable to project specific policy) 10. Oregon (Absolute except for railroads) 11. Texas (Architects and Engineers only) 24

What Law Applies? Changing The Rules Article 42 Venue and Choice of Law 42.1 This contract shall be interpreted in accordance with the laws of the State of Florida without regard to any conflicts. 42.2 All claims, disputes, and lawsuits arising out of or in connection with this Contract shall be resolved or adjudicated in the city of Jacksonville in the State of Florida. 25 Another Loophole? Insured Contract Hold Harmless & Indemnification Clause f. That part of any other contract pertaining to YOUR business under which YOU assume the TORT liability of another to pay B.I/P.D. to a third party. Tort: A private wrong, giving rise to a civil action rather than a criminal one. A legal wrong committed upon the person or property of another independent of contract. 26

The Insured Contract Exclusion Exception 1. Assumption of tort damages by contract 2. A two-party agreement only between the named insured and indemnitee. Third parties are not a party to the agreement. 3. It does not apply to any contract for the named insured to carry out the contractual obligation that the indemnitee has to a third-party. 27 Workers Compensation & Indemnitee Doctrine of exclusive remedy normally protects the employer from actions in tort. In the general contractor-subcontractor relationship, a sub s employee often sues the general alleging negligence resulting in the employee s injury. The general likely had an indemnitee clause with the sub and demands [3 rd party over action] that the sub both defend and indemnify for any damages. How does the general s CGL respond? How does the sub s CGL respond? 28

The Employers Liability Exclusion Does not apply to to liability assumed by the insured under an "insured contract". Question #1: Is there an insured contract per definition of CGL? Question #2: Does the general have joint exclusive remedy protection? 29 AMENDMENT OF INSURED CONTRACT DEFINITION CG 24 26 07 04 Changes the definition of insured contract to dovetail with the new A.I. Endorsements to eliminate protection for the sole negligence of an Additional Insured. Alters definition f. in CGL to eliminate broad form indemnity. A BROAD FORM HOLDHARMLESS IS NO LONGER AN INSURED CONTRACT 30

Reasons To Avoid CG 24 26 Limited application of anti-indemnity statute to construction exposure as defined by the law. Rental or lease of construction equipment may not be reached by law. What is a construction activity reached by statute/ case law? No broad form indemnification contract will be insured on behalf of NI Written notice of change in scope of protection to the NI mandatory. 31 CG 21 39 A Killer Endorsement This endorsement eliminates item f. from the definition of an insured contract. There is now no protection for assumption of liability by contract. Written notice of change in scope of protection to the NI mandatory. 32

Supplementary Payments Thinking Opportunity! Are there circumstances under the ISO CGL where defense costs are within limits? Remember the insuring agreement: 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. We will have the right and duty to defend the insured against any "suit" seeking those damages. 33 CGL Defense Costs CGL Coverage A Is not about defending indemnitees. It is about paying damages on behalf of the INSURED who has agreed by insured contract to pay on behalf of another party. Such costs are damages under the CGL and therefore are Within Limits. Supplementary Payments pays defense costs for an indemnitee when named insured is required by Contract and the terms of defense are met. Defense Costs Outside Limits 34

Supplementary Payments & Direct Defense for Indemnitee 1. Named Insured may get the value of direct defense protection for an indemnitee. 2. What s the value? 3. This protection requires significant action on the parties to come to fruition. 35 What Is Required To Provide Indemnitee With Direct Defense? a. Both the Insured & Indemnitee must be sued b. Suit seeks damages assumed by an insured contract c. Policy applies to liability assumed by the insured d. Obligation to defend assumed by insured contract e. No conflict between interests of the two parties f. Both parties ask company to conduct/ control defense & use the same counsel 36

Additional Obligations Of Indemnitee a. Cooperate Investigation, Settlement or Defense b. Immediately send legal documents to company c. Notify any other insurer with coverage for indemnitee d. Cooperate in coordinating other applicable & available insurance e. Authorize company to obtain records & documents related to the suit 37 What Happens When Insured Status Fails? Belt & Suspenders Theory Indemnitee may receive direct defense from indemnitor s insurer under Supplementary Payments if an insured contract specifically requires a duty to defend! No damages are paid on behalf of, or reimbursed to the indemnitee under this coverage part All damages for B.I. or P.D. on behalf of the indemnitee must come from the limits of liability 38

Shortcomings of Liability Insurance For Collateralizing Indemnification Agreements 1. Scope of coverage is determined by insurance policy, not business contract. 2. Hold harmless language is broader than protection provided by insurance products. 3. Limits required are often not sufficient to equal ALL damages. 39 Pitfalls To Defense & Litigation Expense Supplementary Payments a. All obligations cease with the exhaustion of limits. How? b. Indemnitee violates conditions or terms of the coverage part not met. c. Defense costs under Supplementary Payments do not reduce Limits of Liability. However, if conditions / terms violated, defense reverts back to Coverage - A, insured contract and costs are within limits. 40

41 Should The Agent Read The Insured s Contracts? Why? Get the parties correct Help client avoid breach of contract Avoid over insuring the AI Manage E & O exposure 42

Contracts In Context Business Contract vs. Insurance Contract Insurer normally not able to limit protection based on the contract between the parties. Lives with its scope of coverage. Insurer s obligation is not broadened by the indemnity terms of contract. 43 Agent s Duty Contract Review Limited Advice Do not create a higher standard or practice law. a. Match existing coverage to that required by contract. b. Advise in writing when exact match is not in place. Insured and/or others c. Do not issue Certificate for coverage or conditions that are not exact or do not exist. Reject pressure! 44

Remember Never interpret/give advice on legal status of hold harmless terms. Refer to attorney. Advise not to depend on insurance to be broad enough protection to fully collateralize. Utilize engagement correspondence pointing out your information is insurance specific only. 45 What is? Broad Form Contractual Liability Most contractual insurance requirements mandate Broad Form Contractual Liability Those words do not exist in the ISO CGL What does it mean and is it a part of the new generation CGLs? 46

Length of Time Products-Completed Operations Required By Contract Subcontractor agrees to continue PCOH Coverage for a period of not less than 36 months Subcontractor after the last day, agrees of the to continue last month, of work PCOH on coverage behalf of for Contractor. a period of not less than 36 months after the Why last is this day requirement of the last month a problem? of work on behalf of Contractor. Whose problem is this? 47 Additional Insured Issues 1. A better option for protection? For Who? 2. Contractual traps related to additional insured status: a. Scope of coverage per contract 1. Ongoing operations only? 2. Ongoing + Completed Ops? b. What locations/projects? 48

ISO Additional Insured Endorsements CG 20 10 11 85 Scheduled / OG/PCOH CG 20 10 03 97, et. al.- Scheduled / OG CG 20 26 07 04 (11 85?) Designated / OG CG 20 33 03 97 et. al. Automatic / OG CG 20 37 10 01 Additional Insured Owners, Lessees or Contractors Completed Operations [Scheduled Endorsement] (E & O Trap) 49 ISO Additional Insured Form Changes 1985 CG 20 10 11 85 Arising out of Ongoing or PCOH 1993 CG 20 10 10 93 Limited to Ongoing Operations 2001 CG 20 10 10 01 Ongoing Only + CG 20 37 07 04 PCOH Scheduled 2004 CG 20 10 07 04 Caused in whole or in part CG 20 37 07 04 PCOH Scheduled 2013 CG 20 10 04 13 Revisions: Not broader than contract Limit Per Contract Extent Permitted by law CG 20 37 04 13 50

What About Sole Negligence? ISO altered all construction related A.I. endorsements to eliminate any coverage on behalf of an A.I. for its sole negligence. Additional Insured as scheduled, but only with respect to liability for bodily injury, property damage or personal and advertising injury caused, in whole or in part by: 1. Your acts/ omissions; or 2. The acts/ omissions of those acting on your behalf in ongoing operations only. 51 Additional Insured Traps Is Automatic A.I. Status endorsement broad enough to comply with contract? OG - PCOH Are there any unusual terms, exclusions, conditions or restrictions in the G.L. which is unknown to the A.I.? Any required notice of cancellation or change to policy? Guiding Principle: Coordination of AI status vs. contract requirements is a check-off item. 52

CG 20 33 ADDITIONAL INSURED OWNERS, LESSEES OR CONTRACTORS AUTOMATIC STATUS WHEN REQUIRED IN CONSTRUCTION AGREEMENT WITH YOU Key Exclusion: 2. b. "Bodily injury" or "property damage" occurring after: (1) All work, including materials, parts or equipment furnished in connection with such work, on the project (other than service, maintenance or repairs) to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed; or 53 Plus.. b. (2) That portion of "your work" out of which the injury or damage arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as a part of the same project. 54

2013 CGL AI Changes Because of anti-indemnification laws prohibiting provisions in construction contracts requiring a party to indemnify another party for such other party s own negligence or fault (Sole and/or partial), ISO has revised many AI endorsements. The revisions apply to a large number of AI endorsements, including: CG 20 10; CG 20 26; CG 20 33; CG 20 37; CG 20 38 (NEW) There are 3 revisions 55 2013 ISO CGL Additional Insured Form Revisions 1. The insurance afforded to such AI only applies to the extent permitted by law; and 2. If coverage provided to the AI is required by a contract or agreement, the insurance afforded to such AI will not be broader than that which you are required by the contract or agreement to provide for such AI. 56

Limit On Dollar Amount of Protection 3. If coverage provided to the AI is required by a contract or agreement, the most we will pay on behalf of the AI is the amount of insurance: 1. Required by the contract or agreement; or 2. Available under the applicable Limits of Insurance shown in the Declarations; whichever is less. 57 Additional Insured Owners, Lessees Or Contractors Automatic Status For Other Parties When Required In Written Construction Agreement CG 20 38 Sub NIs often enter into Contracts with a GC wherein the NI Sub agrees to provide AI status to upstream parties the GC has contracted with, such as developers/owners. Horizontal or vertical upstream parties. CG 20 33 not designed to accommodate such scenarios because the NI Sub seldom contracts with the upstream parties. 58

Other Insurance & Indemnification What happens when there is a conflict of other insurance clauses? Four general possibilities: 1. Both primary (Shared payment) 2. Indemnitor primary & indemnitee excess (Actual Intent) 3. Indemnitor excess & indemnitee primary (Opposite Intent) 4. Both policies excess (Shared payment) Coordination of policy language is mandatory! Unless 59 Court Interpretation A court reviews the wording of the policies at risk; it will not review the circumstances surrounding the making of the contract itself. It is not the contract between the parties that determines the outcome, it is the interpreted language of the insurance policy clauses. Clear and unambiguous policy language dictates how the insurers will or will not contribute, and courts will honor such contract language before imposing interpretative solutions of their own. 60

Shared Loss Methods Method 1 Equal Shares; Where liability is shared among insurers covering the same risk, the loss is borne equally by each insurer until the lower policy limit is exhausted, with the policy with the higher limit contributing any remaining amounts within its limit. Method 2 Pro rata: How to allocate limits when two or more policies are determined to be primary on the same loss and must share the overall loss on a pro rata basis. If the policy language is not conclusive, courts generally will require pro rata allocation.14 (Couch, Insurance (2d Ed.) 51-36; 7C Appleman Insurance Law and Practice 4682) To calculate insurance pro rata responsibility when multiple policies apply, determine the percentage each policy contributes to the total amount of insurance. For example, if you have two policies totaling $1,500,000 -- one for $1,000,000 and one for $500,000 -- the first policy will cover 67% of the loss and the second will pay 33% of the loss. 61 Primary & Non-Contributory Can you find Non-contributory in the CGL? How does the agent know coverage is primary and non-contributory to the an additional insured? Putting primary and non-contributory on a certificate may open agency up to an E & O claim Who controls primacy? How to guarantee primacy for a GC/Landlord on subcontractor s or tenant s policy 62

CG 20 01- Primary and Noncontributory Other Insurance Condition Endorsement Coverage is provided to an AI on a primary and noncontributory basis, provided that: The additional insured is a named insured on other insurance available to them; and A written contract or agreement has been entered into by the insured stating that the insured's policy will be primary and would not seek contribution from any other insurance available to the AI. 63 Waiver of Subrogation A. What does the unambiguous policy language say? 8. Transfer Of Rights Of Recovery Against Others To Us If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after the loss to impair them. At our request, the insured will bring suit or transfer those rights to us and help us enforce them. [Source: ISO CG 00 01] 64

Waiver CG 24 04 When is the Waiver endorsement required? 1. Clear up any questions if waiver is granted before a loss without argument. 2. To provide absolute right to waive at anytime. 65 Special Notice This program is presented for information and education purposes only. Refer to specific policy language for coverage issues or loss examples. Seek the advice of a qualified attorney for legal advice. 66

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