Everything You Ever Wanted to Know About CGL Contractual Liability Issues in the Construction Industry. Presented by

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“Everything You Ever Wanted to Know

About CGL Contractual Liability Issues

in the Construction Industry”

Presented by

Craig F. Stanovich, CPCU, CIC, CRM, AU

Austin & Stanovich Risk Managers LLC

1174 Main Street, Holden, MA 01520

[email protected]

Contracts Generally

• Definition of a Contract

• An agreement between two or more

parties creating obligations

enforceable or otherwise

recognizable at law – Black’s Law

Dictionary (Eighth Edition)

Contracts Generally

• Simple Example

• I agree to paint your house and

accept $500 in payment;

• I refuse to paint your house but keep

the $500;

• This is a breach of contract – I have

failed to provide the services

promised and for which you paid;

(2)

Contracts Generally

• Simple Example

• Breach of Contract –

Violation of contractual

obligation by failing to perform

one’s own promise…. Black’s

Law Dictionary (Eighth Edition)

Contracts Generally

• Key Point

• Obligation is created solely by the

contract;

• I would not, absent the contract, be

responsible under law to paint your

house;

• The law enforces contracts that are not

otherwise contrary to the law (i.e.

agreement to commit crime…)

Contracts Generally

• Remedy for Breach of Contract

• In this example, your remedy under law

against me for my breach of contract is

generally the “benefit of the bargain”:

• 1) either I paint your house; or

• 2) I return your $500

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Contractual Liability ‐ Generally

• Contractual Liability

• In the context of insurance, contractual

liability is NOT about breach of contract;

• Rather, contractual liability in the

context of insurance concerns

assuming liability, usually in a

particular provision of a contract;

Contractual Liability ‐ Generally

• Contractual Liability

• Liability imposed by law (not by

contract):

• 1) liability for your own negligence;

• 2) strict liability – without regard to

fault, such as liability under scaffold

or Labor Law (NY)

;

Contractual Liability ‐ Generally

• Contractual Liability

• Liability imposed by law (not by

contract):

• 3) vicarious liability – liability for the

negligence of others even if you are

without any fault – created because

of relationship and right to control (i.e.

liability for negligence of employees)

(4)

Contractual Liability ‐ Generally

• Example:

• Liability Assumed by Contract

(not imposed by Law):

• I agree in our contract to be

responsible for property damage to

adjacent buildings resulting from the

project, even if I am not at fault;

Contractual Liability ‐ Generally

• Example:

• Liability Assumed by Contract (not

imposed by Law):

• Adjacent buildings do suffer property

damage resulting from the project;

• I am not at fault – the law would not

impose upon me liability for the PD;

Contractual Liability ‐ Generally

• Example:

• Liability Assumed by Contract (not

imposed by Law):

• Owners’ of adjacent buildings tender

a claim to me for the PD;

• Owners’ point to the portion of the

contract in which I have agreed to be

responsible without fault;

(5)

Contractual Liability ‐ Generally

• Example:

• Liability Assumed by Contract (not

imposed by Law):

• This is liability assumed by contract –

I would not normally be held liable

under law because I am not at fault;

• I am liable in this example only

because I have agreed to be liable

Contractual Liability ‐ Generally

• Example:

• Liability Assumed by Contract (not

imposed by Law):

• This example is based on the case of

Gilbert Texas Constr, LP, v

Underwriters at Lloyd’s London, 327

SW3d 118 (Tex, 2010),

Contractual Liability –

Assuming the Liability of Others

• The most common assumption of

liability in construction is assuming

the liability of others;

• Concept - by contract, I have agreed

to responsible for negligence of

others;

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Contractual Liability –

Assuming the Liability of Others

• Vicarious liability v Assuming the

Liability of others;

• Both result in the liability for the

conduct of others;

• Vicarious liability – Imposed by Law;

• Assumption of Liability – Agreement

to be responsible for others;

Contractual Liability –

Assuming the Liability of Others

• Section of construction contract

that is assuming liability?

• Typically “indemnification” clause or

“hold harmless and indemnity” clause;

• Usually separate from Insurance

Requirements;

Contractual Liability –

Assuming the Liability of Others

• Hold Harmless Agreement A contract in

which one party agrees to indemnify the other.

See Indemnity. [Black’s Law Dictionary - Eighth

Edition]

• Indemnity Clause A contractual provision in

which one party agrees to answer for any

specified or unspecified liability or harm that the

other party might incur. Also termed hold

harmless clause. [Black’s Law Dictionary

-Eighth Edition]

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Contractual Liability –

Assuming the Liability of Others

• Hold Harmless and Indemnity are

synonyms – they mean the same thing;

• In this context “hold harmless” does not

mean a release of liability but rather

“agreement to indemnify another”;

• Note that Indemnity is the “answering for

the… liability that the other party might

incur.”

Contractual Liability –

Assuming the Liability of Others

• To the fullest extent permitted by law, the

Subcontractor shall indemnify and hold harmless the Contractor, its agents and employees from and against all claims, damages, losses and expenses, including claims for injuries or death rising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, death, sickness, or disease, or to injury to or destruction of tangible property (other than the Work itself) caused in whole or part by the negligence of the Subcontractor, its agents, servants, or

employees or subcontractors.

Contractual Liability –

Assuming the Liability of Others

• This agreement is between a general

contractor (Contractor) and a

subcontractor (subcontractor);

• Project is a large commercial building;

• Subcontractor is plumbing subcontractor

for the project;

• Hold harmless and indemnity is on

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Contractual Liability –

Assuming the Liability of Others

• Contractor requires subcontractor to be at

the jobsite to take possession when

plumbing materials are delivered;

• Subcontractor cannot be found when

plumbing materials are delivered;

• Contractor moves plumbing materials to

side of jobsite (near public sidewalk);

Contractual Liability –

Assuming the Liability of Others

• Third party pedestrian is seriously injured

when pipes slide onto sidewalk and strike

pedestrian;

• Pedestrian sues Contractor;

• Court determines Contractor is 90% at

fault for placing materials close to a public

way;

Contractual Liability –

Assuming the Liability of Others

• Court determines that Subcontractor is

10% at fault for not receiving materials as

required;

• Damages awarded to pedestrian are $1

million;

• Assume that under law, Contractor would

be responsible for 90% or $900,000 of

damages; Subcontractor 10% or $100,000

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Contractual Liability –

Assuming the Liability of Others

• In this example – Subcontractor must

indemnify Contractor for $900,000 for

which Contractor is liable to pedestrian;

• Subcontractor has assumed the liability of

the Contractor, provided the BI is caused

at least in part by the Subcontractor;

• As Subcontractor caused in part (10%) of

the liability, the indemnity is triggered

Contractual Liability –

Assuming the Liability of Others

• Parties to an Indemnity Agreement

• Indemnitor – the one that must indemnify

another (in our example the Subcontractor

was the indemnitor);

• Indemnitee – the one receiving the

benefit of the indemnity (in our example

the Contractor was the indemnitee)

Contractual Liability –

Assuming the Liability of Others

• Parties to an Indemnity Agreement

• Third Party – the person(s) injured in the

underlying tort action – in our example the

pedestrian walking by on the sidewalk;

• Indemnity Agreement does not affect the

rights of the third party – it is a “risk

transfer” shifting financial consequences

between indemnitor and indemnitee;

(10)

Contractual Liability –

Assuming the Liability of Others

• Workings of an Indemnity Agreement

• Performance – The demand by the

Contractor for indemnification from the

Subcontractor is a demand for

performance under the contractor –

indemnify according to the contract;

• Subcontractor may refuse to indemnify –

likely result in litigation as to the indemnity

Contractual Liability –

Assuming the Liability of Others

• Workings of an Indemnity Agreement

• Contractual Indemnification – The

remedy claimed/demanded by the

Contractor is called Contractual

Indemnification;

• Common Law Indemnification – this is

liability imposed by law and would only

apply if Contractor has NO fault;

Contractual Liability –

Assuming the Liability of Others

• Workings of an Indemnity Agreement

• Common Law Indemnification – the

right to common law indemnification is

liability imposed by law absent the

contract;

• Contribution – Right to be reimbursed for

paying more than your share when

concurrently at fault with others;

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Contractual Liability –

Assuming the Liability of Others

• Workings of an Indemnity Agreement

• Contribution – Similar to common law

indemnification, contribution is liability

imposed by law absent the contract;

• Joint and Several Liability at common

law often provides right of contribution;

• Joint Tortfeasor Statutes may change

allocation of damages;

Types of Indemnity Agreements

• Broad Form – Indemnitor assumes all

loss even if due to the sole negligence of

the indemnitee; (California – Type I)

• Intermediate Form – Indemnitor assumes

loss only if the loss was due to the shared

or concurrent negligence of both the

indemnitor and indemnitee; both must

have fault for the indemnity to be

triggered; (California –Type II)

Types of Indemnity Agreements

• Intermediate Form – Two types of

“concurrent” indemnity:

– 1) Full indemnification – if indemnitee is

99% at fault and indemnitor is 1% at fault,

full indemnification, indemnitor must still

provide full indemnity (100%) to indemnitee;

Tracey Alan Saxe and Ashley Rose Adams, Walking the Minefield: Navigating Anti-Indemnity Statutes and Maximizing Third- Party Contractual Indemnification in Construction Contracts, The John Liner Review, Vol. 24 No. 4. Winter, 2011 pg. 37

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Types of Indemnity Agreements

• Intermediate Form – Two types of

“concurrent” indemnity:

– 2) Partial indemnification – if indemnitor

promises to only pay percentage of fault to

indemnitee in this intermediate form

agreement; if indemnitor found 49% at fault,

owes indemnitee only 49% of indemnity;

Tracey Alan Saxe and Ashley Rose Adams, Walking the Minefield: Navigating Anti-Indemnity Statutes and

Maximizing Third- Party Contractual Indemnification in Construction Contracts, The John Liner Review, Vol. 24 No. 4. Winter, 2011 pg. 37

Types of Indemnity Agreements

• Limited Form – Indemnitor assumes

liability for only its own negligence and

promises to indemnify indemnitee if and to

the extent of the indemnitor’s own

negligence; (California – Type III)

• Indemnitor must be 100% at fault for

indemnity to be triggered.

Tracey Alan Saxe and Ashley Rose Adams, Walking the Minefield: Navigating Anti-Indemnity Statutes and

Examples of Indemnity Agreements – Broad Form

• To the fullest extent permitted by law, the

Subcontractor shall indemnify and hold

harmless the Contractor…including claims for

injuries or death rising out of or resulting from

performance of the Work, provided that such

claim… is attributable to bodily injury… or to

injury to or destruction of tangible property

(other than the Work itself)

by any cause,

including the sole negligence of the

Contractors, its agents, servants, or employees

or subcontractors

.

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Examples of Indemnity Agreements – Broad Form

• General Contractor A enters the above broad

form indemnity with Subcontractor B. An

employee of Sub B is injured at the jobsite. It is

determined that the injury is due to the sole

fault of General Contractor A

.

• Subcontractor B will be required to “perform”

and indemnify General Contractor A despite the

fact that Subcontractor B is not at fault and that

General Contractor A is 100% at fault. This

broad indemnity is not permitted in many

states.

Examples of Indemnity Agreements – Limited

• To the fullest extent permitted by law, the

Subcontractor shall indemnify and hold

harmless the Contractor…including claims for

injuries or death rising out of or resulting from

performance of the Work, provided that such

claim… is attributable to bodily injury… or to

injury to or destruction of tangible property

(other than the Work itself)

caused in whole or

in part by the negligence of the Subcontractor,

its agents, servants, or employees or

subcontractors

.

• General Contractor A enters the above limited

form (full indemnity) indemnity with

Subcontractor B. An employee of Sub B is

injured at the jobsite. It is determined that the

injury is due to the shared fault of both GC A

and Sub B.

• Subcontractor A will be required to “perform”

and indemnify General Contractor B for all

100%

of GC B’s damages despite the fact that

that General Contractor A is 99% at fault and

Subcontractor B is 1% at fault .

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Examples of Indemnity Agreements – Limit

ed

• To the fullest extent permitted by law, the

Subcontractor shall indemnify and hold

harmless the Contractor…including claims for

injuries or death rising out of or resulting from

performance of the Work, provided that such

claim… is attributable to bodily injury… or to

injury to or destruction of tangible property

(other than the Work itself)

but only to the

extent

caused in whole or in part by the

negligence of the Subcontractor, its agents,

servants, or employees or subcontractors

.

• General Contractor A enters the above limited

form (partial indemnity) indemnity with

Subcontractor B. An employee of Sub B is

injured at the jobsite. It is determined that the

injury is due to the shared fault of both GC A

and Sub B.

• Subcontractor B will be required to “perform”

and indemnify General Contractor A for percent

Subcontractor is negligent –

if Sub B fault is

10% and GC A is 90%, indemnity is only for

Sub B’s 10%.

• 2007 AIA Contract A401

• ConsensusDocs 750

–“Both contracts are examples of partial

indemnification agreements whereby the

subcontractor agrees to indemnify…only

to the extent the damage is caused by

the negligent acts of the subcontractor.”

• Tracey Alan Saxe and Ashley Rose Adams, Walking the Minefield: Navigating Anti-Indemnity Statutes and

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Indemnity Agreements – Effect on Third Parties

• As third parties are not a party to the indemnity

agreement, the transfer of financial risk

between the General Contractor and

Subcontractor does NOT affect the third parties

rights against either the General Contractor or

Subcontractor(s).

• Third party may seek damages from either or

both the GC and Subcontractor regardless of

indemnity.

Anti‐Indemnity Statutes or Laws

• Most states have enacted by legislation limitations to the enforceability of indemnity agreements – mostly in the context of construction (or design professionals involved in construction).

• Example: “It is declared that indemnification agreements for another party’s own negligence are illegal and unenforceable.”

• Minnesota Subcontractors Association – August 23, 2013 – Minnesota Statute 337.05

Anti‐Indemnity Statutes or Laws

• Reasons for restricting indemnity:

– 1) Reduced or no incentive by indemnitee to exercise safety; and

– 2) Unequal bargaining power allows large GCs to compel smaller subcontractors to agree to onerous terms

• Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage – Key Issues in Every State, -Third Edition, © Matthew Bender & Co, 2015 pg. 424-425

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Anti‐Indemnity Statutes or Laws

• A minority of states will allow and uphold broad form (sole negligence) indemnification;

• Such states may have no anti-indemnity statute but rely on the state’s case law;

• In these states, usually the broad form indemnity must be “clear and unequivocal” to be enforced.

• Tracey Alan Saxe and Ashley Rose Adams, Walking the Minefield: Navigating Anti-Indemnity Statutes and Maximizing Third- Party Contractual Indemnification in Construction Contracts, The John Liner Review, Vol. 24 No. 4. Winter, 2011 pg. 37

Anti‐Indemnity Statutes or Laws

• Example “Clear and Unequivocal” • Supreme Court of Alabama:

• “…indemnity against the indemnitee’s own wrong, if expressed in clear and unequivocal language… will be upheld.”

• Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage – Key Issues in Every State, -Third Edition, © Matthew Bender & Co, 2015 pg. 427

Anti‐Indemnity Statutes or Laws

• A notch above “clear and equivocal” is “the express negligence doctrine.”

• Supreme Court of Texas:

• “…parties seeking to indemnify the indemnitee from …its own negligence must express the intent in specific terms;”

• In addition, the “conspicuous requirement” applies (larger type, contrasting colors)

• Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage – Key Issues in Every State, -Third Edition, © Matthew Bender & Co, 2015 pg. 454-455

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Anti‐Indemnity Statutes or Laws

• Intermediate Form – Partial Indemnity • Illinois

• “…agreement to indemnify or hold harmless another person for that person’s own negligence is void and against public policy.” 740 Ill. Comp. Stat. Ann. 35/1

Anti‐Indemnity Statutes or Laws

• Intermediate Form – Full Indemnity • Massachusetts

• “…in no way prohibits contractual indemnity arrangements whereby the subcontractor agrees to assume indemnity obligations for the entire liability of when both the subcontractor and general

contractor…are causally negligent.”

Anti‐Indemnity Statutes or Laws

• Limited Form • Oregon

• “…any provision in a construction contract …that requires a person…to indemnify another against liability caused in whole or in part by the negligence of the indemnitee is void.”

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Anti‐Indemnity Statutes or Laws

• Limited Form

• “All states allow limited indemnity provisions under which the indemnity promises to indemnify the indemnitee for the indemnitor’s negligence.” • Limited form indemnity may be allowed when

indemnitee is vicariously liable for the acts of the indemnitor.

Anti‐Indemnity Statutes or Laws

• “Savings Clause”

• “To the fullest extent permitted by law…”

• Wording is generally intended to allow enforcement of

portions of the indemnity that do not conflict with

statute or law. Without “savings clause” entire indemnity likely will be void.

Anti‐Indemnity Statutes or Laws

• Insurance Exception

• Some (but not all) states anti-indemnity statutes specifically exempt insurance from the law.

• The “insurance exception” is generally understood to mean that the anti-indemnity statute does not affect insurance requirements – i.e. contractual requirements to purchase insurance.

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Anti‐Indemnity Statutes or Laws

• Insurance Exception • Example: Connecticut

• “…provided this section shall not affect the validity of any insurance contract, workers compensation agreement or other agreement issued by a licensed insurer.”

• Conn. Gen. Stat. Ann. § 52-572k(a)

Anti‐Indemnity Statutes or Laws

• Insurance Exception (Connecticut)

• “While an agreement purporting to hold…a general contractor free from liability for its own negligence undermines the strong public policy…the same

cannot be said for an agreement which simply obligates the parties…to obtain a liability policy insuring the other.”

Anti‐Indemnity Statutes or Laws

• Insurance Exception

• However, a few courts have read the “insurance exception” to not apply because the indemnity clause is funded by a CGL policy as an “insured contract.” • In other words, otherwise prohibited indemnity

provisions may be allowed if insurance backs the indemnity clause.

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Anti‐Indemnity Statutes or Laws

• Insurance Exception • Example: Minnesota

• “…the legislature has established a narrow exception to the general prohibition of indemnification from the indemnitee’s own negligence.”

• Engineering & Const. Innovation, Inc. v. L.H. Bolduc Co, Inc. 825 N.W.2d (Minn. 2013)

Anti‐Indemnity Statutes or Laws

• That exception was due to the interpretation of the statutes allowance for “project specific” insurance. • As of May 24, 2013, a reform of the 337.05 removed

the “insurance loophole.”

• Minnesota Subcontractors Association – August 23 2013

Anti‐Indemnity Statutes or Laws

• “Any attempt to interpret ‘project specific’ to reopen the insurance loophole is overbroad and clearly in conflict with the intent of the law.”

• Minnesota Subcontractors Association – August 23 2013

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Additional Insured

• “…Contractual indemnity and additional insured issues are separate…the indemnitee recovers from the insurer directly as an additional insured and

indirectlyas the beneficiary of the indemnitor’s

coverage…”

Additional Insured

• May be a trend for anti-indemnity statutes to

apply to not only indemnity provisions but also

to apply to requirements in construction

contracts to provide additional insured

coverage for indemnitee.

• In other words, the anti-indemnity statute

affects scope of additional insured that may be

required.

Additional Insured

• Example: Kansas

• “…a provision in a contract that requires a party to provide liability insurance to another party, as an

additional insured, for such other party’s own

negligence…is against public policy is void and unenforceable.”

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Additional Insured

• A few states statutes or case law affecting

additional insureds:

• Montana (2003) • New Mexico (2003) • Oregon (2005)

• Colorado & Oklahoma (2006) • Kansas (2009)

• IRMI.Com – Unenforceable Indemnity Agreements -2011

Additional Insured

• States statutes or case law affecting additional

insureds:

• Texas (2012)- with exceptions • Minnesota (2013)

• California (2013) –with exceptions

CGL Insurance

• Contractual Liability – exclusion b. of Coverage A: • “This insurance does not apply to: ‘Bodily injury’ or

‘property damage for which the insured is legally obligated to pay damages by reason of assumption of liabilityin a contract or agreement.”

• CG 00 01 04 13 © Insurance Services Office, Inc. 2013

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CGL Insurance

• What does “obligated to pay damages by

reason of assumption of liability in a

contract or agreement” mean?

• More specifically, are claims that originate

in or are derived from a contract (i.e. a

construction contract) ever covered by a

CGL policy?

CGL Insurance

• Minority View: Breach of contract claims

are never covered by a CGL policy; only

claims that arise out of a tort (such as

negligence) are covered by the CGL?

• While this may have some intuitive

appeal, such sweeping generalizations

are usually in error.

CGL Insurance

• Breach of Contract:

• Importantly, the determination of whether

coverage is triggered under a CGL is

made by considering whether bodily injury

or property damage resulted from an

“occurrence” all as defined in the CGL

policy.

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CGL Insurance

• “

However, the court noted that the policy made no distinction between tort and contract and held that the policy covered contractual obligations if unexpected harm results from the breach of contract.

• In doing so, the court held that a policy can cover damages arising from a breach of contract.” • Vandenberg v Superior Court, 982 P2d 229, 88 Cal

Rptr 2d 366, decided by the Supreme Court of California on August 30, 1999. Jill B. Berkley - When a

Breach of Contract Constitutes an Accident – ©

2000 IRMI.com

CGL Insurance

• “Instead, a court must focus on the cause of the

injury to ascertain whether coverage exists. It is

the substance rather than the form of the

allegations in the complaint which must be

scrutinized.”

• Travelers Property Cas. Co. of Am v. Peaker

Services, Inc.

855 N.W.2d 523 (Mich. Ct. App.

2014)

CGL Insurance

• “The CGL policy does not limit coverage

for property damage arising from

defendant’s tort liability. Instead, in

relevant part, the coverage applies to

“property damage,” caused by an

“occurrence.”

• Travelers Property Cas. Co. of Am v. Peaker Services, Inc. 855 N.W.2d 523 (Mich. Ct. App. 2014)

(25)

CGL Insurance

• “Thus, merely because the Regents brought a

breach of contract action as opposed to a tort

action is not dispositive as to whether coverage

existed under the CGL policy. Rather, the

policy’s initial grant of coverage turned on

whether the property damage arose from an

‘occurrence’…”

• Travelers Property Cas. Co. of Am v. Peaker

Services, Inc.

855 N.W.2d 523 (Mich. Ct. App.

2014)

CGL Insurance

• Majority View of When Contractual Liability

Exclusion Applies:

• “…the contractual liability exclusion in a

standard CGL policy applies where the insured

has contractually assumed the liability of a third

party

, as in an indemnification or hold harmless

agreement.”

• American Family Mut Ins Co v American Girl,

Inc

, 673 NW2d 65 (2004)

CGL Insurance

• Majority View of When Contractual Liability

Exclusion Applies:

• “In the context of a CGL policy, ‘assumption of

liability’ means assuming the legal obligations

or responsibilities of another.

• Travelers Property Cas. Co. of Am v. Peaker

Services, Inc.

855 N.W.2d 523 (Mich. Ct. App.

(26)

CGL Insurance

• “…the contractual liability exclusion does not

“bar all contract liability, but rather is limited to a

special type of contract—one in which the

insured has assumed the liability of another, i.e.

a hold harmless or indemnification agreement.”

• 3, Jeffery E. Thomas & Francis J. Mootz, III,

New Appleman on Insurance Law (Library Ed.)

(2014), § 18.03[3][a] p 18-43

CGL Insurance

• Minority View:

• “But the [contractual liability] exclusion does not

say it is limited to the narrow set of contracts by

which the insured assumes the liability of

another person

; the exclusion’s language

applies without qualification to liability assumed

by contract…” Gilbert Tex. Construction, L.P. v.

Underwriters at Lloyd’s London,

327 S.W.3d

118 (Tex. 2010) (opinion on reh’g).

CGL Insurance

• Thus, “obligated to pay damages by

reason of assumption of liability in a

contract or agreement” generally means

the CGL contractual liability exclusion

applies when the insured has assumed

the liability of another, usually by virtue

of a hold harmless or indemnity

agreement.

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CGL Insurance

• Coverage to pay the insured for its

obligation to pay damages by reason

of assumption of liability in a contract

or agreement is provided by virtue of

one of two exceptions to the

Contractual Liability exclusion.

CGL Insurance

• First 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;”

Inc. 2013

CGL Insurance

• Liability in the absence of a

contract or agreement

• Usually means that the insured would

have been liable even if the hold

harmless or indemnity clause did not

exist.

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CGL Insurance

• Example: An insured would likely be

liable under the law for 100% of its

own negligence – regardless of any

indemnity agreement.

• The contractual exclusion does not

apply to eliminate liability coverage for

the insured’s own negligence.

CGL Insurance

• Second Exception to the Contractual

Liability exclusion:

• “This exclusion does not apply to liability for

damages: (2) Assumed in an contract or

agreement that is an ‘insured contract’…”

Inc. 2013

CGL Insurance

• Insured Contract:

• A defined term in the CGL policy;

• For construction, part f. of “insured contract” is

usually the pertinent wording;

Inc. 2013

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CGL Insurance

• Insured Contract:

• “That part of any other contract or

agreement…under which you assume the tort

liability of another to pay for ‘bodily injury’ or

‘property damage’ to a third person or

organization.”

Inc. 2013

• CGL Insurance

• Insured Contract: Key Issue

• “Tort liability means a liability that would be

imposed by law in the absence of any contract

or agreement.”

Inc. 2013

CGL Insurance

• Insured Contract: Key Issue

• In other words, while the CGL policy

provides coverage for both contract

and tort for the insured, “insured

contract” applies only to the tort

liability of another assumed by the

insured.

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CGL Insurance

• Insured Contract: Key Issue

• Example: While an insured will have

coverage under “insured contract” for

the negligence of another assumed in

a contract or agreement, no coverage

is provided if the insured assumed the

liability of another for the terms of the

contract of the indemnitee

.

CGL Insurance

• Defense of an Indemnitee

• If an insured agrees to defend an

indemnitee in an “insured contract”

the indemnitor’s CGL will pay for the

indemnitee’s defense, but such costs

will likely be damages and thus

reduce

the limit (compare this to

defense of an additional insured).

CGL Insurance

• Not an “insured contract”

• Agreement to indemnify a railroad for

construction/demolition within 50 feet

of railroad is not an “insured contract”;

• “Insured contract” may be amended

to include railroads by endorsement

(CG 24 17);

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CGL Insurance

• Not an “insured contract”

• Agreement to indemnify an architect,

engineer or surveyor for their

professional services (as defined);

• Agreement by the insured who is an

architect, engineer or surveyor to

indemnify others for their professional

services (as defined)

Additional Insured v. Contractual

• Additional insured is a party to the

insurance contract;

• The rights of the additional insured

are found in the additional insured

coverage wording;

• An additional insured has direct rights

against the insurer with whom they

are an insured.

Additional Insured v. Contractual

• An indemnitee is not a party to the

insurance indemnitor’s policy;

• The rights of the indemnitee are found

solely in the indemnity agreement;

• An indemnitee has no direct rights

against the indemnitor’s insurer;

• Contractual indemnification is NOT

(32)

Additional Insured v. Contractual

• Seeking contractual indemnification is

a remedy available to the indemnitee

that is separate and distinct from

additional insured status;

• The status of an indemnitee does not

confer status as additional insured;

• The status of additional insured does

not confer status of indemnity;

Additional Insured v. Contractual

• While the remedies available to

a contractor or owner may

include both additional insured

and contractual indemnity, it is

critical to tender claims with a

specific demand for each;

Additional Insured v. Contractual

• A demand for contractual indemnity is

a demand for the indemnitor to

perform under the indemnity clause;

• A demand for defense and indemnity

as an additional insured is a demand

that the insurer of the named

(33)

Tying AI to Indemnity

• In some instances, the status of

additional insured is tied directly to the

indemnity;

• “you are an additional insured, but

only to the extent of the indemnity”;

• This approach must be very carefully

undertaken;

• BP Oil Spill claim

BP Oil Spill

• Drilling contract between Transocean

[drilling rig owner] and BP [oilfield

developer] required Transocean add

BP as additional insured.

• BP argued that it was an additional

insured for all “liability imposed by

law”;

BP Oil Spill

• Transocean argued that BP was an

additional insured only to the extent

that Transocean was to indemnify BP

in an “insured contract”

-• Transocean assumed liability for any

loss above the surface

• BP assumed liability any loss below

the surface

(34)

BP Oil Spill

• Question ultimately went to the Texas

Supreme Court

• The Court read the drilling contract to

limit AI coverage to extent of

indemnity – BP was AI for above the

surface ONLY

Closing

• Thank you for your time and attention!

• Presented by:

Craig F. Stanovich, CPCU, CIC, CRM, AU

Austin & Stanovich Risk Managers LLC

1174 Main Street, Holden, MA 01520