The Nuts and Bolts of Contractual Liability Exposures and Coverage Society of Risk Management Consultants Nashville, TN April 2011 Donald S. Malecki, CPCU Malecki, Deimling Nielander & Associates, LLC

The Belt or Suspenders Concept What it is How it should have applied How it applied prior to 2004 How this concept applies currently

The Belt or Suspenders Concept Keep in mind therefore that: Contractual liability coverage may be broader than additional insured coverage The nuts and bolts of contractual liability coverage therefore is important to understand

Contractual Risk Transfer The Basics

Contractual Risk Transfer Transfer involves financial consequences, not fault Determining coverage steps

Contractual Risk Transfer Customary Parties Indemnitee – The party who is attempting to transfer the financial consequences of its liability to another. Indemnitor – The party who often must accept the indemnitee’s transfer.

Some Common Indemnitor and Indemnitee Relationships Buyer of Goods Seller of Goods Subcontractor General Contractor Indemnitee Seller of Goods Purchaser of Goods General Contractor Project Owner

Defining and Differentiating Some Terms Hold harmless: An agreement to assume the financial consequences of another’s liability. Indemnify: Means to reimburse damages and defense costs. Does not include the obligation to defend. Defend or Reimburse for Defense: If indemnitee wants to be defended, must say so, otherwise costs subject to reimbursement.

Contractual Assumption of Liability SUBCONTRACTOR INDEMNITOR GENERAL CONTRACTOR INDEMNITEE CONTRACT INSURANCE THIRD PARTY

Common Law Indemnity What it is The test to recover damages and costs Conclusion

Hold Harmless Agreements LIMITED Indemnitor’s Sole Negligence BROAD Indemnitee’s Sole Negligence INTERMEDIATE Indemnitor’s Sole Negligence or Joint Negligence

General Categories of Hold Harmless Agreements Limited or Reciprocal or Mutual Intermediate—Comparative Fault Form Broad Form

Anti-Indemnity Statutes Statutory Limitations on Contractual Risk Transfer—Examples and Rationale Anti-Indemnity Statutes What they are Purpose

Alaska [A] Arkansas [I] California [A] Georgia [CI] Hawaii [A] States With Anti-Indemnity Statutes Void For Sole Negligence Subject To An Insurance Exception Alaska [A] Arkansas [I] California [A] Georgia [CI] Hawaii [A] Maryland [I] New Jersey [AUI] Ohio [AUI] South Carolina [I] Virginia [AI] West Virginia [I]

Connecticut [LI] Delaware [AU] Illinois [CL] Kansas [I] Kentucky [I] States With Anti-Indemnity Statutes Void For Sole/Partial Negligence Subject To An Insurance Exception Connecticut [LI] Delaware [AU] Illinois [CL] Kansas [I] Kentucky [I] Louisiana [I] Minnesota [I] Mississippi [I] Missouri [I] Montana [I] Nebraska [I] New York [A] North Carolina [I] Oklahoma [I] Rhode Island [I] Texas [I]

A Caveat About Insurance Exceptions Nature of insurance exceptions Potential impact of self-insurance Case exemplifying problem: USX Corporation v. Liberty Mutual Ins. Co. and Turner Construction Co, 645 N.E.2d 396 App.Ct. IL

Arizona Idaho Indiana Michigan South Dakota Tennessee Utah Washington States With Anti-Indemnity Statutes Void For Sole Negligence And No Insurance Exception Arizona Idaho Indiana Michigan South Dakota Tennessee Utah Washington

Colorado Florida New Mexico North Dakota Oregon States With Anti-Indemnity Statutes Void For Sole/Partial Negligence And With No Insurance Exception Colorado Florida New Mexico North Dakota Oregon

Alabama Iowa Maine Nevada Pennsylvania Vermont Wisconsin Wyoming States With No Anti-Indemnity Statutes And Do Not Void Hold Harmless Provisions Alabama Iowa Maine Nevada Pennsylvania Vermont Wisconsin Wyoming

Massachusetts New Hampshire States That Hold Void Sole Negligence By Way of Anti-Indemnity Statutes Massachusetts New Hampshire

Contractual Exclusion Out and in exclusion “Insured Contract” exception Contractual defense options Our attorney, defense in addition to limits Your attorney, defense in limits

Supplementary Payments In addition to the limits of liability Coverage A and B Contractual defense Suit must name insured and indemnitee In addition to limits if indemnitee agrees, in writing

Types of “Insured Contracts” Lease of Premises Easement Agreement A Municipal Agreement Sidetrack Agreement

Sidetrack Agreements Warehouse BI & PD On The Sidetrack Mainline Warehouse Sidetrack BI & PD On The Sidetrack PD To The Rail Car

Types of “Insured Contracts” Lease of premises Easement Agreement A Municipal Agreement Sidetrack Agreement Elevator Maintenance Agreement “Tort Liability Assumed”

Tort Liability Assumed Meaning of tort liability Example Tort liability requires three parties: Indemnitor, Indemnitee and Injured Party

Tort Liability Assumed What tort liability is not: (1) Liability assumed under a limited or mutual or reciprocal agreement (2) Liability assumed for failing to perform work properly (3) Liability assumed for failing to procure insurance

Exclusions In “Insured Contracts” Railroad Construction Operations CG 24 17 Removes Exclusion Indemnification of Architect Professional for Architect

Exclusions In “Insured Contracts” Railroad Construction Operations CG 24 27 Limited Contractual Giveth and Taketh Some

What Is A Third Party Over Action? Common in construction and manufacturing businesses Examples

Third Party Over Action Owner Third-Party Lawsuit A Suit Indemnity AI Endorsement Injured Employee Contractor CGL Workers Comp Subrogation

Shaping Contractual Liability Coverage With ISO Endorsements Contractual Limitation Endorsement—CG 21 39 What this endorsement does Potential impact

Shaping Contractual Liability Coverage With ISO Endorsements Amendment of Insured Contract Definition Endorsement—CG 24 26 What this endorsement does Impact

Coverage Options--Impact Contract prescribes partial fault coverage for tort liability of the indemnitee Anti-indemnity statute permits assumptions of partial fault CGL policy written without contractual liability limiting endorsement Impact

Coverage Options--Impact Contract prescribes partial fault coverage for tort liability of the indemnitee Anti-indemnity statute permits assumptions of partial fault CGL policy written with contractual liability limiting endorsement CG 21 39 Impact

Coverage Options--Impact Contract prescribes sole fault coverage for tort liability of the indemnitee State has no anti-indemnity statute precluding degree of fault assumption by indemnitor CGL policy written with Amendment of Insured Contract Definition Endorsement—CG 24 26 Impact

Coverage Options--Impact Lease requires tenant to indemnify landlord for damage to landlord’s property caused by sole or partial fault of the landlord The state has no anti-indemnity statute regulating lease agreements CGL policy amended with contractual liability limiting endorsement CG 21 39 Impact

Coverage Options--Impact Indemnitor agrees to HH, indemnify and defend the indemnitee Third party over action names solely the indemnitee Indemnitee seeks defense from indemnitor’s insurer No anti-indemnity statute prohibits the assumption ISO CGL policy has no limiting contractual endorsements Impact

Summary--Conclusions Determining the correct option of the belt or suspenders concept requires more knowledge about the intracacies of contractual liability and additional insured status. The limited and mutual or reciprocal forms of contractual liability are not considered “insured contracts.” Most anti-indemnity statutes do not rule out sole fault assumptions. The important question today is whether an insurer will limit contractual liability coverage even though broad form coverage is still permitted in a given state. A possible problem with contractual liability coverage is whether the insurer will provide defense to an indemnitee who requests it.

Summary--Conclusions Coverage for the assumption of tort liability requires three parties Coverage for the five automatic contracts does not require three parties and includes sole fault coverage Third party over actions are the most common forms of litigation in the construction industry and where coverage gaps are likely The contractual limitation endorsement CG 21 39 is a virtual wipe-out The Amendment of Insured Contract Definition Endorsement GC 24 26 will create gaps in states where sole fault assumptions are still permitted

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