Evolving Issues in Contractual Risk Transfer for Contractors
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Transcript Evolving Issues in Contractual Risk Transfer for Contractors
Jeffrey J. Vita – Saxe Doernberger & Vita, PC
Timothy B. Walker – Willis North America
San Antonio, Texas
September 20, 2012
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”
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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
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State statutes and more restrictive AI
endorsements limit Upstream Parties’ ability
to transfer risk
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Three Main Categories:
1. Indemnitor (Downstream Party) is solely
negligent
2. Indemnitee (Upstream Party) is solely
negligent
3. Both parties are partially (concurrently)
negligent
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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
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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”
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Sizeable advantages for
Upstream Party:
Usually covers own
negligence
Potentially avoid claims
between parties
Prohibits subrogation
Protects own corporate insurance
program
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Key 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, ProRata
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It’s Shrinki
ng…
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”
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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
Privity requirement 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
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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.
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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!
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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:
a.The minimum limits of insurance which you agreed
to provide, or
b.The limits of insurance of this policy whichever is
less.
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Two Schools of Thought:
1. POLICY LANGUAGE CONTROLS - Review language of
competing policies’, primary/excess language and
“other insurance” clauses
2. TRADE AGREEMENT CONTROLS - Determine intent of
parties regarding risk transfer by reviewing underlying
contract
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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
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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
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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
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Timothy B. Walker
[email protected]
(212) 915-8481
Jeffrey J. Vita
[email protected]
(203) 287-2103
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