Anthony J. McMahon CNA. 333 S. Wabash Ave., 39 th Floor Chicago, IL (312) Christopher R.

Transcription

1 Transferring Risk: The Interplay of Additional Insured Endorsements and Contractual Indemnity Provisions Anthony J. McMahon CNA 333 S. Wabash Ave., 39 th Floor Chicago, IL (312) Christopher R. Carroll Carroll McNulty & Kull LLC 120 Mountain View Boulevard P.O. Box 650 Basking Ridge, NJ (908)

2 Anthony J. McMahon is a consulting director and attorney with CNA s Coverage Oversight Unit out of its Chicago corporate headquarters. He has overseen coverage matters for CNA s field claim units for the Western and Central United States, as well as its international workers compensation/defense Base Act units. Mr. McMahon began his insurance career with the St. Paul Companies in After completing formal claims training at the St. Paul Company s Washington, D.C., office he was assigned to their Construction Unit in Chicago. While with St. Paul he handled a variety of construction-related cases including wrongful death and construction defect matters. Mr. McMahon has extensive experience in handling additional insured matters including insurance coverage litigation. While working for St. Paul he attended law school at night and obtained his Juris Doctor in 2000 from the John Marshall Law School. Christopher R. Carroll is one of the founding partners of Carroll McNulty & Kull LLC, located in New York and New Jersey, and has extensive experience in resolving complex insurance coverage disputes in all states as well as Puerto Rico and Europe, either through litigation or alternative dispute resolution mechanisms. These matters include insurance coverage disputes involving environmental, toxic tort, asbestos, construction, advertising liability, products, property, automobile, and employment issues. Mr. Carroll graduated magna cum laude from St. Joseph s College in 1988 and then graduated from St. John s University School of Law in He is admitted to practice law before the courts of New York, New Jersey, and Pennsylvania. Mr. Carroll is a frequent lecturer on numerous litigation and insurance topics, including bad faith, construction defect, toxic tort, hazardous waste, and advertising liability. He is AV-Rated by Martindale-Hubbell and is on the Editorial Advisory Board of Insurance Law & Litigation Week. Mr. Carroll also is a member of the Board of Trustees of St. Joseph s College. In 2009, he was named to Martindale-Hubbell s Bar Register of Preeminent Lawyers.

3 Transferring Risk: The Interplay of Additional Insured Endorsements and Contractual Indemnity Provisions Table of Contents I. Introduction II. A Brief Overview of Current Additional Insured Endorsements A. The Evolution of the CG 2010 and the Arising Out Of Versus Caused By Language of the Additional Insured Endorsement B. Non-Standard Additional Insured Endorsements and Vicarious Liability III. Contractual Indemnity or Hold Harmless Provisions IV. Interplay Between Contractual Indemnity Provisions and Additional Insured Endorsements A. Does the Scope of the Indemnity Agreement Define the Scope of Additional Insured Coverage? B. Potential New Trend in Statutory Prohibition/Interpretation of Additional Insured Coverage V. Contractual Indemnification Clauses as a Gap Filler and the Supplementary Payments Section of the CGL Policy VI. Pros/Cons of Contractual Indemnity Agreements and Additional Insured Coverage A. Contractual Indemnity Agreements Pros Cons B. Additional Insured Coverage Pros Cons VII. Conclusion Exhibit A Transferring Risk: The Interplay of Additional Insured... McMahon and Carroll 141

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5 Transferring Risk: The Interplay of Additional Insured Endorsements and Contractual Indemnity Provisions I. Introduction Thank you for attending our break-out session in which we will be focusing upon the interplay of additional insured coverage and contractual indemnification requirements in the context of risk transfer. The purpose of this manuscript is to analyze the relationship and interaction of contractual indemnification provisions in an underlying contract as well as additional insured endorsements/provisions typically encountered in liability insurance policies. Nearly every modern business relationship involves a written contract that typically requires Company A to defend and indemnify Company B for certain injuries and damages arising out of the Companies business relationship. As discussed more fully below, these contractual indemnity agreements may take many forms. They may provide for mutual indemnification between the Companies or may only apply to the extent that the Company required to indemnify (i.e., the indemnitor) was negligent. Depending upon the type of business relationship, the scope and enforceability of these contractual indemnity agreements may also be affected by statutes which specifically prohibit certain types of indemnification under specific circumstances. Often, these written contracts between the companies require, in addition to the contractual indemnity obligations, Company A to procure insurance coverage in favor of Company B. We will analyze below some of the typical additional insured endorsements encountered under commercial general liability insurance policies as well as the scope of coverage afforded under such endorsements. Some of these additional insured endorsements specifically reference an underlying indemnity agreement (i.e., an insured contract ) and virtually all require a written contract that obligates the named insured to procure insurance coverage for the additional insured. These types of endorsements typically raise a number of insurance coverage issues, particularly with respect to the interrelationship between contractual indemnity obligations and the scope of additional insured coverage afforded under the policy. For instance, what if an additional insured endorsement is contingent upon the existence of an insured contract (i.e., the contractual indemnity agreement), but the contractual indemnity clause in the contract has been rendered void or unenforceable as a result of a state statute or court ruling? Is the putative additional insured still entitled to additional insured coverage under the policy? If so, is the scope of coverage limited to the extent the additional insured would have been entitled to contractual indemnification from the named insured or is the scope of additional insured coverage controlled solely by the additional insured endorsement? We will consider all of these issues, as well as others, in this manuscript and analyze how courts from various jurisdictions have approached these issues. Finally, we will review/analyze some recent trends in additional insured coverage, particularly with respect to state legislation on construction contracts. We will also analyze some of the pros/cons with respect to contractual indemnity clauses and additional insured coverage. II. A Brief Overview of Current Additional Insured Endorsements A. The Evolution of the CG 2010 and the Arising Out Of Versus Caused By Language of the Additional Insured Endorsement In 1986, the Insurance Services Office ( ISO ) first offered what has become the standard additional insured endorsement: the CG Since that time, the CG 2010 has undergone a number of changes alter- Transferring Risk: The Interplay of Additional Insured... McMahon and Carroll 143

6 ing the scope of additional insured coverage with each new endorsement. The Additional Insured Book, IRMI (Aug. 2011). Early versions of the CG 2010 made use of the broader arising out of language which, in some instances, provided coverage not only for claims arising out the named insured s negligence, but also included coverage for the additional insured s sole negligence because the language of the endorsement only required a substantial nexus (as opposed to proximate causation) between the injury and the named insured s work in order to trigger additional insured coverage. Merchants Ins. Co. of N.H., Inc. v. U.S. Fid. & Guar. Co., 143 F.3d 5 (1st Cir. 1998) (applying Massachusetts law); Acceptance Ins. Co. v. Syufy Enterprises, 69 Cal. App. 4th 321, 81 Cal. Rptr. 2d 557 (1999) (The general rule under California law is that when an insurer chooses not to limit the extent of coverage to be provided to an additional insured, but instead grants coverage for liability arising out of the named insured s work, the additional insured is covered without regard to whether the injury was caused by the named insured or the additional insured ); Krastanov v. Hovnanian/Shore Acquisitions, LLC, 2008 WL (N.J.A.D., August 6, 2008). Thus, under the early version CG , the additional insured was afforded a fairly broad range of coverage which included defense and indemnification for its own negligence. And, unlike later versions of the CG 2010, the CG does not include an ongoing operations or temporal work requirement. An example of the CG form is provided at Exhibit A. By contrast, the CG , while similar to the CG , includes a specific temporal requirement and limits the additional insured coverage to liability arising out of the named insured s ongoing operations. Consequently, while the CG still contains the broad arising out of language, the endorsement does not provide coverage for the completed operations hazard. See Lancaster v. Ferrell Paving, Inc., 2011 WL (Tenn. App., September 20, 2011) (finding that an endorsement similar to CG was limited to liability arising out of the named insured s ongoing operations, but that the endorsement did not limit additional insured coverage to vicarious liability). An example of the CG form is provided at Exhibit A. Thereafter, ISO acted to further define the scope of additional insured coverage by using the more narrow caused in whole or in part language which has consistently been held by courts to require a direct causal relationship between the insured s alleged liability and the ongoing operations of the named insured for the additional insured. Specifically, the more current CG form provides additional insured coverage for liability caused in whole or in part by the named insured s acts or omissions or the acts or omissions of those acting on behalf of the named insured, in the performance of the named insured s ongoing operations for the additional insured. Thus, unlike the earlier versions of the CG 2010 which required that the additional insured s liability merely arise out of the named insured s work or ongoing operations, the CG contains a specific proximate causation requirement. The endorsement is clear that the additional insured s liability must be caused, in whole or in part, by the named insured s acts or omissions during its ongoing operations. The endorsement is clear that the coverage afforded does not include coverage for additional insured s sole negligence. An example of the CG form is provided at Exhibit A. The specific language of an additional insured endorsement is key to understanding the scope of coverage provided. As an example, a general contractor ( GC ) is sued by its subcontractor s employee for bodily injury that occurred during the ongoing construction work of the subcontractor. The GC tenders the suit to the subcontractor s insurer with a policy that provides additional insured coverage pursuant to a CG 2010 endorsement and utilizes the caused in whole or in part language. The plaintiff/employee may not sue the subcontractor directly because of the exclusive remedy of worker s compensation. Thus, there are no allegations of direct negligence against the subcontractor and, consequently, an argument may be advanced that no liability is alleged to have been caused in whole or in part by the named insured. See Schafer v. Paragano 144 Insurance Coverage and Claims Institute March 2012

7 Custom Building, Inc., 2010 WL (N.J. Super. A.D., February 24, 2010) ( The words of the policy are clear in providing coverage to [the additional insured] only for liability that is caused in whole or in part by the acts or omissions of [the named insured]. The policy does not provide coverage for liability caused by [the additional insured s] own acts or omissions. ). Now, if we analyzed this scenario under an earlier CG 2010 endorsement that utilizes the arising out of language, the outcome may be very different because there only needs to be an incidental connection to the work of the named insured to implicate additional insured coverage. A-1 Roofing Co v. Navigators Ins Co, 2011 WL (Ill.App.1 Dist.), Palp, Inc v. Williamsburg Nat l Ins Co., 200 Cal.App.4 th 282 (Cal.App.4 th Dist., 2011). B. Non-Standard Additional Insured Endorsements and Vicarious Liability More modern day additional insured endorsements, as well as those that have been manuscripted (i.e., custom endorsements), typically utilize even narrower language than the caused in whole or in part endorsement and require that any additional insured coverage be limited to liability due to the named insured s negligence specifically resulting from the named insured s work for the additional insured which is the subject of a written contract or written agreement. These types of endorsements also typically provide that there is no coverage for liability resulting from the sole negligence of the additional insured. The language in this form of an additional insured endorsement is narrow and requires actual allegations of negligence resulting from the named insured s work for the additional insured. The requirement that the negligence result from the named insured s work further narrows the applicability of coverage to a clear causal connection between the work and the damage or injury, as opposed to negligence arising out of the named insured s work. Pekin Ins Co. v. United Parcel Services, Inc., 885 N.E.2d 386 (Ill. App. 2008). For example, in a non-four corners duty to defend state such as California (i.e., both the insured and insurer may look beyond the complaint and the policy to trigger or disclaim coverage), a suit alleging negligence against both the named insured and additional insured still may not trigger a duty to defend as to the additional insured if there are no facts alleged which show that the named insured s work was not a direct cause of the plaintiff s damages. This is the clearest example of an additional insured endorsement limiting its scope of coverage to the additional insured s vicarious liability for the named insured s negligence. Importantly, and in keeping with the non-standard AIE s restrictiveness, there are usually a number of other limitations and conditions imposed upon the additional insured. These may include: (a) exclusions for the additional insured s sole negligence or injury arising out of the rendering of certain professional services; (b) restrictions on the limits of liability; (c) conditions that require the additional insured to provide notice of a claim as soon as practicable, as well as requiring the additional insured to tender its defense and indemnity to any other potentially available insurance; and (d) provisions specifically tying in the scope of additional insured coverage to the scope of any contractual indemnity clause. An example of a non-standard additional insured endorsement form is provided at Exhibit A. III. Contractual Indemnity or Hold Harmless Provisions Since most standard CGL policies afford limited coverage for liability assumed pursuant to a contractual indemnification obligation, it is important to briefly review certain types of indemnity clauses. Generally, there are three (3) types of indemnity clauses: 1. Broad Form (Type I): Typically requires the indemnitor to pay for entire loss, including loss caused by the sole negligence of the indemnitee. Transferring Risk: The Interplay of Additional Insured... McMahon and Carroll 145

8 Example Company A agrees to defend, indemnify and hold harmless Company B, from any damages or loss arising out of or related to Company B s work or operations regardless of whether the damages or loss arises out of Company A s negligence or the negligence of Company B. 2. Intermediate Form (Type II): Requires indemnitor to pay for damages, except when caused (or alleged to have been caused) by the sole negligence of the indemnitee. Generally, any liability on the part of the indemnitor will result in full payment of the claim. Example Company A agrees to defend, indemnify and hold harmless Company B, from any damages or loss arising out of or related to Company A s work or operations and which also arises out of Company A s negligence, except for damages or loss arising out of the sole negligence of Company B. 3. Limited (Type III): Only requires the indemnitor to pay for damages caused by the indemnitor s sole negligence. Sometimes this is referred to as the vicarious liability indemnity clause because it only provides protection for the indemnitor s fault. Example Company A agrees to defend, indemnify and hold harmless Company B, from any damages or loss arising out of or related to Company A s work caused by Company A s negligence. There is no duty to indemnify Company B for Company B s own negligence. The practitioner and claims professional must also be cognizant of jurisdiction specific issues that may arise with respect to the scope and enforceability of a contractual indemnity provision. For instance, many jurisdictions have enacted statutes that will limit, or in some cases, prohibit enforcement of certain types of contractual indemnity clauses contained within a contract for construction related operations. For non-construction related contracts, particularly where an industry is heavily regulated or where consumer protection is an issue, such as housing rentals or consumer financial products, similar statutory constraints may exist. Moreover, aside from statutory authority, common law may also define whether an indemnity clause as written is fully or partially enforceable under the law (i.e., common law requiring that the indemnity clause s language be clear and conspicuous in the agreement). IV. Interplay Between Contractual Indemnity Provisions and Additional Insured Endorsements A. Does the Scope of the Indemnity Agreement Define the Scope of Additional Insured Coverage? As noted above, many types of additional insured endorsements do not specifically list the person or organization as an additional insured. Rather, in these blanket endorsements, the person or organization qualifies as an additional insured under the policy where the named insured is required to procure insurance coverage for that person or organization pursuant to a written contract or an insured contract. Thus, an important issue to consider is the interplay between a contractual indemnity provision and an additional insured endorsement which is dependent upon the existence of a contractual indemnity provision (i.e., an insured contract ). With respect to additional insured endorsements that are not dependent upon the existence of an underlying contract or indemnity agreement (i.e., the person or organization is specifically named as an additional insured on the endorsement), the scope of the indemnity clause is more than likely irrelevant to the scope of additional insured coverage. Rather, in this instance, the terms and conditions of the additional insured endorsement would likely control. 146 Insurance Coverage and Claims Institute March 2012

9 For instance, and as noted, some additional insured endorsements provide additional insured coverage for any person or organization where the named insured is required to provide such coverage pursuant to an insured contract, but then only for liability arising out of the named insured s operations or work. As analyzed above, most courts throughout the United States interpret the arising out of the named insured s work or operations very broadly. However, because the additional insured endorsement specifically references the existence of an insured contract (i.e., a contractual indemnity agreement), is the additional insured s coverage under the policy limited to the scope of the contractual indemnity provision? What if the contractual indemnity provision is held to be void or unenforceable (i.e., pursuant to an anti-indemnity statute)? Does the obligation to procure additional insured coverage and the scope of additional insured coverage stand separate and apart from the contractual indemnity obligation? The case law throughout the United States has been somewhat inconsistent in analyzing the interplay between a contractual indemnity provision and additional insured coverage. For instance, in a recent case, the United States Court of Appeals for the Fifth Circuit, applying Texas law, held that the existence of an insured contract for purposes of an additional insured endorsement was not dependent upon the enforceability of the insured contract. Gilbane Bldg. Co. v. Admiral Ins. Co., 2011 WL (5th Cir., December 12, 2011) ( In the [contract], [the named insured] contracted not only to indemnify [the purported additional insured], but also to secure insurance on its behalf; by doing so, it agreed to assume [the putative additional insured s] tort liability. That provision is not rendered void by the indemnity provision, even if it is unenforceable. As such, the [named insured] agreed to assume [the putative additional insured s] tort liability, and [therefore it] qualifies as an additional insured. ). Thus, although the contractual indemnity clause in the underlying contract was found to be unenforceable, the Fifth Circuit held that the insurer was still required to provide coverage under the additional insured endorsement. Specifically, the court in Gilbane stated that the additional insured question turns not on enforceability, but on whether [the named insured] agreed to assume the tort liability of another party. Id. at *4 (Emphasis in original.); see also Aubris Resources LP v. St. Paul Fire and Marine Ins. Co., 566 F.3d 483 (5th Cir. 2009) (holding that where the additional insured clause is separate from the indemnity clause, the scope of the insurance requirement is not limited by the indemnity clause). Similarly, although Ohio law prohibits indemnity agreements in construction contracts, Ohio courts will sever and enforce additional insured agreements in such a contract. See Brzeczek v. Standard Oil Co., 447 N.E.2d 760 (Ohio App. 1982). In Brzeczek, the Ohio appellate court adopted the view of the Court of Appeals of New York, which stated that the two provisions were distinct, and that an additional insured agreement should be enforced pursuant to the plain language of the policy even where the contractual indemnity provision in the underlying contract is void or unenforceable. Id. at 213 (citing Bd. of Educ. v. Valden Associates, Inc., 389 N.E.2d 798, 800 (N.Y. 1979)); see also Royal Indemn. Co. v. Terra Firma, Inc., 948 A.2d 1101 (Conn. Super. 2006) (upholding and finding coverage under an additional insured endorsement where the contractual indemnification agreement was found to be void as against public policy). In that regard, some jurisdiction s anti-indemnity statutes even provide that the unenforceability of the contractual indemnity provision does not affect an entity s right to insurance coverage. VA Code Ann ( This section shall not affect the validity of any insurance contract, workers compensation, or any agreement issued by an admitted insurer. ). However, in another recent decision, the United States District Court for the Eastern District of Louisiana held that BP s right to additional insured coverage with respect to pollution-related losses under another defendant s insurance policies was necessarily limited to BP s right to contractual indemnification from that defendant pursuant to the underlying contract. In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Transferring Risk: The Interplay of Additional Insured... McMahon and Carroll 147

10 Mexico MDL 2179 (E.D. La., November 15, 2011) ( Therefore, whether and to what extent BP is an Insured depends on whether Transocean, as the named Insured, has obligated itself to BP via an Insured Contract to provide afforded by the policies. ). The additional insured endorsements at issue in Deepwater Horizon were expressly contingent upon the existence of an insured contract requiring the defendant to procure insurance coverage in favor of BP. Notwithstanding BP s obligation to contractually indemnify the defendant with respect to pollution damages, BP sought additional insured coverage for such pollution-related losses from that defendant s insurers. Specifically, BP argued that its entitlement to additional insured coverage was not limited by the scope of the insured contract, and that the defendant s insurers were required to provide complete additional insured coverage as to BP. The trial court ultimately disagreed with BP s arguments and held that BP is an additional insured only for liabilities assumed [by the defendant] under the terms of Drilling Contract. The court reasoned that [i]nsurers have to know what risks they are insuring to be able to appropriately calculate the premiums they must collect. Id. Thus, the insurers would not reasonably have agreed to permit [the defendant] to name additional insureds as to any conceivable risk. Thus, the court held that where the contract of insurance requires reference to the underlying [contract]... it is within the intent of the Insurers and [its insured] that those indemnities shape the scope of additional insured coverage. Id. In sum, as set forth above, courts around the United States tend to arrive at different conclusions with respect to these issues. Some courts view the right to contractual indemnification and the right to additional insured coverage as two (2) very distinct issues and, therefore, the absence of or scope of a contractual indemnity obligation will not affect a person s or organization s right to additional insured coverage. However, other courts may view the issues as inseparable, such that an additional insured endorsement s reference to an underlying indemnity agreement specifically incorporates the scope of that indemnity clause into the additional insured endorsement. As with any insurance coverage issue, the ultimate resolution of these issues will depend upon a caseby-case analysis and often will turn upon the precise language of the indemnity agreement or the additional insured endorsement at issue and the specific state law applicable to the insurance coverage dispute. B. Potential New Trend in Statutory Prohibition/Interpretation of Additional Insured Coverage Most likely as the result of strong lobbying efforts by subcontractors, we are seeing a potential new trend in insurance coverage law wherein state legislatures are beginning to enact laws which prohibit or limit the scope of additional insured coverage in certain instances. Specifically, Louisiana recently enacted a statute that not only voids a contractual indemnity provision that seeks to indemnify the indemnitee for its own negligence, but also renders void and unenforceable any provision in a contract which purports to require an indemnitor to procure liability insurance covering the acts or omissions or both of the indemnitee. La. Rev. Stat. 9:2780.1(C). Thus, this new Louisiana statute has the effect of not only voiding the contractual indemnity provision, but also voiding the indemnitor s obligation to procure insurance coverage for the indemnitee. It is important to note that the Louisiana statute is only applicable to motor carrier transportation contracts and construction contracts. These types of contracts are specifically defined in La. Rev. Stat. 9: Furthermore, by its own terms, the statute is only applicable to any contracts entered into on or after January 1, La. Rev. Stat. 9:2780.1(F). California s governor has also recently enacted into law an Act which would preclude plenary additional insured coverage for Type I contractual indemnity agreements (i.e., liability arising from the indemnitee s own negligence). See CA Senate Bill 474, enacted October 9, 2011 ( Session). Rather, it appears 148 Insurance Coverage and Claims Institute March 2012

11 that the additional insured carrier s duty to indemnify (and possibly defend) is now limited to the named insured s actual fault or negligence. The Act, however, leaves open the issue as to whether the named insured s fault must be established before the named insured s carrier has a defense obligation as to the putative additional insured. The Act is also only applicable to commercial and public construction contracts entered into on or after January 1, Finally, like California and Louisiana, Texas s governor has also signed into law an Act that will render a provision in a construction contract void and unenforceable that requires the purchase of additional insured coverage to the extent that it requires or provides coverage the scope of which is prohibited under [the statute] for an agreement to indemnify, hold harmless, or defend. Tex. Ins. Code (a). In that regard, Tex. Ins. Code renders any provision in a construction contract which purports to require an indemnitor to indemnify another party for the indemnitee s own negligence or fault is deemed to be void and unenforceable. Tex. Ins. Code Thus, if the contractual indemnity obligation is voided by the Texas statute, then the additional insured obligation is similarly rendered unenforceable. Notably, the Texas amendments are only applicable to construction contracts entered into on or after January 1, The foregoing statutes have the effect of not only voiding the contractual indemnity provision, but also prohibiting or severely limiting the scope of any requirement to provide additional insured coverage in certain instances. This is a fairly new development in the law and it is certainly possible that more state legislatures may enact laws similar to the recently enacted Louisiana, California and Texas Acts. V. Contractual Indemnification Clauses as a Gap Filler and the Supplementary Payments Section of the CGL Policy It is important to emphasize that a contractual indemnity provision is not intended to serve as a gap-filler for obligations not otherwise covered under an additional insured endorsement. The best example of this is where an insurer agrees to defend a putative additional insured pursuant to a proper endorsement and written contract, but only on a co-primary or pro-rata basis (i.e., share defense costs with the putative additional insured s primary insurer). The question may arise whether the indemnitee-or, rather, its insurer-is entitled to recover its fifty percent (50 percent) share through a claim for contractual indemnity. In order to analyze this issue, it is important to recall that contractual indemnification coverage is coverage which belongs to the named insured; not the putative additional insured. Nevertheless, 2 of the Supplementary Payments section of a traditional commercial general liability policy provides a mechanism wherein the insurer will agree to pay defense costs on behalf of an indemnitee of the insured outside of the limits of insurance coverage if certain conditions are met. For instance, the obligation to defend the indemnitee or the cost of defense must be assumed in the insured contract; there must be no conflict between the insured and the indemnitee in the litigation; and the insured/indemnitee must agree to representation by the same counsel. The indemnitee must also agree in writing to: (1) fully cooperate in the defense of the action; and (2) notify all other potential insurers of the loss. If all of the conditions set forth in 2 are met, then any defense costs paid in connection with the indemnitee s defense will be considered supplementary payments and will not reduce the limits of available indemnity coverage. Thus, although the indemnitee is still not considered an insured under the policy, 2 of the Supplementary Payments essentially permits the indemnitee to receive defense costs from the indemnitor s insurer if the indemnitee agrees to certain conditions. Transferring Risk: The Interplay of Additional Insured... McMahon and Carroll 149

12 VI. Pros/Cons of Contractual Indemnity Agreements and Additional Insured Coverage As analyzed above, both contractual indemnity provisions and additional insured endorsements, although at times related in their enforcement and application, are nevertheless distinct obligations with unique characteristics as risk transfer vehicles. Below we have set forth some of the key pros/cons of utilizing contractual indemnity agreements and additional insured coverage as a means of risk transfer. A. Contractual Indemnity Agreements 1. Pros May provide relief if there is no additional insured endorsement or the endorsement only provides for excess insurance coverage; May provide broader defense/indemnity than the additional insured endorsement, especially when employee of insured is asserting a claim against indemnitee; Although uncommon, the contractual indemnity provision may provide protection for the sole negligence of indemnitee; May be used as leverage against insurer by insured if indemnitee sues insured for breach of contract. 2. Cons Enforcement dependent upon scope of agreement as well as the precise language used in the agreement (i.e., many states require certain specificity and clarity); If construction-related contract, indemnity clause may be declared void or unenforceable by statute; No direct rights under indemnitor s policy against insurer. B. Additional Insured Coverage 1. Pros Direct rights under the insurance policy. Broader benefits than contractual indemnity (i.e., coverage for additional insured s own negligence and avoidance of anti-indemnity statutes). More favorable contract interpretation rules in court for insurance policies than indemnity clauses. Defense costs paid in advance. 2. Cons Likely will lose ability to select defense counsel. Loss of control of the defense (i.e., risk control). Other insurance clause issues. Deductibles and self-insured retentions in indemnitor s policy. Shared limits with named insured and other additional insureds. 150 Insurance Coverage and Claims Institute March 2012

13 VII. Conclusion In sum, depending upon the precise language of an additional insured endorsement, the enforceability and scope of an insured s contractual indemnity obligation with respect to a putative additional insured may have a significant effect upon the scope of additional insured coverage. As set forth above, some jurisdictions have viewed the two (2) obligations as being mutually exclusive such that the absence of an enforceable indemnity obligation will not affect the scope of additional insured coverage. Other jurisdictions, however, have held that the two (2) obligations are co-extensive such that the scope of an additional insured endorsement is limited to the scope of the named insured s contractual indemnity obligation(s). In analyzing any of the foregoing issues, it is always important to be cognizant of the fact that understanding the jurisdiction s laws applicable to the claim is crucial in determining the language to be used in connection with drafting an indemnity clause as well as in interpreting the scope of an insurance policy s additional insured endorsement. Thus, all of the issues discussed in this manuscript must be approached on a case-by-case basis with a heightened awareness toward any new trends in the law. DISCLAIMER The purpose of this presentation and article is to provide information, rather than advice or opinion. It is accurate to the best of the author s knowledge as of the date of the presentation and article. Accordingly, this presentation and article should not be viewed as a substitute for the guidance and recommendations of a retained professional. Any references to non-cna Web sites are provided solely for convenience, and CNA disclaims any responsibility with respect to such Web sites. To the extent this presentation and article contains any examples, please note that they are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental. In addition, any examples are not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations, or to provide an acknowledgement that any given factual situation is covered under any CNA insurance policy. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All CNA products and services may not be available in all states and may be subject to change without notice. Use of the term partnership and/or partner should not be construed to represent a legally binding partnership. CNA is a registered trademark of CNA Financial Corporation. Copyright 2011 CNA. All rights reserved. Transferring Risk: The Interplay of Additional Insured... McMahon and Carroll 151

14 Exhibit A POLICY NUMBER: CG Example COMMERCIAL GENERAL LIABILITY THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY. ADDITIONAL INSURED OWNERS, LESSEES OR CONTRACTORS (FORM B) This endorsement modifies insurance provided under the following: COMMERCIAL GENERAL LIABILITY COVERAGE PART. Name of Person or Organization: SCHEDULE (If no entry appears above, information required to complete this endorsement will be shown in the Declarations as applicable to this endorsement.) WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your work for that insured by or for you. CG Insurance Coverage and Claims Institute March 2012

15 CG Example POLICY NUMBER: COMMERCIAL GENERAL LIABILITY CG THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY. ADDITIONAL INSURED OWNERS, LESSEES OR CONTRACTORS (FORM B) This endorsement modifies insurance provided under the following: COMMERCIAL GENERAL LIABILITY COVERAGE PART Name of Person or Organizations: SCHEDULE (If no entry appears above, information required to complete this endorsement will be sown in the Declarations as applicable to this endorsement.) WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown I the Schedule, but only with respect to liability arising out of your ongoing operations performed for this insured. CG Transferring Risk: The Interplay of Additional Insured... McMahon and Carroll 153

16 CG Example THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY. ADDITIONAL INSURED OWNERS, LESSEES OR CONTRACTORS SCHEDULED PERSON OR ORGANIZATION This endorsement modifies insurance provided under the following: COMMERCIAL GENERAL LIABILITY COVERAGE PART SCHEDULE Name Of Additional Insured Person(s) Or Organization(s): Location(s) Of Covered Operations Information required to complete this Schedule, if not shown above, will be shown in the Declarations. A. Section II Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for bodily injury, property damage or personal and advertising injury caused, in whole or in part, by: 1. Your acts or omissions; or 2. The acts or omissions of those acting on your behalf; in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above. B. With respect to the insurance afforded to these additional insureds, the following additional exclusions apply: This insurance does not apply to bodily injury or property damage occurring after: 1. All work, including materials, parts or equipment furnished in connection with such work, on the project (other than service, maintenance or repairs) to be performed by or on behalf of the additional insured(s) at the location of the covered operations has been completed; or 2. That portion of your work out of which the injury or damage arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as a part of the same project. 154 Insurance Coverage and Claims Institute March 2012

17 Non-Standard AIE - Example THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY. CONTRACTOR S SCHEDULED AND BLANKET ADDITIONAL INSURED ENDORSEMENT WITH LIMITED PRODUCTS-COMPLETED OPERATIONS COVERAGE This endorsement modifies insurance provided under the following: COMMERCIAL GENERAL LIABILITY COVERAGE PART Name of Person or Organization: SCHEDULE Designated Project: (Coverage under this endorsement is not affected by an entry or lack of entry in the Schedule above.) A. WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization, including any person or organization shown in the schedule above, (called additional insured) whom you are required to add as an additional insured on this policy under a written contract or written agreement; but the written contract or written agreement must be: 1. Currently in effect or becoming effective during the term of this policy; and 2. Executed prior to the bodily injury, property damage, or personal and advertising injury. B. The insurance provided to the additional insured is limited as follows: 1. That person or organization is an additional insured solely for liability due to your negligence specifically resulting from your work for the additional insured which is the subject of the written contract or written agreement. No coverage applies to liability resulting from the sole negligence of the additional insured. 2. The Limits of Insurance applicable to the additional insured are those specified in the written contract or written agreement or in the Declarations of this policy, whichever is less. These Limits of Insurance are inclusive of, and not in addition to, the Limits of Insurance shown in the Declarations. 3. The coverage provided to the additional insured by this endorsement and paragraph f. of the definition of insured contract under DEFINITIONS (Section V) do not apply to bodily injury or property damage arising out of the products-completed operations hazard unless required by the written contract or written agreement. When coverage does apply to bodily injury or property damage arising out of the products-completed operations hazard such coverage will not apply beyond: a. The period of time required by the written contract or written agreement; or b. 5 years from the completion of your work on the project which is the subject of the written contract or written agreement, Transferring Risk: The Interplay of Additional Insured... McMahon and Carroll 155

18 whichever is less. 4. The insurance provided to the additional insured does not apply to bodily injury, property damage, or personal and advertising injury arising out of an architect s, engineer s, or surveyor s rendering of or failure to render any professional services including: a. The preparing, approving, or failing to prepare or approve maps, shop drawings, opinions, reports, surveys, field orders, change orders or drawings and specifications; and b. Supervisory, or inspection activities performed as part of any related architectural or engineering activities. C. As respects the coverage provided under this endorsement, SECTION IV COMMERCIAL GENERAL LIABILITY CONDITIONS are amended as follows: 1. The following is added to the Duties In The Event of Occurrence, Offense, Claim or Suit Condition: e. An additional insured under this endorsement will as soon as practicable: (1) Give written notice of an occurrence or an offense to us which may result in a claim or suit under this insurance; (2) Tender the defense and indemnity of any claim or suit to any other insurer which also has insurance for a loss we cover under this Coverage Part; and (3) Agree to make available any other insurance which the additional insured has for a loss we cover under this Coverage Part. f. We have no duty to defend or indemnify an additional insured under this endorsement until we receive written notice of a claim or suit from the additional insured. 2. Paragraph 4.b. of the Other Insurance Condition is deleted and replaced with the following: 4. Other Insurance b. Excess Insurance This insurance is excess over any other insurance naming the additional insured as an insured whether primary, excess, contingent or on any other basis unless a written contract or written agreement specifically requires that this insurance be either primary or primary and noncontributing. 156 Insurance Coverage and Claims Institute March 2012