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Construction Contract Insurance and Indemnification Clauses

Crafting Provisions to Allocate Risk and Minimize Liability

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUES DAY, JUNE 14, 2011

Today’s faculty features: James P . Bobotek, S enior Associate, Pillsbury Winthrop Shaw Pittman, Washington, D.C. Tamara L. Boeck, Of Counsel, Stoel Rives, Boise, Idaho S cott D. Cahalan, Partner, Smith Gambrell & Russell, Atlanta

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Construction Contracts: Construction Contracts: Crafting Insurance and Indemnification Clauses Indemnification Clauses

James P. Bobotek Pillsbury Winthrop Shaw Pittman LLP

Tips for drafting insurance provisions 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;  Cl l id tif h t f i d  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;

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

commences and also as a condition precedent to payment;

Tips for drafting insurance provisions 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 under which your client is to be made an additional insured;  Ensure that deductibles and/or self-insured retentions may be satisfied by payment by anyone.  AVOID OUTDATED TERMS AND POLICIES!

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

Coverages Under a Typical CGL Policy g yp y

• Coverage A – Bodily Injury and Property

Damage

• Coverage B

Personal and Advertising Injury

• Coverage B – Personal and Advertising Injury
• Supplementary Payments

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

Coverage A – Bodily Injury and Property Damage Property Damage

 I i A t  Insuring Agreement

• What the insurer giveth

 Exclusions  Exclusions

• What the insurer taketh away

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

C A I i A t Coverage A - Insuring Agreement

We will pay those sums that the insured becomes legally obligated to pay as becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. pp

ISO Form CG 00 01 12 07

10 10 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Coverage A Insuring Agreement 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.

 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

11 11 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

C A I i A t Coverage A - Insuring Agreement

We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily to pay as damages because of bodily injury" or "property damage" to which thi i li this insurance applies.

ISO F CG 00 01 12 07

12 12 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

ISO Form CG 00 01 12 07

"Bodily injury" means bodily injury, sickness or disease sustained by a person sustained by a person, including death resulting from any of these at any y y 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 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 the time of the occurrence that caused it.

ISO Form CG 00 01 12 07

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Coverage A - Insuring Agreement g g g

This insurance applies to "bodily injury" and "property damage" only if: 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 during the policy period . . .

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"Occurrence" means an accident "Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. g

• Seems straightforward – but not
• Major issue in construction defect cases –

j is faulty workmanship an occurrence?

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Products-Completed Operations

 Separate sub-limits in a CGL policy  Failure to obtain and procure leads to many breach of contract claims.  Three-part test for coverage.

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Products-Completed Operations Products Completed Operations

 Must Occur Away from Your Premises.

• To be included within the products completed operations hazard
• 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
• 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).

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Products-Completed Operations

 Must arise out of “Your Product” or “Your Work,” terms defined in the CGL.

• Your Product

Includes goods or products manufactured sold

• 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

• r organization whose business assets a named insured has

acquired 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

• r work performed on behalf of the named insured means that

work done by a subcontractor is still considered your work.

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Products-Completed Operations Products Completed Operations

 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.

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the same project.

Products-Completed Operations: Sample Clause 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 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.

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CONSTRUCTION CONTRACTS: CONSTRUCTION CONTRACTS: CONSTRUCTION CONTRACTS: CONSTRUCTION CONTRACTS: Insurance and Insurance and Indemnification Clauses Indemnification Clauses

Tamara L. Boeck June 2011

• Boise/Sacramento

June 2011 • Boise/Sacramento

Construction Clauses: Insurance and Indemnity Construction Clauses: Insurance and Indemnity Construction Clauses: Insurance and Indemnity

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June 2011 • Boeck – Boise/Sacramento

Selecting Insurance Selecting Insurance Selecting Insurance Selecting Insurance

• Umbrella/Excess Insurance

Umbrella/Excess Insurance

• Workers’ Compensation
• Builder’s Risk

Professional Liability

• Professional Liability
• Controlled Insurance Programs

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Selecting Insurance (cont.) Selecting Insurance (cont.) Selecting Insurance (cont.) Selecting Insurance (cont.)

• Umbrella/Excess Insurance

Umbrella/Excess Insurance – Financial Practicality – Does it correspond to the underlying coverage? Nature of the coverage project or company – Nature of the coverage – project or company

Construction Clauses: Insurance and Indemnity Construction Clauses: Insurance and Indemnity

June 2011 • Boeck – Boise/Sacramento 24

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Primary and excess insurer Primary and excess insurer may may be be obligated to defend and indemnify

• bligated to defend and indemnify

insured who participates in an adjudicative administrative proceeding. insured who participates in an adjudicative administrative proceeding. Ameron Ameron International Corp v Insurance Co of the State of Penn International Corp v Insurance Co of the State of Penn 50 50 Ameron Ameron International Corp. v. Insurance Co. of the State of Penn., International Corp. v. Insurance Co. of the State of Penn., 50 50

• Cal. 4th 1370 (2010)
• Cal. 4th 1370 (2010)
• Bureau of Recl’m Contract Officer (CO) determined that insured

Bureau of Recl m Contract Officer (CO) determined that insured subcontract was responsible for defective siphons. Instead of challenging CO’s decision in U.S. Court of Federal Claims, Insured challenged the CO’s decision by appealing to Interior Board of Contract Appeals (IBCA). Following 22 days of “trial,” the 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 f f “‘

Construction Clauses: Insurance and Indemnity

a defense duty for “‘any suit against the Insured seeking damages ….’” Policy did not define “suit” or “damages.”

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International Corp. International Corp. (cont) (cont) International Corp. International Corp. (cont) (cont)

• Trial court and appellate court applied holding of Foster-Gardner, Inc. v. National

pp pp g 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.

• Supreme Court reversed, stating that its holding in Foster-Gardner, which

Supreme Court reversed, stating that its holding in Foster Gardner, which concerned an administrative action designed to obtain a negotiated settlement of the insured’s liability for environmental pollution, was based on its concern that the order did not provide insurance companies with sufficient notice of the parameters of the action against the insured. In this instance, however, the parameters of the action against the insured. In this instance, however, the Supreme Court found that the adjudicative IBCA proceeding did not raise the same concern in that a complaint filed in the IBCA gave “as much, if not more, notice to insurers” as would a complaint filed in court, and noting the similarities between a court and an IBCA proceeding (the latter being authorized to conduct

Construction Clauses: Insurance and Indemnity

bet ee a cou t a d a C p oceed g (t e atte be g aut o ed to co duct trials, determine liability and award damages).

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• See also Clarendon America Insurance Co v

See also Clarendon America Insurance Co. v. StarNet Ins. Co., 186 Cal. App. 4th 1397 (2010), (California Calderon Alternative Dispute Process is “th fi t t i ti liti ti “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 Calderon Notice

Construction Clauses: Insurance and Indemnity

Calderon Notice.

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“Legally Obligated To Pay” Language in Primary and Umbrella Polices “Legally Obligated To Pay” Language in Primary and Umbrella Polices Important In Determining Whether Additional Insureds Will Be Paid Important In Determining Whether Additional Insureds Will Be Paid Ohio Ohio Cas

• Cas. Ins. Co. v. Time Warner

. Ins. Co. v. Time Warner Entm’t Entm’t Co., L.P., Co., L.P., , , , , (2008) 244 (2008) 244 S.W.3d S.W.3d 885 885

• As additional insured on subcontractor’s primary and umbrella polices, the

p y p GC brought declaratory judgment 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:

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’ under an ‘insured contract’ because of ‘bodily injury ’ ‘property damage ’ or insured contract because of bodily injury, property damage, or ‘advertising injury’ that takes place during the Policy Period and is caused by an ‘occurrence’ happening anywhere.”

• Holding – Because GC elected to repair and replace the defective cabling,

the GC was at no time “legally obligated to pay” those sums Therefore the

Construction Clauses: Insurance and Indemnity

the GC was at no time legally obligated to pay those sums. Therefore, the court concluded that the GC failed to establish that it was owed a duty as an additional insured.

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Selecting Insurance (cont.) Selecting Insurance (cont.) Selecting Insurance (cont.) Selecting Insurance (cont.)

• Workers’ compensation

Workers compensation – Driven by state requirements – Know whether there are state exceptions for indemnity, e g Gonzales v R J Novick Constr Co (1978) 20 C3d 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).

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Selecting Insurance (cont.) Selecting Insurance (cont.) Selecting Insurance (cont.) Selecting Insurance (cont.)

• Builder’s risk

Builder s risk – Understand the scope of the policy to dovetail with other project insurance, e.g., special environmental, natural resources, debris/waste removal, additional duration for resources, debris/waste removal, additional duration for project. – Ensure policy requirements are incorporated into the construction contract, e.g., fire watch, security, off-site construction contract, e.g., fire watch, security, off site storage, etc.

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Selecting Insurance (cont.) Selecting Insurance (cont.) Selecting Insurance (cont.) Selecting Insurance (cont.)

• Professional liability

Professional liability – Is the project a DB, and who is obtaining coverage for the professionals? – How broadly is “professional” defined in the policy? – How broadly is professional defined in the policy?

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Selecting Insurance (cont.) Selecting Insurance (cont.) Selecting Insurance (cont.) Selecting Insurance (cont.)

• Controlled insurance programs

– Who is obtaining the program? – What does it encompass? – Limits sufficient? Project or rolling? j g – Who can satisfy the SIR?

• Forecast Homes, Inc. v. Steadfast Insurance Company

(2010) 181 CA4th 1466,105 CR3d 200 (holding that only the (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).

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SIR “Per Claim” Applies to Whole Action SIR “Per Claim” Applies to Whole Action Clarendon America Insurance Co. v. North American Capacity Insurance Co. Clarendon America Insurance Co. v. North American Capacity Insurance Co. (2010) 186 CA4th 556 112 CR3d 339 (2010) 186 CA4th 556 112 CR3d 339 (2010) 186 CA4th 556, 112 CR3d 339 (2010) 186 CA4th 556, 112 CR3d 339 reh'g reh'g denied denied

• Plaintiff insurer sued defendant insurer seeking a proportionate or

g p p equitable share of sums expended to defend a residential developer, which they both insured under separate and consecutive general commercial liability policies, in a construction defect action involving eight homes in a residential development involving eight homes in a residential development.

• 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). 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 Construction Clauses: Insurance and Indemnity pp y each of the homes constructed after the policy was issued. Construction Clauses: Insurance and Indemnity

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d Insurance and I d ifi i Indemnification

Scott D. Cahalan

34

Selecting Insurance Selecting Insurance

 Green Building Risks  Green Building Risks

 Property damage  Certification denial or delay  Certification denial or delay  Code compliance

D f t

 Defects  Building performance

P l i j

 Personal injury

35

Selecting Insurance Selecting Insurance

 Green Building Property & Casualty  Green Building Property & Casualty

Insurance

 Green Building Replacement  Green Building Replacement  Green Upgrade  Commissioning  Commissioning

36

Selecting Insurance Selecting Insurance

 Green Building Liability Insurance  Green Building Liability Insurance

 Indoor Environmental Endorsement  Reputation Endorsement  Reputation Endorsement

37

Selecting Insurance Selecting Insurance

 Indoor Environmental Endorsement covers  Indoor Environmental Endorsement covers

 bodily injury that is “sustained within a green

building and caused by any substance or odor building and caused by any substance or odor produced by or originating from HVAC equipment or any other equipment or product q p y q p p whose purpose is indoor climate, air quality, or water quality control.”

 Must be a certified green buildings at time of loss.

38

Selecting Insurance Selecting Insurance

 Reputation Endorsement covers  Reputation Endorsement covers

 Adverse green publicity event, and  Adverse green defense costs  Adverse green defense costs

39

Selecting Insurance Selecting Insurance

 Adverse Green Defense Costs  Adverse Green Defense Costs

 Reimburses insured for the cost of defending

against an adverse green claim in a civil lawsuit against an adverse green claim in a civil lawsuit “demanding monetary or non-monetary relief, and alleging [the insured’s] failure to meet or g g comply with industry recognized green building standards at one or more insured buildings.”

 Must be a certified green buildings at time of loss.

40

Selecting Insurance Selecting Insurance

 Subcontractor Default Insurance (“SDI”)  Subcontractor Default Insurance ( SDI )

 Alternative to subcontractor performance bonds

41

Selecting Insurance Selecting Insurance

 SDI Advantages over Bonds

SDI Advantages over Bonds

 Cost Savings  Longer Duration

g

 Contractor Control  Consistency  Faster, Non-Adversarial Claims  Higher Limits

g

 Broader damages  Bad faith damages

42

Selecting Insurance Selecting Insurance

 SDI disadvantages over Bonds

g

 Financial risk  Not appropriate for all contractors

i d d l i f b

 No independent analysis of subcontractors  Defaults more likely  No payment protection for subcontractors  No payment protection for subcontractors  No legal precedence  Single source

43

Selecting Insurance Selecting Insurance

The standard 2001 CGL policy form excludes most claims for: “Bodily injury” and “property damage” arising out of the y j y p p y g g 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, th l i it t t i t i l di k gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalines, chemicals, or waste materials.

44

Selecting Insurance Selecting Insurance

Exceptions to the CGL pollution exclusion include: Addi i l i d

• Additional insured
• Hostile Fire
• Building

heating equipment (unless disbursed through ventilation system) 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

l f f b l d d h

• 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

p p ( y expressly excluded by other portions of the exclusion). ”

45 45

Selecting Insurance Selecting Insurance

Many believe that the exceptions to the CGL Many believe that the exceptions to the CGL pollution exclusion are inadequate because of

• ther limitations imposed by the exclusion
• ther limitations imposed by the exclusion,

inconsistent application by the courts, and the existence of sublimits the existence of sublimits.

46 46

Selecting Insurance Selecting Insurance

Many insurance companies now offer Contractor’s y p Pollution Liability Insurance, which generally covers a Contractor’s liability for

 Third party claims for environmental liabilities associated  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 c de ts esu t g

• co t acto s cove ed ope at o s

47 47

Additional Insureds 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.

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Tips For Drafting Additional Insured Requirements 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.

49 49 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Additional Insureds – Sample Provision Additional Insureds Sample Provision

Th O th A hit t th L d th O ’ R t ti th I d ifi d 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 ( p p p y ) 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 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/severability of interests 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

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Subcontractor may be liable.

Additional Insureds - Policy Endorsements Additional Insureds Policy Endorsements

 CG 20 10 11 85

• Provides the additional insured with coverage for liability arising

g y g

• ut 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 the completed work

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Additional Insureds - Policy Endorsements Additional Insureds Policy Endorsements

 CG 20 10 03 97

• Provides the additional insured with coverage only for liability

g y y arising out of the named insured’s ongoing operations;

• Intended to limit the term of the additional insured’s insurance

coverage to the time period during which the named insured is t ll f i ti actually performing operations;

• Does not include coverage for completed operations.

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Additional Insureds - Policy Endorsements Additional Insureds Policy Endorsements

 CG 20 10 10 01

• Provides the additional insured with coverage only for liability arising out
• f 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 ( ) p p 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;
• Intended to deny coverage for completed operations;
• Adopted in conjunction with CG 20 37 10 01, a new standard form

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

53 53 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Additional Insureds - Policy Endorsements Additional Insureds Policy Endorsements

 CG 20 37 10 01

• Provides additional insured with coverage products-completed

g p p

• perations hazard 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.

54 54 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Additional Insureds - Policy Endorsements Additional Insureds Policy Endorsements

 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

• r (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
• 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
• 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.

55 55 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Additional Insureds - Policy Endorsements Additional Insureds Policy Endorsements

 CG 20 37 7 04

• Provides the additional insured with coverage for the products-

l t d ti h d d i h l i t b th 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; 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.

56 56 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Certificates of Insurance Certificates of Insurance

 Most certificates of insurance are issued on a standard form prepared by ACORD Corporation for the insurance industry.  A standard certificate identifies the producer (an agent or  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 names of the insurance to which it refers, including the names of the insurance companies affording coverage, 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.

57 57 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Certificates of Insurance Certificates of Insurance

 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

• 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).

58 58 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Certificates of Insurance Certificates of Insurance

 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); R d d St t F I C 728 A 2d 1202 (D C 1999)

• 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

Marlin v. Wetzel County Board of Education, 569 S.E.2d 462 (W. Va. 2002).

59 59 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Acord Certificate of Insurance – 5/2010

60 60 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Acord Certificate of Insurance – 5/2010 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 confers no rights upon the certificate holder. This certificate the coverage afforded by the policies below. This certificate

• f insurance does not constitute a contract between the

issuing insurer(s), authorized representative or producer, and the certificate holder.

61 61 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Acord Certificate of Insurance – 5/2010 Acord Certificate of Insurance 5/2010

IMPORTANT: If the certificate holder is an ADDITIONAL INSURED the policy(ies) must be endorsed If 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).

62 62 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Acord Certificate of Insurance – 5/2010 Acord Certificate of Insurance 5/2010

Notice of cancellation provision changes 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 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 A d f l  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.

63 63 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

p y p

Acord Certificate of Insurance – 5/2010 Acord Certificate of Insurance 5/2010

 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 i i il d t th O i 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) , y ( ) days in advance.

64 64 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

INDEMNITY AGREEMENTS INDEMNITY AGREEMENTS

• Intermediate Form Indemnity
• Broad Form Indemnity
• Comparative (Limited) Form Indemnity

65 65 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

TYPES OF INDEMNITY AGREEMENTS TYPES OF INDEMNITY AGREEMENTS

Broad Form Indemnity: The indemnitor agrees to 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,

• r severely limit, the use of broad form indemnity
• se e e y

t, t e use o b oad o de ty provisions in construction contracts.

66 66 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

TYPES OF INDEMNITY AGREEMENTS TYPES OF INDEMNITY AGREEMENTS

Intermediate Form Indemnity: The indemnitor 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 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 indemnitor is not responsible for liability incurred as a result of the sole fault or negligence of the indemnitee.

67 67 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

TYPES OF INDEMNITY AGREEMENTS TYPES OF INDEMNITY AGREEMENTS

Comparative (Limited) Form Indemnity: The 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

eg ge ce s type o ag ee e t

• s t e
• bligations imposed by tort law.

68 68 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

AIA A201 Indemnity Provision AIA A201 Indemnity Provision

The unedited AIA A201 provides that the contractor The unedited AIA A201 provides that the contractor (indemnitor) will indemnify the owner (indemnitee) for loss caused by the negligent acts or omissions

• f the contractor its subcontractors or others
• f 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 indemnity provision, which limits the contractor s indemnification obligation "only to the extent of" its negligence.

69 69 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

AIA A201 Indemnity Provision 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 li it d t tt ' f i i t f lti f f limited to attorneys' fees, arising out of or resulting from performance

• f the Work, provided that such claim, damage, loss, or expense is

attributable to bodily injury, sickness, disease or death, or to injury to

• r destruction of tangible property (other than the Work itself), but
• nly to the extent caused by the negligent acts or omissions of
• nly 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 h ll t b t d t t b id d th i ht shall not be construed to negate, abridge, or reduce other rights or

• bligation of indemnity which would otherwise exist as to a party or

person described in this Paragraph 3.18. [Emphasis added.]

70 70 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek General Conditions of the Contract for Construction, Document A201, American Institute of Architects, 2007 edition.

Sample Comprehensive Indemnity Provision: Basic Indemnification 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 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 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 t d t ti f t ibl t ( th th th W k it lf t th t t to or destruction of tangible property (other than the Work itself to the extent amounts are recovered pursuant to builder’s risk insurance), regardless

• f whether or not such Indemnified Claim is caused in part by an Indemnified

Party.

71 71 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Sample Comprehensive Indemnity Provision: Economic Loss Indemnification Economic Loss Indemnification

The Contractor shall also indemnify, defend, and hold harmless the Indemnified Parties from and against Indemnified Claims for 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.

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Sample Comprehensive Indemnity Provision: Catch-all Provision

Such obligations shall not be construed to negate, abridge, or

• therwise 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 that with respect to any legal limitations now or hereafter in effect and affecting the validity and enforceability of the indemnification

• bligation under this Section _____, such legal limitations are

made a part of the indemnification obligation to the minimum 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.

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g

Tips for drafting solid indemnity clauses Tips for drafting solid indemnity clauses

 “To the fullest extent permitted by law”;  Do not run afoul of state-specific statutory anti-indemnity provisions; provisions;  Don’t forget to consider indemnity for economic loss – this may require revisions to the waiver of consequential damages provision; 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  Include language that allows for fees and costs associated with enforcing the indemnity obligation.

74 74 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

James P. Bobotek Senior Associate Washington DC Washington, DC 2300 N Street, NW Washington, DC 20037-1122 +1.202.663.8930 james.bobotek@pillsburylaw.com

75 75 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Anti Anti-

• Indemnity Statutes and

Indemnity Statutes and Li it ti f Li bilit Cl Li it ti f Li bilit Cl Limitation of Liability Clauses Limitation of Liability Clauses

• Minority view – invalidates limitation of liability

Minority view invalidates limitation of liability clauses

• Majority view – upholds limitation of liability
• clauses. These courts recognize that there is a

difference between indemnification, which removes the incentive to act with due care, and a removes the incentive to act with due care, and a limitation of liability, which merely allows parties to allocate risk through contract and, assuming that the limitation is reasonable does not remove the

Construction Clauses: Insurance and Indemnity

the limitation is reasonable, does not remove the incentive to act with due care.

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Overview of Anti Overview of Anti-

• Indemnification Statutes

Indemnification Statutes

• 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 ) p g g q g 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. Construction Clauses: Insurance and Indemnity Construction Clauses: Insurance and Indemnity

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Anti Anti-Indemnity Statutes (cont.) Indemnity Statutes (cont.) Anti Anti Indemnity Statutes (cont.) Indemnity Statutes (cont.)

• Examples:

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

• misconduct. Additional provisions include greater restriction

related to residential housing. Allows owner and design f i l t ll t i k f l professional to allocate risk more freely. – NC: Restricts indemnification in a design or construction contract for liability arising out of bodily injury or property d i t l d b lti f th li damage proximately caused by or resulting from the negligence, in whole or in part, of the indemnitee.

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Untwist Construction v. Untwist Construction v. Amtech Amtech Elevator Elevator Services Services, , Se ces Se ces, (VA 2010) 699 (VA 2010) 699 S.E.2d S.E.2d 223 223

• Court held that even though the subcontract’s

Court held that even though the subcontract s indemnification provision violated anti- indemnification statute, the subcontractor had a t d t t d f d d i d if th i 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.

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Untwist Construction Untwist Construction (cont.) (cont.) Untwist Construction Untwist Construction (cont.) (cont.)

• Indemnification provision was void
• Indemnification provision was void.

– To the fullest extent permitted by law … 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 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 injury to or destruction of tangible property (other than the Work itself) including loss of use l i h f b l h d i h l i resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions of [Uniwest], 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, Construction Clauses: Insurance and Indemnity y y , g , g , loss or expense is caused in part by a party indemnified hereunder. Construction Clauses: Insurance and Indemnity

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Untwist Construction Untwist Construction U t st Co st uct o U t st Co st uct o

• Even though indemnification provision was void, Subcontractor had a

e t oug de cat o p o s o as o d, Subco t acto ad 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 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.

Construction Clauses: Insurance and Indemnity

herein as if they were specifically written herein.

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Example Example Example Example

• Blaylock Grading v Neal Everett Smith
• Blaylock Grading v. Neal Everett Smith

(NC 2008):

– Blaylock hired Smith to perform land surveying. 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 costing Blaylock in excess of $500,000 in additional expenses.

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Example (cont.) Example (cont.) Example (cont.) Example (cont.)

• Blaylock (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 shall not exceed the total amount of $50,000, the amount

• f [defendants’] fee (whichever is greater) or other

amount agreed upon when added under Special Conditions Such causes include but are not limited to

Construction Clauses: Insurance and Indemnity

• 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.) Example (cont.) Example (cont.) Example (cont.)

• Blaylock (cont ):
• Blaylock (cont.):

– Smith offered to pay his $50,000 and walk. Blaylock rejected the offer and Blaylock y j y prevailed at trial. – On appeal, the Court cited to a NC Supreme Court decision upholding a similar risk Court decision upholding a similar risk allocation provision. Bottom line: equal bargaining strength allows the parties to

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enforce their contact.

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Example (cont.) Example (cont.) Example (cont.) Example (cont.)

• For similar outcome see:

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 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

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 h ll t d J&C’ t t l f f th i d d Construction Clauses: Insurance and Indemnity shall not exceed J&C’s total fees for the services rendered

• n the project.”

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Limitation of liability enforceable against homeowner Limitation of liability enforceable against homeowner Zerjal Zerjal v.

• v. Daech

Daech & Bauer Constr., Inc. & Bauer Constr., Inc. j , (Ill. App. 2010) 939 NE (Ill. App. 2010) 939 NE 2d 2d 1067 1067

• Homeowners filed breach of contract alleging that inspector

Homeowners filed breach of contract alleging that inspector did not inform them that the foundation was insufficient to support the home's load, the underlayment was decayed and structurally unstable, the walls were unstable and unable to support the necessary loads, water was entering the home at the footing and the foundation, the HVAC unit was blowing moist air against wooden components of the house and the home’s electrical system was installed and maintained in an unsafe manner. By the terms of the contract, the inspector’s liability was limited to the cost of the inspection, or $175.

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Zerjal Zerjal (cont.) (cont.) Zerjal Zerjal (cont.) (cont.)

• Court held that the inspector’s limitation of the
• Court held that the inspector s limitation of the

liability clause was valid.

– The court rejected homeowner’s argument that the j g clause was against public policy and unconscionable.

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Anti Anti-Indemnity Indemnity Anti Anti Indemnity Indemnity

• California – enacted an exception that explicitly permits parties

p p y p p to continue to limit their respective liability to each other.

– Markborough California, Inc. v. Superior Court (1991) 227 CA3d 705, 277 CR 919 (holding that “a provision in a construction , ( g p contract limiting a party’s liability to the developer of the property for damages caused by the engineer’s professional errors and

• missions 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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Possible Change In CA Law Possible Change In CA Law Possible Change In CA Law Possible Change In CA Law

• Proposed Senate Bill

May overrule

• Proposed Senate Bill – May overrule

holding of court in Markborough California, Inc.

– In effect, this legislation may bar limit of liability provisions

• Residential Construction Contracts?

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Anti Anti-Indemnity (cont.) Indemnity (cont.) Anti Anti Indemnity (cont.) Indemnity (cont.)

• Example:

Example:

– FL: Cannot require indemnification in a construction contract

for liability for damages to persons or property caused in whole

• r in part by the indemnitee UNLESS the contract contains a
• r in part by the indemnitee UNLESS the contract contains a

monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and it was part of the project specifications or bid documents, if any. I t th t t i i d ifi ti f In no event can the contract require indemnification for damages to persons or property caused by the indemnitee’s gross negligence; willful, wanton, or intentional misconduct; and punitive damages (unless caused by the indemnitor). Construction Clauses: Insurance and Indemnity p g ( y ) Construction Clauses: Insurance and Indemnity

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Anti Anti-Indemnification Statutes (cont.) Indemnification Statutes (cont.) Anti Anti Indemnification Statutes (cont.) Indemnification Statutes (cont.)

• Example:

– AL 45.45.900: A provision, clause, covenant, or agreement contained in, collateral to, or affecting a construction contract that purports to indemnify the promisee against liability for damages for (1) death or bodily injury to persons, (2) injury to property, (3) design defects, or (4) other loss, damage or expense i i d (1) (2) (3) f hi i f h l li illf l arising under (1), (2), or (3) of this section from the sole negligence or willful misconduct of the promisee or the promisee’s agents, servants, or independent contractors who are directly responsible to the promisee, is against public policy and is void and unenforceable; however, this provision does not affect the validity f i t t k ’ ti t i d b

• f an insurance contract workers’ compensation, or agreement issued by an

insurer subject to the provisions of AS 21, or a provision, clause, covenant, or agreement of indemnification respecting the handling, containment, or cleanup of

• il or hazardous substances as defined in AS 46.

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Anti Anti-Indemnification Statutes (cont.) Indemnification Statutes (cont.) Anti Anti Indemnification Statutes (cont.) Indemnification Statutes (cont.)

• City of Dillingham v. CH2M Hill Northwest, Inc., 873 P.2d

1271 (Al k 1994) 1271 (Alaska 1994). – The Alaska Supreme Court held that AS 45.45.900 barred parties from negotiating away liability to any 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 amendment to the anti-indemnity statute that would have explicitly exempted limitation of liability clauses.

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Anti Anti-Indemnification Statutes (cont.) Indemnification Statutes (cont.) Anti Anti Indemnification Statutes (cont.) Indemnification Statutes (cont.)

• See also:

See also: In Omaha Cold Storage Terminals, Inc. v. The Hartford Ins. Co., No. 8:03CV445, 2006 WL 695456 (D. Neb. Mar. 17, 2006), the United States District Court for the District of 2006), the United States District Court for the District of Nebraska held that a provision limiting a party’s liability for its

• wn negligence to $100,000 violated Nebraska’s anti-

indemnity statute, which prohibits indemnification for one’s

• wn 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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Anti Anti-Indemnification Statutes (cont.) Indemnification Statutes (cont.) Anti Anti Indemnification Statutes (cont.) Indemnification Statutes (cont.)

• See also:
• 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) equipment).

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Common Law Impact Common Law Impact Common Law Impact Common Law Impact

• What is the impact on the clause?
• What is the impact on the clause?

– Early example: W. William Graham, Inc. v. City

• f Cave City, 709 S.W.2d 94 (Ark. 1986)

y ( ) (holding that a limitation provision in an engineer’s contract was enforceable, but finding that it applied only to limit the engineer’s finding that it applied only to limit the engineer s liability for negligence, not contract claims).

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Common Law Impact (cont.) Common Law Impact (cont.) Common Law Impact (cont.) Common Law Impact (cont.)

• How is the clause if otherwise valid under the

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 – Bargaining strength of the parties – Public policy – Can it be construed as a “cap” rather than an

Construction Clauses: Insurance and Indemnity

Can it be construed as a cap rather than an indemnity restriction?

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Tamara L. Boeck Of Counsel Boise, ID (208) 387-4256 Direct ( ) (208) 389-9040 Fax Sacramento, CA Sacramento, CA (916) 447-0700 Direct (916) 447-4781 Fax Construction Clauses: Insurance and Indemnity tlboeck@stoel.com Construction Clauses: Insurance and Indemnity

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Interaction Between Insurance and I d ifi i Indemnification

Risk allocation is the common thread Risk allocation is the common thread between insurance and indemnification

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Interaction Between Insurance and I d ifi i Indemnification

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

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Interaction Between Insurance and I d ifi i Indemnification

Indemnification shifts risk

• f

costs and Indemnification shifts risk

• f

costs and liability from

• ne

contracting party to another another.

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Interaction Between Insurance and I d ifi i Indemnification

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

101

Interaction Between Insurance and I d ifi i Indemnification

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

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Interaction Between Insurance and I d ifi i Indemnification

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

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Interaction Between Insurance and I d ifi i Indemnification

Exceptions include: Exceptions include:

• additional insured exception,

h i li i d

• the insurance policy exception, and
• the insurance cap on indemnity exception

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Interaction Between Insurance and I d ifi i Indemnification

 CGL

excludes liability assumed by the

 CGL

excludes liability assumed by the insured under a contract

• r

agreement, UNLESS the insured purchases contractual UNLESS the insured purchases contractual coverage endorsement

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Interaction Between Insurance and I d ifi i Indemnification

 A/E’s professional liability policy typically  A/E s professional liability policy typically

excludes contractually assumed liabilities, UNLESS such liability would have UNLESS such liability would have attached to A/E in the absence of such agreement. agreement.

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Interaction Between Insurance and I d ifi i Indemnification

 A/E’s indemnification obligations should be  A/E s indemnification obligations should be

limited to negligence to avoid loss of coverage coverage

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Interaction Between Insurance and I d ifi i Indemnification

 Additional

insured status allows direct

 Additional

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

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Interaction Between Insurance and I d ifi i Indemnification

 Some courts have held that an additional insured  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 (O C A 2003) W E O’N il C P.3d 122 (Or. Ct. App. 2003); W.E. O’Neil Constr.

• Co. v. General Cas. of Illinois, 748 N.E. 2d 667

(2001) (2001).

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Interplay Between Indemnification P i i d I Provisions and Insurance

 CGL excludes coverage for claims for bodily  CGL excludes coverage for claims for bodily

injury incurred by insured’s employees arising out of employment arising out of employment

 But express obligation to indemnify for

injuries to employees may allow a claim injuries to employees may allow a claim under the contractual coverage endorsement

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