insurance provisions in commercial contracts
TRANSCRIPT
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babc.com ALABAMA I DISTRICT OF COLUMBIA I FLORIDA I MISSISSIPPI I NORTH CAROLINA I TENNESSEE
Insurance Provisions in
Commercial ContractsJuly 21, 2015
Presented By:
Katherine J. Henry
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© 2015 Bradley Arant Boult Cummings LLP
Contract Insurance & Indemnity
Provisions Reallocate Risk
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Today’s Presentation
Discuss contractual allocation of risk
between parties and their insurers
Examples of successful risk allocation
and unsuccessful risk allocation
Three steps to successful risk allocation
– Deliberate
– Designate
– Document
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Risk Allocation Step 1
Deliberate – identify the risk
– Type of risk determines relevant coverage
• Bodily injury or property damage = CGL
• Financial loss = professional liability or E&O
– Amount of risk
• What is the potential financial exposure?
– Availability of existing insurance program to
address the risk
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Risk Allocation Step 2
Designate the placement of the risk
– Different risks with different parties or insurers
– Risks typically with party in best position to
control risk
– Insurance typically runs with the risk
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Risk Allocation Step 2 (cont.)
Which portion of risk should be insured?
– Type
– Amount (consider limits, sublimits, SIRs,
deductibles)
All risks need not be insured through
contract
– Role of parties’ existing insurance programs
Not all risks can be insured
– Deliberate wrongdoing, e.g., is not insurable
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Risk Allocation Step 3
Document
– Contractual terms and conditions
– Proof of counterparty’s insurance
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Potential Gaps In Coverage
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Unsuccessful Risk Allocation
Valley Crest
Regis (Owner)
Valley Crest (GC)
Mission Pools (Sub)
Regis =
Additional Insured
Defense &
indemnity by
contractCGL with
National Union
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Unsuccessful Risk Allocation
Valley Crest Accident
2001: Project Completed
2007: Diving Accident
Epps v. Valley Crest Tender to Mission Pools
Mission Pools 2001-
2004 CGL Policy
“Cancelled”
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Unsuccessful Risk Allocation
Valley Crest Settlement
Regis paid Epps $4.5 million
Valley Crest paid $50,000
– $20,000 to Epps
– $30,000 to Regis
Mission Pools paid $200,000
– $130,000 to Epps
– $70,000 to Regis
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Unsuccessful Risk Allocation
Valley Crest Defense Costs
Valley Crest: $200,000 to defend Regis
Valley Crest: $400,000 to defend itself
Valley Crest paid first $250,000 under its
own CGL’s SIR
National Union paid $400,000
– $50,000 paid to Epps and Regis
– $350,000 in defense costs
Regis responsible for $4.4 million
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Unsuccessful Risk Allocation
Valley Crest Litigation
Epps v. Valley Crest National Union
Valley Crest v. Mission Pools
National Union v. Mission Pools
Assumes Defense
Under
Valley Crest
Policy
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Unsuccessful Risk Allocation
Valley Crest Litigation
Trial Court
– $400,000 to National Union under equitable
subrogation
– $250,000 to Mission Pools under express
indemnity
Appellate Court
– Upheld equitable subrogation
– Reversed for jury trial on express indemnity
claim
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Unsuccessful Risk Allocation
Valley Crest Lessons Learned
Dispute may have been avoided if
Mission Pools had CGL coverage in place
– Policy was cancelled prior to injury
• Cancelled in 2004
• Injury in 2007
• Query whether contract required notice of
cancellation
No waiver of subrogation precluding suit
by National Union
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Avoid Valley Crest
Risk Allocation Steps 1 and 2
Determine Risk
Designate Risk Allocation
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Allocate Risk Through Waiver of
Subrogation
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Allocate Risks to Appropriate Policy
Bodily Injury and Property Damage
– Not arising out of professional services = CGL
– Arising out of professional services =
professional liability or errors & omission
Financial Losses
– Professional services
– Errors & omission
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CGL Coverage for Bodily Injury
and Property Damage
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Occurrence Form
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Claims-Made Form
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CGL – Completed Operations
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Allocate Risk Arising out of
Professional Services - PL
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Allocate Risk Arising out of
Professional Services – E&O
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Claims-Made Professional
Liability
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Potential Gap in Professional Liability
Policy A
“all sums in excess of any
applicable Self-Insured
Retention that the Insured
is legally obligated to pay
as Damages or Claim
Expenses because of a
Claim for an actual or
alleged negligent act, error
or omission in the
rendering of
Policy B
Professional Services
exclusion: “based upon or
arising out of any Wrongful
Act in connection with the
performance of
by or
on behalf of the Insured
Entity for the benefit of
any other entity or natural
person . . . .”
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Successful Risk Allocation
Professional Liability Policy
Architect Business
Risk of Loss
Policy follows risk
Business tenders defense
and liabilities to Architect’s
insurer Architect’s Professional
Liability Policy
Contract to design new space
Accident due to improper design
Injured party sues Business
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Allocate Risk Through Insured Party
Status
Chances of
Coverage
Named Insured
Named Additional Insured
Additional Insured By Name
Additional Insured by Category (Blanket)
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Named Insured
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Additional Named Insured
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Additional Insured
Protects AI from NI’s negligence (except
sole negligence)
Insures AI for its own negligence
Benefits:
– Coverage without premium
– No responsibility for deductibles or SIRs
– No erosion of AI’s policies
By Name or category (Blanket)
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Additional Insureds by Name
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Additional Insureds by Name
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Blanket Additional Insured
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Construction Endorsements
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Construction Endorsements
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Successful Reallocation of Risk
Retail store contracts with printing
company to advertise event
Printing company agrees to indemnify
owner for its own negligence
Printing company three days late and
retail store sustains financial loss
Retail store sues printer for loss
Printer’s errors and omissions policy
provides defense and indemnity
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Successful Reallocation of Risk
Business contracts with billing vendor
Vendor names Business as AI on
Vendor’s professional liability policy
Vendor discloses private information
about Business’ clients
Business’ clients sue Business for
improper disclosure
Insurer defends and indemnifies
Business (and Vendor)
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Allocate Financial Risk
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Policy Limits Determine Amount of
Reallocated Risk
$2,000,000
$1,000,000
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Financial Impact of Deductible vs.
SIR
$100,000
Deductible
$100,000
SIR
$100,000
$900,000
$1,000,000
$100,000
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Consider Impact on Existing
Insurance Program
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Step 3: Document
Contract terms should specify the
responsible parties for each risk
Contract terms should specify the types
of coverage for each risk
– Best to specify forms or equivalents
– Best to specify particular coverages
– Contract should specify the amount of
coverage
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All Policy Components Are Relevant
to Contract
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Declarations
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Insuring Agreements
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Exclusions (CGL)
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Exclusions (Professional Liability)
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Conditions
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Conditions
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Form vs. Endorsement
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Require Proof of Insurance
Policy
Additional Insured Endorsement
Form Numbers
Certificate of Insurance
Proof of
Coverage
Memorandum of Insurance
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Certificate of Insurance Not Binding
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Take Aways
Deliberate
Designate
Document
Avoid Valley Crest outcome
– Unfunded liabilities
– Unintended litigation
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Questions?Katherine J. Henry
202.719.8244
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