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RISK TRANSFER SEMINAR

RISK TRANSFER SEMINAR. YCPARMIA TRAINING 2006 Learn more about us at: www.ycparmia.com. PURPOSE. The object of risk transfer is to shift potential risks to another party. RISK = Uncertainty Of Loss. Risk Management Theory. Factors Affecting Contractual Risk Transfer. Control of Risk

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RISK TRANSFER SEMINAR

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  1. RISK TRANSFER SEMINAR YCPARMIA TRAINING 2006 Learn more about us at: www.ycparmia.com

  2. PURPOSE The object of risk transfer is to shift potential risks to another party. RISK = Uncertainty Of Loss

  3. Risk Management Theory

  4. Factors Affecting Contractual Risk Transfer • Control of Risk • Knowledge of Risk • Legal Limitations on Risk Transfer • Custom and Practice • Bargaining Position • Size • Competitive Marketplace • Reputation of the Parties

  5. Key Contract Provisions • Indemnity Clauses • Liability Limitation and Exculpatory Provisions • Waivers of Subrogation • Insurance Requirements • Assure the financial viability • Provide a coordinated insurance program • Fund a recovery of third party damages • Support the indemnity provisions of the contract

  6. Strategies for Transferring Riskto Others • Observe Legal Limitations • Back up Indemnity Provisions with Insurance Requirements • Reasonable • Flexible • Update Requirements • Additional Insured Status • Shared Limits • Completed Operations Coverage • “Other Insurance”

  7. Strategies for Transferring Riskto Others • Verify Compliance with Insurance Requirements • Certificates of Insurance • Errors • Notice of Cancellation – “endeavor”

  8. INDEMNITY AGREEMENTS

  9. Indemnity Agreement • Hold Harmless and Indemnification are the same thing • The indemnitor assumes the liability of the indemnitee • Completely independent of insurance coverage • The Agreement does not relieve the indemnitee of liability to the injured party • Classified based on the scope of obligation

  10. Indemnity Types4 = What is the “scope of the obligation?” • Broad Form - transfers the entire risk = All claims arising from or in “connection with” • “Should do so expressly and unequivocally so that the contracting party is advised in definite terms of liability to which it is exposed.” • Cal. Civil Code 2782 prohibits transferring indemnitee’s sole negligence in construction or design contracts

  11. Indemnity Types • Intermediate Form • Assumes all liabilities except those caused by indemnitee’s sole negligence • Limited Form (or Comparative Fault) • Obligates indemnitor only to extent of its own fault • Hybrid Form • Broad form for some risks and comparative for other risks

  12. Sample Agreement #1 “Contractor shall indemnify, defend, and hold harmless entity and its officers, officials, employees and volunteers from and against any and all liability, loss, damage, expense, costs (including without limitation costs and fees of litigation) of every nature arising out of or in connection with contractor’s performance of work hereunder or its failure to comply with any of its obligations contained in the agreement, except such loss or damage which was caused by the sole negligence or willful misconduct of the entity.”

  13. Sample Agreement #1 • Take out the indemnity statement: “Contractor shall indemnify, defend and hold harmless” “Contractor shall indemnify, defend, and hold harmless entity and its officers, officials, employees and volunteers from and against any and all liability, loss, damage, expense, costs (including without limitation costs and fees of litigation) of every nature arising out of or in connection with contractor’s performance of work hereunder or its failure to comply with any of its obligations contained in the agreement, except such loss or damage which was caused by the sole negligence or willful misconduct of the entity.”

  14. Sample Agreement #1 2. Take out the who: “entity and its officers, officials, employees and volunteers” “Contractor shall indemnify, defend, and hold harmlessentity and its officers, officials, employees and volunteers from and against any and all liability, loss, damage, expense, costs (including without limitation costs and fees of litigation) of every nature arising out of or in connection with contractor’s performance of work hereunder or its failure to comply with any of its obligations contained in the agreement, except such loss or damage which was caused by the sole negligence or willful misconduct of the entity.”

  15. Sample Agreement #1 3. Take out the from what: “from and against any and all liability, loss, damage, expense, costs (including without limitation costs and fees of litigation) of every nature” “Contractor shall indemnify, defend, and hold harmless entity and its officers, officials, employees and volunteersfrom and against any and all liability, loss, damage, expense, costs (including without limitation costs and fees of litigation) of every nature arising out of or in connection with contractor’s performance of work hereunder or its failure to comply with any of its obligations contained in the agreement, except such loss or damage which was caused by the sole negligence or willful misconduct of the entity.”

  16. Sample Agreement #1 4. Take out the from limitations: “except such loss or damage which was caused by the sole negligence or willful misconduct of the entity” “Contractor shall indemnify, defend, and hold harmless entity and its officers, officials, employees and volunteers from and against any and all liability, loss, damage, expense, costs (including without limitation costs and fees of litigation) of every nature arising out of or in connection with contractor’s performance of work hereunder or its failure to comply with any of its obligations contained in the agreement, except such loss or damage which was caused by the sole negligence or willful misconduct of the entity.”

  17. Sample Agreement #1 • What is left is the scope: “arising out of or in connection with contractor’s performance of work hereunder or its failure to comply with any of its obligations contained in the agreement” “Contractor shall indemnify, defend, and hold harmless entity and its officers, officials, employees and volunteers from and against any and all liability, loss, damage, expense, costs (including without limitation costs and fees of litigation) of every naturearising out of or in connection with contractor’s performance of work hereunder or its failure to comply with any of its obligations contained in the agreement,except such loss or damage which was caused by the sole negligence or willful misconduct of the entity.”

  18. Sample Agreement #2 “ To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner and the Architect and their agents and employees from and against all claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from the performance of the Work, provided that any such claim, damage, loss or expense (i) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself) including loss of use resulting there from and (ii) is caused in whole or in part by any negligent act or omission of the Contractor, any subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder…”

  19. Sample Agreement #2 • Take out the indemnity statement: “To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless “To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner and the Architect and their agents and employees from and against all claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from the performance of the Work, provided that any such claim, damage, loss or expense (i) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself) including loss of use resulting there from and (ii) is caused in whole or in part by any negligent act or omission of the Contractor, any subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder…”

  20. Sample Agreement #2 2. Take out the who: “the Owner, and the Architect and their agents and employees” “To the fullest extent permitted by law, the Contractor shall indemnify and hold harmlessthe Owner and the Architect and their agents and employees from and against all claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from the performance of the Work, provided that any such claim, damage, loss or expense (i) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself) including loss of use resulting there from and (ii) is caused in whole or in part by any negligent act or omission of the Contractor, any subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder…”

  21. Sample Agreement #2 • Take out the from what: “from and against all claims, damages, losses and expenses, including but not limited to attorneys’ fees,” “To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner and the Architect and their agents and employeesfrom and against all claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from the performance of the Work, provided that any such claim, damage, loss or expense (i) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself) including loss of use resulting there from and (ii) is caused in whole or in part by any negligent act or omission of the Contractor, any subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder…”

  22. Sample Agreement #2 4. Take out the limitations: “provided that any such claim, damage, loss or expense (i) is attributable to bodily injury… (ii) is caused in whole or in part by any negligent act or omission of the Contractor… regardless of whether or not it is caused in part by a party indemnified hereunder…” “employees from and against all claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from the performance of the Work, provided that any such claim, damage, loss or expense (i) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself) including loss of use resulting there from and (ii) is caused in whole or in part by any negligent act or omission of the Contractor, any subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder…”

  23. Sample Agreement #2 What is left is the scope: “arising out of or resulting from the performance of the Work” “employees from and against all claims, damages, losses and expenses, including but not limited to attorneys’ fees,arising out of or resulting from the performance of the Work,provided that any such claim, damage, loss or expense (i) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself) including loss of use resulting there from and (ii) is caused in whole or in part by any negligent act or omission of the Contractor, any subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder…”

  24. Indemnity Issues • Does the injury or damage fall within the subject matter of the hold harmless clause? • Arising from or arising under • Arising out of the project • Arising out of, incident to, or in connection with the agreement or the performance of the work or services hereunder… • Arising out of or resulting from the performance by … • Broad interpretation with a “but for” test • Narrow interpretation of “clear and unequivocal” (CA)

  25. Indemnity Issues • Indemnity Clauses • Scope • Subject Matter • DURATION • When a contract terminates the clauses within also terminate • Absent clear and unequivocal language • Contrast Additional Insured Status under the insurance policy

  26. Waivers Of Subrogation

  27. Waivers of Subrogation Doctrine of 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 third party, who was responsible for causing the loss.

  28. Waivers of SubrogationInsurance • Insurance payments; LC 3852 re: Workers’ Comp • Helps reduce insurance costs/premiums • Can be reduced by comparative against employer • Limited to the rights of the insured – Waiving the right to recover • Allocation of recoveries- who gets paid first? • Insured cannot prejudice the subrogation rights of the insurer • Post-loss vs. pre-loss waivers • WC double recover with waiver of subrogation • Subrogation is not waived; the derivative right is • Most policies allow a pre-loss waiver; but examine the policy • Endorsing a waiver of recovery may cause additional premium • Generally an insurer cannot subrogate against its insured, nor its additional insured

  29. Contractual Liability Coverage

  30. Contractual Liability Coverage INSURANCE: THE MONEY BEHIND THE PROMISE

  31. Contractual Liability Coverage (Standard Forms) • ISO forms and edition dates • Manuscript and non-ISO forms

  32. Contractual Liability Coverage (Standard Forms) • Commercial General Liability Policy (CGL) • Automatically provides insureds with “broad form blanket contractual liability coverage” • 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 the 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.

  33. Contractual Liability Coverage (Standard Forms) • Contract Exclusion – This insurance does not apply to… “Bodily Injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages: (1) that the insured would have in the absence of the contract or agreement; or (2) 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.

  34. Contractual Liability Coverage (Standard Forms) • Insured Contract Definition – “Insured Contract” means: • A contract for a lease of premises… • A sidetrack agreement • Any easement or license agreement… • An obligation, as required by ordinance, to indemnify a municipality, except in connection with work for a municipality • An elevator maintenance agreement

  35. Contractual Liability Coverage (Standard Forms) • That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for “BI” or “PD” to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement. • Does not include that part of any contract or agreement: • That indemnifies a railroad…arising out of construction…within 50 feet of any roadbed… • That indemnifies an architect, engineer or surveyor arising out of…preparing plans, maps… • Under which the insured, if an architect, engineer, or surveyor…

  36. Contractual Liability Coverage (Standard Forms) • Business Auto Policy (BAP) • For our purposes: coverage comparable to the CGL • An insured contract includes a car rental agreement, but excludes paying for damage to the rented vehicle • Does not cover a vehicle leased “with a driver”

  37. Contractual Liability Coverage (Standard Forms) • Umbrella and Excess Policies • Language varies among insurers • Coverage for contracts has traditionally been very broad

  38. Contractual Liability Coverage (Standard Forms) • Professional Liability Policies • CGL policies generally exclude professional services • Language varies among insurers and types of professionals • Coverage for assumption of another’s professional liability is usually limited to the same kind for which the insured is covered • Contract exclusion might limit coverage to acts of the insured • CGL is needed for non-professional indemnity agreements

  39. Contractual Liability Coverage (Standard Forms) • Pollution Liability Insurance (CPL) • CGL usually excludes coverage • Written on a scheduled project basis • Has contract exclusion subject to exceptions for “covered contracts” • Indemnity agreement between the named insured contractor and the client is a “covered contract” • Some require a schedule of indemnity agreements

  40. ADDITIONAL INSURED

  41. Additional Insured • Require the indemnitor to obtain coverage against the loss on behalf of the indemnitee • Or arrange for its own insurance coverage to be modified to cover the indemnitee • Declaration Page • Named insureds • More stringent occurrence reporting requirements • Employees, executive officers and directors are insured • Certain exclusions only apply to the named insured • Must pay the deductible • Must pay the premium • May cancel the policy • Only the “first” named insured receives the cancellation notice • Other persons who qualify as insureds based on their relationship with the named insured • Other entities may be added as insureds by means of endorsement

  42. Reasons To RequireAdditional Insured Status • Problems with the Hold Harmless • Chevron USA v Bragg Crane (Cal App) – while there is a limit to the amount of risk that can be transferred under an indemnity contract, there is no such limit on obtaining insurance • Note: scope of coverage will not always match up with indemnity agreement- Additional insured status is not an alternative • Direct right of defense • Subrogation- generally an insurer cannot subrogate against its insured • Protection maybe limited so consider a waiver of subrogation • Personal injury coverage is added only if indemnitee is an insured • Obtaining coverage not otherwise available (ex. Malpractice) • Unenforceable indemnity agreement

  43. “Other Insurance” - CGL • Interplay between the indemnitee’s CGL and the Indemnitor’s CGL (additional insured) • Standard pre-1997 CGL coverage is primary but contributory • Current CGL: excess over any other primary insurance for which you have been added as an additional insured by “attachment of endorsement” • “Primary and non-contributory” endorsement • Breach of contract on primary issue • Umbrella policies are not standard forms

  44. Completed Operations • Losses that arise after the work has been completed and accepted • Pre-1993 additional insured endorsements included completed operations coverage- arising out of “your work” • Post-1993 additional insured endorsements limit coverage to “liability arising out of your ongoing operations”

  45. Endorsements • CG 20 10 – Owners, Lessees or Contractors • Most widely used • “Arising out of” • CG 20 09 – Owners, Lessees or Contractors • Attached to policies that do not provide contractual liability coverage • Covers vicarious liability and general supervision • CG 20 11 – Managers or Lessors of Premises • Coverage ends when no longer a tenant • Only that part of the premises leased to you • CG 20 12 – State or Political Subdivisions—Permits • CG 20 33 – Owners, Lessees or Contractors—Automatic Status When Required in Construction Agreement • Does not have to be issued naming the specific party • Limited to the time during which operations are actually being performed • CG 20 07 – Engineers, Architects or Surveyors: excludes professional liability

  46. Endorsements • Umbrella policy will usually follow underlying policy • No endorsement, but handled in the policy • Cancellation Notice • Policy only requires notice to the “first named insured” • California Insurance Code section 677.2(b) “…named insured at the mailing address shown on the policy…”

  47. Additional InsuredAuto Liability • Vicarious Auto Liability extended in the “who is an insured” section by covering anyone liable for the conduct of an insured • CA 20 48 – Designated Insured Endorsement- restates “who is an insured”

  48. Additional InsuredCommercial Property • Requires an insurable interest in the insured property • Loss payee • No standard additional insured form • The main advantage would be to cut off subrogation liens • Builder’s Risk—shifting interests and no subrogation

  49. Additional InsuredWorkers’ Compensation • Generally cannot be named as an additional insured • Organization may be responsible if contractor fails to purchase • Require the contractor to have coverage • Subrogation • Require the contractor to name you on the CGL • Hold-harmless clause • A waiver of subrogation (does not protect against an employee action)

  50. Additional InsuredThird-Party-Over Action • Injured employee collects on workers comp from employer, then • Sues a third party contributing to the injury; • The third party tenders back to the employer under an indemnity contract/additional insured provision

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