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Risk Shifting: Indemnity & AI Provisions in a
Construction Contract Wednesday, August 15, 2012
Presented By the IADC Construction Law & Litigation Committee
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Presenters
Gene Backus Backus, Carranza & Burden,
Las Vegas, NV [email protected]
Lawrence J. West
Johnson, Trent, West & Taylor
Houston, TX
BACKUS, CARRANZA & BURDEN
Attorneys and Counselors at Law
INDEMNIFICATION
Gene Backus, Esq.
BACKUS, CARRANZA & BURDEN Attorneys and Counselors at Law
"OUR EXPERIENCE. YOUR VICTORY."
What is Indemnity?
Indemnity., n. 1. A duty to make good any loss, damage, or liability incurred by another.
What does this exactly mean?
• Indemnity allows persons extinguishing their individual tort liabilities to seek reimbursement in part or in full from other responsible parties.
For example ….
I‘m tryin’ ta think, but nuthin’ happens!
Moe
a/k/a the “indemnitor”
Curly
a/k/a the “injured”
Larry
a/k/a the “indemnitee”
COMMON LAW
• Noncontractual or Equitable Indemnity
• Elements
• Impact of economic loss doctrine
• Contractual
– Express – how to determine scope?
– Implied – which doctrines govern?
Elements of Proof - Equitable
• Indemnitee (Larry) has discharged a legal obligation owed to a third party (Curly);
• The party from whom it seeks liability (Moe) also was liable to the third party (Curly); and
• As between the claimant (Larry) and the party from whom it seeks indemnity (Moe), the obligation ought to be discharged by the latter (Moe).
Existence of Nexus or Special Relationship
In order for one tortfeasor to be in a position of secondary responsibility vis-à-vis another tortfeasor, and thus be entitled to indemnification, there must be a preexisting legal relationship between them, or some duty on the part of the primary tortfeasor to protect the secondary tortfeasor.
Moe and Larry have to have nexus/relationship Does Larry have a duty to protect Moe? Does Larry have a pre-existing legal relationship with Moe? Doesn’t matter that Moe and Larry both have duty of care to
Curly?
COMMON LAW
• Noncontractual or Equitable Indemnity
• Elements
• Impact of economic loss doctrine
Contractual Indemnity • Two parties agree that one party will reimburse
the other party for liability resulting from the former’s work pursuant to a contractual provision.
• Who is entitled to enforce such contractual indemnity provision? – Indemnitee
– Third-Party Beneficiary
– Indemnitee’s Assignee • Must have an agreement clearly creating a direct obligation to
assume such indemnity obligation
• The indemnitor assumes any and all liability regardless of fault, even if that liability is due to the indemnitee’s sole negligence.
Broad Form Indemnity Clause
• Release of indemnitor for the sole negligence of the indemnitee, but indemnitor assumes liability for any joint negligence with the indemnitee no matter the degree of the indemnitee’s liability.
Intermediate Form Indemnity Clause
• Mirrors comparative fault laws where the indemnitor is only liable to the extent of its own negligence or fault.
Limited Form or Comparative Fault Indemnity Clause
AIA A201 – 2007, §3.18 § 3.18.1 To the fullest extent permitted by law the Contractor shall indemnify
and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section 3.18.
OTHER CLAUSES & ALTERNATE CLAUSES
• CONSENSUS DOCS
• ENGINEERS JOINT CONTRACT DOCUMENTS COMMITTEE
• ALTERNATE CONTRACT LANGUAGE – LIMIT THE LIABILITY OF THE C OR SC TO ITS INSURED LIMITS
REQUIRED UNDER CONTRACT DOCUMENTS
– EXCLUDE INDEMNIFICATION FOR CERTAIN ACTS OR OMISSIONS OF THE DESIGN PROFESSIONAL THAT ARE NOT INSURABLE
– REQUIRE THE C TO DEFEND AND INDEMNIFY THE O FOR ALL CLAIMS ARISING OUT OF THE WORK EVEN IF SUCH CLAIMS ARE ECONOMIC LOSSES
What about validity of indemnity clauses?
If no anti-indemnity statute, analysis of any indemnity clause will be
based on common law principles.
Usually strict construction
LARRY,is AI our safety line?
Additional Insurance – What is it?
• Is a risk shifting method that requires one party to obtain insurance coverage for another party.
• Named Insured – the party whose policy is providing coverage.
• Additional Insured – the party seeking to taking advantage of another party’s coverage.
How Do You Get It?
• For AI coverage, you typically need a contract that includes:
1) an indemnity provision, and
2) a requirement to obtain insurance as well as
3) an AI endorsement in the insurance policy.
What are the Benefits?
• Insurance coverage without having to pay insurance premiums.
• Such coverage does not negatively affect AI’s own coverage.
• No burden of satisfying deductibles.
• Provides deep pocket in case indemnitor has no assets.
• Reimbursement for at least a portion of attorney’s fees.
• Provides coverage for AI’s own negligence which is particularly important if you live in a State like Texas which prohibits indemnification for one’s own negligence
Disadvantages for AI
• If carrier agrees to pick up the defense early on, it may select counsel.
• The AI may, therefore, lose control over the defense.
• Limits must be shared among all insureds (i.e., Named Insured and AI).
Benefits for the Named Insured
• Allows transfer of the obligation to defend and indemnify to the insurance company (rather than having to bear the financial burden itself).
Disadvantages for Named Insured
• Erosion of limits shared by Named Insured and Additional Insured.
• Higher premiums down the road based on loss experience.
Contracts Which Typically Include a Provision Requiring AI Coverage
• Construction contracts – GC typically requires subs to identify it as an AI on
sub’s insurance policies.
• Vendor/Vendee contracts – Vendor typically requires AI coverage on
manufacturer’s policy.
• Contracts for equipment leasing – Lessor typically requires AI status on Lessee’s
insurance.
Merely Being Identified on the Certificate is Not Effective
• Appearing on the Certificate of Insurance as a “Named Insured” does not mean the entity is an Additional Insured.
• Unless the entity is named in an endorsement, there is no AI status.
• Thus, a Certificate of Insurance is not proof of insurance. • The Certificate of Insurance has in small type that AI coverage
requires an endorsement. “This Certificate is issued as a matter of information only and
confers no rights upon the certificate holder… IMPORTANT: If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed.”
(ACORD Form 25 (2009/09).
Tips for Confirming AI Coverage
• During the honeymoon period immediately after the execution of the contract, the entity wanting AI coverage should request a full copy of the Named Insured’s policy.
• Of course, most insurance companies do not like to turn over a copy of their policy.
• In that event, at least request the AI endorsements.
What Constitutes Timely Notice Obligation
• The CGL policy typically states that an insured must give notice as soon as practicable of an occurrence that may result in a claim under the policy.
Where Should the AI Claim Be Sent
• The demand for additional insurance must be sent to the Named Insured’s carrier.
• In a construction defect case, an AI claim made by the GC should be sent to the sub’s carrier.
• A courtesy copy should be sent to the sub’s attorney (if they have one) or directly to the sub (if they are not represented by counsel).
• A demand only to the sub’s attorney is ineffective. There is no obligation for the sub’s lawyer to forward it to the carrier.
What Should the AI Demand Say?
• I recommend including a heading that reads: Demand for Defense and Indemnity to remove any ambiguity.
• Enclose a copy of the latest petition in the underlying lawsuit. • The notice should include a reminder that ABC insurance
company furnished CGL coverage to the Named Insured during the relevant time period for the project in question.
• It should reference the policy number and attach the Certificate of Insurance and actual policy, if available.
• Finally, the letter should point out that the entity seeking AI coverage was named as an Additional Insured in the policy.
ABC Insurance Co. RE: Cause No. 2011 Innocent Owner v. General Contractor DEMAND FOR DEFENSE AND INDEMINTY Dear Sir or Madam: I am enclosing a copy of Plaintiff’s Original Petition in connection with the above-referenced lawsuit filed against my client General Contractor (“GC”) in connection with the xyz Condo project (“Project”) in Houston, Texas. ABC Insurance Co. (“ABC”) furnished commercial general liability insurance coverage to Evil Subcontractor (“Subcontractor”) from September 1, 2009 to September 1, 2010 under Policy Number L-076001004 (the “Policy”) in connection with the Project. I am attaching ABC’s insurance certificate for reference. The GC is an additional insured under the Policy. The Plaintiff alleges that the Project has significant design and construction problems causing significant and continuous water infiltration into the building. Please allow this to serve as the GC’s demand for defense and indemnity under the Policy. The GC hereby demands that ABC defend and indemnify the GC against this lawsuit brought by the Plaintiff. Very truly yours,
Duty to Defend and Indemnify in Texas
• Texas Courts have routinely recognized that the duty to defend and the duty to indemnify are separate and distinct duties.
• Duty to defend is a question of law for the court and is governed by the 8 corners rule (a/k/a the complaint-allegation rule).
• The 8 corners rule means the Court only looks at two documents: the latest petition and the insurance policy.
• For a duty to defend, the petition must allege facts that would at least trigger a duty to provide coverage.
Can There Be More Than One AI Carrier
• Yes, there can be multiple AI carriers.
• In construction defect litigation, it is quite common for the GC to require each of its subs to name it as an AI.
• If there are four subs and each has an insurance policy naming the GC as an AI, each carrier may share the obligation to defend and indemnify.
Gilbane v. Admiral Ins. Co. WL 6153370 (5th Cir. 2011)
Background facts: • Michael Parr was injured while climbing down a
ladder on a construction site. His employer (a subcontractor on the job) provided Workers’ Comp coverage and as a result was insulated from further liability. Parr filed suit against Gilbane Bldg. Co., the GC on the project and Baker Concrete, the company responsible for installing and maintaining the ladders at the site.
• Parr alleged that Gilbane failed to keep the worksite free of mud which allegedly caused him to slip on the ladder.
• Gilbane sought coverage as an AI under the CGL policy issued by Admiral Ins. to Parr’s employer (the subcontractor).
• The AI endorsement provided coverage for ongoing operations “but only if coverage as an AI is required by written contract or written agreement that is an insured contract” and only if the “property damage” was “caused in whole or in part by *employer’s acts or omissions+”.
• Admiral denied coverage and Gilbane and Parr settled the underlying lawsuit.
• Gilbane filed a Dec Action against the employer and Admiral contending Admiral had an obligation to defend and indemnify Gilbane.
• Admiral argued that because the indemnity agreement in the contract was unenforceable under Texas law, Gilbane was not covered as an AI.
• District Court rejected this argument finding that the indemnity and insurance provisions were separate clauses that do not reference each other, are not intertwined or interrelated and on their face stand independently as separate obligations.
• The 5th Circuit affirmed finding that the indemnity agreement, even though unenforceable met the policies definition of an insured contract and that Gilbane was an additional insured.
• The 5th Circuit noted that in the contract agreement, the employer “contracted not only to indemnify Gilbane but also to secure insurance on its behalf; by doing so, it agreed to assume Gilbane’s tort liability. That provision is not rendered void by the indemnity provision, even if it is unenforceable” (Gilbane at 5). Having found that the contract agreement was an insured contract, the Court turned to whether the pleadings against Gilbane were sufficient to trigger the duty to defend. In other words, the Court looked to the 8 corners rule.
• Conclusion: It may be in the insurance carrier’s best interest to accept the defense on the front end in order to control the defense of the underlying litigation so as to minimize any risk of indemnity.
Questions for Presenters?
Gene Backus Backus, Carranza & Burden,
Las Vegas, NV [email protected]
Lawrence J. West
Johnson, Trent, West & Taylor
Houston, TX
BACKUS, CARRANZA & BURDEN
Attorneys and Counselors at Law
Risk Shifting: Indemnity & AI Provisions in
a Construction Contract
Wednesday, August 15, 2012
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