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Insurance and Contractual Indemnification: Reconciling Competing Indemnity Obligations With Insurance Coverage

Drafting Indemnification Provisions and Ensuring Adequate Coverage for Contractual Liabilities

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, OCTOBER 7, 2015

Jessica E. Brown, Attorney, Reed Smith, Chicago Robert M. Fineman, Esq., CNA Insurance, San Francisco Jason R. Schulze, Partner, Hinshaw & Culbertson, Chicago

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Jason R. Schulze Hinshaw & Culbertson LLP 222 N. LaSalle Street, Suite 300 Chicago, IL 60601 (312) 704-3000 jschulze@hinshawlaw.com

Insurance, Indemnity and Contribution: The Complex Interplay in Commercial Transactions:

Fundamental Issues In Contribution & Indemnity

6



It is hard to imagine another set of legal terms with more soporific effect than indemnity, subrogation, contribution, co-obligation and joint tortfeasorship. Perhaps because the words describe legal relationships between multiple parties, they are vaguely reminiscent of complex mathematical equations which, after all, also describe relationships, except in numbers rather than words – and for most of us, they are about as easy to understand. Even lawyers find words like “indemnity” and “subrogation” ring of an obscure Martian dialect.



Herrick Corp. v. Canadian Ins. Co. of Cal., 29 Cal. App. 4th 753, 34 Cal. Rptr. 2d 844 (4th Dist. 1994).

Contribution and Indemnity (and Subrogation)

When It’s Simple: No Contracts At Issue

7

Still Pretty Simple: Parties Purchased Their Own Insurance

8

Getting Complicated: Multiple Insurers, Multiple Lines of Coverage, Multiple Layers

9

Downright Complicated: Indemnity/Additional Insured Arrangement Between Company A and Company B

10

11



Contribution: Where one party pays more than its fair share on behalf of its insured, it is entitled to recovery from another party in similar position

• wing the same obligation



Indemnity: Where one party pays the obligation

• f the insured where another party should have

paid the entire obligation, the party is entitled to recover from the party that failed to pay



(Subrogation): Where one party pays on behalf

• f an insured, it can recover (in the name of that

insured) against the responsible party or another party obligated to pay

Interplay Between Contribution and Indemnity (and Subrogation)

12



Equitable Contribution: Based in equity, not in contract and founded on a common obligation



Home Ins. Co. v. Cincinnati Ins. Co., 821 N.E.2d 269, 276 (Ill. 2004): Contribution “is an equitable principle arising among coinsurers which permits

• ne insurer who has paid the entire loss, or greater

than its share of the loss, to be reimbursed from

• ther insurers who are also liable for the same

loss.”



Must insure the “same entities, the same interests, and the same risks.”

General Standards for Contribution & Indemnity

13



Implied Indemnity: when a person discharges a duty that is owed by him but which, as between that person and another, should have been discharged by the other



Contractual indemnity: pursuant to a specific agreement between the parties (See Part III)



Unlike subrogation, which can be had against the

• riginal tortfeasor, indemnity is generally found

against two insurers and/or indemnitors with relationship to insured/indemnitee



Distinction can be significant for statute of limitations

General Standards for Contribution & Indemnity

14



Indemnity situations can arise:



Indemnity agreement specifying priority of obligation found in contracts dealing with employer/employee liability; lessor/lessee liability; vendor liability; contractor/subcontractor liability



Excess coverage/primary coverage

General Standards for Contribution & Indemnity

15



Paying insurer seeking indemnity must be aware of volunteer doctrine (subrogation concept) – paying claim when it was not obligated to do so



Right to indemnity appropriate where the paying insurer had a reasonable belief that its payment was necessary for its protection.



An insurer settling on behalf of insured that contests liability should not make an insurer a volunteer because of possibility

• f judgment.



Equally, where an insurer defends or settles despite coverage defenses (subject to appropriately raised reservations), the insurer should not be considered a volunteer.

General Standards for Contribution & Indemnity

16



Focus before allowing contribution can be placed on whether the terms and conditions

• f the policies have been met.



In essence, returns the analysis to whether both insurers have the same interests with respect to the same risks.



Examples: failure to provide notice of claim

• r occurrence as condition precedent;

known loss

Different Standards For Contribution Claims

17



Pro rata “other insurance” clauses also may limit a party’s right to contribution.



Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765 (Tex. 2007) (holding that pro rata “other insurance” clauses give rise to a several obligation for the indemnification of a loss).

Different Standards For Contribution Claims

Getting Complicated: Multiple Insurers, Multiple Lines of Coverage, Multiple Layers

18

19



Once right to contribution is granted, various methods to determine what was the fair share owed by the parties:



Equal shares



Maximum loss rule (each pays equally until limits are reached)



Pro rata by limits (concurrent coverage), pro rata by time on the risk (consecutive coverage) or a combination of both. See, e.g., Owens-Illinois, Inc.

• v. United Ins. Co., 650 A.2d 974 (N.J. 1994).



Courts turn to the other insurance clauses to determine the fair allocation (See Part II).

Different Standards For Contribution Claims

20



Some courts find no right to contribution for payment of defense costs and expenses. See e.g., Cont’l Cas. Co. v. United

• Pac. Ins. Co., 637 So. 2d 270, 272 (Fla. Dist. Ct. App. 1994);

Barton & Ludwig, Inc. v. Fidelity & Deposit Co. of Maryland, 570 F. Supp. 1470 (N.D. Ga. 1983).



Theory is that each insurer has its individual obligation to policyholder to defend. Thus, although insurers can elect to join together to provide this defense, each insurer is merely satisfying its contractual obligation by defending.



But see Cargill, Inc. v. Ace American Ins. Co., 784 N.W.2d 341 (Minn. 2010) overruling this minority position found in Jostens, Inc. v. Mission Ins. Co., 387 N.W.2d 161, 167 (Minn. 1986).

Exceptions To General Rule Allowing Contribution

21



Fifth Circuit has rejected this argument, addressing the Texas Supreme Court’s decision in Mid-Continent and limiting that case to contribution rights relating to indemnity.



The Fifth Circuit allowed contribution of defense costs, holding that “other insurance” clauses apply only to indemnity and that defense obligation “creates a debt which is equally and concurrently due by all insurers,” thereby meeting contribution standards. Trinity Universal Ins. Co. v. Employers Mut.

• Cas. Co., 592 F.3d 687 (5th Cir. 2010).

Exceptions To General Rule Allowing Contribution

Exceptions To General Rule Allowing Contribution



At least one Texas State court disagrees: Truck

• Ins. Exchange v. Mid-Continent Cas. Co., 320

S.W.3d 613 (Tex. App.-Austin 2010).



Court disagreed with Fifth Circuit in Trinity, holding that the Texas Supreme Court in Mid- Continent also cited to cases involving defense costs and, thus, equitable contribution is barred under that authority for both indemnity and defense costs.



Venue particularly important in Texas

22

Getting Complicated: Multiple Insurers, Multiple Lines of Coverage, Multiple Layers

23

24



The “Selective Tender” or “Targeted Tender” Rule in Illinois: allows a policyholder to unilaterally determine which triggered insurer is to defend and indemnify a claim. See John Burns Constr. Co. v. Indiana Ins. Co., 727 N.E.2d 211 (Ill. 2001).



Supreme Court of Washington has endorsed the concept. See Mutual of Enumclaw Ins. Co.

• v. USF Ins. Co., 191 P.3d 866 (Wash. 2008).

Exceptions To General Rule Allowing Contribution

25



Montana courts arguably endorse selective tender as well. See XL Specialty Ins. Co. v. Progressive Cas. Ins. Co., 411 Fed. App’x 78, 81 (9th Cir. 2011) (citing Cas. Indem. Exchange

• Ins. Co. v. Liberty Mutual Fire Ins. Co., 902

F.Supp. 1235, 1237-1238 at n.3 (D. Mont. 1995).

Exceptions To General Rule Allowing Contribution

26



Policyholder can “deactivate” its selection of an insurer for coverage and can put an insurer on notice for “standby coverage” in the event the selected insurer refuses or exhausts. See Chicago Hosp. Risk Pooling Program v. Illinois State Medical Inter-Insurance Exchange, 925 N.E.2d 1216 (Ill. App. 2010); Statewide

• Ins. Co. v. Houston General Ins. Co., 920 N.E.2d 611 (Ill.
• App. 2009).

Exceptions To General Rule Allowing Contribution

27



Policyholder can make these decisions at any time, including after settlement of the underlying claim. See

• Statewide. But see AMCO Ins. Co. v. Cincinnati Ins. Co.,

10 N.E.3d 374 (Ill. App. 2014) (holding that a selected insurer cannot de-select itself and recover from another insurer).

Exceptions To General Rule Allowing Contribution

28



Generally no contribution between primary and excess insurer. The fundamental concepts

• f equitable contribution not met. The insurers

do not insure the same interests and the same

• risks. Primary has a different interest than

excess insurer.



This distinction has been acknowledged even in Illinois under “selective tender” rule. See Kajima Const. Services, Inc. v. St. Paul Fire & Marine Ins. Co., 879 N.E.2d 305 (Ill. 2007).

Exceptions To General Rule Allowing Contribution

Downright Complicated: Indemnity/Additional Insured Arrangement Between Company A and Company B

29

30



Some courts hold that indemnity agreements between parties placing the obligation of one party to indemnify the other establish priority of coverage and create a barrier to contribution.



See, e.g., American Indem. Lloyds v. Travelers Prop. & Cas.

• Ins. Co., 335 F.3d 429 (5th Cir. 2003) (holding that “an

indemnity agreement between the insureds or a contract with an indemnification clause, such as is commonly found in the construction industry, may shift an entire loss to a particular insurer notwithstanding the existence of an ‘other insurance’ clause in its policy.”); Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8th Cir. 2002) (applying Arkansas law); St. Paul Fire & Marine Ins. Co. v. American Intern. Specialty Lines Ins. Co., 365 F.3d 263 (4th Cir. 2004) (applying Virginia law).

Indemnity Agreements Can Create Different “Risks” and “Interests”

31



Party seeking to establish right to contribution must carry burden of proof that it has paid more than its fair share.



In Scottsdale Ins. Co. v. Century Sur. Co., 182

• Cal. App. 4th 1023, 105 Cal. Rptr. 3d 896 (2d
• Dist. 2010), Scottsdale sought contribution and

requested 50-50 split between itself and Century for defense and indemnity paid on 80 different underlying claims by Scottsdale.

Contribution – Burden of Proof

32



Scottsdale court noted that in nearly every case, Scottsdale was joined by other insurers in defending and paying claims. Thus, the court held that the first step is to determine what Scottsdale’s and Century’s proper shares should have been.



Example: Scottsdale contributed with three other insurers for defense. Under Scottsdale’s theory, it was entitled to 12.5% of defense costs from Century (50% of 25%). But Century’s fair share should have been 20% (5 insurers at 20% each) and, thus, Scottsdale is entitled to the difference between the 25% it paid and the 20% it should have paid.

Contribution – Burden of Proof

33



GC Tishman required subcontractor Herrick (supplier

• f steel) to indemnify it for any liability for the sole

negligence of Tishman and acquire primary insurance in the amount of $10M (adding Tishman as additional insured). Herrick is insured by Classic Ins. Co.



GC Tishman required subcontractor Buggy (supplier of metal decking) to enter into same agreement. Buggy acquired $5M in primary insurance with Canadian Ins. Co.



One of Herrick’s employees is injured on site and he and his wife sue all three.

Example of Interplay Between Contribution & Indemnity

34



Tishman tendered defense to Herrick’s insurer, Classic. Classic defended for 3 years but when Tishman also tendered to Buggy’s insurer, Canadian, Classic withdrew its defense.



Tishman sued Herrick for contractual indemnity and Herrick (and Classic) took the position it had no duty to defend or indemnify Tishman.



Canadian, Buggy’s insurer settled the case, paying $125,000 on behalf of Tishman and $25,000 on behalf

• f Buggy.



Neither Herrick nor Classic participated in settlement.

Example of Interplay Between Contribution & Indemnity

35



Tishman was awarded $125,000 in contractual indemnity from Herrick on its cross-claim. Classic paid the judgment on Herrick’s behalf.



Herrick and its insurer Classic sued Buggy and its insurer Canadian seeking contribution and/or indemnity to recover the $125,000 in indemnity paid to Tishman and its defense costs for the 3 years it defended Tishman.

Example of Interplay Between Contribution & Indemnity

36



The $125,000 in indemnity paid by Classic: The court held that Classic was not entitled to contribution for the indemnity payment made by Classic to Tishman because it was paid as part of an indemnity agreement to Tishman and not on behalf of Tishman (its additional insured) to the claimant. Thus, Classic and Canadian did not make payments on the “same risks” as required for contribution.



Classic’s defense fees and costs: The court held that Classic could recover its defense costs from Canadian because they were incurred in defense of mutual insured and both insurers had identical defense obligation.



Herrick Corp. v. Canadian Ins. Co. of Cal., 29 Cal. App. 4th 753, 34 Cal. Rptr. 2d 844 (4th Dist. 1994).

Example of Interplay Between Contribution & Indemnity

Insurance and Contractual Indemnification:

Reconciling Competing Indemnity Obligations With Insurance Coverage

Strafford Publications Webinar

October 7, 2015

Robert M. Fineman, Esq.

Senior Litigation Counsel CNA Insurance 555 Mission St. Suite 330 San Francisco, CA 94105 Robert.fineman@cna.com

The Relationship Between Contractual Indemnity and Insurance

 McCrary Construction Co. v. Metal Deck Specialists, Inc.

133 Cal.App.4th 1528 (2005)

• An indemnity provision that does not refer to the issue of the

indemnitee’s negligence will be considered to be a general indemnity clause under which the indemnitee is not entitled to indemnity for its active negligence, unless the circumstances of the case and the language of the contract evince a different intent by the parties.  American Casualty v. General Star Indemnity Co., 125

Cal.App.4th 1510 (2005)

• Coverage for additional insured continues even if indemnity

agreement is unenforceable under Civil Code section 2782(a))  JPI Westcoast Construction v. RJS Assoc., et al., 156

Cal.App.4th 1448 (2007)

• Subcontractor’s excess policy not triggered until subcontractor’s and

general contractor’s primary policies are exhausted, notwithstanding indemnity agreement

38

Overview of “Other Insurance” Clauses

 Three General Types of Other Insurance Clauses

 Pro–Rata Clauses

• If there is other valid and collectible insurance, the insurer shall not be liable

for more than its pro-rata share of the loss (i.e. the proportion that its policy limits bear to the total coverage available to the insured  Excess Only Clauses

• If there is other valid and collectible insurance, the insurer is liable only to

the extent that the loss exceeds such other insurance

• “This insurance is excess over any other insurance, whether primary or

excess, contingent or on any other basis”  Escape Clauses

• The existence of other valid and collectible insurance extinguishes the

insurer’s liability to the extent of such other insurance

• Such clauses can be valid as long as the insured is protected but such escape

clauses are generally disfavored

39

Overview of “Other Insurance” Clauses

 Determination of whether a policy provides primary or

secondary coverage is generally determined by the policy provisions including any “other insurance” clause

 Primary policies may contain other insurance condition

stating that the coverage afforded by the primary policy is “excess to other valid and collectible insurance.”

• If several primary policies contain the same excess other insurance

provisions, the clauses are disregarded and the insurers on the risk must share the defense and indemnity costs

• Primary insurers with conflicting “excess” other insurance clauses

can have immediate defense obligations if the policies are not true excess  Conflicts in competing other insurance clauses typically

result in proration of limits rather than permitting an insurer to avoid contributing to the defense or indemnity of the underlying claim

40

Whose Coverage Is Primary?

 The 2001 and later versions of the ISO

CGL Policy (CG 00 01 10 01) contain an amended Other Insurance Clause (Section IV)

• States that the Named Insured’s policy is

excess over any other policy on which “You” have been added as an additional insured by way of endorsement

• Issues still arise when the other party’s

insurance purports to provide only excess coverage

41

Whose Coverage Is Primary?

• Primary and Noncontributory Requirements

 Amendments to “Other Insurance” Clauses  This insurance is primary to and will not seek contribution from any other insurance available to an additional insured under your policy provided that:

• 1. The additional insured is a named insured under such
• ther insurance
• 2. You have agreed in writing in a contract or agreement

that this insurance would be primary and would not seek contribution from any other insurance available to the additional insured

42

Whose Coverage Is Primary?

 Additional Insured Endorsements May

Also Impact “Other Insurance.”

 This insurance is excess over: Any other insurance naming the additional insured as an insured whether primary, excess, contingent

• r on any other basis unless a written contract or

agreement specifically requires that this insurance be either primary or primary and noncontributing. Where required by written contract or agreement, we will consider any other insurance maintained by the additional insured for injury or damage covered by this endorsement to be excess and noncontributing with this insurance

43

Priority of Coverage Between Contract and Policy Language

 Rossmoor Sanitation Inc. v. Pylon, 13 Cal. 3d 622 (1975)

• To apportion the loss pursuant to the other insurance clause would

effectively negate the indemnity agreement and impose liability on [the owner’s insurer] when [the owner] bargained with [the Contractor] to avoid that very result as part of the consideration for the construction agreement.  Reliance National Indemnity Co. v. General Star

Indemnity Co., 72 Cal.App.4th 1063 (1999)

• Rossmoor did not purport to establish a general rule that a

contractual indemnification agreement between an insured and a third party takes precedence over well-established general rules of primary and excess coverage in an action between insurers  Hartford Casualty Ins. Co. v. Mt. Hawley Ins. Co., 123

Cal.App.4th 278 (2004)

• General contractor’s insurer cannot be liable to a subcontractor’s

insurer for any costs of defense or indemnity where the subcontractor agreed to indemnify the general contractor for all liabilities “which arise out of or are in any way related to” the relevant construction project.

44

Priority of Coverage Between Contract and Policy Language

 Hartford Fire Ins. Co. v. LoBrutto, 275 A.D.2d. 525 (NY

2000)

• It is the absence of any specific requirement of primary coverage in

the subcontract that is relevant rather than the absence of any specific provision that the coverage be excess  Regal Homes Inc. v. CNA Insurance, 171 P.3d. 610 (AZ

2007)

• Endorsement to policy stated “Any coverage provided hereunder

shall be excess over any other valid and collectible insurance available to the additional insured whether primary, excess, contingent or on any other basis unless a contract specifically requires that this insurance be primary or you request that it apply

• n a primary basis
• Testimony from company president did not establish requirement
• f primary insurance for purposes of endorsement and contract did

not specify whether insurance was to apply on a primary basis  Pecker Iron Works v. Travelers, 99 N.Y. 2d 391 (2003)

• Coverage for additional insured held to by primary unless

unambiguously stated otherwise and subcontract was silent on the issue

45

Priority of Coverage Between Contract and Policy Language

 Cases Giving Priority to Indemnity Agreement

• Federal Ins. Co. v. Gulf Ins. Co., 162 S.W.3d 160 (Mo. Ct.
• App. 2005)
• St. Paul Fire & Marine Ins. Co. v. Am. Int’l Specialty Lines
• Ins. Co., 365 F.3d 263 (4th Cir. 2004)
• Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8th Cir.

2002)

• American Indem. Lloyds v. Travelers Prop. & Cas. Co., 189

F.Supp.2d 630 (S.D. Tex. 2002)

• Chubb Insurance Co of Canada v. Mid-Continent Cas. Co.,

982 F.Supp.435 (S.D. Miss. 1997)

• J. Walters Constr. Inc. v. Gilman Paper Co., 620 So.2d 219

(Fla. App. Ct. 1993)

• Truck Ins. Exchange v. Liberty Mut. Ins. Co., 428 N.E.2d

1183 (Ill. App. Ct. 1981)

46

Priority of Coverage Between Contract and Policy Language

 Cases Giving Priority to Insurance Provisions

• JPI v. Westcoast Construction L.P. v. RJS & Assoc., Inc. 156

Cal.App.4th 1448 (2007) (distinguishing Rossmoor as a case involving two primary insurers and this case involved a primary versus excess priority dispute)

• Cincinnati Ins. Co. v. Boller Constr. Co., 2006 WL 695459 (N.D.
• Ill. 2006)(using principal of horizontal exhaustion, primary insurer

had to exhaust prior to excess policy having obligation to contribute)

• U.S. Liability Insurance Co. v. Mountain Valley Indem. Co.,

371 F .Supp.2d 554 (S.D.N.Y. 2005) (holding risk-shifting agreement between lessor and lessee did not supersede “other insurance” clause)

• Liberty Mut. Ins. Co. v. Tokio Marine & Fire Ins. Co. Ltd.,

2004 WL 2125411 (N.D. Ill. 2004) (subcontractor’s excess policy is not reached until primary policies of general contractor and subcontractor are exhausted)

• USF&G Co. v. CNA Ins. Cos., 618 N.Y.S.2d 465 (N.Y. App. Div.

1994) (holding risk-shifting agreement between contractor and sub-contractor did not supersede “other insurance” clause).

47

Priority of Coverage Between Contract and Policy Language

 2013 Amendments to AI Language  AI coverage linked to the additional-insured requirements in an underlying transactional document.  The policy limits applicable to the additional-insured’s coverage are deemed to be the lesser of the amount: (1) “Required by the contract or agreement”; or (2) “Available under the applicable Limits of Insurance shown in the Declarations” (i.e., the policy limit).  “Insurance afforded to the additional insured will not be broader than that which [the named insured] is required by contract or agreement to provide such additional insured.”  The court’s Feb. 13 decision in Deepwater Horizon validates the contractual connection made by ISO’s additional-insured endorsements linking the policy’s coverage to the limitations of an underlying contract.  In Re Deepwater Horizon, No. 13–0670 (TX. Sup. Ct.

• Feb. 2015)(additional insured coverage limited by

insurance policy language)

48

Is There An Insured Contract?

 Issue: Is obligation to indemnify covered

under the indemnitor’s CGL policy?

 Coverage for the indemnity claim turns on

whether the indemnity agreement is an “insured contract” as defined by the subcontractor’s CGL policy.

49

Insurance Coverage for Contractual Indemnity Claims: Significant CGL Provisions  Typical CGL Coverage Grant: “The

company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies caused by an

• ccurrence.”

50

Insurance Coverage for Contractual Indemnity Claims: Significant CGL Provisions (cont.)

Typical CGL Contractual Liability Exclusion: “This insurance does not apply to . . . ‘bodily injury’ or ‘property damages’ for which the insured is obligated to pay as damages by reason of the assumption of liability in a contract or agreement.” This exclusion would appear to eliminate coverage for claims arising out of a contractual indemnification agreement. However . . .

51

Exception to the Contractual Liability Exclusion

 Typical CGL Exception to the Contractual Liability

Exclusion: “This exclusion does not apply to liability for damages:

(1) that the insured would have in the absence of the contract or agreement; or (2) assumed in a contract or agreement that is an ‘insured contract’, provided the bodily injury or property damage

• ccurs subsequent to the execution of the contract

agreement.”

 What is an “insured contract”?

52

The Crucial Inquiry: Is the Indemnification Agreement an “Insured Contract”?

Insured Contract: Defined in the typical CGL policy to include, among other things, “that part of any other contract or agreement pertaining to [the insured’s] business under which [the insured] assumes the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person. Tort liability means a liability that would be imposed in the absence of any contract or agreement.”

53

The Crucial Inquiry: Is the Indemnification Agreement an “Insured Contract”? (cont.)

 Revised Definition of Insured Contract

• Language added to address anti-indemnity

statutes

 “However, such part of a contract or agreement shall only be considered an ‘insured contract’ to the extent your assumption of the tort liability is permitted by law”

• This may impact whether or not a party to a

contractual indemnity agreement also qualifies as an additional insured, despite intent of the parties.

54

The Crucial Inquiry: Is the Indemnification Agreement an “Insured Contract”? (cont.)

 Thus, to qualify as an insured contract,

the contract must:

• Pertain to the insured’s business
• Have been entered into before the underlying

liability (a tort liability) occurs

• Assume the tort liability of another
• Not violate anti-indemnity statutes

55

“Insured Contract” Litigation Outcomes

 Virginia Surety Co., Inc. v. Northern Ins. Co. of New

York, et al., 224 Ill.2d 550 (2007) (Illinois)

• Indemnity agreement was not an insured contract where

indemnitor had only agreed to provide indemnification for its own negligence and not the negligence of the indemnitee  Garnet Const. Co., Inc. v. Acadia Ins. Co., 61 Mass.App.

705 (2004)

• Indemnity obligation implied by industry practice did not meet the

requirements of an “insured contract”

• Progressive Cas. Ins. Co. v. Brown’s Crew Car of

Wyoming, Inc., 27 F.Supp.2d 1288 (D. Wyoming 1998)

• Contract qualified as an insured contract, but did not extend to

coverage for defense costs of the indemnitee

56

“Insured Contract” Litigation Outcomes

 Golden Eagle Ins. Co. v. Ins. Co. of the West, 99 Cal.

• App. 4th 837 (2002) (California)
• “The insured must assume the other contracting party’s tort liability

to third parties in order for insured contract coverage to attach”  Lubrizol Corp. v. National Fire Ins. Co. of Pittsburgh,

PA., 200 Fed.Appx. 555 (6th Cir. 2006)(unpublished)

• Indemnity agreement was not an “insured contract” under the

National Union policy, because it did not require the assumption by Lubrizol of the tort liability of another party. Lubrizol was only required to indemnify Valvoline for Lubrizol’s own negligence or willful misconduct.  Certain London Market Ins. Cos. v. PA Nat. Mut. Cas.

• Ins. Co., 106 Fed. Appx. 884 (5th Cir. 2004)
• Contract in violation of Mississippi’s anti-indemnity law would not fit

the “insured contract” exception

57

Insurance, Indemnity and Contribution: The Complex Interplay in Commercial Transactions: Negotiating the Agreement

Jessica E. Brown 312.207.2421 jebrown@reedsmith.com

Unequal Bargaining Power

59

The “Armstrong” Scenario

• We-Sell – a national retail chain

headquartered in Illinois contracted with Grill Co. to manufacture a grill to be sold under its own brand the “Armstrong Rocket”

• We-Sell had Grill Co. manufacture

a new special fuel grill – the “Armstrong Rocket” – per We- Sell’s specifications including patented fuel type

• The “Armstrong Rocket” became a

bestseller and millions were sold

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We-Sell’s Perspective

• WHAT WE-WELL WANTS
• We-Sell wants Grill Co. to provide it with an indemnity that

covers any claim that could possibly arise out of the Armstrong Rocket – even if We-Sell is solely negligent.

• We-Sell also wants to make sure that Grill Co. will defend it on

any claim.

• Finally, to protect itself against Grill Co’s possible bankruptcy,

We-Sell wants to be an additional insured under Grill Co.’s liability insurance.

• WE-SELL’S BARGAINING POWER
• We-Sell can always find another manufacturer somewhere

else if it cannot get what it wants, but Grill Co. is its only U.S.

• ption.

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We-Sell Proposed Indemnity Provision

[Manufacturer] agrees to indemnify and hold harmless We-Sell and its agents from and against any and all claims or suits for: (i) bodily injury to all persons whether employees

• f

We-Sell

• r
• therwise, and (ii) damage to property -- arising out
• f the [Product], and all other damage, direct or

indirect, of whatsoever nature, resulting from We- Sell’s use, sale or distribution of the [Product], however caused including We-Sell’s sole or partial

• negligence. It is expressly agreed that this provision

shall survive the performance of this Agreement.

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We-Sell Proposed Defense Provision

[Manufacturer] agrees to defend We-Sell for any claim, suit or loss allegedly attributable to bodily injury or damage to property, arising out of We-Sell’s use of the [Product], even if We-Sell is solely at fault for such bodily injury or property damage.

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We-Sell Proposed Provisions

• WHAT WOULD BE THE EFFECT?
• By including the specific and explicit phrase

“including We-Sell’s sole or partial negligence”, We- Sell has covered its own negligence even where We-Sell is found to be solely at fault.

• We-Sell’s defense provision also explicitly covers it

if it is alleged that We-Sell is solely at fault

• Note that the defense provision requires that Grill
• Co. do more than simply pay defense costs – Grill
• Co. must provide We-Sell with a defense.

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Grill Co.’s Perspective

• WHAT GRILL CO. WANTS
• Grill Co. wants to provide as little indemnity to We-Sell as

possible – preferably strictly limited to its own negligence for certain acts

• Grill Co. is fine with making Grill Co. an additional insured as

long as it does not increase Grill Co.’s premiums. (Would the coverage We-Sell is requesting cost more? Why?)

• GRILL CO.’S BARGAINING POSITION
• Grill Co. needs the contract with We-Sell because it has been

hurt by competition and the economic decline.

• Also it has developed a reputation for poor quality due to

several recalls involving explosions and deaths.

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Grill Co. Proposed Indemnity

Grill Co. agrees to indemnify [Purchaser] for sums [Purchaser] becomes legally obligated to pay as damages for bodily injury

• r properly damage caused by " Grill Co.’s fault.” “Grill Co.’s

fault” means: (i) a manufacturing defect, design defect or negligent failure to warn with respect to products designed by Grill Co. and supplied to [Purchaser] by Grill Co. Grill Co. further agrees to indemnify [Purchaser] for reasonable legal expenses it incurs defending itself against any suits seeking such damages. Grill Co. shall have no obligation to indemnify [Purchaser] for any damages caused by [Purchaser’s] fault or for any legal expenses incurred by [Purchasers] in defending itself against suits seeking damages caused by [Purchaser’s] fault.

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Grill Co. Proposed Provision

• WHAT WOULD BE THE EFFECT?
• Grill Co.’s provision is a very weak

indemnity, limited to where it is at fault

• It is unlikely to cover design defects in the

proposed scenario because We-Sell designed the Armstrong Grill – Grill Co. was

• nly the manufacturer
• It does not include a duty to defend – only a

duty to indemnify covered defense costs

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Negotiations

• We-Sell rejects Grill Co.’s indemnity
• However, We-Sell prefers to have the Armstrong

Grill manufactured in the U.S. so it agrees to alter its provision to a similar “back-up” provision

• Grill Co. needs the business so it agrees to We-

Sell’s new proposal including a duty to defend

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Final We-Sell – Grill Co. Indemnity

WHAT’S THE RESULT? Grill Co. agrees to indemnify and hold harmless We- Sell and its agents from and against any and all claims or suits for: (i) bodily injury to all persons whether employees of We-Sell or otherwise, and (ii) damage to property – arising out of the Armstrong Grill, and all other damage, direct or indirect, of whatsoever nature, resulting from We-Sell’s use of the Armstrong Grill, however caused. It is expressly agreed that this provision shall survive the performance of this agreement.

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Final We-Sell – Grill Co. Defense Provision

“Grill Co. agrees to defend We-Sell for any claim, suit or loss allegedly attributable to bodily injury or damage to property, arising

• ut of We-Sell’s use of the Armstrong Grill,

even if We-Sell is partly at fault for such bodily injury or property damage.”

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We-Sell’s Additional Insured Provision

“Grill Co. shall obtain and maintain in full force during the performance of this Contract and six months thereafter: (a) Commercial General Liability Insurance endorsed to include products/completed operations, independent contractors, contractual liability (covering We- Sell’s indemnity obligations in this contract), broad form property damage and fire liability coverage with a combined single limit of $1,000,000 per occurrence and $2,000,000 in the

• aggregate. All such policies shall name We-Sell

and its agents as additional insureds. Grill Co. shall furnish to a Certificate of Insurance evidencing such coverage.”

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Insurance

• WHAT HAPPENS WITH THE INSURANCE
• Grill Co. agrees to We-Sell’s additional insured

provision and provides We-Sell with a certificate of insurance that shows that it has insurance with $2 million per occurrence and $4 million aggregate limits

• We-Sell does not ask for a copy of the insurance

policy itself

• Grill Co’s policy has the following provisions, which
• f course We-Sell doesn’t know about:
• $500,000 self-insured retention
• The additional insured provision limits coverage

to the extent required by contract

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Unfortunately….

• The Armstrong Rocket had

a tendency to really “take

• ff” – exploding right out of

consumers backyards

• This resulted in numerous

lawsuits for property damage, bodily injury and injury to wildlife (geese) against We-Sell and Grill Co.

• The suits alleged only

design defects

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Who Pays?

• We-Sell seeks protection from Grill Co. and its

insurer

• Grill Co. asserts that it does not owe We-Sell either

indemnity or defense because the lawsuits allege design defects and We-Sell designed the Armstrong Rocket so is solely negligent

• Grill Co’s Insurer asserts that there is no coverage

because (1) the $500,000 SIR and (2) the insurance is limited to the indemnity provision and We-Sell is solely negligent

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Result

• For suits that allege only a design defect:
• We-Sell probably won’t be indemnified by Grill
• Co. or covered for indemnity under its insurance

because We-Sell is the designer.

• However, if Grill Co. is also alleged to be the

designer, We-Sell may be entitled to a defense

• For suits that allege manufacturing as well as

design defects:

• We-Sell is probably covered by Grill Co.’s

indemnity

• We-Sell is also probably covered by insurance,

but only after the SIR is exhausted – Grill Co. may be required to pay the amounts in the SIR

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Equal Bargaining Power

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The Super Lawn Scenario

• Eco-Solutions, a small company

based in Ohio, has developed “Super Lawn” a lawn supplement that fertilizes and takes care of all weeds leaving a perfect healthy

• lawn. It is non-toxic and actually

binds with toxins eliminating them. Eco-Solutions holds a patent on “Super-Lawn” that does not expire until 2027.

• “Super Lawn” is a very hot product

and We-Sell would like to sell it at its stores.

• Eco-Solutions would like to

distribute “super Lawn” through We-Sell because of its market share, but does have many other retailers who would like to distribute its as well

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Negotiations

• We-Sell would like to have its standard indemnity and defense

provisions discussed previously

• WHAT HAPPENS
• Eco-Solutions rejects the We-Sell indemnity and defense

provisions and states that it would like to be indemnified by We-Sell

• Although Eco-Solutions is a much smaller company, We-Sell

has to bargain to get this one of kind product in its stores

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Reciprocal Indemnity Provision

• (a) Eco-Solutions agrees to indemnify We-Sell for sums We-

Sell becomes legally obligated to pay as damages for bodily injury or properly damage caused by solely by "Eco-Solutions’ negligence.” "Eco-Solutions’ negligence” means: (i) a manufacturing defect, design defect or negligent failure to warn with respect to products designed by Eco-Solutions and supplied to We-Sell by Eco-Solutions. Eco-Solutions further agrees to indemnify We-Sell for reasonable legal expenses it incurs defending itself against any suits seeking such

• damages. Eco-Solutions shall have no obligation to indemnify

We-Sell for any damages caused by We-Sell’s fault or for any legal expenses incurred by We-Sell in defending itself against suits seeking damages caused by We-Sell’s fault. Eco- Solutions shall also have no duty to indemnify We-Sell, if its product is changed or altered in any way.

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Reciprocal Indemnity Provision

• (b) We-Sell agrees to indemnify Eco-Solutions for sums Eco-

Solutions becomes legally obligated to pay as damages for bodily injury or properly damage caused by solely by “We- Sell’s negligence.” “We-Sell’s negligence” means: (i) any negligence by We-Sell in the distribution, sale or use of Eco- Solution’s products, including failure to warn and (ii) any change or alteration to Eco-Solution’s product by We-Sell. We- Sell further agrees to indemnify Eco-Solutions for reasonable legal expenses it incurs defending itself against any suits seeking such damages. We-Sell shall have no obligation to indemnify Eco-Solutions for any damages caused by Eco- Solutions’ fault or for any legal expenses incurred by Eco- Solutions in defending itself against suits seeking damages caused by Eco-Solutions fault.

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Reciprocal Indemnity Provision

• EFFECT OF PROVISIONS
• Under the reciprocal indemnity, neither party

indemnifies the other unless the suit is based on the sole negligence of one party for specific acts

• Additionally, neither party has a duty to

defend the other – at most each party must pay the other’s reasonable defense costs if a suit is based on its sole negligence

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Which Goes First? Indemnity or Insurance?

• The law is sparse and unclear on this point
• The insurance policy won’t say
• Usually the indemnity won’t say – but it should.
• Suggested Provision:

It is the express intent of the parties that the insurance identified in Paragraph X, naming We-Sell as an additional insured, respond first and defend and indemnify We-Sell and its agents with respect to any and all claims or suits arising out

• f the performance or breach of this Agreement by Grill Co. If

and only if such insurance does not apply or is otherwise not available with respect to a particular matter, the indemnity provisions in this paragraph will apply

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