The Nuts and Bolts of Contractual Liability Exposures and Coverage

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. Indemnitor Buyer of Goods Seller of Goods Subcontractor General Contractor Indemnitee Seller of Goods Purchaser of Goods General Contractor Project Owner Some Common Indemnitor and Indemnitee Relationships

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 SUBCONTRACTORINDEMNITOR GENERAL CONTRACTORINDEMNITEE CONTRACT INSURANCE THIRDPARTY

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

11. Hold Harmless Agreements LIMITEDIndemnitor’sSoleNegligence BROADIndemnitee’sSoleNegligence INTERMEDIATEIndemnitor’s SoleNegligence orJoint Negligence

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

13. 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] Maryland [I] New Jersey [AUI] Ohio [AUI] South Carolina [I] Virginia [AI] West Virginia [I] States With Anti-Indemnity StatutesVoid For Sole NegligenceSubject To An Insurance Exception

15. 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] States With Anti-Indemnity StatutesVoid For Sole/Partial NegligenceSubject To An Insurance Exception

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 StatutesVoid For Sole NegligenceAnd No Insurance Exception

18. States With Anti-Indemnity StatutesVoid For Sole/Partial NegligenceAnd With No Insurance Exception • Colorado • Florida • New Mexico • North Dakota • Oregon

19. States With No Anti-Indemnity StatutesAnd Do Not Void Hold Harmless Provisions • Alabama • Iowa • Maine • Nevada • Pennsylvania • Vermont • Wisconsin • Wyoming

20. States That Hold Void Sole NegligenceBy 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 • AMunicipal Agreement • Sidetrack Agreement

24. Sidetrack Agreements 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 24 17 Removes Exclusion • Indemnification of Architect • Professional for Architect

29. Exclusions In“Insured Contracts” • Railroad Construction Operations • CG 24 27 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-PartyLawsuit A Suit Indemnity AI Endorsement InjuredEmployee Contractor CGL WorkersComp 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 21 39 is a virtual wipe-out • The Amendment of Insured Contract Definition Endorsement GC 24 26 will create gaps in states where sole fault assumptions are still permitted

41. Other Questions?