EMERGING TRENDS IN CONTRACTUAL RISK TRANSFER

1. EMERGING TRENDS IN CONTRACTUAL RISK TRANSFER Jeffrey J. Vita – Saxe Doernberger & Vita, PC Timothy B. Walker – Willis North America San Antonio, Texas September 20, 2012

2. Two Key Methods of Contractual Risk Transfer • Indemnity – Downstream party agrees to indemnify upstream party from project related losses • Insurance– Downstream party agrees to purchase insurance which covers upstream party as an “additional insured”

3. COMPETING OBJECTIVES • Upstream Parties (Owners and Contractors) goal: transfer as much risk as possible • Downstream Parties and Insurers goal: avoid as much risk from upstream parties as possible • Same objective: Minimize loss exposure, retain limits in own policies, and maintain good insurance loss history/rating

4. The Pendulum is Shifting • State statutes and more restrictive AI endorsements limit Upstream Parties’ ability to transfer risk

5. Indemnity Three Main Categories: Indemnitor (Downstream Party) is solely negligent Indemnitee (Upstream Party) is solely negligent Both parties are partially (concurrently) negligent

6. Indemnity Enforceability • Most states have anti-indemnity statutes • Legislative response to perceived inequities caused by greater bargaining strength and leverage of the Upstream Party – All states allow for indemnification of sole negligence of indemnitor – Approximately 25 states allow for partial indemnification for concurrent negligence – Approximately 16 states allow for full indemnification for concurrent negligence – A small minority of states allow indemnification for sole negligence of the indemnitee • The trend is towards greater indemnity restrictions, reducing upstream party advantage

7. What Happens to Non-Compliant Language? • Some states void the entire indemnity provision • Some states void only the offending language • Some states allow “savings” language such as “to the fullest extent permitted by law”

8. Additional Insured Coverage Sizeable advantages for Upstream Party: • Usually covers own negligence • Potentially avoid claims between parties • Prohibits subrogation • Protects own corporate insurance program

9. Additional Insured CoverageKey Issues Impacting AI value • Scope of AI Coverage • “Arising Out Of” • “Ongoing Operations” • “Caused in Whole or in Part By” • “When you and such person have agreed in writing” • Limits Of Liability – Policy Limits (shared), Minimum amount required by contract. • “Other Insurance” and Exhaustion – Primary and Non-Contributory, Pro-Rata

10. Scope of AI CoverageIt’s Shrinking… Insuring industry response to adverse case law CG 20 33 07 04 Only applies “when you and such person or organization have agreed in writing in a contract”

11. 2004 AI Endorsements Shrinking the Pie of Coverage Available to AI’s • “Caused in whole or in part by” is narrower than “arising out of” • GC 20 10 10 93, CG 20 10 10 01, and CG 20 10 07 04 only apply to ongoing operations and only while the sub is on the job • Privityrequirement of CG 20 33 07 04 can have effect of abolishing AI coverage for CM and/or Owner, which do not have written contracts with the named insured subs

12. PREFERABLE CONTRACT LANGUAGE RE: AI REQUIRMENT (FOR UPSTREAM PARTY) Sample Language: Subcontractor is required to add contractor as an additional insured per (CG 20 10 11 85) endorsement or equivalent (CG 20 10 10 01 is acceptable if it is accompanied by CG 20 37 10 01). All insurance, whether issued on a primary or excess basis, afforded the additional insureds shall be primary insurance to any other insurance available to the additional insureds and that any other insurance carried by the additional insureds shall be excess of all other insurance carried by the Subcontractor and shall not contribute with the Subcontractor’s insurance.

13. Oh No You Don’t! Handful of states prohibit Upstream Party from requiring Sub to obtain AI Coverage that protects CG from its own negligence. Ex. Colorado, Georgia, Montana, New Mexico, Oklahoma, Oregon and Texas. The Pie Continues to Shrink!

14. Adequate Limits? AI Endorsement may limit coverage to that which is minimally required by contract; E.g.: The limits of insurance afforded to such person(s) or organization(s) will be: The minimum limits of insurance which you agreed to provide, or The limits of insurance of this policy whichever is less.

15. Priority of Coverage Two Schools of Thought: POLICY LANGUAGE CONTROLS - Review language of competing policies’, primary/excess language and “other insurance” clauses TRADE AGREEMENT CONTROLS - Determine intent of parties regarding risk transfer by reviewing underlying contract

16. Priority of Coverage Compare Horizontal Exhaustion • All available primary policies must exhaust first • Focus on policy language, not underlying contract • Excess policy is a payer of last resort (as reflected by premium) With Vertical Exhaustion • AI policies (primary & excess) exhaust before Upstream Party’s primary policy • Focus on underlying contract’s indemnity obligation, not policy language / Reflects intent of parties • Avoids circuity of litigation

17. CIRCUITY OF LITIGATION • Vertical exhaustion avoids time and cost of litigation incurred by horizontal exhaustion because the loss is ultimately paid by sub’s carrier any way • Stringent anti-indemnity statutes diminish circuity argument - as AI coverage does not mirror indemnity coverage provided to sub

18. TAKE MY ADVICE! • Know the law of the relevant jurisdiction • Conform trade contracts to relevant law, to maximize recovery and avoid forfeiture by offensive language. • Always obtain and review AI endorsements • Consider consolidated insurance (“wrap-up”) programs, which may help avoid indemnity and AI issues involved in traditional programs

19. QUESTIONS?

20. Thank You! Timothy B. Walker Timothy.b.walker@willis.com (212) 915-8481 Jeffrey J. Vita jjv@sdvlaw.com (203) 287-2103