Insurance and Indemnification Clauses: Practical Advice and Pitfalls to Avoid

WMACCA Non-Profits and Associations Forum

July 11, 2013

Panel Moderator-Rhonda LeesRhonda Lees is currently Vice President, Legal Affairs for the American Diabetes Association. She took this position in March 2008, after joining the ADA in 1998. Her portfolio includes Legal Affairs and Administrative Services, with a focus on contracts, litigation, trademarks, advisory opinions, risk management and insurance.

Rhonda is co-chair of the WMACCA Non-Profits Forum.

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Presenter- Selena LindeSelena Linde is a partner in Perkins Coie's Insurance Coverage Practice and is a primary author and editor of the Association of Corporate Counsel's Policyholders Primer on Insurance. Ms. Linde was honored in 2012 as one of twenty-five worldwide recipients of Business Insurance's Women to Watch, one of eleven National Insurance Stars by Benchmark Plaintiff, and a Women Worth Watching by Diversity Journal. Benchmark recognized Ms. Linde in its 2009-2012 editions and noted that during her years of practice she has "established a significant mark on the insurance industry."

Ms. Linde has recovered more than a billion dollars for her clients and has an active trial practice representing policyholders in complex insurance coverage matters in federal and state courts throughout the country and an equally active arbitration, mediation, and counseling practice. Selected current representations include:•Lead Coverage Counsel for Residential Capital (E&O and D&O Claims related to packaging of mortgage backed securities)•Lead Coverage Counsel for a Global 50 Pharmaceutical (D&O Claims related to Government Investigations and Anti-Trust Suits)•Lead Counsel for NorthWestern Energy (CGL, D&O, Property, and EPL Claims)•Lead Counsel for an NBA Team (NBA Player Disability Claim)•Co-lead Counsel Motors Liquidation Trust (CGL claims related to historical asbestos and environmental liability for pre-BK General Motors)

Join Ms. Linde's linked in network for regular updates and articles on insurance coverage topics. She can be reached directly at (202) 654-6221 or SLinde@perkinscoie.com.

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Presenter- Marjorie CliftonMarjorie Clifton is executive director of the Center for Safe Internet Pharmacies and has over 16 years of communications, advocacy and public policy experience in the private sector and non-profit arena. Marjorie began her career working in the technology field as a product developer and spokesperson for Kodak and Sony. Since 2003, she has been a consultant for NGO’s, corporations, non-profits, policy organizations and foundations advising them on their strategic planning, advocacy and communications strategies. Her clients have included the U.S. Department of State, the Federal Reserve, the U.S. Department of Energy, Coca-Cola, Booz Allen Hamilton, Verizon, the American Red Cross, Boeing, General Motors, Pfizer, Ebay, the American Medical Association and the Nature Conservancy.

Ms. Clifton is also a published author, speaker, and media commentator. She regularly appears on CNN, CNBC, Fox, global television networks and national radio. She is an executive board member of Running Start and is a board member of American University’s Women in Politics Institute.

Ms. Clifton received her bachelor’s degree in Communications and Spanish from the University of Texas, where she is currently a fellow for the Annette Strauss Institute for Civic Participation. She has her master’s from Drama Studio London. She is currently based in Washington, DC.

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Presenter- Aaron CoombsAaron Coombs is an associate with Perkins Coie’s Insurance Coverage Practice. He represents corporate policyholders in coverage disputes and litigation, and routinely advises clients with selection and purchase of insurance policies and other risk management practices. Aaron has experience in every stage of civil litigation—from pre-suit negotiation to appellate litigation—having represented clients in disputes over mass tort, product liability, environmental contamination and other claims. He helps clients maximize their insurance assets under all types of insurance policies.

Selected representations include: •Recovery of asbestos liabilities and defense costs for top ten pharma company •Recovery of noise-induced hearing loss claims for manufacturing company•Insurance claims management for global communications provider•Recovery of environmental remediation costs for several utility companies•Internal investigation of employment discrimination for mortgage lender•Risk management and insurance audits for large retail cooperative

Aaron can be reached directly at (202) 654-6246 or ACoombs@perkinscoie.com

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Additional Insured Coverage• What is an Additional Insured• Scope of Coverage• Other Insurance

Indemnity Agreements • How Broad is the Indemnification?• Does the Indemnity Agreement Cover Defense Costs?• Potential Pitfalls• Examples

Other Risk Management Issues• Maintenance of Insurance Clauses-Vendor Contracts• Liability Waivers• Exhibitor Contracts• Charitable Immunity Statutes

Overview

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Additional Insured CoverageWhat is an Additional Insured?

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Additional Insured Coverage:

How To Become An Additional Insured?

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Additional Insured CoverageInsurance Company

Named Insured

Policies and Coverage

Specific Limitations

Certificate Holder

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Additional Insured Coverage:

Who Controls the Rights of the Additional Insured?

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Scope of Coverage:

What is the Scope of Additional Insured Coverage?

Scope of Coverage: Examples

Additional ExclusionsAdditional Exclusions

Limitations to Coverage

Limitations to Coverage

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Scope of Coverage:

What Is The Scope Of Additional Insured Coverage?

Notes specific endorsement

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Scope of Coverage: New ISO Forms

ISO: Insurance Services Office• New standard CGL policy forms as of April 1, 2013• Additional Insured Endorsements • Insured Contract Definition Endorsement• Primary and Noncontributory Other Insurance Endorsement

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Scope of Coverage: New ISO Forms (Cont’d)

Owners, Lessees, or Contractors • “To the extent permitted by law”• No broader than contract requires• Insurance limits are capped at contract requirements

Blanket Additional Insureds•Coverage for upstream suppliers/contractors

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Scope of Coverage: New ISO Forms (Cont’d)

Insured Contract Definition Endorsement• Limits “Insured Contracts” to extent the named insured’s

assumption of tort liability is permitted by law• Restricts ability of indemnitee to access insurance coverage• Request copies of insured contract endorsements

Primary and Noncontributory – Other Insurance • Additional insured can access other party’s insurance first

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Scope of Coverage

Who is at fault?

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Scope of Coverage

Who pays the deductible?

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Scope of Coverage

Other Insurance

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Other Insurance

Company's own insurance policies• CGL (property damage, bodily injury, advertising injury)• D&O (company wrongful acts)

Overlapping coverage leads to coverage disputes•which is primary•what if a conflict•what if limits of AI too low

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Additional Insured Coverage and Indemnity

Agreements

What’s the difference?

Contractual Indemnity

AdditionalInsured

Coverage

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Typical Indemnified ClaimsCurrent Issues• How Broad is the Indemnification?

• Third Party versus First Party Claims• Overlapping Indemnification

• Does the Indemnity Agreement Cover Defense Costs?Potential Pitfalls• Claim Preclusion• Limits on Damages• Priority with Insurance Clauses

Indemnity Agreements

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Breach of warranty or representation

Breach of contractual obligation

Negligent or intentional misconduct

Bodily injury or property damage

Violation of intellectual property rights

Typical Indemnified Claims

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Current Issues:How Broad is the Indemnity?

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Current Issues:How Broad is the Indemnity?

Rexall

UnicityProteotech

Proteotech sues Unicity and Rexall, alleging infringement, and seeking indemnification from Rexall"Rexall agrees to defend, indemnify and hold Proteotech harmless from and against any and all claims, damages, expenses and losses or liability to any third party resulting from any act or omission by Rexall"Held: indemnification clause is limited to claims or liability to third parties only, does not include costs incurred pursuing affirmative relief. • Proteotech, Inc. v. Unicity Int'l, Inc.,

547 F. Supp. 2d 1174 (W.D. Wash. 2008)

License Indemnity

License

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Current Issues:How Broad is the Indemnity?

Fagan Holdings

Thinkware

Fagan sues Thinkware because software fails to perform as expected• Any and all…losses, damages, costs and

expenses…from, or alleged to have arise[n] from the acts or omissions (whether negligent, reckless, intentional or otherwise) of Thinkware"

Held: indemnification clause is not limited to third-party claims, but includes first-party losses caused by failure of software to perform. • Fagan Holdings, Inc. v. Thinkware, Inc.,

750 F. Supp. 2d 820 (S.D. Tex. 2010)

License for Software

Indemnity

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Biolitec

AngioDynamics

Current Issues:How Broad is the Indemnity?

Biolitech agreed to defend any claim of infringement by the "manufacture, sale, distribution, or use of a Product."BUT AngioDynamics also agreed to indemnify for "Loss" "arising out of" certain conditions• "Loss" was broadly defined to include

first-party losses and defense costs

Defense & Indemnity

Indemnity

When indemnity provisions overlap:

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Current Issues:How Broad Is the Indemnity?

When Indemnity Provisions Overlap• AngioDynamics sued for patent infringement• Court: Patent infringed by AngioDynamics processes, not by

Biolitec's product • Biolitec sues AngioDynamics for reimbursement of defense

costs • Held: indemnification provision could apply to Biolitec's

defense of AngioDynamics because "Loss" is not limited to third-party claims• AngioDynamics, Inc. v. Biolitec, Inc.,

606 F. Supp. 2d 300 (N.D.N.Y. 2009). • See also Shen v. New Century Escrow (CA unreported)

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Current Issues: Defense Costs

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Current Issues: Defense Costs

Indemnification of defense costs vs. duty to defend• Who controls? • When is it decided? • What is the standard? • What is the scope of the defense provided?

Depends on Contract Language

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Current Issues: Defense Costs Duty to DefendBuyer sued for alleged patent infringement, but Seller refused to pay defense costs until duty to indemnify was established • Purchase agreement to "defend, indemnify and hold harmless…" for

liability "arising out of any…claim or allegation."• Seller had right to control defense

Held: duty to defend accrued before duty to indemnify• MetroPCS Wireless, Inc. v. TeleCommunications Systems, Inc.

2009 WL 3418581 (D. Md. Oct. 20, 2009)

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Current Issues: Defense Costs No Duty to DefendBuyer was sued for patent infringement, but successfully defended• Purchase agreement to indemnify and hold harmless from any

losses arising out of the breach of any representation or warranty

Held: No right to indemnification for defense costs: no infringement, therefore no breach of warranty• Free Motion Fitness, Inc. v. Wells Fargo Bank West, NA, 208

P.3d 1066 (Utah Ct. App. 2009).

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Current Issues: Defense Costs

What if there are multiple potential indemnitors with a duty to defend?Agreement should anticipate this scenario: • Explain how multi-party indemnification clause works• Duty to defend is not diminished just because there are

multiple potential indemnitors• Parties may elect to negotiate defense cost sharing agreement• Absent cost-sharing agreement, allocation of defense costs is

in sole discretion of the Indemnified Party

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Potential Pitfalls

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Potential Pitfalls

Claim Preclusion

Limits on Damages

Priority: Insurance or Indemnification?

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Potential Pitfall: Claim Preclusion

Scenario• Patent holder sues both Licensor and Licensee for

infringement• Licensor and Licensee reach separate settlement agreements

with Patent holder; settlements entered as consent judgments• Licensee files separate lawsuit against licensor seeking

indemnification for settlement and defense costs, under express warranty and hold harmless provisions of licensing agreement

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Potential Pitfall: Claim Preclusion (cont'd)

Pitfall: • Is licensee precluded from seeking its defense costs because

indemnification claim arose out of the same core of operative facts as the infringement claim (res judicata)?

• Held: Yes, claim precluded. • Peregrine Financial Group, Inc. v. Trademaven, L.L.C.,

909 N.E.2d 837 (Ill. Ct. App. 2009).

How to Prevent:• File Cross-claim against Indemnitor• Ensure that settlement or judgment preserves unresolved

indemnification rights

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Potential Pitfall: Limits on Damages Sellers/Licensors may try to exclude consequential, incidental, or special damages, or cap damages by value of the contractPitfall:•Damage limits could conflict with indemnification provisions – e.g., defense costs could be considered “consequential” damagesHow to Prevent:• Don't agree to such limits • Draft an exception for damages arising under an indemnification obligation

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Potential Pitfalls:Examples

Limitation of Liability:• "Except for damages arising under a Party's indemnification

obligations…neither party will be liable to the other for the other's consequential, incidental, special or punitive damages…"

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Potential Pitfall: Priority – Insurance or Indemnification?

• Which goes first?• Insurance?• Indemnification?

• A simple fix, often left out

Language should:•Prioritize:

• "___ excess to any available _____”

•Timing:• What if insurance goes first

and there is a denial?• or indemnification first

then repayment upon insurance

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Key Takeaways:Insurance and Indemnification Matters!

• What does the agreement require?• Insurance, indemnity, or both?• How do such agreements interact?

• Get copies of:• Relevant endorsement• Full policy

• Understand the scope of coverage• Specific language in agreements can avoid disputes

and uncertainty (otherwise default rules)

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Other Risk Management Issues

• Maintenance of Insurance in Contracts• Vendors• Sponsors • Exhibitors

• Liability Waivers

• Charitable Immunity Statutes

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Maintenance of Insurance ProvisionsVendor will maintain in full force and effect during the term of this Agreement:

A. Commercial general liability insurance (including contractual liability coverage) on an occurrence basis for bodily injury, death, “broad form” property damage, and personal injury, with coverage limits of not less than $1,000,000 per occurrence;

B. Auto liability insurance coverage all owned, non-owned and hired vehicles with coverage limits of not less than $1,000,000 per occurrence for bodily injury and property damage; (only needed if driving is part of scope of work; limits can be modified for individuals/small companies)

C. Workers compensation insurance as required by law in the state where the services will be provided, including employer’s liability coverage for injury, disease and death, with coverage limits of not less than $1,000,000 per accident and employee;

D. Umbrella (excess) liability insurance on an occurrence form, for limits of not less than $1,000,000 per occurrence; (need for less depends on scope of work)

E. Professional liability, for limits of not less than $1,000,000 per claim (need is dependent on scope of work)

F. Fidelity insurance on an occurrence form, for limits of not less than $1,000,000 annual aggregate (need is dependent on scope of work: only when vendor has access to customers' bank accounts, funds, payments, client records)

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Maintenance of Insurance Provisions:

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Maintenance of Insurance/Indemnification Clauses-Sample Vendor Contracts

Insurance Vendor shall maintain adequate and sufficient insurance to cover all potential losses to the Client under this Agreement. The Client shall be a named as an additional insured under such policy(ies), with evidence of such insurance provided to the Client within 30 days of the signing of this Agreement. Vendor shall provide certificates of insurance listing Client, its directors, officers, employees, subcontractors, agents, volunteers and assigns as additional insureds, coverage to apply on a primary basis without contribution. All policies must contain a waiver of subrogation favorable to the additional insureds. Vendor’s insurance carrier shall agree in writing to provide the Client with thirty (30) days’ notice of cancellation or material change to coverage.

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Maintenance of Insurance/Indemnification Clauses-Sample Vendor Contracts

Indemnification Vendor agrees to indemnify, defend and hold harmless Client, its officers, directors, volunteers, employees, contractors and agents, from any and all claims, losses, damages, liabilities, judgments, or settlements, including reasonable attorneys’ fees, costs and other expenses, incurred by the Client on account of any act, omission or breach of this Agreement or arising in any way from services performed by Vendor pursuant to this Agreement. Vendor remains liable for all damage or injury due to Vendor’s negligence, or the negligence of Vendor’s employees, contractors or agents.

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Sponsorship Agreement

Indemnification and InsuranceCompany and the Association agree to indemnify, defend and hold harmless each other, their officers, directors, employees, volunteers, subcontractors and agents, from any and all claims, losses, damages, liabilities, judgments, or settlements, including reasonable attorneys' fees, costs, and other expenses incurred on account of the indemnifying party’s negligent acts or omissions in connection with the Sponsorship. In addition, Company shall maintain insurance of not less than $1,000,000 for comprehensive general liability, with evidence of such insurance provided to the Association within 30 days of the signing of this Agreement.

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Exhibitor Agreement

Exhibitor hereby agrees to indemnify, defend and hold harmless Exposition Management to the same extent that Exposition Management may be obliged to indemnify the owner of the building and other related entities as lessee or licensee of the exhibit hall or space. If there are any inconsistencies between Exposition Management’s lease or license for the exhibit hall or space and this agreement, the terms of the lease or license shall govern. If there are additional rules, regulations or terms or conditions that Exposition Management must comply with under its lease or license, to the extent they may be applicable to the Exhibitor’s booth, those additional rules, etc. are hereby incorporated herein by reference and the Exhibitor agrees to comply with them.

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Liability Waivers

• Will your wavier of liability be enforced? • Conspicuous, clear, concise• Identify the specific parties being released• Educate staff about importance/seriousness of waivers• May not protect against gross negligence/recklessness

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Liability Waiver: Example

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Liability Waiver: Example

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Liability Waivers: Practical Advice

• Consider adding a savings clause:• This release is intended to be as broad as is permitted

under applicable law. If any portion of this release is held invalid, you agree that the remainder of the release shall remain valid.

• Consider other risk transfer strategies•Contractual Indemnification•Additional Insured Status•Your company’s own insurance

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Charitable Immunity: Maryland

• Charities are immune from tort liability• Agent is not personally liable for damages if:

• Organization maintains liability insurance• Insurance provides coverage for subject matter of the suit; no merit

to any denial• Insurance meets minimum limits ($200k per claim) and maximum

deductible ($10k)• No malice or gross negligence

• An “[I]nsurer may not assert the defense that the insured is immune from liability because it is a charitable institution.” – MD Ins. Code § 19-103

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Charitable Immunity: Virginia

• Charities are immune from liability to beneficiaries for negligence arising from acts of servants and agents• Must exercise due care in selection and retention of

servants and agents • Does not apply to invitees or strangers• Does not apply to gross, willful, or wanton negligence

• Multifactor test to determine if organization is a “charity,” but non-profit status is key

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Charitable Immunity: DC

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Questions?

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