national contract management association contractual risk management – from contract to policy...

National Contract Management Association

Contractual Risk Management – From Contract to Policy

March 16, 2011

William C. Eustace, Esq. - Marsh National Casualty Practice

Jeffrey J. Vita, Esq. – Saxe, Doernberger & Vita

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Contracts - General Principles

Ensure an adequate distribution of risks between the parties

Risk assumed should be commensurate with actor’s conduct and role

In a perfect world, the party with control or the ability to prevent loss should be the party to assume the risk

Avoid ambiguous terms and unstated assumptions – words have meaning

We live in a 2 track world - keep both in mind as you negotiate – insurance and contract provisions ideally operate in tandem

Recognize that certain risks will not be borne by the insurance markets

Whatever is not covered by insurance becomes a bet on the balance sheet of another organization

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Contracts – Real World Concerns

Some companies have more leverage than others

Invariably, the sales force at your firm will have struck a deal with just such a company

There will be little time to weigh risk versus reward before the closing

If you question the wisdom of a provision, it may be suggested that you’re not being commercial

The proposed deal, if consummated, will be material for your company in terms of revenue and/or profit

The contract terms, no matter how tiny the print or egregious the verbiage, will be characterized as standard form

If your name or approval is associated with that agreement, and it results in litigation 2 years later, none of the above will be recalled

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General Liability Insurance – Foundation

Insurance is a risk transfer device: the insurer assumes the described risk in exchange for premium

Not all risks can be transferred (at a reasonable price)

Insurers have generations of experience in claim handling

Many policy terms have acquired meaning from custom and practice – and from decades of litigation

Courts interpret liability policies as a matter of law

Meaning: unless found to be ambiguous, no parol or extrinsic evidence is required for the court to decide what the wording means

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General Liability Insurance - Continued

Coverage Grant (Coverage A - 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. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply. We may, at our discretion, investigate any "occurrence" and settle any claim or "suit" that may result.

Copyright ISO Properties, Inc. CG 00 01 (12/07)

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BI – bodily injury (resulting mental anguish)

PD – property damage – physical injury to tangible property and its loss of use

PI – personal injury – slander; invasion of privacy

AI – advertising injury – theft of competitor’s advertisement or advertising idea

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Is there a duty to defend? Compare the four corners of the complaint to the four corners of the policy

If one of the above types of injury or damage is not alleged, there is no GL coverage

If an occurrence is alleged, then evaluate conditions and exclusions

Known Loss – condition within insuring agreement

Prior to the policy period, no insured listed under Paragraph 1. of Section II – Who Is An Insured and no "employee" authorized by you to give or receive notice of an "occurrence" or claim, knew that the BI or PD had occurred, in whole or in part. If known prior to the policy period, then any continuation, change or resumption of such BI or PD during or after the policy period will be deemed to have been known prior to the policy period.

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General Liability Insurance - Occurrence

‘Occurrence’ means an accident, including continuous or repeated exposure to substantially the same general harmful conditions

One of the most litigated definitions in history

Occurrence policies cover unfortunate events (accidents) which take place during the policy period

The opposite of claims made forms, which cover the insured for claims made in the policy period - professional liability


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General Liability Insurance – Who is an Insured

Corporation (non JV/LLC/Partnership) – is an insured, along with:

Executive officers and directors (but only with respect to their duties as your officers or directors)

Stockholders (but only with respect to their liability as stockholders)

Employees and volunteer workers (only for acts within the scope of their employment by you or while performing duties related to the conduct of your business) - plus additional limitations

Organization (non JV/LLC/Partnership) – for 90 days – no coverage for occurrences before ownership

WARNING: No person or organization is an insured with respect to the conduct of any current or past partnership, joint venture or limited liability company that is not shown as a Named Insured in the Declarations.

Portions copyright ISO Properties, Inc. CG 00 01 (12/07)

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Notice: like voting in Chicago

a. You must see to it that we are notified as soon as practicable of an "occurrence" or an offense which may result in a claim. To the extent possible, notice should include:

(1) How, when and where the "occurrence" or offense took place;

(2) The names and addresses of any injured persons and witnesses; and

(3) The nature and location of any injury or damage arising out of the "occurrence" or offense.


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Cooperation and Subrogation / No Voluntary Payments

b. If a claim is made or "suit" is brought against any insured, you must …

(2) Notify us as soon as practicable (written notice)

c. You and any other involved insured must:

(1) Immediately send us copies of any … legal papers …

(2) Authorize us to obtain records and other information;

(3) Cooperate with us in the investigation or settlement of the claim or defense against the "suit"; and

(4) Assist us … in the enforcement of any right against any person or organization which may be liable to the insured because of injury or damage to which this insurance may also apply.

d. No insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.


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General Liability Insurance – Other Insurance

“b. Other Insurance

If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Coverage

Part, our obligations are limited …”

Each underwriter only wants to pay after every other underwriter on the risk has paid

Dueling ‘other insurance’ clauses

Types: – Escape Clauses – Excess Clauses – Excess and Non Contributory

Portions copyright ISO Properties, Inc. CG 00 01 (12/07)

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General Liability Insurance – Other Insurance Continued

Excess Insurance

(1) This insurance is excess over:

(a) Any of the other insurance, whether primary, excess, contingent or on any other basis: …

(b) Any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an additional insured by attachment of an endorsement.


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General Liability Insurance – More Conditions

Separation of Insureds ‘… This insurance applies:

a. As if each Named Insured were the only Named Insured; and

b. Separately to each insured against whom claim is made or "suit" is brought.’

Transfer Of Rights Of Recovery Against Others To Us

Subrogation - if the insurer pays under the policy, it can seek recovery from responsible parties, and the insured will assist it in seeking recovery


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General Liability Insurance – Select Definitions

Coverage Territory – occurrence must take place in the coverage territory (and sometimes the suit as well)

Products-completed operations hazard:

a. Includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except: …

(2) Work that has not yet been completed or abandoned. …

b. Does not include "bodily injury" or "property damage" arising out of:

(1) The transportation of property, unless the injury or damage arises out of a condition in or on a vehicle not owned or operated by you, and that condition was created by the "loading or unloading" of that vehicle by any insured …


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General Liability Insurance – Your Work

"Your work":

a. Means:

(1) Work or operations performed by you or on your behalf; and

(2) Materials, parts or equipment furnished in connection with such work or operations.

b. Includes:

(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your work", and

(2) The providing of or failure to provide warnings or instructions


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General Liability Insurance – Select Definitions

Property Damage

Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.

For the purposes of this insurance, electronic data is not tangible property.


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General Liability Insurance – Select Exclusions

Expected Or Intended Injury - "Bodily injury" or "property damage" expected or intended from the standpoint of the insured …

Pollution

(1) "Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants":

(a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or

loaned to, any insured. …

NPTE endorsements


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General Liability Insurance – Additional Exclusions

Aircraft, Auto & Watercraft

Product recall

WC / Employer’s Liability

War

Mobile Equipment

Liquor Liability

Damage to Property – including CCC

Distribution Of Material In Violation Of Statutes / Electronic Data

Damage to Impaired Property


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General Liability Insurance – Your Work Exclusion

Damage To Your Work

"Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard".

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a sub-contractor.

The exception has been the subject of much litigation in the construction defect context – particularly in PA – Kvaerner

Kvaerner – can faulty workmanship result in an occurrence?


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General Liability Insurance – Supplementary Payments

If we defend an insured against a "suit" and an indemnitee of the insured is also … a party to the "suit", we will defend that indemnitee if all of the following conditions are met:

a. The "suit" against the indemnitee seeks damages for which the insured has assumed the liability of the indemnitee in a contract … that is an "insured contract";

b. This insurance applies to such liability assumed by the insured;

c. The obligation to defend, or the cost of the defense of, that indemnitee, has also been assumed by the insured in the same "insured contract";

d. The allegations in the "suit" and the information we know about the "occurrence" are such that no conflict appears to exist between the interests of the insured and the interests of the indemnitee;


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e. The indemnitee and the insured ask us to conduct and control the defense … and agree that we can assign the same counsel to defend … and

f. The indemnitee:

(1) Agrees in writing to:

(a) Cooperate … in the investigation, settlement or defense of the "suit";

(b) Immediately send us copies of any demands, notices … or legal papers received in connection with the "suit";

(c) Notify any other insurer whose coverage is available to the indemnitee; and

(d) Cooperate with us with respect to coordinating other applicable insurance available to the indemnitee; and


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(2) Provides us with written authorization to:

(a) Obtain records and other information related to the "suit"; and

(b) Conduct and control the defense of the indemnitee in such "suit"

So long as the above conditions are met, attorneys' fees incurred by us in the defense of that indemnitee, necessary litigation expenses incurred by us and necessary litigation expenses incurred by the indemnitee at our request will be paid as Supplementary Payments. Notwithstanding the provisions of Paragraph 2.b.(2) of Section I – Coverage A – Bodily Injury And Property Damage Liability, such payments will not be deemed to be damages for "bodily injury" and "property damage" and will not reduce the limits …


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General Liability Insurance – Professional Liability Exclusion

‘This insurance does not apply to "bodily injury", "property damage" or "personal and advertising injury" due to the rendering of or failure to render any professional service by you or on your behalf’

Often asserted as a defense by insurers even when not actually incorporated into the policy

Architect, Surveyor, Engineer

GL carrier philosophy: Insureds should buy E&O coverage


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Insurance Requirements

Insurer rating

Additional insured

Certificates / Copy of policy

Deductibles and SIRs

Occurrence Form

Particular Endorsements

Notice of cancellation

Required lines of coverage and minimum limits

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Indemnity

May shift payment of defense to sub/indemnitor

May shift settlement/judgment to sub/indemnitor

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Risk Allocation Through Contract

Owner/GC/CM contract, subcontract, side agreement

Specific paragraphs for indemnity

Hidden provisions throughout contract

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Contract Language - Indemnity

“…the Subcontractor agrees to indemnify and save [GC] harmless of all loss, cost, expense, liability, damage or injury, including legal fees and disbursements …”

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Contractual Liability Exclusion

This insurance does not apply to: . . .

b. Contractual Liability

BI or PD for which insured is obligated to pay damages by reason of liability in a contract or agreement…

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Exception

This exclusion does not apply to liability for damages:

(1) Assumed in a contract or agreement that is an “insured contract,” provided the “bodily injury” or “property damage” occurs subsequent to the execution of the contract or agreement; or

(2) That the insured would have in the absence of the contract or agreement

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Insured Contract

That part of any other contract or agreement…under which you assume the tort liability of another party to pay for “bodily injury” or “property damage” to a third person

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Contractual Indemnity v. AI Coverage

AI coverage and indemnity operate independently

Indemnity covered as contractual liability

AI coverage determined by policy and AI endorsement

AI coverage not limited by states’ anti-indemnity laws (exceptions)

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Benefits of AI Status

Supplement to contractual indemnity

Protects GC from own negligence and vicarious liability

Prohibits subrogation

Avoids impact to GC’s loss history

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AI Issues

Who is an “Insured”? – Blanket Endorsement– Specifically Named

Notice to Insurer

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Evolution of the AI Endorsement

2001 20041985 1993

CG 20 10 11 85 “Arising out of”

CG 20 10 10 93 Limits coverage

to “ongoing operations”

CG 20 10 10 01 Excludes coverage

for completed operations

CG 20 10 07 04 Replaces

“arising out of” with “caused in

whole or in part.” Excludes

completed operations

CG 20 37 10 01 Reinstates completed operations coverage

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Modify the Contract

Sample Manuscript Language (best):

Subcontractor is required to add contractor as an additional insured per (CG 20 10 11 85) endorsement or equivalent (CG 20 10 10 01 is acceptable if it is accompanied by CG 20 37 10 01 or CG 20 10 07 04 and CG 20 37 07 04). All coverage shall be primary and non-contributory with any other insurance available to contractor or owner.

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Recommendations for Contract

1. Obtain AI status

2. Specify AI endorsement

3. Specify limits required

4. Specify that all AI coverage (whether purchased as primary, excess, or umbrella) shall be primary to any other insurance maintained by AI

5. Specify that AI’s own insurance will be excess of and not contribute with AI coverage regardless of “other insurance” clause

6. Obtain broad indemnification from downstream party

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AI TIPS

Always give notice and think of potential AI coverage when claim occurs

Review AI endorsements carefully for compliance with your contracts

Fight AI denials claiming that first named insured was not negligent

Don’t confuse indemnity and AI status

If providing indemnity, make sure your insurance covers your contractual obligation

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Subrogation

Subrogation allows a party who has paid a loss or debt on the part of another to succeed to the rights of that other party to pursue recovery from a responsible third party

The right to subrogation can be waived prior to loss

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Risk Transfer

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Waiver of Subrogation

Allocate the risk of property damage and do not permit reallocation through subrogation

Contractually waive subrogation

and/or

Include party and all of its subcontractors as insureds

since insurers can not subrogate against their own insureds

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Caveats

Nothing contained in this presentation should be construed as, or relied upon for, legal advice, which neither Marsh nor the author provide:– Statements concerning legal or regulatory matters should be

understood to be general observations based solely on our experience as insurance brokers and risk consultants and should not be relied upon as legal advice

– All such matters should be reviewed with the client’s own qualified legal advisors in these areas

Any comments concerning insurance policies are offered only in our capacity as an insurance broker, are based upon currently available information and are not binding on insurers

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THANK YOU!

William C. Eustace

[email protected]

(860) 723-5753

Jeffrey J. Vita

[email protected]

(203) 287-2103

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