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Contracts Generally Contracts Generally “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; 1 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 2 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) 3 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; 4 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; • Answering for the liability of another; 5 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] 6 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 previous slide – assume its terms 7 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 8 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; 9 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; 10 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
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