Contractual Indemnification Obligations and Insurance Coverage

Contractual Indemnification

Obligations and Insurance Coverage

Joseph Fields Steven H. Weisman

McCarter & English, LLP

Jacqueline Beaudet

Contractual Indemnification

♦ Business contracts commonly contain indemnity obligations – Construction – Manufacturing – Vendor/Vendee – Service Agreements – Lease Agreements

Sample Contractual Indemnity Provision

♦ To the fullest extent permitted by law, the

Subcontractor shall defend, indemnify, and hold harmless the Contractor and all of its agents and employees from and against all claims, damages, losses, and expenses, including attorneys’ fees, in any way arising out of or resulting from the

performance, condition, or existence of the work under the contract, whether or not such claim,

damage, loss, or expense is based in whole or in part upon any negligent act or omission of the Contractor.

Example of Contractual Indemnification in

Construction Context

♦ General contractor contracts with subcontractor to perform work at construction site

♦ Contract requires subcontractor to indemnify general contractor for claims arising from work

♦ General contractor sued when third party injured at construction site

♦ General contractor seeks indemnification from subcontractor

New York General Obligations Law

♦ A party is entitled to full contractual indemnity where such an

intention can be clearly implied from the terms of a contract. Drzewinski v. Atlantic Scaffold & Ladder, 70 N.Y.2d 774, 521

N.Y.S.2d 216 (1987); New York Telephone Co. v. Gulf Oil Corp., 203 A.D.2d 26, 609 N.Y.S.2d 244 (1st Dept. 1994).

♦ Even a finding of negligence on the part of the contractually

indemnified party does not defeat said party’s right to contractual indemnity. Ameri v. Diane Young Skincare Ctr., 170 A.D. 280, 565 N.Y.S.2d 810 (1st Dept. 1991), appeal dismissed, 78 N.Y.2d 907, 573 N.Y.S.2d 468 (1991); See also Buccini v. 1568 Broadway

Assocs., 673 N.Y.S.2d 398 (1st Dept. 1998) (holding that the owner’s strict liability pursuant to statute does not preclude contractual

New York General Obligations Law

♦ However, if the contract wording provides for

indemnification of the indemnitee’s own negligence it may be unenforceable under the New York

General Obligations law. New York GOL §5-322-1 provides:

New York General Obligations Law

"A covenant, promise, agreement or understanding in, or in connection with or collateral to a contract or agreement relative to the construction, alternation, repair or maintenance of a building, structure, appurtenances and appliances including moving, demolition and excavating connected therewith, purporting to indemnity or hold harmless the promisee against liability for damage arising out of bodily injury to persons or damage to property contributed to, caused by or resulting from the

negligence of the promisee, his agents or employees, or indemnitee, whether such negligence be in whole or in part, is against public policy and is void and

unenforceable; provided that this section shall not affect the validity of any

insurance contract workers’ compensation agreement or other agreement issued by an admitted insurer. This subdivision shall not preclude a promisee requiring

indemnification for damages arising out of bodily injury to persons or damage to property caused by or resulting from the negligence of a party other than the promisee, whether or not the promisee is partially negligent.”

New York General Obligations Law

♦ Similar statutes are contained in the GOL for other type of contracts, see, e.g. GOL 5-321, landlord; GOL-322, caterers; GOL 5-323, building

Coverage for Contractual Indemnification

♦

Obligation to indemnify does not necessarily

trigger coverage under indemnitor’s policy

♦

What steps can be taken to secure coverage

for contractual indemnification obligations?

♦

Two most common ways

– Contractual liability coverage

– Additional insured endorsement covering indemnitee

Contractual Liability Coverage

♦ CGL policies exclude liabilities the insured assumed by contract

– Intended to exclude breach of contract claims

Contractual Liability Coverage

♦ Two exceptions:

– Liability the insured would have in the absence of contract

Insured Contracts

Ewing v. Amerisure (690 F.3d 628 (5

Cir.

2012)) – contractual liability coverage

♦ The Facts:

– Ewing contracted with a school district in Texas to build tennis courts. The courts began cracking and flaking. The school district filed suit against Ewing alleging breach of contract and negligence for the faulty construction. Ewing tendered its claim to its insurer, Amerisure, which denied coverage.

♦ The Holdings:

– Amerisure contended that its’ policy’s "contractual liability exclusion" applied to exclude defense

coverage for Ewing’s claim. The district court

granted summary judgment in favor of Amerisure on that basis, and the Fifth Circuit affirmed.

Ewing v. Amerisure (690 F.3d 628 (5

Cir.

2012)) – contractual liability coverage

How was Gilbert different from Ewing?

♦ Contractor hired by the Dallas Area Rapid Transit System to construct a light rail project.

♦ In its contract, Gilbert agreed to protect all surrounding

property, and to repair any damages to the property of third parties caused by its construction.

♦ Heavy rain caused a building near the work site to get flooded.

♦ Building owner filed suit alleging several different theories including negligence and breach of contract.

♦ Only breach of contract claim was NOT dismissed, which Gilbert settled.

How was Gilbert different from Ewing?

♦ Gilbert sought indemnity from Lloyds.

♦ Texas Supreme Court ruled that the promise to repair any damaged property was a contractual obligation.

– The exception to the exclusion for liability that you would have in the absence of any contract did not apply in this case since all negligence allegations had been dismissed. But for the existence of the contract, Gilbert would have no liability. Simple enough.

How was Gilbert different from Ewing?

♦ Failing to take into account the unique facts of

Gilbert, the majority of the Fifth Circuit panel

applied the contractual liability exclusion to Ewing's claims, citing Gilbert.

The Contractual Liability Exclusion and its

Exceptions:

♦ The typical contractual liability exclusion excludes bodily injury and property damage "for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or

agreement."

♦ However, there is an exception for liability "the

insured would have in the absence of the contract or agreement" and for liability assumed under an "insured contract."

The Contractual Liability Exclusion and its

Exceptions:

♦ Ewing was sued for breach of contract AND negligence. Ewing would be liable for that negligence claim in the absence of the

contract or agreement. Simple, right? Maybe not…or so says the Fifth Circuit:

“The School District's use of the term ‘negligence,’ however is not dispositive…. When the only loss or damage is to the subject matter of the contract, the plaintiff's action is ordinarily on the contract. Ewing's contract with the School District is the source of its potential liability because Ewing's duty to construct usable tennis courts arose out of contractual undertakings. Further, the damage alleged in the School District's complaint is damage to the subject matter of the contract, the tennis courts, not to any other property. The school district's claim therefore sounds in contract, regardless of the other labels that may be attached to it…. Because the liability Ewing faces is contractual, it is not liability that would arise in the absence of a contract. The exception, therefore, does not apply and coverage remains

excluded. We hold that Amerisure owes no duty to defend Ewing in the underlying lawsuit.”

The Upshot:

♦ If the Ewing analysis survives, the long-recognized

"eight-corners rule" for determining a duty to defend is in jeopardy, as is completed operations coverage

generally, at least in federal courts in Texas. Under Ewing, even where a plaintiff alleges a clear claim for negligence, that is not enough to trigger a defense obligation. Under Ewing, the defective work must

damage something outside the “subject matter of the Contract” for coverage to attach. This negates a

contractor's completed operations coverage for work in place. If kept alive, the implications of this decision

What is Additional Insured Coverage?

♦

Risk transfer method that allows one party to

a business relationship to obtain coverage

under another party’s policy

♦

Grants indemnitee direct coverage rights

under the indemnitor’s policy

Parties to Additional Insured Relationship

♦

Named Insured: Party whose policy provides

coverage for additional insured

– E.g., the indemnitor

♦

Additional Insured: Party seeking to take

advantage of another party’s coverage

Additional Named Insured

♦

Different from additional insured

♦

No generally accepted meaning

♦

Same rights and responsibilities as named

insured

♦

Typically identified in policy declarations or

addendum to declarations

Benefits of Additional Insured Status

♦

Can be independent of, and provide broader

protection than, an indemnity obligation

– i.e., may provide coverage for additional

insured’s own negligence

– Important where state law prohibits

indemnification for a party’s own negligence

Securing Additional Insured Status

♦

Two options:

– Endorsement specifically naming indemnitee as additional insured

– Broad form additional insured endorsement

 Grants additional insured status to categories of additional insureds or those the named insured has a contractual obligation to insure

 Sometimes referred to as automatic additional insureds

Broad Form Additional Insured

Endorsements

–

Contractual obligation to indemnify alone

does not confer additional insured status

on indemnitee

–

Contract between indemnitor and

indemnitee also must require additional

insured status for indemnitee

Examples of Additional Insurance Form

Endorsements

WHO IS AN INSURED is amended to include as an additional insured the person(s) or organization(s) shown in the

Schedule, but only with respect to liability for “bodily injury,”

“property damage” or “personal and advertising injury” caused, in whole or in part, by:

1. Your acts or omissions; or

2. The acts or omissions of those acting on your behalf; In the performance of your ongoing operations for the

Comparison Of 2004 and 2013 Versions Of

ISO CG 20 10

Additional Insured Claim

Contract requiring that manufacturer be added as additional insured.

Customer’s Insurance Company

Injured Third Party Customer (Named Insured) Manufacturer

Scope of Additional Insured Coverage

♦ Typically provide coverage for liabilities “arising out of” named insured’s activities

♦ Some courts broadly construe additional insured provisions in favor of coverage

– Federal Home Loan Mortgage Corp. v. Scottsdale Ins. Co., 316 F.3d 431, 444 (3d Cir. 2003) (stating “courts have

given a broad and liberal interpretation to common insurance policy language pertaining to coverage for

additional insured parties for injuries "arising out of" work performed by the main policyholder.”)

Breadth of Additional Insured Coverage

N.J. Super. 107, 114 (App. Div. 2000) (stating

“‘arising out of’ has been defined broadly … to mean conduct ‘originating from,’ ‘growing out of’ or having a ‘substantial nexus’ with the activity for which coverage is provided.”)

 Krastanov v. K. Hovnanian/Shore Acquisitions, LLC, 2008 WL 2986475 (App. Div. Aug. 6, 2008)

(additional insured coverage existed when

construction worker drowned while swimming at construction site)

Coverage for Additional Insured When

Named Insured Solely Negligent

♦ Courts find coverage for named insured’s sole negligence

♦ Aetna Cas. & Sur. Guar. Corp. v. Ocean Acc. &

Guar. Corp., 386 F.2d 413 (3d Cir. 1967): Injury to additional insured’s employee caused by named insured’s sole negligence covered

♦ Injuries arose out of additional insured’s work because liability would not have arisen “but for”

Does Additional Insured Have Coverage

Where Named and Additional Insureds Are

Negligent?

♦ Allen-Stevenson School v. Burlington Ins. Co., 2008 N.Y. Misc. LEXIS 10587 (N.Y. Sup. Ct. Mar. 31, 2008): “Additional insured language … defines coverage … based on the scope of the named insured’s work. As long as the claim against the additional insured arises out of the named insured’s work, coverage is provided…”

♦ Am. Empire Surplus Lines Ins. Co. v. Crum & Forster Specialty Ins. Co., No. H-06-004, 2006 U.S. Dist. LEXIS 33556 (S.D. Tex. May 23, 2006): Additional insured coverage exists where both named insured and

Does Additional Insured Have Coverage

for its Sole Negligence?

♦ Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487 (5th Cir. 2000): Injury to named insured’s employee “arose out of” named insured’s operations, even if the cause of injuries was sole negligence of the additional insured

♦ Smith v. Toys “R” Us, Inc., No. A-1635-10T3 (N.J. App. Div. Sept. 5, 2012): Where employee of employment agency

sued for injuries while working at Toys “R” Us plant, Toys “R” Us sought coverage as additional insured under

agency’s policy. New Jersey Appellate Division found no coverage because Toys “R” Us – the additional insured –

Changes in Additional Insured

Endorsement Affect Scope of Coverage

♦

Recent change in attempt to exclude

coverage for additional insured’s sole

negligence

♦

Requires the liability be caused, in whole or

Changes in Additional Insured

Endorsement

Comparison Of 2004 and 2013 Versions Of

ISO CG 20 10

No Coverage for Additional Insured’s Sole

Negligence

♦ Gilbane Building Co. v. Empire Steel Erectors, L.P., 691 F. Supp. 2d 712 (S.D. Tex. 2010):

– Policy contained 2004 endorsement limiting AI coverage – Complaint contained no allegations of negligence by

named insured

– District court speculated named insured’s negligence not pled because of Workers’ Compensation bar

– Held negligence could be imputed to named insured, which triggered duty to defend

– 5th _{Circuit reversed, finding duty to defend only where}

Anti-Indemnity Statutes

♦ Some states legislatively prohibit coverage for additional insured’s own negligence where that negligence could not be transferred through an indemnity agreement

Notice Obligation

♦

CGL policies require “the insured” provide

notice of an occurrence as soon as possible

♦

Depending on jurisdiction:

– Notice by named insured may satisfy notice requirement for additional insured

– Additional insured may have independent notice obligation

 Am. Manufs. Mut. Ins. Co. v. CMA Enterprises, Ltd., 667 N.Y.S.2d 724, 725 (1st _{Dept. 1998)}

Priority of Coverage

♦ Priority determined by “other insurance clauses”

– Sport Rock Intl. Inc. v. Am. Cas. Co. of Reading, Pa, 65 A.D.3d 12 (1st _{Dept. 2009)}

– Jefferson Ins. Co. of NY v. Travelers Indem. Co., 92 N.Y.2d 363 (1998)

♦ Broad form endorsement states policy is excess

over other insurance available to additional insured

♦ Additional insured’s own coverage likely has similar other insurance clause

Priority of Coverage

♦ Generally, “mutually repugnant” other insurance clauses cancel each other out and insurers

contribute equally

– New York State Dorm. Auth. v. Scottsdale Ins. Co., 810 N.Y.S.2d 707 (4th _{Dept. 2006)}

Priority of Coverage

♦ Some courts hold additional insured coverage is primary to additional insured’s own insurance

♦ Pecker Iron Works of N.Y., Inc. v. Travelers Ins.

Co., 99 N.Y.2d 391, 393-94 (2003) (Subcontractor, Upfront, agreed to name contractor, Pecker, as an additional insured. Upfront agreed, that its carrier would provide Pecker with primary coverage on the risk.)

Priority of Coverage

♦ Compare

– Kajima Constr. Servs. v. CATI, Inc., 302 A.D.2d 228 (1st _{Dept. 2003)}

 Endorsement: primary coverage only if the underlying claim determined to be solely as a result of negligence or responsibility of named insured.

– Bp A.C. Corp. v. One Beacon, 33 A.D.3d 116 (1st Dept. 2006)

Alternative Insurance Programs

♦ Wrap Insurance

– Covers all parties to a construction project under a single party

♦ Owner Controlled Insurance Program (OCIP)

– Wrap program where owner provides coverage for contractors and subcontractors

♦ Contractor Controlled Insurance Program (CCIP)

– Wrap program where general contractor provides coverage for subcontractors

Considerations in Placing Additional

Insured Coverage

♦ If policyholder is contractually obligated to procure insurance for indemnitee’s sole negligence,

determine if pre-2004 endorsement is available

♦ If post-2004 endorsement included, discuss removal with underwriter

♦ If insurer will not remove, advise business unit it cannot fulfill its contractual obligation

Best Practices

♦ When negotiating a contract that will require your company to provide contractual indemnification to the other contracting party or to provide insurance to third parties, then:

– Review coverage options with risk manager

– Review additional insured and contractual liability provisions in current insurance policies

– Determine what, if any, coverage changes should be made

– Determine if can secure coverage changes