1. 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

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

3. 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

4. Contractual Risk Transfer
The Basics

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

6. 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.

7. 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

8. 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.

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

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

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

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

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

14. 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]

15. 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]

16. 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

17. 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

18. 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

19. 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

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

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

22. 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

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

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

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

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

27. 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

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

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

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

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

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

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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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.

40. 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 is a virtual wipe-out
The Amendment of Insured Contract Definition Endorsement GC will create gaps in states where sole fault assumptions are still permitted

41. Other Questions?