1. National Contract Management Association Contractual Risk Management – From Contract to Policy March 16, 2011 William C. Eustace, Esq. - Marsh National Casualty Practice Jeffrey J. Vita, Esq. – Saxe, Doernberger & Vita

2. 1 Contracts - General Principles Ensure an adequate distribution of risks between the parties Risk assumed should be commensurate with actors conduct and role In a perfect world, the party with control or the ability to prevent loss should be the party to assume the risk Avoid ambiguous terms and unstated assumptions – words have meaning We live in a 2 track world - keep both in mind as you negotiate – insurance and contract provisions ideally operate in tandem Recognize that certain risks will not be borne by the insurance markets Whatever is not covered by insurance becomes a bet on the balance sheet of another organization

3. 2 Contracts – Real World Concerns Some companies have more leverage than others Invariably, the sales force at your firm will have struck a deal with just such a company There will be little time to weigh risk versus reward before the closing If you question the wisdom of a provision, it may be suggested that youre not being commercial The proposed deal, if consummated, will be material for your company in terms of revenue and/or profit The contract terms, no matter how tiny the print or egregious the verbiage, will be characterized as standard form If your name or approval is associated with that agreement, and it results in litigation 2 years later, none of the above will be recalled

4. 3 General Liability Insurance – Foundation Insurance is a risk transfer device: the insurer assumes the described risk in exchange for premium Not all risks can be transferred (at a reasonable price) Insurers have generations of experience in claim handling Many policy terms have acquired meaning from custom and practice – and from decades of litigation Courts interpret liability policies as a matter of law Meaning: unless found to be ambiguous, no parol or extrinsic evidence is required for the court to decide what the wording means

5. 4 General Liability Insurance - Continued Coverage Grant (Coverage A - Insuring Agreement) We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply. We may, at our discretion, investigate any "occurrence" and settle any claim or "suit" that may result. Copyright ISO Properties, Inc. CG 00 01 (12/07)

6. 5 General Liability Insurance - Continued BI – bodily injury (resulting mental anguish) PD – property damage – physical injury to tangible property and its loss of use PI – personal injury – slander; invasion of privacy AI – advertising injury – theft of competitors advertisement or advertising idea

7. 6 General Liability Insurance - Continued Is there a duty to defend? Compare the four corners of the complaint to the four corners of the policy If one of the above types of injury or damage is not alleged, there is no GL coverage If an occurrence is alleged, then evaluate conditions and exclusions Known Loss – condition within insuring agreement Prior to the policy period, no insured listed under Paragraph 1. of Section II – Who Is An Insured and no "employee" authorized by you to give or receive notice of an "occurrence" or claim, knew that the BI or PD had occurred, in whole or in part. If known prior to the policy period, then any continuation, change or resumption of such BI or PD during or after the policy period will be deemed to have been known prior to the policy period.

8. 7 General Liability Insurance - Occurrence Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions One of the most litigated definitions in history Occurrence policies cover unfortunate events (accidents) which take place during the policy period The opposite of claims made forms, which cover the insured for claims made in the policy period - professional liability Copyright ISO Properties, Inc. CG 00 01 (12/07)

9. 8 General Liability Insurance – Who is an Insured Corporation (non JV/LLC/Partnership) – is an insured, along with: Executive officers and directors (but only with respect to their duties as your officers or directors) Stockholders (but only with respect to their liability as stockholders) Employees and volunteer workers (only for acts within the scope of their employment by you or while performing duties related to the conduct of your business) - plus additional limitations Organization (non JV/LLC/Partnership) – for 90 days – no coverage for occurrences before ownership WARNING: No person or organization is an insured with respect to the conduct of any current or past partnership, joint venture or limited liability company that is not shown as a Named Insured in the Declarations. Portions copyright ISO Properties, Inc. CG 00 01 (12/07)

10. 9 Notice: like voting in Chicago a. You must see to it that we are notified as soon as practicable of an "occurrence" or an offense which may result in a claim. To the extent possible, notice should include: (1) How, when and where the "occurrence" or offense took place; (2) The names and addresses of any injured persons and witnesses; and (3) The nature and location of any injury or damage arising out of the "occurrence" or offense. Copyright ISO Properties, Inc. CG 00 01 (12/07)

11. 10 Cooperation and Subrogation / No Voluntary Payments b. If a claim is made or "suit" is brought against any insured, you must … (2)Notify us as soon as practicable (written notice) c. You and any other involved insured must: (1)Immediately send us copies of any … legal papers … (2)Authorize us to obtain records and other information; (3)Cooperate with us in the investigation or settlement of the claim or defense against the "suit"; and (4)Assist us … in the enforcement of any right against any person or organization which may be liable to the insured because of injury or damage to which this insurance may also apply. d. No insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent. Copyright ISO Properties, Inc. CG 00 01 (12/07)

12. 11 General Liability Insurance – Other Insurance b. Other Insurance If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Coverage Part, our obligations are limited … Each underwriter only wants to pay after every other underwriter on the risk has paid Dueling other insurance clauses Types: – Escape Clauses – Excess Clauses – Excess and Non Contributory Portions copyright ISO Properties, Inc. CG 00 01 (12/07)

13. 12 General Liability Insurance – Other Insurance Continued Excess Insurance (1) This insurance is excess over: (a) Any of the other insurance, whether primary, excess, contingent or on any other basis: … (b) Any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an additional insured by attachment of an endorsement. Copyright ISO Properties, Inc. CG 00 01 (12/07)

14. 13 General Liability Insurance – More Conditions Separation of Insureds … This insurance applies: a. As if each Named Insured were the only Named Insured; and b. Separately to each insured against whom claim is made or "suit" is brought. Transfer Of Rights Of Recovery Against Others To Us Subrogation - if the insurer pays under the policy, it can seek recovery from responsible parties, and the insured will assist it in seeking recovery Copyright ISO Properties, Inc. CG 00 01 (12/07)

15. 14 General Liability Insurance – Select Definitions Coverage Territory – occurrence must take place in the coverage territory (and sometimes the suit as well) Products-completed operations hazard: a. Includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except: … (2) Work that has not yet been completed or abandoned. … b. Does not include "bodily injury" or "property damage" arising out of: (1) The transportation of property, unless the injury or damage arises out of a condition in or on a vehicle not owned or operated by you, and that condition was created by the "loading or unloading" of that vehicle by any insured … Copyright ISO Properties, Inc. CG 00 01 (12/07)

16. 15 General Liability Insurance – Your Work "Your work": a. Means: (1) Work or operations performed by you or on your behalf; and (2) Materials, parts or equipment furnished in connection with such work or operations. b. Includes: (1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your work", and (2) The providing of or failure to provide warnings or instructions Copyright ISO Properties, Inc. CG 00 01 (12/07)

17. 16 General Liability Insurance – Select Definitions Property Damage Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it. For the purposes of this insurance, electronic data is not tangible property. Copyright ISO Properties, Inc. CG 00 01 (12/07)

18. 17 General Liability Insurance – Select Exclusions Expected Or Intended Injury - "Bodily injury" or "property damage" expected or intended from the standpoint of the insured … Pollution (1) "Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants": (a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured. … NPTE endorsements Copyright ISO Properties, Inc. CG 00 01 (12/07)

19. 18 General Liability Insurance – Additional Exclusions Aircraft, Auto & Watercraft Product recall WC / Employers Liability War Mobile Equipment Liquor Liability Damage to Property – including CCC Distribution Of Material In Violation Of Statutes / Electronic Data Damage to Impaired Property Copyright ISO Properties, Inc. CG 00 01 (12/07)

20. 19 General Liability Insurance – Your Work Exclusion Damage To Your Work "Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard". This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a sub-contractor. The exception has been the subject of much litigation in the construction defect context – particularly in PA – Kvaerner Kvaerner – can faulty workmanship result in an occurrence? Copyright ISO Properties, Inc. CG 00 01 (12/07)

21. 20 General Liability Insurance – Supplementary Payments If we defend an insured against a "suit" and an indemnitee of the insured is also … a party to the "suit", we will defend that indemnitee if all of the following conditions are met: a. The "suit" against the indemnitee seeks damages for which the insured has assumed the liability of the indemnitee in a contract … that is an "insured contract"; b. This insurance applies to such liability assumed by the insured; c. The obligation to defend, or the cost of the defense of, that indemnitee, has also been assumed by the insured in the same "insured contract"; d. The allegations in the "suit" and the information we know about the "occurrence" are such that no conflict appears to exist between the interests of the insured and the interests of the indemnitee; Copyright ISO Properties, Inc. CG 00 01 (12/07)

22. 21 General Liability Insurance – Supplementary Payments e. The indemnitee and the insured ask us to conduct and control the defense … and agree that we can assign the same counsel to defend … and f. The indemnitee: (1) Agrees in writing to: (a) Cooperate … in the investigation, settlement or defense of the "suit"; (b) Immediately send us copies of any demands, notices … or legal papers received in connection with the "suit"; (c) Notify any other insurer whose coverage is available to the indemnitee; and (d) Cooperate with us with respect to coordinating other applicable insurance available to the indemnitee; and Copyright ISO Properties, Inc. CG 00 01 (12/07)

23. 22 General Liability Insurance – Supplementary Payments (2) Provides us with written authorization to: (a) Obtain records and other information related to the "suit"; and (b) Conduct and control the defense of the indemnitee in such "suit" So long as the above conditions are met, attorneys' fees incurred by us in the defense of that indemnitee, necessary litigation expenses incurred by us and necessary litigation expenses incurred by the indemnitee at our request will be paid as Supplementary Payments. Notwithstanding the provisions of Paragraph 2.b.(2) of Section I – Coverage A – Bodily Injury And Property Damage Liability, such payments will not be deemed to be damages for "bodily injury" and "property damage" and will not reduce the limits … Copyright ISO Properties, Inc. CG 00 01 (12/07)

24. 23 General Liability Insurance – Professional Liability Exclusion This insurance does not apply to "bodily injury", "property damage" or "personal and advertising injury" due to the rendering of or failure to render any professional service by you or on your behalf Often asserted as a defense by insurers even when not actually incorporated into the policy Architect, Surveyor, Engineer GL carrier philosophy: Insureds should buy E&O coverage Copyright ISO Properties, Inc. CG 00 01 (12/07)

25. 24 Insurance Requirements Insurer rating Additional insured Certificates / Copy of policy Deductibles and SIRs Occurrence Form Particular Endorsements Notice of cancellation Required lines of coverage and minimum limits

26. 25 Indemnity May shift payment of defense to sub/indemnitor May shift settlement/judgment to sub/indemnitor

27. 26 Risk Allocation Through Contract Owner/GC/CM contract, subcontract, side agreement Specific paragraphs for indemnity Hidden provisions throughout contract

28. 27 Contract Language - Indemnity …the Subcontractor agrees to indemnify and save [GC] harmless of all loss, cost, expense, liability, damage or injury, including legal fees and disbursements …

29. 28 Contractual Liability Exclusion This insurance does not apply to:... b. Contractual Liability BI or PD for which insured is obligated to pay damages by reason of liability in a contract or agreement…

30. 29 Exception This exclusion does not apply to liability for damages: (1) Assumed in a contract or agreement that is an insured contract, provided the bodily injury or property damage occurs subsequent to the execution of the contract or agreement; or (2) That the insured would have in the absence of the contract or agreement

31. 30 Insured Contract That part of any other contract or agreement…under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person

32. 31 Contractual Indemnity v. AI Coverage AI coverage and indemnity operate independently Indemnity covered as contractual liability AI coverage determined by policy and AI endorsement AI coverage not limited by states anti-indemnity laws (exceptions)

33. 32 Benefits of AI Status Supplement to contractual indemnity Protects GC from own negligence and vicarious liability Prohibits subrogation Avoids impact to GCs loss history

34. 33 AI Issues Who is an Insured? – Blanket Endorsement – Specifically Named Notice to Insurer

35. 34 Evolution of the AI Endorsement 2001200419851993 CG 20 10 11 85 Arising out of CG 20 10 10 93 Limits coverage to ongoing operations CG 20 10 10 01 Excludes coverage for completed operations CG 20 10 07 04 Replaces arising out of with caused in whole or in part. Excludes completed operations CG 20 37 10 01 Reinstates completed operations coverage

36. 35 Modify the Contract Sample Manuscript Language (best): Subcontractor is required to add contractor as an additional insured per (CG 20 10 11 85) endorsement or equivalent (CG 20 10 10 01 is acceptable if it is accompanied by CG 20 37 10 01 or CG 20 10 07 04 and CG 20 37 07 04). All coverage shall be primary and non-contributory with any other insurance available to contractor or owner.

37. 36 Recommendations for Contract 1. Obtain AI status 2. Specify AI endorsement 3. Specify limits required 4. Specify that all AI coverage (whether purchased as primary, excess, or umbrella) shall be primary to any other insurance maintained by AI 5. Specify that AIs own insurance will be excess of and not contribute with AI coverage regardless of other insurance clause 6. Obtain broad indemnification from downstream party

38. 37 AI TIPS Always give notice and think of potential AI coverage when claim occurs Review AI endorsements carefully for compliance with your contracts Fight AI denials claiming that first named insured was not negligent Dont confuse indemnity and AI status If providing indemnity, make sure your insurance covers your contractual obligation

39. 38 Subrogation Subrogation allows a party who has paid a loss or debt on the part of another to succeed to the rights of that other party to pursue recovery from a responsible third party The right to subrogation can be waived prior to loss

40. 39 Risk Transfer

41. 40 Waiver of Subrogation Allocate the risk of property damage and do not permit reallocation through subrogation Contractually waive subrogation and/or Include party and all of its subcontractors as insureds since insurers can not subrogate against their own insureds

42. 41 Caveats Nothing contained in this presentation should be construed as, or relied upon for, legal advice, which neither Marsh nor the author provide: – Statements concerning legal or regulatory matters should be understood to be general observations based solely on our experience as insurance brokers and risk consultants and should not be relied upon as legal advice – All such matters should be reviewed with the clients own qualified legal advisors in these areas Any comments concerning insurance policies are offered only in our capacity as an insurance broker, are based upon currently available information and are not binding on insurers

43. 42 THANK YOU! William C. Eustace William.C.Eustace@marsh.com ( 860) 723-5753 Jeffrey J. Vita jjv@sdvlaw.com (203) 287-2103