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Insurance Subrogation, Indemnity and Hold Harmless Releases: Navigating the Complexities

Protecting Subrogation Rights and Negotiating Subrogation Waivers, Indemnities and Settlement Releases

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WEDNESDAY, MARCH 19, 2014

Presenting a live 90-minute webinar with interactive Q&A Tarron Gartner, Shareholder, Cooper & Scully, Dallas Steven K. Gerber, Member, Cozen O'Connor, Philadelphia Stephen D. Palley, Founder, Palley Law, Washington, D.C.

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Insurance Subrogation, Indemnity and Hold Harmless Releases: Navigating the Complexities

Tarron Gartner-Ilai Cooper & Scully P.C. 214.712.9570 tarron.gartner@cooperscully.com

Wha What t Is Sub Is Subrog rogation? ation?

The Substitution of one party for another whose debut the party pays, entitling the paying party to the rights, remedies or securities that would otherwise belong to the debtor. Black’s Law Dictionary, 9th Ed. (2004).

6

Why Why Is It Is It Imp Importan

• rtant?

t?

• Subrogation allocates loss to the party

who should actually bear the responsibility.

• Subrogation offsets the Company’s
• verall indemnity payout.
• Subrogation is a valuable claim service

that is part of the value-added proposition afforded by the Company.

7

Ho How w Is Is Sub Subrog rogati ation

• n Rec

Recogn

• gnize

zed d In In Law Law?

• Conventional Subrogation: Arises by contract.
• Equitable Subrogation: Arises by operation of

law.

• Statutory Subrogation: Legislatively mandated,

such as in worker’s compensation statutory schemes.

8

How How Doe Does Subro s Subrogation gation App Apply To Insu ly To Insurance rance?

• Insurer makes a payment under the

policy (typically first party property, auto physical damage and/or UM/UIM physicsl damage claims).

• Insurer is entitled to seek reimbursement

from the tortfeasor?

9

Two Types Of Subroga Two Types Of Subrogation tion Cla Claus uses es

• Transfer of Right Clause: Typically

provides that the “all rights are transferred to the insurer” upon payment under the policy to the extent of the payment made.

• Reimbursement Clause: Requires the

insured to reimburse all sums paid under policy from any recovery realized.

10

What’s The Difference?

A Reimbursement Clause is not subject to the “made whole rule.” A Transfer Clause is.

11

Int Interests To Be Prote erests To Be Protected cted

• Extracontractual Liability to the Subrogating

Carrier – Putting the company’s (client’s) interest ahead of the insured.

• Class Action Potential for Subrogating Insurer

– Failure to comply with law; aggregate property damage claims.

• Market Conduct Exams – Fines, penalties and

damage to reputation and rank.

12

The The Made Made Who Whole Rule le Rule

The insurer is not entitled to subrogation if the loss exceeds the amounts recovered from the insurer and the third party covering the loss. Ortiz v. Great Southern Fire & Cas. Ins. Co., 587 S.W.2d 342 (Tex. 1980).

13

What’s The Risk?

Putting the Subrogating Company’s financial interests ahead of the insured’s without Investigation

• What if insured has significant uninsured loss?
• What if insured has corresponding bodily injury claims?
• What if insured and insurer are locked in a coverage

dispute?

• Could the insured put a constructive trust on thhe

proceeds of recovery?

14

Bes Best t Pra Practices ctices

• Increase client’s awareness of potential risks and

inquire as to whether the client has communicated with the insured;

• Encourage client communication to communicate with

the insured and propose an allocation agreement;

• Disclose conflict of interest and obtain written waiver;
• Encourage insured to seek the advice of counsel.
• If the insured has an attorney, reach out to the attorney

to negotiate a joint prosecution agreement allocating recovery and expenses.

15

Pror Prorating ating Rec Recovery,

• very, Ded

Deductible uctibles s and and Re Recovery covery Co Costs sts

• Statutory rules in most states with regard

to recovery of auto physical damage claims;

• May require full reimbursement if staff

counsel is used;

• All other lines of business subject to the

applicable common law made-whole rule.

16

Exa Example mple

Deductible must be included in subrogated demands unless otherwise requested by the insured. Proportionate sharing of attorneys’ fees is permitted provided

• utside counsel is used.

2 A.A.C. §26.080

17

All Alloca

• cation

tion Agr Agreem eements ents

• Determines priority of recovery.
• Serves as an assignment of claims for new consideration recited –

becomes, in essence, contractual subrogation.

• Shores up amount of uninsured losses claimed.
• Bridges gaps caused by claim/coverage investigation – great

customer service tool.

• Allocates unassignable recoveries associated with insured’s

personal claims that might otherwise prevent recovery on the subrogated claim.

• Serves to protect both the insured’s and carrier’s legal and

financial interests.

• Determines allocation of costs.
• Diminishes extracontractual liability.

18

Ess Essential ential Ele Elements ments

• Recitals;
• Statement as to policy terms;
• Recital of amount of insured and

uninsured losses;

• Consideration;
• Identification of Joint Counsel;

19

Cont’d…

• Assignment of non-personal causes of

action and/or claim retention;

• Allocation of money associated with

punitive damages claimed;

• Express waiver by insured of right of

recovery;

• Prosecution of Recovery Suit;

20

Cont’d…

• Advancement of Interim Costs;
• Allocation of Interim Costs upon recovery

and expression of manner of calculation;

• Allocation of net recovery and expression
• f manner of calculation;
• General terms and conditions.

21

All Alloca

• cation

tion For Formula mula

Simple algebraic formula prorating the total recovery to the deductible or uninsured loss, and costs and attorney’s fees:

Insured Loss = Percentage to which Insurer Total Loss is entitled. Uninsured Loss = Percentage to which Insured Total Loss is entitled.

22

All Alloca

• cation

tion of

• f Rec

Recov

• veries

eries, , De Dedu duct ctibles ibles an and Ex d Expe pens nses es

If the Insurer pays a claim of for $47,500.00 ($50,000.00 policy limits less a $2,500.00 deductible), and expends $6,600.00 recovering $20,000.00 from the responsible party, the insured is entitled to .01% of the $20,000.00 ($200.00), and the Insurer is entitled to $19,800.00. From that, the insured must pay .01% of the costs, or $66.00, while the Insurer must bear $6,534.00 of the responsibility.

23

Purs Pursuing uing consumer consumer prot protection ection and and pun punitive itive dam damages ages

• Subrogating insurer may actually spend a lot of money

supporting efforts at tort reform;

• Some states do not allow for the assignment of certain

types of claims;

• Can the “real party” assert consumer protection

claims? Is the insurer a “consumer”?

• What happens if (however remotely), the subrogating

insurer recovers more than what is paid under the policy?

• Assume that there is no uninsured loss and therefore no

allocation agreement;

• Subrogating insurer’s policy likely provides subrogation only to

“the extent of the payment made.”

24

Waivers of Subrogation

Stephen Palley

Palley Law, PLLC 1750 K St, NW Washington, DC 20006 202.847.3964 sdp@palleylaw.com

www.palleylaw.com

Waivers of Subrogation

 Basic principles:

 Common feature in commercial contracts.  Often ignored until after all a claim arises.  Scope can be broader than anyone realizes.  They are WAIVERS

 (“of subrogation”)

 State law varies widely  Different rules may apply where litigated between insurers, as opposed to insured v. insured.

26

Boilerplate

 Language varies widely, but some common features issues can be identified.  Here’s an example from the AIA A201 general conditions (emphasis added):

 11.3.1 Unless otherwise provided the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance written on a builder’s risk “all-risk”

• r equivalent policy form in the amount of the initial Contract Sum, plus value of

subsequent Contract Modifications and cost of materials supplied or installed by

• thers, comprising total value for the entire Project at the site on a replacement

cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Section 9.10 or until no person

• r entity other than the Owner has an insurable interest in the property required by

this Section 11.3 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Project.

27

What Is Being Waived?

 The right of the parties to sue to the extent of “available” insurance coverage?  A third party insurance company’s rights?  Is a waiver of a third party’s rights really enforceable?  Why is it called a “waiver of subrogation”



• cf. Robert Frost, “Mending Wall” (because people find

comfort in things that have been around for a long time, even if they don’t necessarily make sense) (available at http://www.sparknotes.com/poetry/frost/section3.rhtml).

28

When Is The Waiver Triggered?

 Upon execution of the contract, before a claim even arises?  When a claim arises but before it is paid?  After insurance is procured?  After a claim arises and an insurance company has paid?

29

Is Insurer Consent Required?

 Policies may permit pre-loss waiver

 On a blanket-basis (where required by written contract)  Or on a scheduled basis?  A “best practice” to coordinate between contract requirements and policy contents?

 What if the policy doesn’t include a waiver?

 Generally, insurer stands in insured’s shoes and the waiver is enforceable.  See e.g., North American Specialty Insurance Company vs. Payton Construction Corp., 80 Mass. App. Ct. 367 (2011)  Does the insurer have a claim back against their own insured?

30

In Insurer Consent Required?

 If you’re an insured, does it matter?

 Impact of anti-subrogation rules  See e.g., Allstate Ins. Co. v. Palumbo, 994 A.2d 174 (Conn. 2010).

 An agreement to provide insurance company may be deemed an implied waiver.

 See e.g., Walker v. Vanderpool, 225 Va. 266, 271 (1983) (Va. 1983)

31

Third party beneficiaries?

 If you’re not named in a contract that contains a waiver of subrogation, can it still protect you?  Best practice is to get the waiver if you can, of course, but see cases like:

 Gulf Ins. Co. v. Quality Bldg. Contractor, Inc., 58 A.D.3d 595 (N.Y. App. Div. 2009) (subcontractor protected by waiver of subrogation in prime contract where subcontract incorporated prime contract)  Best Friends Pet Care. Inc. v. Design Learned, Inc., 823 A.2d 329 (Conn. App. Ct. 2003) (subcontractor covered by waiver

• f subrogation in prime contract even where subcontract did

not contain a waiver of subrogation provision).

32

How Much Is Waived?

 Construction project:

 Claims arising from ongoing operations?  Completed operations?

 Does the waiver apply to “over/under” liability?  Does the waiver apply to claims between insurers (equitable contribution, for example).

33

How Much Is Waived (cont)

 Work v. non-work?

 On the one hand . . . see, Copper Mountain. Inc. v. Industrial Systems, Inc., 208 P.3d 692, 696 (Colo. 2009).  On the other hand . . . See, Lexington Insurance Co. v. Entrex Communication Services, Inc., 749 N.W.2d 124 (Neb. 2008)

34

Are All Waivers Enforceable?

 Waiver that extends to claims arising from “sole negligence”

 On the one hand . . . See Lexington Ins. Co. v. Entrex Commc’n Servs., Inc., 749 N.W.2d 124, 130 (Neb. 2008).  On the other hand . . . See St. Paul Fire & Marine Ins. Co. v. Turner Constr. Co., No. 08•2292, 2009 WL 738768, at *1 (3d Cir. 2009)

 Workers compensation claims?

35

State Law Nuances

As always with insurance, there are many state law nuances. Here’s an example from Kansas: K.S.A. 16-1803. . . . (b) The following provisions in a contract for private construction shall be against public policy and shall be void and unenforceable: . . .

(3) a provision that purports to waive, release or extinguish rights of subrogation for losses or claims covered or paid by liability or workers compensation insurance except that a contract may require waiver of subrogation for losses or claims paid by a consolidated or wrap-up insurance program, owners and contractors protective liability insurance, or project management protective liability insurance, unless otherwise prohibited under subsection (b)(5) of K.S.A. 2012 Supp. 40-5403, and amendments thereto.

36

Take-aways

 If you are drafting a waiver of subrogation clause, think of it as a WAIVER.  Focus on scope of waiver:

 Time  Property  Claims  Excess/under liability

 The same holds true in litigation.

37

Some Light Reading

 Subrogation Waivers, The Construction Lawyer, Vol. 31, Number 4 (Fall 2011).  Insurance Update: 'Boilerplate,’ Subrogation Waivers and Choice of Law, 14 Under Construction: The Newsletter

• f the ABA Forum on the The Construction Industry

(Apr. 2012). Available at: www.palleylaw.com/static_pages/publications.

38

Presented By:

Indemnity, Hold Harmless and Confidentiality Provisions In Property Damage Subrogation Releases

Steven K. Gerber Cozen O’Connor sgerber@cozen.com (215) 665-2088 March 19, 2014 Strafford Publications Webinar

The Issue

In dealing with property damage subrogation claims, reaching agreement on other issues, especially indemnity, hold harmless and confidentiality provisions, can be as difficult as reaching agreement on the amount of the Settlement.

40

What is “Indemnity”?

• According to Black’s Law Dictionary indemnity is:

“A collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or of some third person. Term pertains to liability for loss shifted from one person held legally responsible to another person.”

41

What is an “Indemnity Contract”?

Black’s defines an “Indemnity Contract” as:

“A contract between two parties whereby the one undertakes and agrees to indemnify the other against loss

• r damage arising from some contemplated act on the part
• f the indemnitor, or from some responsibility assumed by

the idemnitee, or from the claim or demand of a third person, that is, to make good to him such pecuniary damage as he may suffer.”

42

What is a “Hold Harmless Agreement”? Black’s defines a “Hold Harmless Agreement” as: “A contractual arrangement whereby one party assumes

the liability inherent in a situation, thereby relieving the other party of responsibility. Such agreements are typically found in leases, and easements. Agreement or contract in which one party agrees to hold the other without responsibility for damage or other liability arising out of the transaction involved.”

43

Purpose?

The essential purpose of indemnity and hold harmless provisions in a release is to protect the settling party from future claims, costs, expenses and/or attorneys fees after settling a claim or lawsuit.

44

Reality of indemnity language

In reality, indemnity and hold harmless language is whatever the releasing party agrees to in the Release. It is therefore critical that you know exactly what you have agreed to on behalf of the recovering subrogating insurer.

45

Who wants what?

• Defendants and liability insurers typically want

to make the protection – and language – provided by a release as broad as they can.

• Conversely, subrogating insurers, and

plaintiffs in general, prefer to have no indemnity language, and otherwise desire language that is as narrow as possible.

• Reaching agreement on language that

bridges the gap between these opposite positions can be challenging.

46

Know what you agree to!

• When you are in the position of the party

releasing claims, and the Defendant insists on indemnity and/or hold harmless language, you must make sure you read the language carefully and understand exactly what you are agreeing to do and provide “indemnity” for.

47

Some Key questions

• Who is being protected?
• Who is providing the protection?
• What protection is included?
• Is it only future indemnity payments or does it include

attorney’s fees and other costs or expenses?

• Are you agreeing to indemnify for actions of third

parties or strangers?

• Are you agreeing to indemnify actions you control?
• Has the statute of limitations run? Has the statute of

repose run?

• Does it matter if the statute of limitations or statute of

repose has run?

48

The Scope of the Language

For example, language which reads “Releasor agrees to indemnify, hold harmless and defend Releasee from and against any and all claims or actions of any kind that might be brought against the Releasee arising out of or incidental to the occurrence” is exceedingly broad in scope and potentially leaves the subrogating insurer at risk should anyone ever file suit or make a claim against the defendant arising out of the

• ccurrence which is the subject of the pending

action.

49

Problem with the Broader Language

The broad scope language raises the potential for problems for the settling subrogating insurer because the settling subrogating insurer does not have any control over whether someone else files a lawsuit or claim. For example, suppose a firefighter who fought the fire at the insured’s premises files suit against the settling defendant for injuries sustained in the fire. Under the broad scope language, the subrogating insurer may be required to indemnify the defendant.

50

More Narrow Language

An example of more narrow language is “if Releasor files a lawsuit or otherwise makes a claim against anyone other than the released parties as a result of the Occurrence, and if as a result of that suit or claim, claims and/or demands are made against any of the released parties, releasor agrees to indemnify, hold harmless and defend Releasee from and against any such claims or demands.”

51

Effect of the More Narrow Language

The more narrow language permits the subrogating insurer to control whether the indemnity becomes operable. The indemnity is only triggered if the subrogating insurer affirmatively chooses to make a claim or file an action which results in a claim or suit being made against the releasee.

52

Confidentiality Provisions

Defendants and liability insurers, especially product manufacturers, frequently include confidentiality provisions in releases in order to keep information from the lawsuit or settlement confidential.

53

Purpose

There are legitimate reasons for keeping sensitive information confidential or the amount

• f the settlement confidential. The defendants

and liability insurers typically do not want publicity or other potential plaintiffs and their lawyers to be able to use information against them.

54

What to Look for as a Subrogating Insurer

Subrogating insurers, and plaintiffs in general, are typically more interested in getting their cases settled and are not concerned about a reasonable confidentiality provision. Nevertheless, confidentiality provisions must be carefully reviewed to make sure you know exactly what you are agreeing to and to make sure you do not create a problem down the road.

55

An Issue for the Subrogating Insurer

An issue raised by confidentiality provisions for the subrogating insurer is ensuring that the subrogating insurer may still use information relating to the settlement both within the company and outside of the company as necessary in the ordinary course of business as an insurer without violating the terms of the release.

56

A Possible Solution

Adding the following language to a confidentiality provision may provide a possible solution:

“Notwithstanding anything to the contrary, nothing in this Release shall prevent the disclosure of confidential information nor the terms thereunder to lawyers, accountants, auditors, insurers, and re-insurers, together with such insurers and re-insurers’ third-party providers, actuaries or intermediaries, or regulators, provided the disclosure of the information is reasonably necessary to effectuate the terms of this Release, or is required for tax, financial reporting or government compliance purposes, or is otherwise necessary to transact the business of insurance.”

57

Conclusion

Settling parties should be able to reach agreement on reasonable indemnity, hold harmless and confidentiality provisions in conjunction with the settlement of a property damage subrogation claim which represents an effective compromise of the respective positions and provides reasonable protection to both the releasors and releasees.

58