Construction Contract Insurance, Indemnification and Limitations on - - PowerPoint PPT Presentation

Construction Contract Insurance, Indemnification and Limitations

• n Liability Clauses

Structuring and Negotiating Key Provisions to Allocate Risk and Minimize Exposure

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Brian Thomas Moore, Part ner, Drew Eckl & Farnham, At lant a Myles Levelle, S enior Associat e, Drew Eckl & Farnham, At lant a

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Brian T. Moore | Myles Levelle Drew, Eckl & Farnham, LLP Tel: 404.885.1400 bmoore@deflaw.com | levellem@deflaw.com

Insurance Policies & Provisions at Issue.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

6

Commercial General Liability (CGL)

• Purpose of CGL policy is to cover insured for

legal liability to third party, with certain limitations.

– Major limitations are:

• Only damage caused to others work or for work

performed by subcontractors covered.

• For contractors, any professional services are likely

excluded

• Mold and mildew, a common damage in construction

cases, is typically not covered unless by special endorsement.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

7

Builder’s Risk Policy

• Builder's risk insurance is coverage that protects a

person's or organization's insurable interest in materials, fixtures and/or equipment being used in the construction

• r renovation of a building or structure should those

items sustain physical loss or damage from a covered cause of loss.

– First party insurance maintained by Owner to ensure limited interest; completed or partially completed structures on ongoing project, materials, fixtures, equipment; – Typically applies only to build period; – Must read with and consider effect of AIA A201 waiver of subrogation.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

8

Property Insurance Policy (Owner)

• The owner may maintain some alternative form of

property insurance policy and, pursuant to AIA standard contract terms, will be required to insure the project (See AIA Sec. 11)

– First party insurance – required of Owner by contract to protect contractor’s limited interest in build. No fault payments for property damage. – While a builder’s risk policy is more common, owner’s may insure an interest by adding special endorsements to pre- existing property insurance policies. – Again, must read together with waiver of subrogation provision. – Timing of payment under property insurance policy should not affect application of waiver.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

9

“All-Risk” Policies

• Most comprehensive, though not always maintained

as part of a construction project. AIA A201 Sec. 11.3.1 requires that the owner maintain “property insurance written on a builder’s risk “all risk” policy

• r equivalent policy form in the amount of the initial

contract sum…”

– Insures “all-risks” that are not specifically omitted from the insurance policy. If the contract is silent as to a certain risk, it should be covered.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

10

“Fringe Policies”: Other Applicable Insurance

• Workers’ Compensation

– State law on statutory employer?

• Green Build Policies

– LEED, sustainable materials, earthen materials?

• “SDI” or Subcontractor Default Policies

– SDI’s vs. payment and performance bonds, which is preferred?

• Excess or umbrella
• Professional liability
• Pollution liability insurance

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

11

Important Questions when Approaching an Insurance Policy:

• Who is covered?

– Insured, additional insured, etc. (will touch on additional insureds later in presentation).

• What is covered?

– Type of damage

• To what extent are the insureds covered?

– Policy limits, per occurrence or aggregate, diminishing or vanishing policy?

• What is excluded?

– What exclusions apply? – Have the insureds failed to fulfill conditions precedent to coverage?

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

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What is covered?

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

13

Coverage Under CGL Policy:

– Bodily Injury and Property Damage (Cov. A)

• “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. – Personal and Advertising Injury (Cov. B) – Supplementary Payments

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

14

Definitions:

• Bodily Injury: “‘Bodily Injury’ means bodily injury, sickness or disease

sustained by a person, including death resulting from any of these at any time”

• Property Damage:

– Physical injury to tangible property including all resulting loss of use

• f 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.

• Of course, coverage only applies if the bodily injury or property damage

is caused by an occurrence in the coverage territory and during the policy period.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

15

Occurrence:

• “Occurrence” means an accident including

continuous or repeated exposure to substantially the same general harmful conditions.

– This is a major battleground for coverage in construction matters under CGL policies; insurers argue that faulty workmanship is not an “occurrence” because it is not accident. That is, contractors intend to do the work – it is not “accidentally” performed.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

16

What constitutes an “occurrence”?

• Faulty workmanship?
• Negligence?
• Breach of contract?
• Breach of warranty?
• Intentional torts?
• Fraud?
• See Taylor Morrison Services, Inc. v. HDI-Gerling America Ins. Co.

(Georgia Supreme Court; No. S13Q0462; 2013WL3841555)

– Two key questions:

• whether an “occurrence” under the insurance policy only exists if

damage occurs to other property; and

• if not, whether an “occurrence” exists for claims of breach of

contract, breach of warranty, and fraud?

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

17

Holding in Taylor Morrison Services

• An injury or damage does not have to occur to other property for an

“occurrence to exist”.

– What are the practical implications? – Is this really a departure from prior rulings? – Why is this not a big deal?

• Affirmation of majority rule that faulty workmanship and negligence

are “occurrences”, extends definition of “occurrence” to breach of contract and breach of warranty claims (at least in certain circumstances), but holds fraud is not an occurrence.

– Why are breach of contract and warranty claims “occurrences” if an “occurrence” is an accident? – What are the practical implications?

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

18

Other Jurisdictions

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

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Products Completed Operations:

• What are product completed operations?

– In lay terms, products or business operations conducted away from the insured’s premises – most likely the construction site.

• Key points:

– Separate limits in a CGL policy – Many construction contracts require PCO coverage – Coverage is typically determined under three part test.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

20

‘PCO’ Three Part Test:

• Must Occur Away from your premises:

– Away from premises owned or rented by insured

• Must arise out of your “product” or “work”:

– Product. Goods manufactured, sold, handled, distributed, or disposed of by named insured. – Work. Operations performed by named insured or on their

• behalf. This can include work performed by subcontractors on

G.C.’s behalf.

• Work or Product must be complete

– Either contractually, or at a specific job site (contract requires work at multiple locations).

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

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What is excluded?

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

22

Important Exclusions or Policy Provisions:

• In addition to “occurrence”, must consider

the following exclusions:

– “Your Work” exclusion – “Damage to Property” – “Your Product” – “Impaired Property”

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

23

“Your Work”

• Exclusion (l) of the standard CGL policy form

excludes:

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

• Your work: operations performed on your behalf or

materials, parts, or equipment furnished.

– This means only damage to work completed by others or for work performed by subcontractors is covered. – Particularly important in small construction agreements and/or agreements where it is understood a GC will self- perform large or important portions of the work. This Shapes the type of insurance you will need as a contractor

• r want as an owner.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

24

“Damage to Property”

• Exclusion j(5) and j(6) – This insurance does not apply

to:

– j(5) That particular part of real property on which you or any contactors or subcontractors working directly or indirectly on your behalf are performing, if the property damage arises out of those operations.

• Designed to bar claims that are covered by Builders Risk Policies;
• Applies to damage to real property arising out of insureds work.

– j(6) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.

• Does not apply to damage that arises after the insured’s work has

been completed.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

25

“Your Product”

• Exclusion (k) precludes coverage for “property damage”

to “your product” arising out of it or any part of it.

– “Your Product”: any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by you, others trading under your name, or a person or organization whose business or assets you have acquired. – This includes any warranties or representations concerning your products or failure to provide warnings or instructions. – Excludes coverage for property damage to insured’s product, but not to work product and/or products of others.

• Is the entire project “your product?

– Split in courts, compare:

• Federated Serv. Ins. Co. v. R.E.W., Inc., 770 P.2d 654 (Wash. 1980)
• Maryland Cas. Co. v. Reeder, 270 Cal. Rptr. 719 (Cal. App. Ct. 1990)

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

26

“Impaired Property”

• Exclusion (m) of the standard CGL policy:

– “Property damage” to “impaired property” or property that has not been physically injured arising out of (1) a defect, deficiency, inadequacy or dangerous condition in “your product” or “your work”

• Excludes claims for damage resulting from the

incorporation of an insured’s work or product if use of the property can be restored by repair or replacement of the insured’s work or product.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

27

Framework for Approaching and Analyzing Insurance Provisions in a Construction Contract

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

28

General Considerations:

• Consider the type of project:

– What are the specific risks? – Can the be shifted or allocated? If so, at what cost?

• What law applies?
• Knowing the risks and applicable law, identify the type of

coverage, necessary endorsements, limits and sub-limits (with input from the client);

• How long will you need coverage (project length, statutes of

repose, statute of limitations?);

• Require certificates of insurance and copies of policies with all

required endorsements prior to commencement of work and as a condition precedent to payment.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

29

General Considerations

• Require payment and performance bonds or obtain subcontractor

default insurance prior to commencement of work (P+P bonds as a condition precedent to payment);

• Require that any contractor or supplier below you in the chain of

command provide certificates of insurance and policies upon each renewal or inception of new coverage;

• Identify specific forms and/or coverages for which additional insured

requirements are included:

• Ensure that deductibles and/or self-insured retentions may be

satisfied by anyone; and

• Avoid outdated terms and policies (but be flexible, understand the

various forms and their potential benefits to your client. For example, older AIA forms may be more contractor friendly while new AIA forms tend to favor owners).

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

Certificates of Insurance

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

31

Certificates of Insurance

• Typically issued on a standard ACORD form.
• Identifies the produce (agent/broker), insured, and

the insurer(s) providing coverage

• Provides some basic information concerning the

policy or policies: type of insurance, limits, effective

• dates. There is space for endorsements and special

provisions, but these are typically left blank.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

32

Certificates of Insurance

• Certificates of Insurance are not a guarantee of insurance
• r coverage.
• What do they demonstrate?

– That the named insured held a policy at some point with the specified limits and policy periods.

• What do they not demonstrate?

– Evidence of coverage for either the named insured or additional insureds; – That the policy identified is maintained (read paid for) by the insured; – Evidence of waivers of subrogation or other provisions and/or endorsements that may be contractually imposed

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

33

Certificates of Insurance

• Caselaw:

– Clarendon Am. Ins. Co. v. Aragus 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 (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);

• 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).

34

Insurance Provisions and the AIA

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

35

Article 11: Insurance and Bonds

• Generally, we are dealing with AIA A201

Article 11.

– Sec. 11.1: Contractor’s Liability Insurance – Sec. 11.2: Owner’s Liability Insurance – Sec. 11.3: Property Insurance

• Including “Boiler and Machinery” and “Loss of Use

insurance”.

– Sec. 11.3.7: Waivers of Subrogation – Sec. 11.4: Payment and Performance Bonds

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

36

Additional Risk Shifting Provisions:

• Sec. 15.1.6: Claims for Consequential

Damages

– This provision waives to right to consequential damages related to the contract including rental expenses, loss of use, income, profit, financing, business and reputation – Reserves contractor’s right to profit derived directly from work.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

37

Additional Risk Shifting Provisions:

• Sec. 15.3 (Mediation) and 15.4 (Arbitration)

– While not traditional “risk-shifting” or insurance provisions, it is important to point these out. Parties should understand their rights and where they will be required to litigate. – These provisions, in theory, are intended to streamline the claims process. – These sections are typically read together to require, at a minimum, a request to mediate prior to the filing

• f a demand for arbitration.

– Proponents of arbitration would argue that it is more efficient and less expensive, but complex arbitrations can often take as long as state court litigation.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

38

Additional Risk Shifting Provisions

• AIA A201 Sec. 3.18 – Indemnification

– 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 any 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

• r death, or to injury 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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

39

Indemnity Provisions

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

40

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

Indemnity Agreements

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

41

TYPES OF INDEMNITY AGREEMENTS

• Broad Form Indemnity: The indemnitor agrees

to be responsible for any and all liability arising

• ut 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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

42

• 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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

TYPES OF INDEMNITY AGREEMENTS

43

• Comparative (Limited) Form Indemnity: The

indemnitor agrees to be responsible for liability arising out of the contractually-provided products

• r 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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

TYPES OF INDEMNITY AGREEMENTS

44

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

• r services on behalf of these entities. This constitutes a

comparative form indemnity provision, which limits the contractor’s indemnification obligation “only to the extent

• f” its negligence.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

45

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, fined, 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 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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

46

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 lass (that is, Indemnified Claims not attributable to bodily injury, sickness, disease, or death or to injury to or destruction of tangible property), but

• nly 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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

47

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 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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

48

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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

49

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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

50

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:

– Prohibiting indemnification for negligence and willful acts; – Mixed prohibiting full risk shifting for certain claims or requiring it meet certain standards; – Viewed as “risk allocation” verses anti-indemnity; and – 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

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

51

Anti-Indemnification 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 contract: where a contracting party seeks to shift the risk of negligence and similar torts from the indemnitee to a third party. Cannot require insurance for excluded obligation. – GA:

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

52

What are the limitations of Anti-Indemnity?

• In CA and TX, new indemnity provision 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, 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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

53

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

• f the prime contract clauses, which were incorporated by

reference into the subcontract. – Caution against boilerplate “incorporation” language in lower tier.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

54

Untwist Construction

• Even though indemnification provision was void, Subcontractor has

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 twoard [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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

55

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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

56

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.

Brian T. Moore | bmoore@deflaw.com Myles Levelle | levellem@deflaw.com

57

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

• f [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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• 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 contract in most states with the anti-indemnity statutes.

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Blaylock (cont.)

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Limitation of liability enforceable against homeowner:

• Zerjal v. Daech & Bauer Constr., Inc. (III. App. 2010) 939

NE 2d 1067

– Homeowners filed breach of contract alleging that inspector did not inform then 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 of Liability Barred Under Anti- Indemnify Statute

• Omaha Cold Storage Terminals, Inc. v. The Hartford Ins. Co.,

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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Limitation of Liability 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 indemnity the engineering firm from the consequences of the firm’s own negligence.

• Held: Limitations 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

• ther. 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 statutes that would have explicitly exempted limitation of liability clauses.

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• 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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Anti-Indemnification Statutes (cont.)

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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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• 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 constructed 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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Common Law Impact (cont.)

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Additional Insureds

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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 insures 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

• 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.

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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 polices 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’s and Subcontractor, and not

• f 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

• f the Contractor or its Subcontractors, or anyone for whom the Contractor or a

Subcontractor may be liable.

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Additional Insureds – Policy Endorsements

• CG 10 10 11 85

– Provides the additional insured with coverage for liability arising

• 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

• perations;

– Meets a contractual requirement that owners impose on general contractors, and general contractors require or subcontractors – that the additional insured has coverage for claims arising out of the completed work.

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Additional Insureds – Policy Endorsements

• CG 20 10 03 97

– Provides the additional insured with coverage only for liability arising out of the named insured’s ongoing

• perations;

– 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.

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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 the 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

• perations;

– 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.

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Additional Insureds – Policy Endorsements

• CG 20 37 10 01

– Provides additional insured with products-completed

• perations 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.

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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 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 he additional insured to liability caused at least in part by the named insured’s ongoing

• perations;

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

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Additional Insureds – Policy Endorsements

• 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

• missions 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 pat by the named insured’s completed

• perations;

– 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 for both ongoing and completed operations.

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Waivers of Subrogation

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AIA A201 Sec. 11.3.7

• The Owner and Contractor waive all rights against (1) each other and any of

their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect’s consultants, separate contractors described in Article 6, if any, and any of their subcontractors, sub- subcontractors, agents and employees for damage caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary. The Owner or Contractor, as appropriate, shall require of the Architect, Architect’s consultants, separate contractors described in Article 6, if any and the subcontractors, sub-subcontractors, agents and employees of any of them, by appropriate agreements, written where legally required for validity, similar waivers each in favor of other parties numerated herein. The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would

• therwise have a duty of indemnification, contractual or otherwise, did not

pay the insurance premium directly or indirectly, and whether or not the person had an insurable interest in the property damaged

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Waiver of Subrogation

• What is the purpose?

– Generally, it’s an agreement to shift the risk of certain types of loss solely to applicable property insurance.

• How broad is the waiver?

– Very broad, to the extent property insurance is applied as contemplated in Sec. 11.3.7 – However, the majority opinion is that “property insurance” is not payment by a CGL or other policy unless that policy is being treated like a property insurance policy.

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Waiver of Subrogation

• Based on language, we know the standard AIA contract

requires:

– That there be property insurance; – That the parties to the construction obtain a waiver of subrogation in their respective insurance provisions; – That either the GC or the Owner require contracting parties to execute a waiver of subrogation

• We also know that it does not matter which property

insurance pays for the loss or how the parties are tied to that insurance – so long as property insurance covers a loss, the parties waive the right to seek recovery against each other regardless of fault.

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Waiver of Subrogation

• Applicable to property insurance or policies treated “like property

insurance”

– IRMA v. O’Donnell, Wicklund, Pigozzi & Peterson Architects, Inc., 295 Ill. App. 3d 784 (1998).

• Purpose of clauses is to shift risk of loss to an insurance company

regardless of fault and to avoid prospect of extended litigation.

• Policy at issue in IRMA is the municipalities general liability policy held by

the City. A fire occurred during construction of a city fire department and the city’s insurer paid for property damage. Similar waiver provision in place.

• The city’s risk management agency sues the architect claiming

defective design, does the waiver of subrogation bar IRMA’s recovery?

–

• Yes. While AIA Waiver of Subrogation is applicable to property insurance

policies, the purpose of the waiver is shift the risk to insurance for property or property like insurance. Because the GL policy paid without fault as if it was a property policy, the court held that the waiver of subrogation applied.

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Copper Mountain, Inc. v. Industrial Systems, Inc. 208 P. 3d 692 (Colo. 2009)

• During construction of an addition to a ski lodge, a fire occurred as a result
• f ongoing welding. The lodge’s “Ski Areas Property Coverage” policy,

which was neither contemplated in nor purchased as a result of the construction agreement, covered the subject loss. Would the AIA A201 Waiver of Subrogation bar the insurer’s subrogation claim?

• Yes. Why?

– There is a payment made pursuant to a property insurance policy. – The Colorado Supreme Court held that it makes no difference whether the covering insurance policy was obtained pursuant to the contract or is some other policy through which the Owner has also provided coverage for the work. – If you give the waiver of subrogation provision its plain meaning, subrogation is barred for any property insurance policy provided to protect the contractor’s limited interest in the building.

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Town of Silverton v. Phoenix Heat Source System,

• Inc. 948 P. 2d 9 (Colo. App. 1997)
• Over a year after construction a fire occurs as a result of a defective roof

heating system. The town’s insurer, CIRSA, paid for the property damage and was assigned all rights, including the right of subrogation. Would the AIA A201 waiver of subrogation bar the insurer’s recovery despite the fact that the loss and payment occurred post construction?

• Yes, in part. Why?

– Again, there is a direct property insurance payment made by the town’s insurer regardless of fault. – Town argued that waiver should be limited spatially (only to work performed under contract) and temporally (only during construction).

• Court held that there is a spatial limitation because 11.3.7 applies to “the

Work” or the value of “the Work”, but not a temporal limitation. The phrase “other property insurance applicable to the work” is broad enough to encapsulate property insurance obtained to protect the work at any time.

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Summit Contractors, Inc. v. General Heating & Air Condition, Inc., 358 S.C. 410 (S.C. 2004).

• Similar fact pattern to the others; sub-subcontractor causes fire

through soldering, contractor maintained property insurance policy covers loss without a determination of fault. Court affirms that the waiver bars insurer’s subrogation claims.

– Contractor further contends it is against public policy to enforce the waiver of subrogation clause because it unconscionably relieves Subcontractor of liability for its negligence. As noted by the Court of Appeals, other courts have upheld waiver of subrogation clauses because they apply only to property loss, they waive subrogation

• nly to the extent covered by first party insurance, and they merely

give effect to the parties' agreement to allocate risk. See IRMA v. O'Donnell, Wicklund, Pigozzi & Peterson Architects, Inc., 295 Ill.App.3d 784, 229 Ill.Dec. 750, 692 N.E.2d 739 (1998); Viacom Internat'l, Inc. v. Midtown Realty Co., 193 A.D.2d 45, 602 N.Y.S.2d 326 (N.Y.1993). We decline to find such a waiver against public policy.

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Practical Implications

• How do you approach a claim?
• Other considerations:

– It appears to be a hold harmless provision. Need to examine law in local jurisdiction to see if this is enforceable. This could invalidate the waiver provision. Most courts hold that, where the risk is shifted to insurance, the hold harmless agreement will be enforced regardless of other legal exceptions.

• Drafting:

– Who is your client, and how will this affect their legal rights?

• Representing GC’s, we typically try to limit the waiver to the owner.

We want the right to be able to go after any at-fault party other than the owner, or at least to specifically preserve that right for the insurer.

• How do you approach a new construction litigation file?

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Tort Reform – Increased Applicability of Apportionment

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Tort Reform Trends

• Several liability, apportionment
• Narrowing or limiting of contribution claims
• Modification of comparative fault schemes
• Damages caps

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Joint and Several vs. Several Liability

• Joint and several is a byproduct of older comparative fault

systems, any liable party can be held liable for entirety of verdict regardless of percentage of fault. (Party 1% at fault can be required to pay 100% of judgment)

– Right of contribution exists against non-paying joint tortfeasors.

• Several liability stems from implementation of apportionment

as part of new tort reform schemes. A party is only liable for the percentage of fault assigned to them. (If 20% at fault in $1M verdict, only required to pay $200,000.00).

– Right of contribution ceases to exist following verdict because party is only liable for their own portion of the damages. Cannot be forced to pay damages attributable to other parties.

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Modern “Fault” Systems:

• Pure Several Liability:

– Apportionment of fault with no right of contribution amount tortfeasors subject to apportionment; liable only for portion of fault

• Joint & Several Liability:

– Liability for any portion of judgment with right of contribution

• Hybrid Systems:

– Combines elements of both several and joint and several. One example is apportionment of fault then application of joint and several liability

• nly to defendants who are more than 50% at fault with respect to

economic damages. Iowa Code Sec. 668.4 (1984).

• Variable Liability:

– Both systems can apply, but it will depend on the particular tort, or actions of the tortfeasors (i.e., actions to which vicarious liability would apply use joint and several liability system)

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Joint & Several States

• Alabama
• Delaware
• Maine
• Maryland
• Massachusetts
• North Carolina
• Rhode Island
• Virginia

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Several Liability States

• Alaska
• Arkansas
• Georgia
• Kansas
• Kentucky
• Oklahoma
• Utah
• Wyoming

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Hybrid States

• California
• Hawaii
• Iowa
• Nebraska
• New York
• Ohio

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Variable Liability States

• Arizona, California, Colorado, Connecticut,

Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Vermont, Washington, West Virginia, Wisconsin

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Impact on Construction Litigation

• A state’s comparative fault system will drastically impact the

rights of construction litigants, particularly primary defendants.

– A state’s approach may alter:

• Who you may sue or bring into ongoing litigation;
• How you may sue or bring a party into litigation;
• When you may bring a party into litigation (and under what theories
• f recovery); and
• What you may recover, if anything.
• Construction litigation, like any other business litigation, isn’t

always about prevailing on all issues in the case before you. Often, it is about maintaining business relationships and finding resolutions that will enable clients to continue to grow their business.

– This means you need to understand your clients business relationships and ongoing or potential projects prior to filing third-party complaints against potentially at-fault third-parties.

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Example: Georgia’s Apportionment Scheme

• O.C.G.A. Sec. 51-12-33 and 51-12-32

– OCGA 51-12-33 provides for:

• Apportionment at trial where plaintiff is partially at fault; and/or
• Apportionment at trial where there are multiple defendants
• Apportionment to at-fault non-parties (or former parties that

settled) if named at least 120 days prior to trial; and

• No right of contribution among joint tortfeasors for which

damages are apportioned.

– OCGA 51-12-32 provides for:

• Contribution where single party caused to pay more than fair

share of total judgment or contribution for pre-trial settlements.

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Example: Georgia’s Apportionment Scheme

• Does the statutory scheme mesh?
• When does the right to contribution exist?

– Zurich Amer. Ins. Co. v. Heard, 321 Ga. App. 325 (2013)

• When should a party be brought into litigation?

– Under what theory?

• Contribution? Apportionment?

– District Owners Ass’n, Inc. v. AMEC Environmental & Infrastructure, Inc., 747 S.E. 2d 10 (Ga. App. 2013).

• What is the impact of settling the case?

– With all parties? – Without all other parties?

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