national contract management association contractual risk management – from contract to policy...
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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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General Liability Insurance - Continued
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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General Liability Insurance - Continued
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
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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.
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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.
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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.
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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 …
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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.
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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?
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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;
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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General Liability Insurance – Supplementary Payments
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
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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General Liability Insurance – Supplementary Payments
(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 …
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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
Copyright ISO Properties, Inc. CG 00 01 (12/07)
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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
(860) 723-5753
Jeffrey J. Vita
(203) 287-2103