additional insured coverage: reconciling contract and...

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Additional Insured Coverage: Reconciling Additional Insured Coverage: Reconciling Business Contract Obligations and Policy TermsMaximizing Existing Coverage and Resolving Disputes Between Additional and Named Insureds

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, DECEMBER 1, 2010

Today’s faculty features:

Joann M. Lytle, Partner, McCarter English, Philadelphia

Justin L. Weisberg, Partner, Arnstein & Lehr, Chicago

Nicholas M. Insua, Attorney, McCarter & English, Newark, N.J.

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OTHER PEOPLE’S INSURANCE:INSURANCE:

Additional Insured Coverage

BByJoann M. Lytle, Esq.

McCarter & English, LLP

December 1, 2010

g ,BNY Mellon Center1735 Market Street, Suite 700Philadelphia, PA [email protected]

Information which is copyrighted by and proprietary to Insurance Services Office, Inc. ("ISO Material") is included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their Authorized Representatives. Use by ISO Participating Insurers is limited to use in those jurisdictions for which the insurer has an appropriate participation with ISO. Use of the ISO Material by Authorized Representatives is limited to use solely on behalf of one or more ISO Participating Insurers.

Wh t i Additi l I dWhat is Additional Insured Coverage?

Risk transfer method that allows one party Risk transfer method that allows one party to a business relationship to obtain coverage under another party’s policy

5

Who Are The Players?

Additional Insured – the party seeking to take advantage of another party’s coverage

Named Insured – the party whose policy is providing coverage to the Additional Insured

6

Additi l I d Additi lAdditional Insured vs. Additional “Named Insured”

Not the same thing Not the same thing “Additional Named Insured” has no generally

accepted meaningp g

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Additional Named Insured

“A person or organization, other than the first p g ,named insured, identified as an insured in the policy declarations or an addendum to the policy declarations ”declarations.

“A person or organization added to a policy after the policy is written with the status of named yinsured. This entity would have the same rights and responsibilities as an entity named as an insured in the policy declarations ”

8

insured in the policy declarations….

Irmi Online - Glossary of Insurance and Risk Management Terms

Additional Insured

“A person or organization notA person or organization not automatically included as an insured under an insurance policy, but for whom p y,insured status is arranged, usually by endorsement. …”

Irmi Online - Glossary of Insurance and Risk Management Terms

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Benefits for Additional Insured

Coverage without premium Doesn’t erode additional insured’s own limits

of liabilityof liability No responsibility for deductibles Particularly important for companies who are y p p

self-insured or who have retentions on their own policies

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B fit f Additi l I dBenefits for Additional Insured (cont.)

Supports indemnity obligation, which only has value if the indemnitor has assets to fulfill it

Defense coverage without having to wait for a Defense coverage, without having to wait for a resolution of the indemnity obligation

Can be independent of, and provide broader p pprotection than, the indemnity obligation, i.e., for the additional insured’s negligence

Important where applicable state’s law prohibits

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– Important where applicable state s law prohibits indemnification for one’s own negligence

Di d t f Additi lDisadvantages for Additional Insured:

No control over the defense No control over the defense– Significant where both the Named Insured and Additional

Insured are sued Limits must be shared among all insureds Limits must be shared among all insureds Often no business relationship with carrier

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Implications for Named Insured

ProsAllows transfer of the obligation to defend and– Allows transfer of the obligation to defend and indemnify the indemnitee to the insurer

Cons– Erosion of limits– Limits shared by all insureds

Limits used to pay claims for which the Additional– Limits used to pay claims for which the Additional Insured may be partly or entirely at fault

– Responsibility for deductible

13– Higher premiums down the road based on loss

experience

R l ti hi Gi i Ri tRelationships Giving Rise to Additional Insured Coverage

Construction Construction– General contractor requires additional insured status on

subcontractors’ policies Vendor/VendeeVendor/Vendee

– Vendor requires additional insured coverage on manufacturer’s policy

Service AgreementService Agreement– Customer requires additional insured status on service

provider’s policy Building maintenance

14 Cafeteria operation

Relationships Giving Rise to Additional Insured Coverage (cont.)

Equipment Lease

– Lessor requires additional insured status on lessee’s insurance

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R l Lif E lReal Life Example

Manufacturer leases equipment to Customer Customer installs equipment in its plant and uses equipment to q p p q p

manufacture insulation Explosion on one of the lines Very serious injuries to Customer’s employees, including

multiple deathsmultiple deaths Customer’s employees sue Manufacturer Manufacturer has multi-million dollar retention for products

claims on its own policy, and Manufacturer’s policy does not fimpose a duty to defend

Manufacturer makes claim as an Additional Insured against Customer’s policy for both defense and indemnification

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H D O B AHow Does One Become An Additional Insured?

Generally requires both contract between the parties and an additional insured provision in anparties and an additional insured provision in an insurance policy

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The Contract

An obligation to indemnify does not confer additional insured statusadditional insured status

Does the contract contain an insurance provision?p

– Does it require that the other party name your client as an additional insured?

– Does it specify the type and amount of insuranceDoes it specify the type and amount of insurance coverage to be provided? CGL, Umbrella? Primary or Excess?

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Primary or Excess? Limits?

The Insurance Policy

A contractual obligation to provide insurance is ineffective unless the Named Insured’s policy contains an Additional Insured Clause

Usually in an endorsement Usually in an endorsement

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T f Additi l I dTypes of Additional Insured Endorsements

Both ISO endorsements and manuscript endorsementsTwo varieties– Two varieties Blanket additional insured endorsements – grant

additional insured status to categories of Additional Insureds or to those whom the NamedAdditional Insureds or to those whom the Named Insured has a contractual obligation to insure– Sometimes called automatic additional

insuredsinsureds – If the contract does not specifically require

insurance, the endorsement is ineffectiveSched led additional ins red endorsements lists

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Scheduled additional insured endorsements – lists the name of the additional insured

Verifying Additional InsuredVerifying Additional Insured Coverage

A certificate of insurance is not proof of iinsurance

The Acord form specifically states that dditi l i d iadditional insured coverage requires an

endorsement

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Verifying Additional InsuredVerifying Additional Insured Coverage (cont.)

Ideally, request a full copy of the Named I d’ liInsured’s policy

May not be that simple– For some large companies, the extent of their

insurance program, including limits and deductibles, is a closely-guarded secret, y g

– In that situation, review the additional insured endorsement(s), at a minimum

23– Review the Other Insurance Clause, if possible

Whose Coverage is Primary?

Formerly a hotly-disputed issue ISO attempted to resolve the dispute in the CGL

policy itselfTh 2001 d l t i f th ISO CGL The 2001 and later versions of the ISO CGL Policy (CG 00 01 10 01) contain an amended Other Insurance Clause (Section IV)( )

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ISO Other Insurance Clause

• States that the Named Insured’s policy is excess over any other policy on which “You” have beenover any other policy on which “You” have been added as an additional insured by way of endorsement

• Issues still arise when the other party’s insurance purports to provide only excess coveragecoverage

• Issues also arise concerning whose policy pays after the limits of the policy providing additional insured coverage are exhausted

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insured coverage are exhausted

S Of Additi l I dScope Of Additional Insured Coverage

How broad is it? Does it essentially back-stop the Named Insured’s

contractual indemnity obligation?– Which clause appears first in the contract – indemnity or pp y

insurance? Does it cover more than the Additional Insured would be

able to recover under the Indemnity Agreement?– What if the indemnity agreement contains a monetary cap?– What if the insurance provision states that the Additional

Insured will receive coverage in the minimum amount of $ ?

27$________?

Scope of Additional InsuredScope of Additional Insured Coverage (cont.)

What if the indemnity agreement is f bl ?unenforceable?

– For example, an agreement that purports to indemnify the indemnitee for its own negligence?indemnify the indemnitee for its own negligence?

– In a state where such an agreement is void as against public policy?

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Gilbane Building Co. v. Empire Steel Erectors, L.P., No. H-08-

1707, 691 F. Supp. 2d 712 (S.D.Tex. 2010)

Parr, an employee of Empire Steel, a , p y p ,Subcontractor, fell off a ladder at a construction site and sued Gilbane Building Co., the General Contractor

– Admiral Ins. Co. argued that because the indemnity agreement in the Trade Contractor Agreement was unenforceable under TX law, Gilbane was not covered as an additional insured

– Court rejected this argument and noted that the indemnity and insurance provisions were separate clauses that do not reference each other are not intertwined or interrelated and on their face

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each other, are not intertwined or interrelated, and on their face stand independently as separate obligations

Norfolk & Dedham Mut. Fire Ins. Co. v. Morrison, 456 Mass.

463, 924 N.E.2D 260 (2010)

Dr. Beverly Shafer rented office space from C iCummings– The lease agreement required Dr. Shafer to

indemnify Cummings against liability to thirdindemnify Cummings against liability to third parties and to purchase insurance adding Cummings as an additional insured

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Norfolk & Dedham Mut Fire InsNorfolk & Dedham Mut. Fire Ins. Co. v. Morrison (cont.)

One of Dr. Shafer’s patients tripped in the ki l t d d b th D Sh f dparking lot and sued both Dr. Shafer and

CummingsCummings (landlord) demanded that both Dr– Cummings (landlord) demanded that both Dr. Shafer and Norfolk (Shafer’s insurer) indemnify it

– Norfolk refused, citing a Massachusetts statute , gvoiding a tenant’s obligation to indemnify a landlord

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Norfolk & Dedham Mut Fire InsNorfolk & Dedham Mut. Fire Ins. Co. v. Morrison (cont.)

The Court held that the statutory prohibition i t i d it t did t lagainst indemnity agreements did not apply

to the insurance provision of the lease agreement:agreement:– “An agreement in a lease that the tenant

indemnify or hold harmless the landlord is distinct yfrom an agreement to purchase insurance on the landlord’s behalf, which covers the liability of both in the event of a negligently caused injury ”

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in the event of a negligently caused injury.

Typical Additional Insured Claim

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C f Additi l I d’Coverage for Additional Insured’s Own Negligence

Prior to 2004, a number of ISO additional insured endorsements provided coverage for liabilityendorsements provided coverage for liability “arising out of” the Named Insured’s operations for the Additional Insured

A number of courts construed “arising out of” to be the same as “but for” causationIf the liability would not have arisen “but for” the If the liability would not have arisen “but for” the named insured’s involvement, the additional insured has coverage

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C f Additi l I d’Coverage for Additional Insured’s Own Negligence (cont.)

Township of Springfield v. Ersek, 660 A.2d 672 (Pa. Commw. 1995) (to nship as added to pro shop’s polic as additional1995) (township was added to pro shop’s policy as additional insured “with respect to liability arising out of operations performed by” pro shop; policy covered damages for injuries to pro shop’s employee, caused by township’s negligence, because p p p y y p g g“arising out of” means causally connected with, not proximately caused by)

Aetna Cas. & Surety Guar. Corp. v. Ocean Acc. & Guarantee C 386 F 2d 413 (3d Ci 1967) ( id d f i j iCorp., 386 F.2d 413 (3d Cir. 1967) (coverage provided for injuries to named insured’s employee, caused by additional insured’s sole negligence, where the additional insured’s liability would not have arisen “but for” its engagement by or association with the

35

g g ynamed insured)

Coverage for Additional Insured’sCoverage for Additional Insured’s Own Negligence (cont.)

Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487 (5th Cir. 2000) (finding that injuries to named insured’s employee “arose out2000) (finding that injuries to named insured’s employee “arose out of” named insured’s operations, even if the cause of the injuries was the sole negligence of the additional insured)

McIntosh v. Scottsdale Ins. Co., 992 F.2d 251 (10th Cir. 1993) (festival patron injured on fairgrounds brought suit against township/additional insured. Festival operator’s insurer obligated to cover township, even though township stipulated that it was 100% negligent, since injuries “arose out of” Festival’s operations)eg ge t, s ce ju es a ose out o est a s ope at o s)

Dayton Beach Park No. 1 Corp. v. National Union Fire Ins. Co., 573 N.Y.S.2d 700 (N.Y. App. Div. 1991) (insurer was obligated to indemnify additional insured for its own negligence where policy provided coverage for liability “arising out of” operations performed by named

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coverage for liability “arising out of” operations performed by named insured)

Th 2004 A d t t ISO’The 2004 Amendments to ISO’s Endorsements

In response to these cases, in 2004, ISO amended some of its most commonly-used additional insured endorsements to make clear that the additional insured’s sole negligence isthat the additional insured s sole negligence is not covered

Additional Insured only has coverage with respect to liability for BI or PD caused, in whole or in part, by the Named Insured’s conduct

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Comparison Of Pre And PostComparison Of Pre- And Post-2004 Versions Of ISO CG 20 10

Includes copyrighted material of Insurance Services Office, Inc.,

with its permission.38

Did ISO’s Amendment ResolveDid ISO’s Amendment Resolve The Issue?

Maybe not In the Gilbane Building Co. case, Admiral

argued that since the complaint contained no ll ti f li th t fallegations of negligence on the part of

Empire (the Subcontractor/Named Insured) or anyone acting on its behalf the Generalor anyone acting on its behalf, the General Contractor was not covered

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Gilbane Building Co v EmpireGilbane Building Co. v. Empire Steel Erectors (cont.)

Court rejected Admiral’s argument and sided ith th G l C t twith the General Contractor:

– Parr (the employee) was statutorily barred from naming his employer the Subcontractor as anaming his employer, the Subcontractor, as a liable party because of the Workers’ Compensation bar

– Under Texas’s comparative responsibility statute, Parr’s own negligence is at issue, even if not pled Parr while acting in the scope of his employment for

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Parr, while acting in the scope of his employment for Empire (and thus acting on behalf of Empire), was potentially responsible for his own injuries

Dale Corp v Cumberland MutDale Corp. v. Cumberland Mut. Fire Ins. Co.

Dale Corp. v. Cumberland Mut. Fire Ins. Co., N 09 1115 2010 U S Di t LEXIS 65052No. 09-1115, 2010 U.S. Dist. LEXIS 65052 (E.D. Pa. June 30, 2010) (Pennsylvania law)

Another construction injury case– Another construction injury case– Dale Corp. was hired as a construction manager

for the Brewerytown construction project in y p jPhiladelphia

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Dale Corp v Cumberland MutDale Corp. v. Cumberland Mut. Fire Ins. Co. (cont.)

Dale retained Nesmith as a subcontractor– The Dale/Nesmith subcontract required Nesmith

to add Dale as an additional insured on Nesmith’s CGL Policy, issued by CumberlandCGL Policy, issued by Cumberland

– The Cumberland Policy contained the 2004 ISO Additional Insured Endorsement

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Nesmith rented a Genie lift and left it at the itsite

Francis, an employee of an electrical b t t d N ith’ lift ith tsubcontractor, used Nesmith’s lift without

permission and was electrocuted while working near an overhead power lineworking near an overhead power line

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Francis sued Dale and Nesmith– Dale sought coverage as an additional insured

under the Cumberland policy issued to NesmithCumberland refused to defend or indemnify– Cumberland refused to defend or indemnify, alleging that Francis’ injuries did not arise “in whole or in part” out of Nesmith’s acts or

i iomissions

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Court held that Cumberland was obligated to d f d D l b F i ’ l i tdefend Dale because Francis’ complaint alleged that Nesmith was negligent in failing to secure the lift and keysto secure the lift and keys

However, Cumberland was not obligated to indemnify Dale for its settlement with Francisindemnify Dale for its settlement with Francis

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Duty to indemnify was based on facts known t D l t ti f ttl tto Dale at time of settlement

Was Nesmith the proximate cause of the id t?accident?

– No, because it was undisputed that Nesmith did not give permission to anyone to use the liftnot give permission to anyone to use the lift

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Revised CG 20 10 Does Not LimitRevised CG 20 10 Does Not Limit Coverage To Vicarious Liability

American Empire Surplus Lines Ins. Co. v. C & F t S i lt I C N H 06Crum & Forster Specialty Ins. Co., No. H-06-004, 2006 U.S. Dist. LEXIS 33556 (S.D. Tex. May 23 2006) (language of endorsementMay 23, 2006) (language of endorsement requiring that Additional Insured’s liability arise, in whole or in part, out of Named , p ,Insured’s conduct, does not limit coverage to vicarious liability, but provides coverage

47where both Named Insured and Additional Insured are negligent)

Final Thoughts

Additional insured coverage may provide more – or less coverage than the parties anticipatedless – coverage than the parties anticipated

Review the actual insurance policy or the additional insured endorsements

Review indemnity and insurance provisions before contracts are signed

Caution the business units about signing contracts containing indemnity and/or additional insured clauses

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Stafford Webinar Stafford Webinar Additional Insured CoverageAdditional Insured Coverage

December 1, 2010December 1, 2010

Justin L. [email protected]@arnstein.com

© Justin Weisberg All Rights reserved© Justin Weisberg All Rights reserved

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Indemnification versus additional insurance• Contractual Indemnification• Contractual Insured Requirements• Additional Insured Status

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IndemnificationIndemnification

A duty to make good any loss, damage, orliability incurred by another and to theright of an injured party to claimreimbursement for its loss, damage orliability from a person who has such aliability from a person who has such aduty.

Black’s Law Dictionary 772 7th Ed. 1999

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INDEMNIFICATIONINDEMNIFICATION

Owner and ArchitectOwner and Architect

ContractorContractor

SubcontractorsSubcontractors

SuppliersSuppliers

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AIA AAIA A--401 4.6 INDEMNIFICATION401 4.6 INDEMNIFICATION

4.6.1 To the fullest extent permitted by law, the Subcontractorshall indemnify and hold harmless the Owner, Contractor,Architect, Architect’s consultants, and agents and employees ofany of them from and against claims, damages, losses and

i l di b t t li it d t tt ’ f i i texpenses, including but not limited to attorney’s fees, arising outof or resulting from performance of the Subcontractor’s Workunder this Subcontract, provided that any such claim, damage,loss or expense is attributable to bodily injury, sickness, diseaseor death or to injury to or destruction of tangible property (otheror death, or to injury to or destruction of tangible property (otherthan the Work itself), but on to the extent caused by the negligentacts or omissions of the Subcontractor, the Subcontractor’s Sub-subcontractors, anyone directly or indirectly employed by them oranyone for whose acts they may be liable, regardless of whether

t h l i d l i d i t bor not such a claim, damage, loss or expense is caused in part bya party indemnified hereunder. Such obligation shall not beconstrued to negate, abridge, or otherwise reduce other rights orobligations of indemnity which would otherwise exist as to a partyor person described in this Paragraph 4 6or person described in this Paragraph 4.6.

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EJCDC CEJCDC C--700700 To the fullest extent permitted by Laws and Regulations,

Contractor shall indemnify and hold harmless Owner andEngineer, and the officers, directors, members, partners,employees, agents, consultants and subcontractors of each and

f th f d i t ll l i t l dany of them from and against all claims, costs, losses, anddamages (including but not limited to all fees and charges ofengineers, architects, attorneys, and other professionals and allcourt or arbitration or other dispute resolution costs) arising outof or relating to the performance of the Work provided that anyof or relating to the performance of the Work, provided that anysuch claim, cost, loss, or damage is attributable to bodily injury,sickness, disease, or death, or to injury to or destruction oftangible property (other than the Work itself), including the loss ofuse resulting therefrom but only to the extent caused by any

li t t i i f C t t S b t tnegligent act or omission of Contractor, any Subcontractor, anySupplier, or any individual or entity directly or indirectly employedby any of them to perform any of the Work or anyone for whoseacts any of them may be liable .

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EJCDC CEJCDC C--700700 In any and all claims against Owner or Engineer or any of

their officers, directors, members, partners, employees,agents, consultants, or subcontractors by any employee (orthe survivor or personal representative of such employee)the survivor or personal representative of such employee)of Contractor, any Subcontractor, any Supplier, or anyindividual or entity directly or indirectly employed by any ofthem to perform any of the Work, or anyone for whose actsp y , yany of them may be liable, the indemnification obligationunder Paragraph 6.20.A shall not be limited in any way byany limitation on the amount or type of damages,compensation or benefits payable by or for Contractor orcompensation, or benefits payable by or for Contractor orany such Subcontractor, Supplier, or other individual orentity under workers’ compensation acts, disability benefitacts, or other employee benefit acts.

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EJCDC CEJCDC C--700700 The indemnification obligations of Contractor

under Paragraph 6.20.A shall not extend to theliability of Engineer and Engineer’s officers,directors members partners employees agentsdirectors, members, partners, employees, agents,consultants and subcontractors arising out of:• the preparation or approval of, or the failure to

prepare or approve maps, Drawings, opinions,prepare or approve maps, Drawings, opinions,reports, surveys, Change Orders, designs, orSpecifications; or

• giving directions or instructions, or failing togive them, if that is the primary cause of theinjury or damage.

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Intended beneficiary

Architect/owner

Agreement to assume the contractors Agreement to assume the contractors obligations

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Kiferbaum 57 Ill.App.3d 1002 (2005)

General

Subcontractor

Subcontractor (Kotecki waiver)

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Third Party BeneficiaryThird Party Beneficiary Kiferbaum 57 Ill App 3dKiferbaum 57 Ill App 3dThird Party Beneficiary Third Party Beneficiary -- Kiferbaum 57 Ill.App.3d Kiferbaum 57 Ill.App.3d 1002 (2005)1002 (2005)

Here, under paragraph 11.11.1 of the Arlington-Decking & Steelsubcontract, Decking & Steel (as "Subcontractor") agreed toindemnify Arlington (as "Contractor") against claims of injury"caused in whole or in part by any negligent act or omission of theS b t t " F th h 11 11 2 t t th t "thSubcontractor." Furthermore, paragraph 11.11.2 states that "theindemnification obligation under this Paragraph 11.11 shall not belimited in any way by any limitation on the amount or type ofdamages, compensation or benefits payable by or for theSubcontractor under * * * workmen's compensation acts "Subcontractor under workmen s compensation acts.

Reading this language, we agree with the circuit court thatDecking & Steel waived the Kotecki cap as to Arlington's claim forcontribution Whether that waiver extends to Kiferbaum's claim forcontribution. Whether that waiver extends to Kiferbaum s claim forcontribution is another matter.

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Article I of the contract between Arlingtond D ki & St l ifi lland Decking & Steel specifically

incorporates the contract betweenKiferbaum and Arlington, making it a partKiferbaum and Arlington, making it a partof the subcontract by reference. Accordingly, we examine both contracts in

determining whether Kiferbaum was anintended third-party beneficiary of theArlington-Decking & Steel subcontractArlington-Decking & Steel subcontract.

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A third party has no rights to damagesfrom a breach of a contract entered into byothers unless the agreed-to provision wasintentionally included for the direct benefitof the third partyof the third party. It is not necessary that the contract

specifically name the third partyspecifically name the third-partybeneficiary if it adequately defines a classof individual beneficiaries.o d dua be e c a es

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With respect to construction contracts, it is not enough toconfer direct third-party-beneficiary status where theparties to the contract know, expect, or intend that a thirdparty will benefit from the construction of a building in thatparty will benefit from the construction of a building in thatthey will be the users of it. The contract must be undertakenfor the third party's direct benefit and the contract mustaffirmatively make such an intention clear.y

However, if the terms of a promise for which the promiseebargained with the promisor are to render a performancedirectly to the third party, in nearly every case the thirdparty who is to receive performance will be the partyintended to be benefited.

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Liability to a third party must appear affirmatively in the contract language and the circumstances of the parties at the time of execution; it cannot b d d i l b th i tbe expanded simply because the circumstances justify or demand further liability.

Illinois courts require an express provision indicating third-party-beneficiary status because of the strong presumption against construing it, and the presumption can only be overcome by anand the presumption can only be overcome by an implication so strong as to be practically an express declaration.

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The Kiferbaum-Arlington contract contains no provisionsgranting Kiferbaum any rights to enforce subcontractsbetween Arlington and other subcontractors

nor does it contain any provisions directing that anysubcontracts undertaken by Arlington contain languagedesignating Kiferbaum as an intended third-partybeneficiary.beneficiary.

Moreover, the Arlington-Decking & Steel subcontractcontains no direct reference to Kiferbaum or anyobligations by Decking & Steel toward Kiferbaum.

Therefore, we find that Kiferbaum has no rights to enforcethe terms of the Arlington-Decking & Steel subcontract.

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While we realize it may be of little solace toKiferbaum in this instance, we feel it incumbentupon us to advise general contractors to insertl i t f t t d d t t i ilanguage into future standard contracts requiringthat their subcontractors designate the generalcontractor as an explicit third-party beneficiary ofall subcontracts entered into in furtherance of theall subcontracts entered into in furtherance of thegeneral contract. We believe such alterationswould protect general contractors by providingthem explicit rights of recovery in theirp g yappurtenant subcontracts, and would prevent thefuture recurrence of the result we have justreached.

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Kiferbaum

Incorporation clauseIncorporation clause

Sub-subcontractor’s Kotecki waiver did not flow to General Contractorto General Contractor

No requirement for sub-subcontractor to indemnify general contractor.indemnify general contractor.

But what about subcontractor’s indemnity obligation?obligation?

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Loss must be attributable to bodily, injury, sickness, disease or death or damage to tangible property

67


Provisions generally exclude professionalacts

68


Does not include “the work itself”(i e construction defects)(i.e., construction defects)

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Only to the extent caused by the negligent acts or omissions of the contractor and its subcontractors

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BrayeBraye v. Archerv. Archer--Daniels Midland Co.Daniels Midland Co., 175 Ill.2d 201 (1997), 175 Ill.2d 201 (1997)

Indemnitor can waive WorkersCompensation Act (“Kotecki”)Limits to Indemnitee

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WORKERS COMPENSATION WAIVERWORKERS COMPENSATION WAIVER

4.6.2 In claims against any person or entityindemnified under this paragraph 4.6 by anemployee of the Subcontractor, theS b t t ’ S b b t tSubcontractor’s Sub-subcontractors, anyonedirectly or indirectly employed by them or anyonefor whose acts they may be liable, theindemnification obligation under Subparagraphindemnification obligation under Subparagraph4.6.1 shall not be limited by a limitation on theamount or type of damages, compensation orbenefits payable by or for the Subcontractor orp y ythe Subcontractor’s Sub-contractors underworkers’ compensation acts, disability benefitacts or other employee benefit acts.

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INDEMNITYINDEMNITY

(Kotecki Wavier)

$1 million Damages

400,000 (W.C. limit)

Employerp y

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740 ILCS 35/1 (from Ch. 29, par. 61) Sec. 1. Withrespect to contracts or agreements, either publicor private for the construction alteration repairor private, for the construction, alteration, repairor maintenance of a building, structure, highwaybridge, viaducts or other work dealing withconstruction, or for any moving, demolition orexcavation connected therewith, every covenant,promise or agreement to indemnify or holdp g yharmless another person from that person's ownnegligence is void as against public policy andwholly unenforceable (Source: P A 77 1629 )wholly unenforceable. (Source: P.A. 77-1629.)

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INDEMNIFICATIONINDEMNIFICATION Can an exculpatory clause violate a Construction Contract

Indemnification For Negligence Act?

Paragraph 9 W(A) stated that the terms of the contract did not "createParagraph 9.W(A) stated that the terms of the contract did not create,impose, or give rise to any duty in contract, tort or otherwise" owed byBaxter & Woodman to any other individual or entity.

Paragraph 9.10(C) stated that Baxter & Woodman "will not beresponsible for the acts or omissions of [the general contractor] or ofp [ g ]any [s]ubcontractor or any other individual or entity performing any ofthe Work."

Paragraph 9.02(B) specifically incorporated all of the limitations setforth in paragraph 9.10, including the disclaimer of any duty in tort.

Paragraphs 9.10(A) and 9.02(B) violate the Construction ContractIndemnification for Negligence Act, which precludes a party fromcontractually exempting itself from liability for its own negligence. See740 ILCS 35/1 (West 2002). Dorris v. Baxter & Woodman (2008)UnpublishedUnpublished

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INSURANCE COVERAGE IMPLICATIONSINSURANCE COVERAGE IMPLICATIONS

Christy Foltz v. Safety Mutual CasualtyCorporation, 309 Ill.App.3d 686 (4th Dist.2000)

• Additional liability not covered under• Additional liability not covered underworkers compensation policy

• But see, Virginia Surety, 2007

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“Insured Contract”

That part of any other contract oragreement pertaining to your Businessunder which you assume the tort liabilityunder which you assume the tort liabilityof another

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Virginia Surety – Illinois Supreme Court, January 19, 2007

Typical Indemnity Provision which is limited tothe negligence of the indemnitor does notindemnify assume the tort liability of another andtherefore the obligation under such a provision isnot covered under a standard CGL Policy Christyy yFoltz, Michael Nicholas, and West Bend areoverruled.

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Defense Obligation UnderDefense Obligation UnderDefense Obligation Under Defense Obligation Under Indemnification AgreementIndemnification Agreement

Claims against indemnitee arise out of or are inany way connected with" a negligent act oromission by indemnitor. UDC – UniversalD l t CH2M Hill H033610 (C l A 1Development v. CH2M Hill, H033610 (Cal.App. 1-15-2010)

The person indemnifying is bound, on request ofthe person indemnified, to defend actions orproceedings brought against the latter in respectto the matters embraced by the indemnity but theto the matters embraced by the indemnity, but theperson indemnified has the right to conduct suchdefenses, if he chooses to do so. California CivilCode § 2778Code § 2778

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Contractual Insurance RequirementsContractual Insurance Requirements

§ 11.1.1 The Contractor shall purchase from and maintain in a company or companies lawfullyauthorized to do business in the jurisdiction in which the Project is located such insurance as willprotect the Contractor from claims set forth below which may arise out of or result from theContractor’s operations and completed operations under the Contract and for which the Contractormay be legally liable, whether such operations be by the Contractor or by a Subcontractor or byanyone directly or indirectly employed by any of them, or by anyone for whose acts any of themmay be liable:may be liable:

.1 Claims under workers’ compensation, disability benefit and other similar employee benefitacts that are applicable to the Work to be performed;

.2 Claims for damages because of bodily injury, occupational sickness or disease, or death ofthe Contractor’s employees;

.3 Claims for damages because of bodily injury, sickness or disease, or death of any personth th th C t t ’ lother than the Contractor’s employees;

.4 Claims for damages insured by usual personal injury liability coverage; .5 Claims for damages, other than to the Work itself, because of injury to or destruction of

tangible property, including loss of use resulting therefrom; .6 Claims for damages because of bodily injury, death of a person or property damage arising

out of ownership, maintenance or use of a motor vehicle; .7 Claims for bodily injury or property damage arising out of completed operations; and .8 Claims involving contractual liability insurance applicable to the Contractor’s obligations

under Section 3.18.

AIA A-201 2007

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§ 11.1.2 The insurance required by Section 11.1.1 shall bewritten for not less than limits of liability specified in theContract Documents or required by law, whichevercoverage is greater. Coverages, whether written on ancoverage is greater. Coverages, whether written on anoccurrence or claims-made basis, shall be maintainedwithout interruption from the date of commencement of theWork until the date of final payment and termination of anycoverage required to be maintained after final payment,coverage required to be maintained after final payment,and, with respect to the Contractor’s completed operationscoverage, until the expiration of the period for correction ofWork or for such other period for maintenance ofcompleted operations coverage as specified in the Contractco p eted ope at o s co e age as spec ed t e Co t actDocuments.

AIA A-201 2007

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§ 11.1.3 Certificates of insurance acceptable to the Owner shall be filedwith the Owner prior to commencement of the Work and thereafter uponrenewal or replacement of each required policy of insurance. Thesecertificates and the insurance policies required by this Section 11.1 shallcontain a provision that coverages afforded under the policies will not becontain a provision that coverages afforded under the policies will not becanceled or allowed to expire until at least 30 days’ prior written noticehas been given to the Owner. An additional certificate evidencingcontinuation of liability coverage, including coverage for completedoperations, shall be submitted with the final Application for Payment asrequired by Section 9.10.2 and thereafter upon renewal or replacement ofrequired by Section 9.10.2 and thereafter upon renewal or replacement ofsuch coverage until the expiration of the time required by Section 11.1.2.Information concerning reduction of coverage on account of revised limitsor claims paid under the General Aggregate, or both, shall be furnished bythe Contractor with reasonable promptness.

AIA A-201 2007

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§ 11.1.4 The Contractor shall cause thecommercial liability coverage required by theContract Documents to include (1) the Owner, theA hit t d th A hit t’ C lt tArchitect and the Architect’s Consultants asadditional insureds for claims caused in whole orin part by the Contractor’s negligent acts oromissions during the Contractor’s operations;omissions during the Contractor s operations;and (2) the Owner as an additional insured forclaims caused in whole or in part by theContractor’s negligent acts or omissions duringg g gthe Contractor’s completed operations.

AIA A-201 2007AIA A 201 2007

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Generally the obligation to name a party as an additional insured has been determined to be a duty to procure insurance rather than a duty to i d ifindemnify.

Accordingly, in Illinois for example the duty to procure insurance has been determined not to be i i l ti f th Illi i A ti I d ifi ti A tin violation of the Illinois Anti-Indemnification Act even if the Subcontractor must provide insurance to cover the contractor for its own negligence. St John v City of Naperville 155 Ill App 3d 919St. John v. City of Naperville, 155 Ill.App.3d 919, 508 N.E.2d 1128, 1131-1132 (2nd Dist. 1987); Lehman v. IBP, 265 Ill.App.3d 117, 639 N.E.2d 152, 156 (3rd Dist. 1994) ( )

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ADDITIONAL INSUREDADDITIONAL INSURED

CG 20 10 11 85

Extends To - liability arising out of “your work” for that insured by or for you.

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CG 10 07 04 Extends To - liability for “bodily injury”,

“ t d ” “ l d d ti i“property damage” or “personal and advertising injury” caused, in whole or in part by:• The insured’s acts or omissions; orThe insured s acts or omissions; or• The acts or omissions of those acting on the

insured’s behalf; • In the performance of the insured’s “ongoing

“operations for the additional insured

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CG 10 07 04 does not apply to “bodily injury” or pp y y j y

“property damage” occurring after all work for the additional insured has been

l t d h b t t it i t d dcompleted or has been put to its intended use. CG 20 37 07 04 CG 20 37 07 04 Provides completed operations coverage

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Vicarious Liability Coverage only with respect to its vicarious liability for

damages because of “bodily injury” or“property damage” directly caused by theNamed Insured’s acts or omissions at theNamed Insured s acts or omissions at thelocation designated and described in theSchedule of this endorsement and included inthe “products – completed operationshazard”

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THE HISTORY OF TARGETED TENDER IN ILLINOISTHE HISTORY OF TARGETED TENDER IN ILLINOIS

The right of a contractor or owner to demand that a subcontractor’s insurer provide primary non-contributory coverage when the contractor has been named as an additional insured on thenamed as an additional insured on the subcontractor’s policy.

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Institute of London Underwriters v. Hartford Fire Insurance Co., 240 Ill.App.3d 70 (1992)

Contractor may select additionalContractor may select additional insurance policy and instruct its own policy not to contribute.policy not to contribute.

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Bituminous Casualty Corp. v. Royal Insurance Co. of America, 301 Ill.App.3d 720 (1998)

If an insured does not select its ownIf an insured does not select its own insurer, the targeted insurer cannot demand contribution from additionaldemand contribution from additional insured’s own insurance policy pursuant to other insurance clase.

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Alcan United Inc. v West Bend Mutual Insurance Co., 303 Ill.App.3d.72 (1999)

An “other insurance” clause in a policy will not automatically reach intowill not automatically reach into coverages provided under other policies merely because such other policies are inmerely because such other policies are in existence.

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John Burns Construction Company v.Indiana Insurance Company, 189 Ill.2d 570(2000)

Illinois Supreme Court upholds theIllinois Supreme Court upholds theinsured’s right to select the insurer whichis obligated to defend even when theis obligated to defend even when thetargeted policy contains an “otherinsurance” clause

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Targeted TenderTargeted Tender

However, under Illinois law an excess policy has no obligation to provide defense or indemnity until all primary policies are exhausted. Kajimauntil all primary policies are exhausted. Kajima Const. v. St. Paul, 227 Ill.2d 102, 114 (2007).

In addition, a contract that requires a contractor to name a party as an additional insured butto name a party as an additional insured, but does not specify whether the policy is primary does not require that contractor to provide primary noncontributory coverage to theprimary noncontributory coverage to the additional insured. River Village v. Central Insurance, Co. 1-08-3529 (5th Dist. 2009).

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Other Insurance ClausesOther Insurance Clauses

Other insurance" clauses in insurance policiesusually take one of three forms. A pro rata clauseapportions liability among concurrent insurersapportions liability among concurrent insurers.An excess clause restricts liability upon aninsurer to excess coverage after another insurerhas paid up to its policy limits. An escape clausepurports to avoid all liability in the event of otherinsurance. Cincinnati v. American Alt., 886,N.E.2d 326,329 (Ind.App. 2007).

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Cincinnati Policy Pro rata allocation

A. If there is other applicable liabilityinsurance, "we" will pay only "our" shareof the loss "Our" share is the proportionof the loss. Our share is the proportionthat "our" limit of liability bears to the totalof all applicable limits. Any insurance"we" provide for a vehicle "you" do notown shall be excess over any othercollectible insurancecollectible insurance. . . .

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AAIC Policy Excess

For any covered "auto" you own, thisCoverage Form provides primaryinsurance. For any covered "auto" youdon't own, the insurance provided by thisC F i thCoverage Form is excess over any othercollectible insurance. . . .

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Lamb-Weston, Inc. v. Oregon Auto. Ins.Co., 219 Or. 110, 341 P.2d 110 (1959). Asadopted by our supreme court this ruleadopted by our supreme court, this ruleprovides, "where `other insurance'clauses conflict, . . . they are to be ignored, y gand each insurer is liable for a proratedamount of the resultant damage not toexceed his policy limits In such a caseexceed his policy limits. In such a case,there exists dual primary liability." Id. at407

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Other Insurance ClausesOther Insurance Clauses If the language of a policy is clear and unambiguous, we

give the language its plain and ordinary meaning. Thepower to interpret contracts does not extend to changingtheir terms and we will not give insurance policies antheir terms, and we will not give insurance policies anunreasonable construction. If, in fact, it is impossible toreconcile competing "other insurance" clauses byreference to the ordinary rules of contract interpretation,y p ,then there might be room to invoke the Lamb-Weston rule.Such cases should be relatively rare. First and foremost, weshould make every attempt to discern the intent of theparties who drafted "other insurance" clauses by referenceparties who drafted other insurance clauses by referenceto the language of the policies. Cincinnati v. American Alt.,at 886 N.E.2d 332.

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Here, we readily conclude that the "otherinsurance" clauses are reconcilable andprovide that Cincinnati's policy providessole primary coverage for this accident,with AAIC's policy only providing excesswith AAIC s policy only providing excesscoverage upon exhaustion of the limits ofthe Cincinnati policy. Cincinnati v.the Cincinnati policy. Cincinnati v.American Alt., at 886 N.E.2d 332.

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Equitable SubrogationEquitable Subrogation Gulf Insurance Company v TIGGulf Insurance Company v TIGEquitable Subrogation Equitable Subrogation -- Gulf Insurance Company v. TIG Gulf Insurance Company v. TIG Insurance Co.,Insurance Co., 86 Cal.App.4th 422, 432 (2nd Dist 2001) 86 Cal.App.4th 422, 432 (2nd Dist 2001)

An insurer's cause of action for equitable subrogation containssix elements:

(1) the insured has suffered a loss for which the party to becharged is liable;g ;

(2) the insurer has compensated for the loss; (3) the insured has existing, assignable causes of action against

the party to be charged, which the insured could have pursuedhad the insurer not compensated the loss;p ;

(4) the insurer has suffered damages caused by the act oromission which triggers the liability of the party to be charged;

(5) justice requires that the loss be shifted entirely from theinsurer to the party to be charged; andp y g ;

(6) the insurer's damages are in a stated sum, which is usually theamount paid to the insured, assuming the payment was notvoluntary and was reasonable.

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ADDITIONAL INSURED STATUS VERSUSADDITIONAL INSURED STATUS VERSUSADDITIONAL INSURED STATUS VERSUS ADDITIONAL INSURED STATUS VERSUS INDEMNIFICATIONINDEMNIFICATION

Comparative Fault

Impact of Anti-Indemnity Act

Direct Obligation by Insurers Direct Obligation by Insurers

Employee ExclusionEmployee Exclusion

Insured Contract

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For More Information:For More Information:

Justin L. WeisbergArnstein & Lehr LLP120 South Riverside Plaza Suite 1200Chicago, IL 60606Ph: 312-876-6688Ph: 312 876 6688Email: [email protected]

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Additional Insured Coverage: Reconciling Business Contract Obligations and Policy Terms

Maximizing Existing Coverage and Resolving DisputesBetween Additional and Named Insureds

BByNicholas M. Insua, Esq.

McCarter & English, LLP

December 1, 2010

g ,Four Gateway Center100 Mulberry StreetNewark, NJ [email protected]

Typical Scenario

A general contractor and subcontractor enter into an agreement by which the subcontractor agrees to indemnify the general contractor and name the general contractor as an additional insured.

A third party sues the general contractor. What is the p y ggeneral contractor’s response? – The general contractor-additional insured submits a

claim to the subcontractor’s insurerclaim to the subcontractor s insurer. – The general contractor-indemnitee also seeks

indemnification from the subcontractor-indemnitor. The subcontractor then submits the indemnity claim to its

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subcontractor then submits the indemnity claim to its insurer.

THE BASICS

– Make written indemnity demand upon Sub C t tContractor.

– Obtain copies of Contract, any Additional Insured endorsements and certificates ofInsured endorsements and certificates of insurance, and copies of Contractor’s insurance policy.

– Place Sub Contractor’s insurer on notice. – Consider placing own insurer on notice.

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THE BASICS (cont.)

– Acknowledge tender, under a reservation of g ,rights, within statutory time period.

– Investigate facts of claim.– Determine duty to defend and evaluate

whether to reserve rights. Request copies of contract and all Sub– Request copies of contract and all Sub Contractors’ insurance policies.

– Direct insured to tender to all Sub Contractors’

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insurers.

THE BASICS (cont.)

– Place insurer on notice of indemnity demand.

– Review indemnity and insurance procurement provisionsprovisions.

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KEY ISSUES

Does Injury “Arise Out Of” Contractor’s Work?– Vitton Const. Co. v. Pacific Ins. Co., 110 Cal.App.4th 762 (2003)

The fact that an accident is not attributable to the named insured's negligence is irrelevant when the additional insured endorsement does not purport to allocate or restrict coverage to faultrestrict coverage to fault.

– Acceptance Ins. Co. v. Syufy Enterprises, 69 Cal.App.4th 321(1999) Courts have held that the following provisions effectively Courts have held that the following provisions effectively

limit coverage to only vicarious liability: “liability connected to named insured's work excepting any loss caused by additional insured's sole negligence”; “liability with respect

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to acts or omissions by named insured”; and “only to the extent additional insured is held liable for named insured's acts or omissions.”

KEY ISSUES

Does Injury “Arise Out Of” Contractor’s Work?– St. Paul Mercury Ins. Co. v. Frontier Pac. Ins. Co., 111

Cal App 4th 1234 (2003)Cal.App.4th 1234 (2003) Liability “arising out of” or “based on” the named insured’s

work for the additional insured broadly cover an additional insured for claims caused by its own negligence

– St. Paul Fire & Marine Ins. Co. v. American Dynasty Surplus Lines Ins. Co. 101 Cal.App.4th 1038 (2002) Court found that phrase “arising out of ... your ongoing

operations” was ambiguous but looking at the contract asoperations was ambiguous, but looking at the contract as a whole to resolve ambiguity, held additional insured coverage was intended to cover only such liability as might arise from subcontractor's actual performance of the work called for This was consistent with the parties' contract

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called for. This was consistent with the parties contract under which Subcontractor's duty to indemnify Contractor was limited to liability for Subcontractor's “acts or omissions.”

KEY ISSUES

Who Controls the Defense? Who Controls the Defense?– Retaining separate counsel for the AI

Considerations with respect to use of separate counsel f AI j i t d f f AIfor AI or joint defense of AI

– Different considerations when subcontractor is a party versus situation where subcontractor is a non-party

– Controlling the defense of AI

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KEY ISSUES

Defense cost issuesPotential methods of allocating defense costs– Potential methods of allocating defense costs Equal shares among all insurers, unless GC primary/non-

contributory Other allocation methods

E th t ll AI i d t– Ensure that all AI insurers are pursued to participate in defense Burden on AI to identify and demand defense from other AI insurers

Recalculation of allocated shares– Recalculation of allocated shares Re-allocate each time an additional AI insurer is added? Retroactive versus prospective re-allocation?

– Problems when not all AI insurers agree to defend

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g Potential bad faith exposure? Attorney’s fees?

KEY ISSUES

Defense cost issues (cont.)Li it ti i d b t ti b t t– Limitations imposed by construction subcontract Issues when subcontract with general contractor requires AI insurer

to be primary and noncontributory to the Developer/GC insurance Issues when subcontract states amount of limits available to AI

– Shared defense by multiple AI carriers Specify law firm obligations Establish billing rates Detail requirements to submit budgets and plans Detail requirements to submit budgets and plans Explain reporting requirements

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KEY ISSUES

Defense cost issues (cont.)– Policies excess of SIRPolicies excess of SIR

Depending on language of SIR endorsement, payment of other valid and collectible will generally satisfy the SIR (The Vons Cos. v. United States Fire Ins. Co., 78 Cal.App.4th 52 (2000)).(2000)).– Exception where SIR endorsement states that insured “will

be responsible for full Retention Amount before the limits of Insurance under this policy apply”

Negotiations with insured for payment of SIR if insured itself isNegotiations with insured for payment of SIR if insured itself is required to satisfy SIR

– Other defense cost issues Scope of duty to defend – in California, each insurer obligated

to defend 100% (Presley Homes v American States 90

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to defend 100% (Presley Homes v. American States, 90 Cal.App.4th 571 (2001))

No AI endorsement, but Type I indemnity

KEY ISSUES

Other defense cost issues (cont.)Seeking reimbursement of defense costs from– Seeking reimbursement of defense costs from other insurers and/or from the insured Reimbursement for amounts paid in defense of claims that

were not even potentially covered (Buss and Scottsdale)were not even potentially covered (Buss and Scottsdale) Must include right to seek reimbursement in ROR

– Sharing of limits between both insureds, if defense is within limitsis within limits Implied covenant of good faith and fair dealing prohibits the

favoring of one insured over another in splitting payments made from a policy’s limits. See, e.g., Schwartz v. State F Fi d C C 88 C l A 4th 1329 (2001) (h ldi

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Farm Fire and Cas. Co., 88 Cal.App.4th 1329 (2001) (holding that settlements must be split evenly between insureds unless the co-insureds mutually agree to an unequal division)

KEY ISSUES

Other defense cost issues (cont.)D ti d t lti l i d– Duties owed to multiple insureds Denial of coverage as to one insured does not negate the

separate obligations owed by the insurer to others that may be insured under the same policybe insured under the same policy

– Application of deductible to both defense and indemnity Who pays deductible, GC or subcontractor? Splitting deductible in same manner as splitting limits?

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KEY ISSUES

What Are the “Other Insurance” Implications? Hartford Casualty Ins. Co. v. Mt. Hawley Ins. Co., 123 Cal.App.4th

278 (2004)278 (2004)– General contractor’s insurer can not be liable to a

subcontractor’s insurer for any costs of defense or indemnity where the subcontractor agreed to indemnify the general contractor for all liabilities “which arise out of or are in any way related to” the relevant construction project.

Reliance National Indemnity Co. v. General Star Indemnity Co., 72 Cal.App.4th 1063 (1999) Ca pp t 063 ( 999)– Rossmoor did not purport to establish a general rule that a

contractual indemnification agreement between an insured and a third party takes precedence over well established general rules of primary and excess coverage in an action between insurers

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of primary and excess coverage in an action between insurers

The Relationship Between Indemnity and Insurance

Rossmoor Sanitation Inc v. Pylon, 13 Cal. 3d 622 (1975).– To apportion the loss pursuant to the other insurance clause would effectively

negate the indemnity agreement and impose liability on [the owner’s insurer] g y g p y [ ]when [the owner] bargained with [the Contractor] to avoid that very result as part of the consideration for the construction agreement.

McCrary Construction Co. v. Metal Deck Specialists, Inc. 133 Cal.App.4th 1528 (2005)

An indemnity provision that does not refer to the issue of the indemnitee’s– An indemnity provision that does not refer to the issue of the indemnitee s negligence will be considered to be a general indemnity clause under which the indemnitee is not entitled to indemnity for its active negligence, unless the circumstances of the case and the language of the contract evince a different intent by the parties.

A i C lt G l St I d it C 125 C l A 4th 1510 (2005) American Casualty v. General Star Indemnity Co., 125 Cal.App.4th 1510 (2005) – Coverage for additional insured continues even if indemnity agreement is

unenforceable under Civil Code section 2782(a)) JPI Westcoast Construction v. RJS Assoc., et al., 156 Cal.App.4th 1448 (2007)

Subcontractor’s excess policy not triggered until subcontractor’s and general

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– Subcontractor s excess policy not triggered until subcontractor s and general contractor’s primary policies are exhausted, notwithstanding indemnity agreement

Other Key Issues

Issue: Is the subcontractor’s obligation to i d if th l t t dindemnify the general contractor covered under the subcontractor’s CGL policy? C f th i d it l i t Coverage for the indemnity claim turns on whether the indemnity agreement is an “insured contract” as defined by theinsured contract as defined by the subcontractor’s CGL policy.

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Insurance Coverage for Contractual Indemnity Claims: Significant CGL Provisions

Typical CGL Coverage Grant: “The company yp g p ywill pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies caused by an occurrence ”applies caused by an occurrence.

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Insurance Coverage for Contractual Indemnity Claims: Significant CGL Provisions (cont.)

Typical CGL Contractual Liability Exclusion: “This insurance does not apply to ‘bodily injury’ orinsurance does not apply to . . . bodily injury or ‘property damages’ for which the insured is obligated to pay as damages by reason of the assumption of liability in a contract or agreement.”

This exclusion would appear to eliminate coverageThis exclusion would appear to eliminate coverage for claims arising out of a contractual indemnification agreement. However . . .

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Exception to the Contractual Liability Exclusion

Typical CGL Exception to the Contractual Liability Exclusion: “This exclusion does not apply to liability forExclusion: This exclusion does not apply to liability for damages:

(1) that the insured would have in the absence of the contract or agreement; or

(2) assumed in a contract or agreement that is an(2) assumed in a contract or agreement that is an ‘insured contract’, provided the bodily injury or property damage occurs subsequent to the

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execution of the contract agreement.” What is an “insured contract”?

The Crucial Inquiry: Is the Indemnification Agreement an “Insured Contract”?

Insured Contract: Defined in the typical CGL policy to include, among other things, “that part of any other contract or agreement pertaining to [the insured’s] business underpertaining to [the insured s] business under which [the insured] assumes the tort liabilityof another party to pay for ‘bodily injury’ or ‘ d ’ hi d T‘property damage’ to a third person. Tort liability means a liability that would be imposed in the absence of any contract or

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imposed in the absence of any contract or agreement.”

The Crucial Inquiry: Is the Indemnification Agreement an “Insured Contract”? (cont.)

Thus, to qualify as an insured contract, the contract must:contract must:– Pertain to the insured’s business

Have been entered into before the underlying– Have been entered into before the underlying liability (a tort liability) occurs

– Assume the tort liability of another

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“Insured Contract” Litigation Outcomes

West Bend Mut. Ins. v. Mulligan Masonry Co., 337 Ill. App. 3d 698 (2003) (indemnity agreement was an insured3d 698 (2003) (indemnity agreement was an insured contract even though indemnitor had only agreed to provide indemnification for its own negligence and not the negligence of the indemnitee) (Illinois)negligence of the indemnitee) (Illinois)

Hankins v. Pekin Ins. Co., 713 N.E.2d 1244 (1999) (not insured contract where indemnitor only agreed to provide indemnification for its own negligence; tort liability of theindemnification for its own negligence; tort liability of the indemnitee was not assumed) (Illinois)

Golden Eagle Ins. Co. v. Ins. Co. of the West, 99 Cal. App.

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4th 837 (2002) (“The insured must assume the other contracting party’s tort liability to third parties in order for insured contract coverage to attach”) (California)

The Duty to Defend and the Impact on Policy Limits

Does an Insurer have a duty to defend an indemnitee? Maybe if the indemnitee isindemnitee? Maybe, if the indemnitee is named as an additional insured.

Alex Robertson Co v Imperial Cas & Indem Alex Robertson Co. v. Imperial Cas. & Indem. Co., 8 Cal.App.4th 338 (1992) (an insurer’s duty to defend extends only to insureds; an insurer need not defend an indemnitee).

CGL policy language states: “we will have the

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right and duty to defend the insured against any suit . . ..”

Potential Application of Cross-Suits Exclusion

Exclusion for coverage based upon claim by any “insured” against another “insured”– Twin City Fire Ins. Co. v. Ohio Cas. Ins. Co., Inc., 480 F.3d 1254

(11th Cir. 2007) Rejecting application of cross-suits exclusion in litigation between

named insured and additional insured– Great Western Drywall v. Interstate Fire & Cas. Co., 161 Cal. App.

4th 1033 (2008) Upholding application of cross suits exclusion in litigation between Upholding application of cross-suits exclusion in litigation between

named insured and additional insured– Ohio Cas. Ins. Co. v. Holcim, No. 06-0317-WS-M 2010 U.S. Dist.

LEXIS 109298 (S.D. Ala. Oct. 13, 2010) (discussing cross-suits

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exclusion)

Practical Tips

An indemnitee should examine all of its rights under: The indemnity contract The indemnity contract Any insurance policy naming it as an additional

insured Do not confuse indemnity and insurance obligations --

separate issues requiring separate analysis. Make indemnity demands and insurance tenders Make indemnity demands and insurance tenders

promptly. Caution!! Don’t ignore additional insured issues.

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g

Acknowledgement

Strafford would like to acknowledge that the foregoing slides were created by Robert Fineman, a partner with Duane Morris in Sancreated by Robert Fineman, a partner with Duane Morris in San Francisco, in conjunction with an earlier run of this program.

Due to a last minute cancellation of an unrelated speaker for thisDue to a last minute cancellation of an unrelated speaker for this program, Nicholas Insua, of McCarter & English, agreed to step in and present this material.

Accordingly, all case citations in this presentation should be updated and checked for accuracy.

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