crafting key provisions to allocate risk and minimize...

Construction Contract Insurance and Indemnification Clauses Crafting Key Provisions to Allocate Risk and Minimize Exposure

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WEDNESDSAY, APRIL 11, 2012

Presenting a live 90-minute webinar with interactive Q&A

Scott D. Cahalan, Partner, Smith Gambrell & Russell, Atlanta

Tamara L. Boeck, Partner, Stoel Rives, Boise, Idaho and Sacramento, Calif.

James P. Bobotek, Senior Associate, Pillsbury Winthrop Shaw Pittman, Washington, D.C.

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Construction Contracts: Crafting Insurance and

Indemnification Clauses

James P. Bobotek

Pillsbury Winthrop Shaw Pittman LLP

6 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Tips for drafting insurance provisions

Carefully consider the type of project and all potential risks so that they may be properly allocated and/or transferred;

Clearly identify each type of coverage required, necessary endorsements, limits and sublimits (ask the client’s risk manager or insurance broker to weigh in on this);

Identify the duration of each type of coverage, taking into consideration applicable statutes of limitations and statutes of repose;

Require that certificates of insurance and copies of policies with all required endorsements be provided before any work commences and also as a condition precedent to payment;


Tips for drafting insurance provisions

Require that certificates of insurance and policies be provided upon each policy renewal or inception of new coverage;

Identify the specific forms and/or coverages for which additional insured requirements are included;

Ensure that deductibles and/or self-insured retentions may be satisfied by payment by anyone.

AVOID OUTDATED TERMS AND POLICIES!


Coverage A – Bodily Injury and Property

Damage

Coverage B – Personal and Advertising Injury

Supplementary Payments

Coverages Under a Typical CGL Policy


Coverage A – Bodily Injury and Property Damage

Insuring Agreement What the insurer giveth

Exclusions What the insurer taketh away


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. ISO Form CG 00 01 12 07



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.

Who is “the insured”?

Named Insured – important to ensure dec page is correct Insured (Who Is An Insured section)

employees, officers, directors (acting in scope of employment) real estate managers newly formed/acquired organizations (grace period)

Additional insureds



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. ISO Form CG 00 01 12 07


"Bodily injury" means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time. ISO Form CG 00 01 12 07

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"Property damage" means: a. 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

b. 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.

ISO Form CG 00 01 12 07



This insurance applies to "bodily injury" and "property damage" only if: (1) The "bodily injury" or "property damage" is caused

by an "occurrence" that takes place in the "coverage territory";

(2) The "bodily injury" or "property damage" occurs during the policy period . . .


"Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Seems straightforward – but not Major issue in construction defect cases –

is faulty workmanship an occurrence?


Products-Completed Operations

Separate sub-limits in a CGL policy

Failure to obtain or maintain leads to many breach of contract claims.

Three-part test for coverage.



Must Occur Away from Your Premises.

To be included within the products-completed operations hazard,

the bodily injury or property damage must occur away from premises owned or rented by the named insured.

Bodily injury or property damage that takes place on the named insured premises is not within the products-completed operations hazard (this can be amended by endorsement, however).



Must arise out of “Your Product” or “Your Work,” terms

defined in the CGL. Your Product. Includes goods or products manufactured, sold,

handled, distributed, or disposed of by the named insured, others trading under the named insured’s name, and includes a person or organization whose business assets a named insured has acquired.

Your Work. Includes operations performed by the named insured or on the named insured’s behalf, including material, parts, or equipment in connection with the operations. Operations or work performed on behalf of the named insured means that work done by a subcontractor is still considered your work.



Does not apply if the work has not yet been completed or abandoned. The work is considered to be completed the earlier of: When all the named insured’s work as required in a contract has been

finished. When all the work at a job site has been completed if the named

insured’s contract requires work under the same contract but at another job site. For example, a mechanical sub has a contract to repair the HVAC systems for

at three different locations. Once the sub has completed the repair of the HVAC equipment at the first location, that job is considered to be complete. Thus, any bodily injury or property damage that may arise from that first location is included within the products-completed operations hazard, even if the other two jobs are not finished.

When that part of the work done at a job has been put to its intended use by someone other than another contractor or subcontractor working on the same project.


Products-Completed Operations:

Sample Clause

The Contractor shall maintain all required insurance coverage in full force and effect until Final Completion of the Work, except that the products and completed operations coverage under the CGL and pollution legal liability insurance, and coverage under the professional liability insurance, required under this Exhibit shall be maintained (or if applicable, an extended reporting period will be exercised) for the period of any applicable statute of limitations or five years following Final Completion of the Work, whichever is longer.

Construction Clauses: Insurance and Indemnity Apr i l 2012• Boeck – Boise/Sacramento

22

Tamara L. Boeck, Partner

April 2012 • Boise/Sacramento

CONSTRUCTION CONTRACTS: Insurance and

Indemnification Clauses

Construction Clauses: Insurance and Indemnity Apr i l 2012 • Boeck – Boise/Sacramento


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Selecting Insurance

• Umbrella/Excess Insurance • Workers’ Compensation • Builder’s Risk • Professional Liability • Controlled Insurance Programs


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Selecting Insurance (cont.)

• Umbrella/Excess Insurance – Financial practicality in current market

• Greater availability – Nature of the coverage – project or company?

• Depletion risks – Does it correspond to the underlying coverage?

• Gaps in scope and obligations – common items: – “suit”? – “legally obligated to pay”? – “damages”?


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Adjudicative administrative proceedings? Ameron International Corp. v. Insurance Co. of the State of Penn., 50 Cal.

4th 1370 (2010)

IS ADMINSTRATIVE PROCEEDING “SUIT”? • Bureau of Recl’m Contract Officer (CO) determined that insured

subcontract was responsible for defective siphons. Following 22 days of administrative “trial,” Insured settled the claim for $10M and then sought to recover the settlement and defense costs from primary and excess insurers.

• Policy provided indemnification of “‘all sums which [Insured] shall become legally obligated to pay as damages’” and provided a defense duty for “‘any suit against the Insured seeking damages ….’” Policy did not define “suit” or “damages.”

• Yes, given the “trial like” proceedings, sufficient notice to insurer.


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Is it a “suit”?

Given claim risks by administrative agencies or “pre-suit” claims procedures or warranty disputes in construction matters – verify your policy scope and state’s interpretation.

• See, Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal.

4th 857 (1998), in which the court applied the “literal meaning” of the word “suit” to mean an action filed in a court of law, and therefore, ruled that none of the policies provided coverage.

• Yet, the Ameron Supreme Court distinguished Foster’s concern that the agency order did not provide insurance companies with sufficient notice on the grounds that the IBCA proceeding did.


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“Suit” in statutory requirements?

• See also Clarendon America Insurance Co. v. StarNet Ins. Co., 186 Cal. App. 4th 1397 (2010), (California Calderon Alternative Dispute Process is “the first step – in a continuous litigation process, and therefore, it meets the definition of “suit” in insurance policy). – As a result, developer was able to recover defense costs

incurred in defending against pre-litigation Calderon Right to Repair Notice.

• Know your state’s interpretation if policies do not include “claim or suit” in insuring scope, but only “suit”.


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“Legally Obligated To Pay” – Proactive Effort Discouraged Ohio Cas. Ins. Co. v. Time Warner Entm’t Co., L.P.,

(Tex. App. 2008) 244 S.W.3d 885

• GC as AI on primary and excess policies, brought dec. action against subcontractor’s insurers to recover cost of removing and replacing fiber optic cable that subcontractor installed improperly.

• The umbrella policy included standard liability policy language: – “We will pay on behalf of the ‘insured’ those sums in

excess of the ‘Retained Limit’ that the ‘Insured’ becomes legally obligated to pay by reason of liability imposed by law or assumed by the ‘Insured’ ….”

• Election to repair does not equal “legally obligated to pay”. – Critical issue on warranty items and some “Right to Repair” statutes.


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Policy Language Remain Key – “Damages”, “Expenses”, and Applicability to Injunctive Relief

• Powerine Oil Co. v Superior Court (Powerine II) (2005) 37 C4th 377, 33 CR3d 562 (order to clean up contamination).

– Insuring language includes "expenses" as defined in an "ultimate net loss" provision, and that includes sums paid for settlement, adjustment, and investigation of claims, coverage extends to expenses to comply with an administrative agency's orders.

• AIU Ins. Co. v Superior Court (1990) 51 C3d 807, 825, 274 CR 820. CGL “legally obligated" language covered cost of reimbursing government agencies and complying with injunctions ordering clean-up of contaminated property.

• Is there a threat of injunctive relief against your client (or that you are pursuing” that may be covered?

– While you may have an indemnity provision, the claim could be covered.


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“Legally Obligated To Pay” – Warranty and Right to Repair Issues and Insurance Interplay

• San Diego Housing Comm'n v Industrial Indem. Co. (1998) 68 CA4th 526, 543, 80 CR2d 393.

– Finding that CGL does not cover payments made by the insured to the injured party before a judgment has been rendered against the insured (also a voluntary payment).

– Until judgment, the insured is not "legally obligated" to make the payment.

• Practically: – Contractor put in the untenable position of not being able to repair (or

do so “voluntarily”), and having retention withheld. – Forces stand-off with Owner on lawsuit if insurer uncooperative, and

“chase” lawsuit (not defense) against third parties under indemnity agreement academically viable but may not be collectible


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• Workers’ compensation – Driven by state requirements – Know whether there are state exceptions for indemnity by

employer. e.g. Gonzales v. R. J. Novick Constr. Co. (1978) 20 C3d 798, 144 CR 408 (subcontractor paid via indemnity clause with general contractor for its own workers’ injury).

– Insert into your indemnity provisions expressly, and verify that indemnitor has CGL for such a claim.

– Consider indemnitor’s AI scope as well, is it limited? – Consider whether “waiver of subrogation of WC” any

benefit or windfall to claimant under state law.


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Coverage for AI’s Own Negligence?

• Federated Service Insurance Company v. Alliance Construction et al., 282 Neb. 638, 805 N.W.2d 468 (October 28, 2011). – An employee of subcontractor was injured and sued the

general contractor. GC sought coverage as an additional insured from subcontractor’s liability carrier.

– The Court found that the subcontract, by agreeing to make GC an additional insured, was sufficient to show that sub was required to procure tort liability coverage for GC’s negligence and that the "arising out of" language in the additional insured endorsement was enough to extend such coverage to GC.


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• Builder’s Risk – Does it dovetail with other project insurance, e.g., special

environmental, natural resources, debris/waste removal, etc.

• additional duration for project in slow economy? – “Special perils” or “All risk”?

• Renovations require critical review – Ensure policy requirements are incorporated into the

construction contract, e.g., fire watch, security, off-site storage, occupied building requirements, etc. to avoid denial after a claim and allow clarity on indemnity pursuit

– Typical waivers in contracts extend only if coverage paid


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• Professional liability – Is the project a DB, and who is obtaining coverage for the

professionals? • Critical to verify the indemnity and insurance • Are the levels, SIR, deductible sufficient? • What standard for indemnity is being used?

– Are there elements of design in a non-DB project that require extra insurance?

– Is “Green/Sustainable” included or excluded? – How broadly is “professional” defined in the policy? – Owner’s do your CMs have insurance?


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• Controlled insurance programs – Who is obtaining the program? – What does it encompass? – Limits sufficient? Project or rolling? – “Per Claim” or “Per Occurrence” SIR? – Who can satisfy the SIR?

• Forecast Homes, Inc. v. Steadfast Insurance Company (2010) 181 CA4th 1466,105 CR3d 200 (holding that only the named insured subcontractors, not the general contractor, had the right to satisfy the SIR per occurrence amounts).

• Verify policy language and “Named Insured” v. “The Named Insured” nomenclature is not a bar to rights if not intended


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SIR “Per Claim” Applies to Whole Action

Clarendon America Insurance Co. v. North American Capacity Insurance Co. (2010) 186 CA4th 556, 112 CR3d 339

reh'g denied

• Contribution action between two insurers re eight homes. • Policy provided a $25,000 “per claim” SIR, and defendant

insurer argued that it had no duty to defend insured unless and until insured expended $200,000 (eight times $25,000).

• Court of Appeal reversed: – Insured (homebuilder) had objectively reasonable

expectation that SIR would apply to class action as a whole rather than each of the homes constructed after the policy was issued.

• This is a more common position by insurers, multiple “claims” or “occurrences” – is it per trade, owner, building, and if not, does your indemnitor have a collectability issue?

Are you covered? Special Insurance

Products

Scott D. Cahalan, Partner

Smith Gambrell & Russell, LLP Promenade II, 1230 Peachtree Street NE

Atlanta, Georgia 30309 [email protected]

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Special Insurance Products

Green Building Risks Contractor’s Pollution Liability Policy Default Insurance

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Green Building Insurance Green building is the practice of creating structures and using

processes that are environmentally responsible and resource-efficient throughout a building's life cycle from siting to design, construction, operation, maintenance, renovation and deconstruction, according to the EPA

894 sustainable certification initiatives set up around the globe, according to the Winnipeg, Canada-based International Institute for Sustainable Development

U.S. Green Building Council (“USGBC”) certified its 10,000th project in mid-2011

USGBC currently certifies an additional 1.6 million feet each day around the world

Green retrofitting of commercial buildings is outpacing the construction of new green buildings.

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Green Building Insurance

Green Building Risks Property damage Certification Code compliance Defects Building performance Personal injury

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Green Building Insurance Fireman’s Fund – “Green-Gard” Insurance Products (Oct. 2006) • Green-Gard Certified – If you have a loss on your green-certified

property, Fireman’s Fund will pay to rebuild and replace to recognized green specifications. This includes coverage for vegetated roofs, alternative power systems and alternative water systems. • Green-Gard Upgrade - This coverage is specifically designed for those who have not yet made green upgrades, or have not attained green certification from the U.S. Green Building Councel (“USGBC”). If you have a total loss, Fireman’s Fund will pay to rebuild your structure, from top to bottom, as a green-certified building. • Green-Gard Commissioning - For any loss that exceeds $10,000, Fireman’s Fund will pay for a professional commissioning engineer to oversee your building’s repairs and inspect new or repaired systems

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Green Building Insurance Fireman’s Fund – Next Generation “Green-Gard” Insurance Products (July

2010) Broadening eligibility for post-loss green upgrades to include all real and personal

property that more efficiently uses energy or water, improves human health or reduces environmental impact (such as alternative energy generating equipment and water systems or green roofs);

Combining four of its endorsements – three commercial and one manufacturing – into a single endorsement, which also includes coverage for building commissioning;

For certified buildings, coverage now allows the insured to attain certification at one level above the certified green building level that the insured had prior to the loss or damage (i.e. LEED Gold instead of Silver);

Vegetated roof coverage has now been extended to vegetated swales and other vegetation that reduces the heat island effect, including vegetated walls. This coverage now applies to both certified and traditional buildings (previously it was only for certified buildings); and

Coverage has also been expanded to include porous paving – water permeable paving that allows water to drain into the ground to help manage water flow.

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Green Building Insurance Fireman’s Fund – Next Generation “Green-

Gard” Insurance Products (July 2010) • “Green Financial Incentive Coverage” policy

that provides policyholders with protection from the loss of green building-related financial incentives, including tax credits and deductions, utility rebates, and loan discounts, for a period of two (2) years after the loss.

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ISO green endorsement for commercial package policies (CP 04 02) (available March 2010) Green upgrade coverage: A percentage of the amount of loss

from 10 percent to 50 percent and a sublimit applies; Related expenses: includes waste reduction and recycling

costs, design and engineering professional fees, certification fees and building air out, with sublimits selected;

Extension for period of restoration: 30 to 180 additional days for green upgrades during restoration; and

Rating (i.e. LEED-certified, Green Globes rated, or Energy Star).

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AIG Green Building Products (Dec 2008) AIGRMGreen Reputation Coverage

Provides up to $50,000 in coverage, per occurrence, when a green building experiences adverse publicity.

Provides funds to employ crisis management specialists to manage adverse publicity; guide and counsel key company personnel; and provide other services to assist in restoring a company’s reputation

AIGRMGreen Indoor Environment Coverage. Protects against claims of bodily injury caused by any substance or

odor produced by or originated from a green building’s specialized equipment used to improve air quality or water quality control

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Green Building Insurance Argo Insurance Group – First green design

endorsement (June 2009) Available to qualified professionals, such as architects,

engineers, interior designers, land surveyors, landscape architects, scientists, and technical consultants.

Retroactive coverage available for past acts Coverage for Computer Aided Drafting including BIM Mold and pollution coverage Punitive damages where insurable by law Guarantees or warranties coverage carve back Discounts to U.S. Green Building Council

(USGBC) members

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Default Insurance

Subcontractor Default Insurance (“SDI”) Alternative to subcontractor performance bonds

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Selecting Insurance

SDI Advantages over Bonds Cost Savings Longer Duration Contractor Control Consistency Faster, Non-Adversarial Claims Higher Limits Broader damages Bad faith damages

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Selecting Insurance

SDI disadvantages over Bonds Financial risk Not appropriate for all contractors No independent analysis of subcontractors Defaults more likely No payment protection for subcontractors No legal precedence Single source

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Pollution Liability Insurance The standard 2001 CGL policy form excludes most claims for: “Bodily injury” and “property damage” arising out of the actual

or threatened discharge, dispersal, release or escape of pollutants into or upon land, the atmosphere or any water course or body of water. Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalines, chemicals, or waste materials.

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Pollution Liability Insurance Exceptions to the CGL pollution exclusion include: • Additional insured • Hostile Fire • Building heating equipment (unless disbursed through ventilation system) • Away from Insured’s Premises but only if bodily injury or property damage is

• Sustained within the building where the insured is performing operations • Due to releases from parts of mobile equipment designed to contain such

pollutants • Hostile Fire

• Products and Completed Operations (but only to the extent not expressly excluded by other portions of the exclusion). ”

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Pollution Liability Insurance

Many believe that the exceptions to the CGL pollution exclusion are inadequate because of other limitations imposed by the exclusion, inconsistent application by the courts, and the existence of sublimits.

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Pollution Liability Insurance Many insurance companies now offer Contractor’s

Pollution Liability Insurance, which generally covers a Contractor’s liability for Third party claims for environmental liabilities associated

with job-site operations of contractors Claims for remediation costs stemming from pollution

incidents resulting from contractor’s covered operations

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Additional Insureds

Naming additional insureds requires a separate endorsement to the basic CGL coverage, which can either specifically name the parties that are additional insureds or designate a general category of persons entitled to such coverage under a blanket endorsement.

The terms of the endorsement will control the nature and extent of such additional insured coverage.

General Rule – the more words included, the narrower the coverage.

Some additional insured endorsements specifically omit coverage for completed operations; others don’t.

One size does not fit all.


Tips For Drafting Additional Insured Requirements

Specify the form endorsements through which the additional insured coverage is provided.

Require that the additional insured coverage be “primary and non-contributory.”

Understand the difference between additional insured and additional named insured.

Do not rely on certificates of insurance to confirm additional insured status – require copies of policies and endorsements.


Additional Insureds – Sample Provision

The Owner, the Architect, the Lender, the Owner’s Representative, other Indemnified Parties, and other persons or entities designated by the Owner in writing (together, the “Additional Insureds” and each an “Additional Insured”) shall each be included in all policies required hereunder to be maintained by the Contractor and Subcontractors (except for workers’ compensation and professional liability insurance) as additional insureds for claims against them relating to this Project, with the understanding that any affirmative obligation imposed upon the insured Contractor and Subcontractor (including without limitation the liability to pay premiums) shall be the sole obligation of the Contractor and Subcontractor, and not of the Additional Insureds. All of the Contractor’s and Subcontractors’ liability policies shall be endorsed so as to indicate that such policies provide primary coverage (without any right of contribution by any other insurance or self-insurance, including any deductible or retention, maintained by an Additional Insured) for all claims against the Additional Insureds arising out of the performance of this Contract by the Contractor or Subcontractors, or anyone for whom the Contractor or a Subcontractor may be liable. These policies shall include a separation of insureds clause for claims against the Additional Insureds due to the negligence, act, omission or other conduct of the Contractor or its Subcontractors, or anyone for whom the Contractor or a Subcontractor may be liable.


Additional Insureds - Policy Endorsements

CG 20 10 11 85 Provides the additional insured with coverage for liability arising

out of the named insured’s work for the additional insured; Provides coverage not only while the named insured’s work is in

progress, but also for the named insured’s completed operations; Meets a contractual requirement that owners impose on general

contractors, and general contractors require of subcontractors -- that the additional insured has coverage for claims arising out of the completed work.



CG 20 10 03 97 Provides the additional insured with coverage only for liability

arising out of the named insured’s ongoing operations; Intended to limit the term of the additional insured’s coverage to

the time period during which the named insured is actually performing operations;

Does not include coverage for completed operations.



CG 20 10 10 01 Provides the additional insured with coverage only for liability arising out

of the named insured’s ongoing operations; Expressly excludes injuries or damages suffered after (i) the “named”

insured’s work at the site of the cove operations has been completed, or (ii) the relevant portion of named insured’s work has been put to its intended use;

Intended to limit the term of the additional insured’s coverage to the time period during which the named insured is actually performing operations;

Intended to deny coverage for completed operations; Adopted in conjunction with CG 20 37 10 01, a new standard form

endorsement that, if used in conjunction with this form, provides coverage similar to the CG 20 10 11 85.



CG 20 37 10 01 Provides additional insured with products-completed operations

hazard coverage arising out of the named insured’s work; Only applies to completed operations; No coverage for premises or operations; When used in conjunction with CG 20 10 10 01, provides

coverage similar to CG 20 10 11 85.



CG 20 10 07 04 Provides the “additional” insured with coverage only for liability caused in

whole or in part by the acts or omissions of either (i) the named insured or (ii) someone acting on behalf of the named insured;

Limits coverage to ongoing operations for the additional insured; Excludes injuries or damages suffered after (i) the named insured’s work

at the site of the covered operations has been completed, or (ii) the relevant portion of named insured’s work has been put to its intended use;

Intended to limit the coverage provided to the additional insured to liability caused at least in part by the named insured’s ongoing operations;

Intended to eliminate coverage for the additional insured’s sole negligence.



CG 20 37 7 04 Provides the additional insured with coverage for the products-

completed operations hazard caused in whole or in part by the acts omissions of either (i) the named insured or (ii) someone acting on behalf of the named insured;

Intended to limit the coverage provided to the additional insured to liability caused at least in part by the named insured’s completed operations;

Not intended to provide coverage for the additional insured’s sole negligence;

When used in conjunction with CG 20 10 07 04, meets typical contract requirement to provide additional insured coverage coverage for both ongoing and completed operations.


Certificates of Insurance

Most certificates of insurance are issued on a standard form prepared by ACORD for the insurance industry.

A standard certificate identifies the producer (an agent or broker), the insured, and the insurers affording coverage.

The certificate also gives basic information about the policies to which it refers, including the type of insurance, the policy numbers, the effective dates and expiration dates of the policies, and the liability limits of the policies. There is space to describe operations, exclusions, etc., added by endorsement to the policies listed, or to identify special policy provisions.



What they are: Evidence of insurance issued to the policy’s named insured.

What they are not:

Evidence of coverage for additional insureds. Evidence of waivers of subrogation. Evidence of any other special endorsements to the named

insured’s insurance policies.

Clarendon Am. Ins. Co. v. Aargus Sec. Sys., Inc., 870 N.E.2d 988, 994 (Ill. App. Ct. 2007);

Rodless Props., L.P. v. Westchester Fire Ins. Co., 40 A.D.3d 253, 835 N.Y.S.2d 154, 155 (2007).



Can certificates of insurance be used to support an estoppel theory? Majority – no:

TIG Ins. Co. v. Sedgwick James of Washington, 184 F. Supp. 2d 591 (S.D. Tex. 2001), aff’d, 276 F.3d 754 (5th Cir. 2002);

Redmond v. State Farm Ins. Co., 728 A.2d 1202 (D.C. 1999).

Minority - yes: Marlin v. Wetzel County Board of Education, 569 S.E.2d 462 (W. Va.

2002).


Acord Certificate of Insurance – 5/2010



This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate the coverage afforded by the policies below. This certificate of insurance does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder.



IMPORTANT: If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed. If SUBROGATION IS WAIVED, subject to the terms and conditions of the policy, certain policies may require an endorsement. A statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s).

Certificate of Insurance Disclaimer Language

Required by statute or regulation in some states: Alabama - Regulation 482–1–062.03(2) California - Ins. Code Sect. 384 Kansas - Stat. Sect. 40–955(b) Kentucky - 806 Ky. Admin. Regs. 14:100 Louisiana - La. Admin. Code, Title 37, Part XIII, Chpt. 81, Reg. 30, Sect. 8101 Mississippi - Regulation 2009–1, Paragraph C Minnesota - Minn. Stat. Sect. 60A.39, Subd. 3 Utah - Utah Stat. Sect. 31A-22-1704

Certificate of Insurance Disclaimer Language

Required or recommended by other states’ insurance departments: Idaho - Bulletin No. 08–03 (March 27, 2008) (required) Illinois - Memorandum (Feb. 11, 2008) (required) Indiana - Bulletin No. 170 (April 3, 2009) (recommended) Michigan - Bulletin No. 2008-11-INS (Aug. 15, 2008)

(recommended) New Hampshire - Bulletin No. 09-048-AB (July 29, 2009) (required) Texas - Bulletin No. B-0035-06 (Sept. 8, 2006) (recommended) West Virginia - Informational Letter No. 3 (Feb. 1969)

(recommended) Wyoming - Memorandum 01–2007 (June 19, 2007) (recommended)



Notice of cancellation provision changes

Prior Acord form language: Should any of the above described policies be cancelled

before the Expiration date thereof, the issuing insurer will endeavor to mail _______ days written notice to the certificate holder named to the left, but failure to mail such notice shall impose no obligation or liability of any kind upon the insurer, its agents or representatives.

5/2010 Acord form language: Should any of the above described policies be cancelled

before the expiration date thereof, notice will be delivered in accordance with the policy provisions.



Suggested language in response to the 5/2010 Acord form: All policies shall be endorsed to state that such insurance

shall be non-renewed, canceled or modified to reduce the limits only after written notice to the Owner from such insurance company or companies, mailed to the Owner in the same method as would be required under the law of the jurisdiction in which the Project is located for mailing such notice to the first named insured, no less than thirty (30) days in advance.


INDEMNITY AGREEMENTS

Intermediate Form Indemnity

Broad Form Indemnity

Comparative (Limited) Form Indemnity


TYPES OF INDEMNITY AGREEMENTS

Broad Form Indemnity: The indemnitor agrees to be responsible for any and all liability arising out of the contractually-provided products or services, including liability that is the result of the sole negligence of the indemnitee. Most states prohibit, or severely limit, the use of broad form indemnity provisions in construction contracts.



Intermediate Form Indemnity: The indemnitor agrees to be responsible for liability arising out of the contractually-provided products or services that is the result of the indemnitor's sole fault or negligence, as well as liability for which the indemnitee and indemnitor are jointly at fault. The indemnitor is not responsible for liability incurred as a result of the sole fault or negligence of the indemnitee.



Comparative (Limited) Form Indemnity: The indemnitor agrees to be responsible for liability arising out of the contractually-provided products or services that is the result of the indemnitor's fault or negligence, but only to the extent of such fault or negligence. This type of agreement mirrors the obligations imposed by tort law.


AIA A201 Indemnity Provision

The unedited AIA A201 provides that the contractor (indemnitor) will indemnify the owner (indemnitee) for loss caused by the negligent acts or omissions of the contractor, its subcontractors, or others providing goods or services on behalf of these entities. This constitutes a comparative form indemnity provision, which limits the contractor's indemnification obligation "only to the extent of" its negligence.


AIA A201 Indemnity Provision

3.18.1 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect's Consultants, and agents and employees of any of them from and against claims, damages, losses, and expenses, including but not limited to attorneys' fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligation of indemnity which would otherwise exist as to a party or person described in this Paragraph 3.18. [Emphasis added.]

General Conditions of the Contract for Construction, Document A201, American Institute of Architects, 2007 edition.


Sample Comprehensive Indemnity Provision:

Basic Indemnification

To the fullest extent permitted by law, the Contractor shall defend, indemnify and hold harmless the Owner, Lender, Lender’s construction consultant, Architect, consulting engineers, Owner’s Representative, and their respective agents and employees (the “Indemnified Parties” and each an “Indemnified Party”) from and against any and all claims, damages, fines, penalties, losses and expenses, including reasonable attorney’s fees and expert witness fees (“Indemnified Claims” and each an “Indemnified Claim”), arising, directly or indirectly, from the performance of the Work, breach of this Contract, or a Contractor Party’s negligence or willful misconduct with respect to the Project, provided that such Indemnified Claim is attributable to bodily injury, sickness, disease, or death or to injury to or destruction of tangible property (other than the Work itself to the extent amounts are recovered pursuant to builder’s risk insurance), regardless of whether or not such Indemnified Claim is caused in part by an Indemnified Party.


Sample Comprehensive Indemnity Provision:

Economic Loss Indemnification

The Contractor shall also indemnify, defend, and hold harmless the Indemnified Parties from and against Indemnified Claims for economic loss (that is, Indemnified Claims not attributable to bodily injury, sickness, disease, or death or to injury to or destruction of tangible property), but only to the extent such economic loss was caused by a breach of this Contract or a Contractor Party’s negligence or willful misconduct with respect to the Project, regardless of whether such Claim is caused in part by an Indemnified Party.


Sample Comprehensive Indemnity Provision: Catch-all Provision

Such obligations shall not be construed to negate, abridge, or otherwise reduce any other right or obligation of indemnity which would otherwise exist as to any Indemnified Party. Nothing herein shall be construed to require the Contractor to indemnify an Indemnified Party for an Indemnified Claim caused by or resulting solely from that Indemnified Party’s own negligence. It is agreed that with respect to any legal limitations now or hereafter in effect and affecting the validity and enforceability of the indemnification obligation under this Section _____, such legal limitations are made a part of the indemnification obligation to the minimum extent necessary to bring Section _____ into conformity with the requirements of such limitations, and as so modified, the indemnification obligation shall continue in full force and effect.


Tips for drafting solid indemnity clauses

“To the fullest extent permitted by law”; Do not run afoul of state-specific statutory anti-indemnity

provisions; Don’t forget to consider indemnity for economic loss – this

may require revisions to the waiver of consequential damages provision;

Make first-party damages, or damages sustained directly by the indemnitee, a part of the indemnity agreement;

Include language that allows for fees and costs associated with enforcing the indemnity obligation.

James P. Bobotek Senior Associate Washington, DC 2300 N Street, NW Washington, DC 20037-1122 +1.202.663.8930 [email protected]



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Anti-Indemnity Statutes and Limitation of Liability Clauses • Minority view – invalidates limitation of liability clauses

• Majority view – upholds limitation of liability clauses.

Majority recognize that there is a difference between indemnification (removing incentive to act with due care), and a limitation of liability (merely allows parties to allocate risk through contract), and assuming that the limitation is reasonable, does not remove the incentive to act with due care.


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Overview of Anti-Indemnification Statutes

• Last count – 46 states have some form of anti-indemnity statute; NV recently reaffirmed it had none in Lawn v. Plaster Dev. (2011)

• Generally, four broad types of anti-indemnification statutes: 1) Prohibiting indemnification for negligence and willful acts; 2) Mixed prohibiting full risk shifting for certain claims or

requiring it meet certain standards; 3) Viewed as “risk allocation” verses anti-indemnity; and 4) Requests to procure insurance (i.e. additional insured

provisions) do not generally violate anti-indemnity statute. – OR and OK are exceptions to this general rule; TX and CA new

laws have limitations as well.


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Anti-Indemnity Statutes (cont.)

• Examples: – CA: Restricts transfer of risk for sole negligence or willful

misconduct. Additional provisions include significant restriction related to residential housing projects. Allows owner and design professional to allocate risk more freely.

– CA 2013 anti-indemnity in commercial construction contracts. Cannot require insurance for excluded obligation. Owner/GC limitation for “active negligence, sole negligence or willful” conduct, but still can shift a lot of risk to design and GC.

– TX 2012 anti-indemnity in “construction contracts” where a contracting party seeks to shift the risks of negligence and similar torts from the indemnitee to a third party. Cannot require insurance for excluded obligation.


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What are the limitations of Anti-Indemnity?

• In CA and TX, new indemnity provisions must be written for all construction related contracts.

• In turn, the insurance obligations must correspond to that change.

• Where does the risk transfer? In CA, for instance, potentially the GC/Contractor, as provisions left broad negotiation rights for Owner to Contractor, but not Contractor to lower tiers.

• Drawn out litigation may increase between parties as disputes as to demonstrated fault will be required (by sub and its insurer) prior to concession of resolution: prove it.

• Owner and GC should consider insurance levels given that lower tiers may not contribute much or at all to resolution.


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Incorporating Duty to Defend Around Statute?

• Untwist Construction v. Amtech Elevator Services, (VA 2010) 699 S.E.2d 223 – Despite subcontract’s indemnification provision violation of

anti-indemnification statute, the subcontractor had a separate duty to defend and indemnify the prime contractor pursuant to the terms of the prime contract clauses, which were incorporated by reference into the subcontract.

– Caution against boilerplate “incorporation” language if lower tier.


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Untwist Construction

• Even though indemnification provision was void, Subcontractor had a separate duty to defend and indemnify the prime contractor pursuant to the terms of the prime contract clauses, which were incorporated by reference into the subcontract. The terms of the prime contract provided: – [Amtech] agrees to be bound to Uniwest by all the terms of the [Prime

Contract] and to assume toward Uniwest all of the obligations and responsibilities that Uniwest has by the [Prime Contract] assumed toward [Fountains]. All terms and conditions contained in the [Prime Contract] which, by the [Prime Contract] or by operation of law, are required to be placed in [the] Subcontract[ ], are hereby incorporated herein as if they were specifically written herein.


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Anti-Indemnity Distinguished from Insurer’s Defense of AI

Windham v. L.C.I.2 (2011) 2012 NMCA-001 Court of Appeals – Construction site injury case. Insurer argued that the anti-

indemnity statute is a general prohibition against agreements that allows an indemnitor to indemnify an indemnitee for the indemnitee’s negligence. Court held that it doesn’t apply to a defense obligation, separating the duty to defend from the duty to indemnify regardless of the primary insured’s ultimate liability to Plaintiff.

– Verify statutory anti-indemnity language to ensure contractual and insurance compliance and coverage.


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Limitation of Liability Distinguished From Anti-Indemnity

• Blaylock Grading v. Neal Everett Smith (NC 2008):

– Blaylock hired Smith to perform land surveying. Smith mis-surveyed the marks by about 1.7 feet. It required Blaylock to import fill, costing Blaylock in excess of $500,000 in additional expenses.


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Example (cont.)

• Blaylock (cont.): – The contract contained a “risk allocation” provision which

stated: “[Defendants’ liability to plaintiff] for any and all injuries, claims,

losses, expenses, damages or claim expenses arising out of this agreement, from any cause or causes, shall not exceed the total amount of $50,000, the amount of [defendants’] fee (whichever is greater) or other amount agreed upon when added under Special Conditions. Such causes include, but are not limited to, [defendants’] negligence, errors, omissions, strict liability, breach of contract or breach of warranty.”


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Example (cont.)

• Blaylock (cont.): – Smith offered to pay his $50,000 and walk. Blaylock

rejected the offer and Blaylock prevailed at trial. – On appeal, the Court cited to a NC Supreme Court

decision upholding a similar risk allocation provision.

– Bottom line: equal bargaining strength allows the parties to enforce their contact in most states with the anti-indemnity statutes.


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Example (cont.)

• For similar outcome, see: – Moore & Associates, Inc. v. Jones & Carter, Inc., Case

No. 3:05-0167, U.S. Dist. Ct. Middle Dist. Nashville, Tennessee (December 13, 2005) (holding maximum damages at $18,109.98 in lieu of the claim for over $200,000 in damages).

• “In order for [contractor] to obtain the benefit of a fee which includes a lesser allowance for risk funding, [contractor] agrees to limit J&C’s liability arising from J&C’s professional acts, errors or omissions such that the total liability of J&C shall not exceed J&C’s total fees for the services rendered on the project.”


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Limitation of liability enforceable against homeowner Zerjal v. Daech & Bauer Constr., Inc.

(Ill. App. 2010) 939 NE 2d 1067

• Homeowners filed breach of contract alleging that inspector did not inform them of significant structural problems with the home.

• By the terms of the contract, the inspector’s liability was limited to the cost of the inspection, or $175.

• Court held that the inspector’s limitation of the liability clause was valid. The court rejected homeowner’s argument that the clause was against public policy and unconscionable.


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Limitation Barred Omaha Cold Storage Terminals, Inc. v. The Hartford Ins. Co., No.

8:03CV445, 2006 WL 695456 (D. Neb. Mar. 17, 2006),

• In an unreported case, the United States District Court for the District of Nebraska held that a provision limiting a party’s liability for its own negligence to $100,000 violated Nebraska’s anti-indemnity statute, which prohibits indemnification for one’s own negligence.

• The court concluded that any clause insulating or limiting a person’s liability for its negligent acts violated Nebraska’s public policy and anti-indemnity statute.


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LOL Barred as Anti-Indemnity Lanier at McEver, L.P. v Planners and Engineers Collaborative,

Inc., 284 Ga. 204, 663 S.E.2d 240 (2008)

• Owner had built an apartment complex according to plans specified by Engineer, and then discovered defects resulting in approximately $500,000 in damages.

• Engineer defended on a limitation of liability clause capping potential liability exposure to its fees: $80,514.50.

• Supreme Court stated that a contract clause capping an engineering firm’s liability, including in respect of third-party claims, was effectively an indemnity clause, where the client was obligated to indemnify the engineering firm from the consequences of the firm’s own negligence.

• Held: Limitation of liability clause violated Georgia’s anti-indemnity law.


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Anti-Indemnity

• California – enacted an exception that explicitly permits parties to continue to limit their respective liability to each other. See Civ. Code 2782.5 and caselaw: – Markborough California, Inc. v. Superior Court (1991) 227 CA3d

705, 277 CR 919 (holding that “a provision in a construction contract limiting a party’s liability to the developer of the property for damages caused by the engineer’s professional errors and omissions is valid under [the exception to the anti-indemnity statute] if the parties had an opportunity to accept, reject or modify the provision.”).


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Anti-Indemnification Statutes (cont.)

• City of Dillingham v. CH2M Hill Northwest, Inc., 873 P.2d 1271 (Alaska 1994). – The Alaska Supreme Court held that AS 45.45.900 barred

parties from negotiating away liability to any extent. Note that the court specifically found that the Alaska legislature had considered – and rejected – an amendment to the anti-indemnity statute that would have explicitly exempted limitation of liability clauses.


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Anti-Indemnification Statutes (cont.)

• See also: – Saia Food Distribs. & Club, Inc. v. SecurityLink from

Ameritech, Inc., 902 So. 2d 46 (Ala. 2004) (holding maximum damages the owner could recover was $5,800, the purchase price of the equipment).


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Common Law Impact

• What is the impact on the clause? – Early example: W. William Graham, Inc. v. City of Cave

City, 709 S.W.2d 94 (Ark. 1986) (holding that a limitation provision in an engineer’s contract was enforceable, but finding that it applied only to limit the engineer’s liability for negligence, not contract claims).


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Common Law Impact (cont.)

• How is the clause, if otherwise valid under the anti-indemnity statute or if no such statute exists, viewed by the jurisdiction? – Clear and plain language – Conspicuous – Bargaining strength of the parties – Public policy – Can it be construed as a “cap” rather than an indemnity

restriction? • Bottom line: If permitted, who picks up the orphan risk and is

it insured?

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Tamara L. Boeck Partner Boise, ID (208) 387-4256 Direct (208) 389-9040 Fax Sacramento, CA (916) 319-4678 Direct (916) 447-4781 Fax [email protected]

Interaction Between Insurance and Indemnification

Risk allocation is the common thread between insurance and indemnification

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Insurance shifts risk of costs and liability from the insured to its insurance company

Indemnification shifts risk of costs and liability

from one contracting party to another.

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Interplay Between Indemnification Provisions and Insurance

CGL excludes coverage for claims for bodily injury incurred by insured’s employees arising out of employment

But express obligation to indemnify for injuries to employees may allow a claim under the contractual coverage endorsement

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While insurance may cover SOME risk shifted to a party through indemnification, insurance does not cover ALL risks shifted to a party through indemnification.

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Example: Owner shifts risk of pollution clean up to Contractor through indemnification, but Contractor’s CGL policy excludes coverage for pollution clean up.

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Indemnification clauses should be drafted to only shift risk to a party who can prevent, control, or insure against such risk.

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Liability insurance coverage of indemnification: Old ISO: Excludes liability assumed by the

insured under a contract or agreement, UNLESS the insured purchases contractual coverage endorsement

Modern ISO: Insured Contract provision in standard policy

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BUT A/E’s professional liability policy still typically excludes contractually assumed liabilities, UNLESS such liability would have attached to A/E in the absence of such agreement.

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A/E’s indemnification obligations should be limited to negligence to avoid loss of coverage

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A requirement to procure insurance for another party may be an exception to an anti-indemnification statute.

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Exceptions include: • additional insured exception, • the insurance policy exception, and • the insurance cap on indemnity exception

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Additional insured status allows direct coverage in the event of a third-party claim, but typically only if the claim derives from the acts or omissions of the named insured.

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Some courts have held that an additional insured provision is void if it is inextricably tied to an indemnification clause that is void under the applicable State’s anti-indemnification statute. See, e.g., Walsh Constr. Co. v. Mutual of Enumclaw, 92 P.3d 122 (Or. Ct. App. 2003); W.E. O’Neil Constr. Co. v. General Cas. of Illinois, 748 N.E. 2d 667 (2001).

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Scott D. Cahalan Smith, Gambrell & Russell, LLP 1230 Peachtree St., NE., Ste. 3100

Atlanta, GA 30309 (404)815-3500

[email protected]

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