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 – 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

11 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 Maximizing Third- Party Contractual Indemnification in Construction Contracts , The John Liner Review, Vol. 24 No. 4. Winter, 2011 pg. 36

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.

12 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.

Examples of Indemnity Agreements – Limited • 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 .

13 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) but only to the extent caused in whole or in part by the negligence of the Subcontractor, its agents, servants, or employees or subcontractors.

Examples of Indemnity Agreements – Limited • 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%.

Examples of Indemnity Agreements – Limited • 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 Maximizing Third- Party Contractual Indemnification in Construction Contracts , The John Liner Review, Vol. 24 No. 4. Winter, 2011 pg. 43

14 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

15 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

16 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

• Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage – Key Issues in Every State, - Third Edition, © Matthew Bender & Co, 2015 pg. 435

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.”

• Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage – Key Issues in Every State, - Third Edition, © Matthew Bender & Co, 2015 pg. 439

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.”

• Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage – Key Issues in Every State, - Third Edition, © Matthew Bender & Co, 2015 pg. 450

17 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. • 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. 36

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. • 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. 43

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.

18 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.”

• Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage – Key Issues in Every State, - Third Edition, © Matthew Bender & Co, 2015 pg. 431

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.

19 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

• Insurance Exception •Example: Minnesota • 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

• Insurance Exception •Example: Minnesota • “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

20 Additional Insured

• “…Contractual indemnity and additional insured issues are separate…the indemnitee recovers from the insurer directly as an additional insured and indirectly as the beneficiary of the indemnitor’s coverage…”

• Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage – Key Issues in Every State, - Third Edition, © Matthew Bender & Co, 2015 pg. 426

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.”

• Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage – Key Issues in Every State, - Third Edition, © Matthew Bender & Co, 2015 pg. 437

21 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

• Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage – Key Issues in Every State, - Third Edition, © Matthew Bender & Co, 2015 pg. 430

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 liability in a contract or agreement.”

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

22 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.

23 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)

24 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. 2014)

25 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.

26 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;”

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.

27 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’…”

CGL Insurance

• Insured Contract: • A defined term in the CGL policy; • For construction, part f. of “insured contract” is usually the pertinent wording;

28 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.”

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.”

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.

29 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); • Railroad Protective does NOT suffice

30 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 insurance.

31 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 insured/indemnitor perform;

32 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

33 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 [email protected]