Contractual Indemnification Obligations and Insurance Coverage Joseph Fields Steven H. Weisman McCarter & English, LLP Jacqueline Beaudet Frenkel & Company Contractual Indemnification ♦ Business contracts commonly contain indemnity obligations – – – – – Construction Manufacturing Vendor/Vendee Service Agreements Lease Agreements 2 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. 3 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 4 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 indemnification from the contractor.) 5 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: 6 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.” 7 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 maintenance contractors. 8 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 9 Contractual Liability Coverage ♦ CGL policies exclude liabilities the insured assumed by contract – Intended to exclude breach of contract claims ♦ This policy does not apply to 10 Contractual Liability Coverage ♦ Two exceptions: – Liability the insured would have in the absence of contract – Liability assumed in an “insured contract” 11 Insured Contracts 12 Ewing v. Amerisure (690 F.3d 628 (5th 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. 13 Ewing v. Amerisure (690 F.3d 628 (5th Cir. 2012)) – contractual liability 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. 14 How was Gilbert different from Ewing? ♦ Gilbert v. Lloyd’s London, 327 S.W.3d 118 (Tex. 2010) ♦ 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. 15 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. 16 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. 17 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." 18 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.” 19 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 could be grave for general contractors. 20 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 ♦ Scope of coverage varies 21 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 – E.g., the indemnitee 22 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 23 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  E.g., GA, NY, CA 24 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 25 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 26 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 additional insured(s) at the location(s) designated above. 27 Comparison Of 2004 and 2013 Versions Of ISO CG 20 10 28 Additional Insured Claim Customer’s Insurance Company Manufacturer (Additional Insured) Contract requiring that manufacturer be added as additional insured. Customer (Named Insured) Injured Third Party 29 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.”) 30 Breadth of Additional Insured Coverage  County of Hudson v. Selective Insurance Co., 332 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) 31 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” engagement by or association with named insured 32 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 additional insured are negligent 33 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 – was solely liable. 34 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 in part, by conduct of the named insured 35 Changes in Additional Insured Endorsement 36 Comparison Of 2004 and 2013 Versions Of ISO CG 20 10 37 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 complaint alleges named insured proximately caused injuries 38 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 – E.g., CA, CO, KS, LA, NM 39 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) 40 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 41 42 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) – Hanco v. Sisoukraj, 364 N.J. Super. 41, 47 (App. Div. 2003) 43 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.) 44 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) 45 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 46 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 47 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 – Obtain endorsements 48