2. 1 A Time Travel Tale: Mock Negotiation of Liability, Indemnification and Insurance Provisions Breakout Session # D-09 Name: Colleen Bertone (U.S. Air Force); Linda Fitch (Independent Consultant); Jennifer Izzo (Draper Laboratory); Allie Stanzione (MIT Lincoln Labs) Date: July 31, 2012 Time: 11:15-12:30

3. 2 Industry Day for Acquisition of Time And Relative Dimension In Space Capsule (TARDIS) Featuring: - The U. S. Government - Prime SciFi Company - Sub R&D Company - The Narrator Time Travel Tale: A Mock Negotiation

4. Agenda 3 Setting the Scene Liability Indemnification Insurance Clauses Q&As

5. Setting the Scene 4 Prime SciFi hopes to win an exciting development contract by the government for delivery of a space-time vehicle. Sub R&D Company will build the communications system. The acronym: Time And Relative Dimension In Space (TARDIS) The spec: Flies through space and time by de- and re- materializing

6. Time Travel Tale: A Mock Negotiation 5

7. 6

8. Liability: Government Concerns 7 Contract Type Getting the product out on time Meeting the functional specification Staying within the available funding Avoiding bad press Avoiding project overruns Political considerations Interested in protecting Govt interests from crooked contractors Insurance Requirements

9. Liability: Prime Contractor Concerns 8 Contract Type Liability for Damages to Third Parties Liability for Damages to Government Property Liability for Product Defects Inspection and Acceptance - Latent Defects Liability for IP Infringement Claims Statutory Immunities from Government Contractual Risk Allocation – Government and Subcontractor Indemnification Insurance Requirements

10. Liability: Subcontractor Concerns 9 Contract Type Liability for Damages to Prime Contractor and Third Parties Liability for Product Defects Inspection and Acceptance - Latent Defects Contractual Risk Allocation – Extent of Indemnification Limitation on Liability IP Infringement Claims Insurance Requirements

11. How to minimize risks? 10 Define appropriate Contract Type Shift liability to the Government Shift liability to the Subcontractor or Prime, as applicable Obtain Appropriate Insurance Coverage

12. Indemnification 11 Indemnification: a promise by one party to take financial responsibility for damages that the other party may suffer in the future. Insurance backs up the promise (but know your policy exclusions!)

13. Prime’s Allocation of Risk – Government Indemnification 12 Anti-Deficiency Act Public Law 85-804 (FAR 52.250-1): unusually hazardous or nuclear risk as defined in the contract. Price-Anderson Act: radioactive, toxic, explosive or other hazardous properties of source, special nuclear or byproduct material. Indemnification for R&D Projects (10 U.S.C.A. 2354) FAR 52.228-7 Insurance Liability to Third Parties

14. 13 Cost reimbursement contracts If Contractor maintains required insurance, then Government will reimburse Contractor for liabilities to third persons not compensated by insurance. Doesn’t matter if contractor is negligent But…. Government will only reimburse final judgments or settlements Subject to availability of appropriated funds Excluded: willful misconduct or failure to carry required insurance

15. 14 Prime’s Allocation of Risk – Govt. Immunities & Limits of Liability SAFETY Act: liability protections for sellers of qualified anti-terrorism technologies PREP Act: liability protection for companies developing and administering biological countermeasures. Defense Base Act: requires employers to buy special workers’ comp insurance to cover claims filed by employees due to injuries sustained while deployed abroad.

16. Prime’s Allocation of Risk – What’s in the Subcontract? 15

17. Flowing Down FAR 52.228-7 to Sub 16 If flowed down without government’s consent, the effect is that prime is indemnifying sub One potential solution is to amend Disputes clause to state that prime will sponsor sub’s claims to the government

18. Disputes Clause 17 Prime agrees to sponsor subcontractor for claims to federal government to the extent prime has recourse to the government under the prime contract. “Any dispute that arise this Subcontract which relates to a matter that gives the Prime Contractor recourse against the Government under the prime contract or applicable law, shall, at Prime’s election, be resolved as follows … Prime shall promptly notify Subcontractor of any decision by the Contracting Officer on such claim. If said decision is binding upon Prime under the prime contract or applicable law, it shall in turn be binding upon Prime and Subcontractor with respect to such decision insofar as it relates to this Subcontract. If Subcontractor is adversely affected by any such decision made by the Contracting Officer, and if Prime elects not to appeal such decision pursuant to the “Disputes” clause of the prime contract and applicable law, Prime shall promptly notify Subcontractor. If Subcontractor thereafter timely requests Prime to appeal such decision, Prime shall authorize Subcontractor to do so under the name of Prime as the sponsor of Subcontractor’s appeal. Any decision upon such an appeal, whether submitted by Prime or Subcontractor with Prime’s sponsorship, if binding upon Prime under the prime contractor applicable law, shall in turn be binding upon Prime and Subcontractor under this Subcontract with respect to such decision insofar as it relates to this Subcontract.”

19. Prime’s Indemnification Clause 18 “To the fullest extent permitted by law, Subcontractor shall indemnify and hold harmless the PRIME and its officers, directors, agents and employees from and against all claims, damages, losses, and expenses including but not limited to attorneys’ fees arising out of or resulting from the performance of the work by the Subcontractor or its subcontractors, regardless of whether or not such claims or losses are caused in part by a party indemnified hereunder.”

20. Sub’s Response 19 Limit Scope of Indemnity, Exclude Prime’s Wrong-Doings To the fullest extent permitted by law, Subcontractor shall indemnify and hold harmless PRIME and its officers, directors, agents and employees from and against all claims, damages, losses, and expenses including but not limited to reasonable attorneys’ fees arising out of or resulting from the negligent acts or omissions or willful misconduct of Subcontractor performance of the work by the CONTRACTOR or its subcontractors, except to the extent such claims arise out of the negligence or willful misconduct of the PRIME. regardless of whether or not it is caused in part by a party indemnified hereunder.

21. Sub’s Response, cont. 20 Carve out FAR 52.228-7 “Subcontractor’s obligation to indemnify and hold harmless PRIME shall not apply to the extent FAR 52.228-7 applies.” Cap Liability “In no event shall Subcontractor’s liability in connection with this Agreement exceed, in the aggregate, the total fees paid by PRIME hereunder.” Exclude Consequential Damages “IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, EXEMPLARY, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR OTHER INDIRECT DAMAGES OF ANY KIND, EVEN IF SUCH PARTY HAS BEEN ADVISED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES, OR SUCH DAMAGES COULD HAVE REASONABLY BEEN FORESEEN BY SUCH PARTY.”

22. Types of Insurance 21

23. General Liability Insurance 22 Government Requirements for Prime Contractor FAR 28.307-2: $500K per occurrence FAR 52.228-7 Insurance – Liability to Third Persons Prime Contractor Requirements for Subcontractor $2M GL $300M umbrella coverage Additional Insured Waiver of Subrogation

24. Sub’s Insurance Certificate 23

25. Additional Insured 24 “All insurance required herein shall be endorsed to include the Prime, its officers and employees as additional insureds and shall not be reduced or canceled without 30 days’ prior written notice to the Prime.”

26. Waiver of Subrogation 25 “Company A waives all rights against Company B for damages caused by any peril to the extent covered by insurance provided under the insurance requirements of this Agreement. Company A shall require similar waivers by Subcontractors. All insurance policies required hereunder shall permit and recognize such waivers of subrogation.”

27. Automobile Liability 26 Comprehensive Automobile Liability covers bodily injury and/or property damage to third parties due to act or omission committed by a company or its employees arising from the use of company owned, hired, or non-owned vehicles. FAR Clause 52.228-10 / Subpart 28.307-2(c) requires injury and property damage liability covering the operation of all automobiles used in performance of the contract. The minimum limits are $200,000 per person and $500,000 per occurrence for bodily injury and $20,000 per occurrence for property damage.

28. Auto Liability: Prime’s requirements 27 “The Subcontractor shall carry automobile liability coverage for owned, hired and non-owned vehicles in the minimum amount of $400,000,000 per occurrence, combined single limit for bodily injury and property damage.”

29. Worker’s Compensation 28 Covers medical expenses and lost wages for employee injuries arising out of the course and scope of employment. FAR Clause 52.228-3 / Subpart 28.307-2(a): Must carry employer’s liability for accidental bodily injury or death and occupational disease with a minimum liability limit of $100,000.

30. Work on Government Installation 29 FAR 52.228-5 Insurance-Work on a Government Installation FAR 28.310

31. Overseas Workers Compensation and War Hazard Insurance 30 The Defense Base Act covers injury to employees working or traveling overseas or in war zone areas. FAR Clause 52.228-5: Contractor and subcontractor working at a government installation must provide and maintain the minimum insurance requirements listed in the FAR for worker’s comp, employer’s liability, commercial general liability and automobile liability.

32. Insurance Against Loss or Damage to Government Property 31 Covers damage to government property (except to the extent covered by contractor’s insurance policy) FAR Clause 52.245-1(h) Contractor Liability for Government Property FAR Subpart 45.104 Responsibility and Liability for Government Property FAR Subpart 45.107(a) FAR Subpart 31.205-19 Insurance and Indemnification

33. Cargo Insurance 32 Covers cargo in the care, custody, or control of the carrier (e.g., theft, loss of shipment due to a collision, explosion or burning of the transportation provider, damages due to bad weather, flood, mud and grease). FAR Clause 52.228-9 requires the total value of the property in the shipment to be insured.

34. Professional Liability/Errors & Omissions 33 Covers costs of defending suits asserting that the insured’s work was professionally deficient because it contained errors and/or omissions. Covers the insured’s clients if they are sued because of the insured’s work.

35. Conclusion 34 Covered Issues: Liability Indemnification Insurance THANK YOU FOR ATTENDING OUR SESSION!