Risk Transfer in Commercial Contracts Leveraging Indemnity, Insurance - - PowerPoint PPT Presentation

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Risk Transfer in Commercial Contracts

Leveraging Indemnity, Insurance and Limitation of Liability Clauses to Mitigate Risk

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNES DAY, NOVEMBER 7, 2012

Today’s faculty features:

• D. Hull Y
• ungblood, Jr., Of Counsel, The Ford Firm, S

an Antonio, Texas S kip Durocher, Partner, Dorsey & Whitney, Minneapolis

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Risk Transfer in Commercial Contracts

Negotiating I ndemnity Agreements

Presented by: Hull Youngblood – The Ford Firm, 210.731.6400, hull.youngblood@ford-firm.com

Types of Indemnity

• Express Contractual Indemnity
• Implied Indemnity

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Types of Agreements Considered

• M&A Agreements
• Settlements
• Employment
• Officer/Director Agreements

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Direct Indemnity Claims

• Typical claim:

Third Party vs. Indemnitee

• Direct Claim:

Indemnitee vs. Indemnitor

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Common law Remedies

• Can be broader than Indemnity
• Less certain results
• Plaintiff vs. Defendant perspective

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Benefits Added by Indemnity

• Customized protected class
• Variable scope of damages

Ad i i t ti C t i t

• Administrative Certainty
• Specific areas of coverage

types of negligence

• Specific areas of coverage – types of negligence

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Indemnity for Gross Negligence

S ll i d i f G N li

• Some states allow indemnity for Gross Negligence
• Arms length transaction

Parties represented by Counsel

• Parties represented by Counsel
• Sophisticated Entities
• Equality of bargaining power
• Valero Energy Corp. v. M.W. Kellogg Constr. Co

“…even when the indemnity protects a party from their own gross y y g negligence, such a fairly negotiated provision, between sophisticated parties, does not offend public policy. “

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Exclusivity of Remedy

• The Parties acknowledge and agree that the

remedies provided and set forth in Article X. Indemnification shall be the Parties’ sole and Indemnification, shall be the Parties sole and exclusive remedy with respect to any subject matter

• f this Agreement. The Parties agree that Seller is

to have no liability or responsibility whatsoever to Buyer for any Claim or Losses of any nature, except as set forth in this Agreement. No party shall be g p y able to avoid the limitations expressly set forth in this Agreement by electing to pursue some other remedy

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remedy.

Exclusivity of Remedy

• If remedy to retained funds is the exclusive remedy,

then Indemnitor has fixed its absolute maximum liability.

• Typically have carve outs in M&A Transactions.
• Actual Fraud – requires intent
• Capitalization – ownership of the shares or assets
• Authority – authorization to enter into the transaction

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Avoiding Exclusivity of Remedy

• Ex-contractual claims
• Merger, Integration and Anti-Reliance Provisions

(see p 14 of reference document for lengthy provision) (see p. 14 of reference document for lengthy provision)

• Can you contract yourself out of fraud?

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Avoiding Exclusivity of Remedy

• Can you contract yourself out of fraud?
• Yes, if you do it carefully. Disclaim reliance.
• Factors Courts may consider - pages 16 & 17 of

reference document

• BUT, courts may imply an exclusion for ACTUAL

fraud

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fraud.

Avoiding Exclusivity of Remedy

• BUT, courts may imply an exclusion for ACTUAL

f d

• fraud. (Abry Partners v F& W Acquisiton 891 A.2d 1032 (Del. Ch. 2006))

“BUYER has no moral justification for escaping its BUYER has no moral justification for escaping its

• wn voluntarily-accepted limits on its remedies

against the Seller absent proof that the Seller itself acted in a consciously improper manner ” acted in a consciously improper manner.

• Review related documents for Anti-reliance terms.

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SPECIFICITY - Coverage

• Typical Provision:

A d f d d i d if B f

• A agrees to defend and indemnify B from :

(i) CLAIMS (Procedural) ( ) ( ) (ii) SOMEHOW RELATED TO (Causation) (iii) AN EVENT (Substantive)

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SPECIFICITY - Coverage

• Three components of “Claims”
• “Procedural” – the processes included.
• lawsuits,
• demands,

injunctions

• injunctions,
• subpoenas,
• investigations.

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g

SPECIFICITY - Coverage

• Examples of broad definitions on page 21 of

reference document.

• “Claims” means all claims, requests, accusations, allegations,

assertions, complaints, petitions, demands, suits, actions, proceedings, governmental inquiries and investigations of any every nature, (including but not limited to subpoenas, expressions of interest, audits and all other h f i i i d i ti ti ) d f phases of inquiries and investigations), and causes of action of every kind and description, including but not limited to any and all Claims sounding or arising, in whole or in part, in tort contract statute equity or strict liability

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in tort, contract, statute, equity or strict liability.

SPECIFICITY - Coverage

• Three components of “Claims”
• “Causation” – the connection between process and

substance.

• proximately caused by

arising from

• arising from
• in connection with
• incidental to

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incidental to

SPECIFICITY - Coverage

• Three components of “Claims”
• “Substantive” – the subject matter covered
• performance/violation of the contract
• violation of law
• negligent actions or inactions
• Indemnitors Conduct

violation of a representation or warranty

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• violation of a representation or warranty

SPECIFICITY - Coverage

• “Hold Harmless”
• Controversy over definition
• Equivalent to Indemnification
• Equivalent to Indemnification
• Equivalent to a “Release”
• May create an obligation to advance expenses

y g p

• Why use it if meaning is unclear
• Basura vs. Trash.

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SPECIFICITY – Identifying Parties

• “Indemnitor” or “Indemnitee”

“Amalgamated Meatball and all of its employees, agents, representatives officers directors affiliates shareholders representatives, officers, directors, affiliates, shareholders,

• wners, members, managers, attorneys, subsidiary corporations,

and advisors. “

E t h ld b ‘ ifi ll d i t d’

• Extras should be ‘specifically designated’.
• Agent = authority to act vs. independent contractor

g y p

• Consultants, professionals, small contractors

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SPECIFICITY – Burden of Proof

• Mandatory Indemnity

“…indemnification to the fullest extent permitted by law… “ & “Expenses reasonably incurred by an Indemnitee in defense…shall be advanced by the Partnership” advanced by the Partnership

• “Shall indemnify” may shift burden to Indemnitor
• When is the burden NOT shifted?

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SPECIFICITY – Fair Notice

• Express Negligence
• Texas vs other jurisdictions
• Texas vs. other jurisdictions
• “Not My Negligence” exception.

y g g

• Five suggestions for compliance with Fair Notice

requirements – pages 39 & 40 of reference document requirements pages 39 & 40 of reference document

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Indemnity and Settlements

• Typical Settlement provision:

“Plaintiff shall defend and indemnify Defendant from any claim brought by or through Plaintiff arising from the EVENT ” EVENT.”

• Huge expense and burden for Plaintiff
• Huge expense and burden for Plaintiff

T M&A d t t

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• Try M&A rep and warranty system.

Indemnity and Settlements

• Plaintiff only indemnifies – no defense.

“Plaintiff shall indemnify Defendant from any Losses arising from any breach

• f

any of the warranties contained in this agreement.”

• Plaintiff/Payee represents and warrants to Defendant/Payor, with the specific

intent that Defendant/Payor shall rely upon these representations and warranties:

• Each of the Claims that are subject to the terms of this Agreement and settled,

compromised and released herein are owned solely by Plaintiff/Payee, and no other person or entity has any interest whatsoever in such claims.

• Upon payment of the consideration required to be paid by Defendant to

Plaintiff by this Agreement, no person or entity shall have any right, title or interest in or to the Claims settled, compromised and released by this Agreement.

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Interpretation of indemnity

• First find intent – then do not expand.
• Strict construction for Indemnitor is not automatic
• First find the intent of the parties
• Then apply strictissimi juris – not a rule of construction

Then apply strictissimi juris not a rule of construction – but substantive law

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Duty to provide a Defense

• Duty to Defend is separate from the

Duty to Indemnify. Duty to Indemnify.

• Tort liability could arise for negligent failure to

Tort liability could arise for negligent failure to provide a defense.

• Negligent exercise of duty imposed by contract.
• Impact of Indemnity only.

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Duty to provide a Defense

• Approval of Counsel – “unreasonably

withheld”

• Commercial reasonableness used in other

t t contexts.

• Typical commercial reasonableness may not be
• Typical commercial reasonableness may not be

applicable to unusual attorney/client relationship.

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Duty to provide a Defense

• Conflicts that might be considered:
• Party Issues - represents opponent/secrecy

Party Issues represents opponent/secrecy

• Business Conflicts – represents competitors
• Subject Matter – represents issue opponents

j p pp

• Experience Issues – no experience on point
• Personal conflicts – offensive personality, etc.
• Reputation conflicts – leader on sensitive issue
• Financial conflicts - other counsel cheaper

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Remedy for Refusal to Defend

• When a defense is claimed, but

refused. refused.

• Suggested Remedial Provision on page 48
• Allows a “justified refusal” – opinion of counsel
• If denial is PROVEN to be without justifiable basis in

la then law, then

• Waiver of right to dispute fee, costs and expense

incurred in providing the defense.

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p g

Types of Damages

• Fees, Costs and Expenses
• Might cover more or less than intended
• See broad definition of Losses on page 50 of

reference document

• Consider - diminution in value, fine, penalty,

deficiency, cost of investigation, travel costs,

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y g storage, exhibit costs, data retrieval, settlement payments, etc.

Limits on Damages/ Indemnity

• Caps, Baskets, etc.
• Deductible Basket
• First Dollar Basket
• Blended Basket

Mini Basket

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• Mini Basket

Limits on Damages/ Indemnity

• Post Closing Warranty obligations
• Double Dipping arising from Double Materiality
• For purposes of this Article X (Indemnification) the representations and warranties

For purposes of this Article X (Indemnification), the representations and warranties

• f Seller shall not be deemed qualified by any references to materiality or to Material

Adverse Effect. (MAE disregarded for all purposes)

• For the sole purpose of determining Losses (and not for determining whether or not

any breaches of representations or warranties have occurred), the representations and warranties of Seller shall not be deemed qualified by any references to materiality or to Material Adverse Effect. (MAE disregarded only for calculating

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Losses)

Sandbagging

• Sandbagging. No information or knowledge of

Buyer, nor the results of any due diligence or investigation by Buyer of the Company, shall affect, waive, modify, limit or diminish: (i) any representation or warranty of Seller contained in representation or warranty of Seller contained in this Agreement or the Related Documents; or (ii) Buyer’s right to rely upon such representations and warranties of Seller.

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Mitigating Risk With Insurance Mitigating Risk With Insurance

Skip Durocher, Partner D & W hit LLP Dorsey & W hitney LLP ( 6 1 2 ) 3 4 0 -7 8 5 5

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durocher.skip@dorsey.com

Basics

• Place responsibility to insure certain risks on
• ne party to the contract
• May help circumvent restrictions created by anti-

indemnity agreements

• Typical requirement: Name indemnitee as

“additional insured” on indemnitor’s CGL policy

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Additional Insured Endorsements

• Adds party as “insured” on other party’s policy
• Vary in form and scope

Vary in form and scope

• Scope of coverage

“Arising out of” – Arising out of – “Resulting from” – “Caused in whole, or in part, by”

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Additional Insured Endorsements

• Advantages over indemnity clause alone:

– Create direct obligation between insurer and indemnitee indemnitee – Include obligation to defend – Obligation survives insolvency of indemnitor g y – May help overcome restrictions of anti-indemnity statutes

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Additional Insured Endorsements

• Standard form ISO endorsements
• May limit coverage to “ongoing operations” or

May limit coverage to ongoing operations or “completed operations”

• Custom endorsements

Custom endorsements

– May limit to vicarious liability of named insured – May remove “business risk” exclusions – Tie coverage provided to that required by contract

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Two Approaches to Insuring Requirements

• Require indemnitor to insure the

indemnity obligation

“[I d it ] t bt i i t i d – “[Indemnitor] agrees to obtain, maintain and pay for such general liability insurance coverage as will insure the provisions of this paragraph”

• Include specific insurance requirements

– Most often in form of separate clause or “insurance rider” “insurance rider”

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Sample Clause

• What about this clause?

– “X agrees to name Y as additional insured with respect to the services provided under this contract ” contract.

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Best Practices

• Well-drafted insuring requirement should:

– Name indemnitee as additional insured – Identify specific endorsement[s] to be obtained – Require that additional insured endorsement provide p completed operations coverage – Identify expectations regarding priority of coverage g – Require proof of insurance

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Additi l I d d S bilit f Additional Insureds and Severability of Interests Clauses

• Company X's Commercial General Liability and Automobile Liability Insurance

policies shall include Company Y, its directors, officers, and employees as Additional Insureds thereunder. Each such policy shall waive or otherwise prohibit insurer subrogation against Company Y and all such other Additional p g g p y

• Insureds. Each such policy shall also include a severability of interests (or

“separation of insureds”) provision. Company X shall require any subcontractors it engages with respect to its performance under this Agreement to afford Company Y and other parties described above similar Additi l I d St t d t i il l i th i hibit i Additional Insured Status, and to similarly waive or otherwise prohibit insurer subrogation against such Additional Insureds. The Additional Insured status under Company X's Commercial General Liability Policy shall be provided pursuant to an Insurance Services Office (ISO) form Policy shall be provided pursuant to an Insurance Services Office (ISO) form CG 20 10 11 85 Additional Insured Endorsement, by a combination of ISO forms CG 20 10 and CG 20 37, or by other equivalent Additional Insured endorsement form(s) that provide both Premises and Operations and Completed Operations liability coverage that is at least as broad as that ff d d b th b f d f

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afforded by the above-referenced forms.

Primary Insurance Clause

• With respect to liability arising out of X's performance

under this Agreement, all insurance required of X hereunder shall respond on a primary (not excess hereunder shall respond on a primary (not excess

• r contributory) basis with respect to any similar

insurance maintained by Y and/or any other party required to be included as an Additional Insured required to be included as an Additional Insured hereunder, notwithstanding any policy language to the contrary.

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Evidence of Insurance Clause

• Prior to the commencement of any performance under this Agreement, X

will provide Y with evidence that the insurance coverage required of X hereunder is in full force and effect. In the event any such insurance renews or is terminated during the course of X's performance X will renews or is terminated during the course of X s performance, X will promptly provide Y with evidence that such coverage will be renewed

• r replaced upon termination with insurance that complies with these
• provisions. Such evidence of insurance will be in the form of a standard

Certificate of Insurance or other form of evidence of insurance Certificate of Insurance or other form of evidence of insurance acceptable to Y, and shall contain sufficient information to allow Y to determine whether there is compliance with these provisions. Such evidence of insurance shall be accompanied by copies of any Additional Insured endorsements or automatic Additional Insured policy y provisions necessary to achieve compliance with the Additional Insured requirements of this Agreement. All such evidence of insurance shall require that the insurer provide at least thirty (30) day written notice to Y prior to the effective date of policy cancellation (ten (10) day notice in th t f ll ti d t t f i )

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the event of cancellation due to nonpayment of premium).

Waiver of Subrogation

• What is it?

– Stepping into shoes of insured

• Impact of a Waiver

– Risk of loss lies with the insurer

• Why agree?

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