1 The following article is from National Underwriter s latest online resource, FC&S Legal: The Insurance Coverage Law Information Center. The Insurance Coverage Law Information Center LIABILITY CLAIMS COSTS TOO HIGH? THE CONTROL OF INSURANCE AND LITIGATION COST By Tricia A. Swann and Lars J. Lederer The authors suggest that with proper contract drafting and active pursuit of defense and indemnity, companies can effectively and efficiently shift liability claims costs where they belong to the independent contractors who contracted to provide a defense and indemnity should something happen. Liability claims costs making too big a dent in the company s bottom line? Managing these costs is an issue facing most companies and one that these companies are handing in the same manner expensively. That does not have to be the case. With proper contract drafting and active pursuit of defense and indemnity, companies can effectively and efficiently shift liability claims costs where they belong to the independent contractors who contracted to provide a defense and indemnity should something happen. The Components Liability claims costs are comprised of several components. First, most companies utilize a third-party administrator ( TPA ) to handle pre-suit claims. TPAs can be an independent organization or claims adjuster employees of the liability carrier. In either scenario, companies are incurring a claims handling cost, often based on a per claim basis. Many TPAs charge an initial fee for each claim, followed by additional fees after the expiration of a stated period of time (e.g., 60 to 90 days). Because many claims can linger for a year or more (prior to suit filing), the cost of TPAs can become significant depending on the number of claims a company is facing at any given time. These costs, while necessary, can be recovered. A second component of liability claims costs is settlement cost. More often than not, companies attempt to resolve claims pre-suit in order to avoid the cost of litigation. This scenario also occurs at the direction of liability carriers, depending upon the structure of the policy (which likely authorizes the carrier to make settlement determinations regardless of whether the insured is funding the settlement via a self-insured retention or claim deductible). Settlement costs can also become a huge hit to a company s bottom line. Fortunately, this type of cost can also be avoided in the vast majority of cases. A third component of liability claims costs is litigation expense. Litigation expense is comprised of attorneys fees and costs associated with litigation, examples of which include court filing fees, subpoenaed records costs, court reporting costs and miscellaneous expenses (copying, telephone, fax, etc.). Unfortunately, litigation expense can become so costly that companies and/or their liability carriers feel compelled to settle lawsuits rather than defend them. In this regard, it is not uncommon for carriers to routinely settle suits for up to $10,000 upon notification/filing of a lawsuit in order to avoid litigation expense altogether. Of course, the obvious downsides to this strategy are both the settlement cost incurred by the insured company and the litigation-friendly atmosphere which results (where certain carriers who employ this strategy are known easy targets by personal injury attorneys). A fourth, and final, component of liability claims costs are insurance costs. These costs are seen via reserves (established for each claim) and annual premiums. While these liability claims costs appear quite daunting especially to companies that face high claim volume that does not have to be the case. Although TPA and litigation costs are a necessary evil, they can be recovered, and settlement costs can be completely avoided in most cases. Moreover, with respect to litigation costs, proper contract drafting and active pursuit of defense and indemnity can stop the bleeding at an early stage of litigation, so that companies are not forced to defend a lawsuit through the entire discovery stage, much less through trial. The end result of which leads to both reduced claim reserves and significantly reduced annual premiums.
2 The Liability-Shifting Scenario The typical liability-shifting scenario involves a contractor and subcontractor/independent contractor, often for various facility management and/or property management needs, including but not limited to snow and ice removal, landscaping, lot cleaning, waste management, janitorial services, floor care and building repair. Those types of services often give rise to personal injury claims arising from slip-and-fall mishaps and/or other accidents that relate to the facilities management services provided. In a typical personal injury lawsuit, the plaintiff has filed suit against the premises owner/operator, the service contractor and the subcontractor/independent contractor. The premises owner/operator tenders its defense to the service contractor, who in turn tenders the defense (for itself and its customer the owner/operator) to its subcontractor. Unfortunately, liability carriers don t often accept defense tenders or do so only after extended delays, such that all involved entities are left to file cross claims against one another for defense/indemnity and incur the costs of defending the case for months if not years. In the end, faced with mounting defense costs, most cases resolve whereby all defendants contribute to settlement and either significantly discount their claim for defense costs (often accepting well less than 50 percent of total costs from the co-defendant who is contractually required to provide full defense/indemnity) or waive them entirely (which is to say, dismiss the cross claim upon settlement of the plaintiff s personal injury claim) and all of the defendants simply walk away. Needless to say, this strategy does not benefit those defendant companies who are contractually entitled to defense/indemnity through another company (i.e., premises owner/ operators and contractors who hire subcontractors/independent contractors). Effective risk management strategies include carefully tailoring contracts between service providers and their subcontractors/independent contractors, including defense and indemnity clauses mandating the use of an expedited case management process requiring arbitration for all claims arising under the subcontract, that not only minimizes or eliminates defense costs in most cases, but puts the service provider in a strong position to dramatically reduce their overall insurance costs. The key to controlling risk exposure on claims relating to the work of independent contractors begins with the formation of the contract for services. The proper contractual language can effectively indemnify and protect companies (and their customers) from both the negligence of the independent contractor and even their own negligence. This contract drafting must address a number of issues, including liability coverage (whereby the independent contractor must obtain a sufficient amount of coverage to cover the contractor and its customer for all claims arising in connection with the contractual services); defense and indemnity language and service specifications which fully define the scope of services to be performed is essential. In addition to developing effective contractual language pertaining to liability insurance, defense/indemnity and service specifications, proper contract drafting should include a provision directing for arbitration with a specific arbitration forum utilizing specific arbitration rules for the resolution of all claims between the contracting parties. This strategy effectively manages the cost of litigation and, depending upon the nature and timing of the arbitration, may be done on an expedited basis, which significantly reduces filing fees and arbitrator fees (whereby expedited cases are often handled via a flat fee). Added benefits of arbitration clauses are that the parties may direct which rules will apply (common law versus statutory arbitration as well as the inclusion of the Federal Arbitration Act), which state s law applies and where the arbitration will take place. A venue provision (directing where the arbitration will take place) and a choice of law provision (which directs that a particular state s law will govern the litigation between the parties) requires an analysis of the laws of those states which have a connection to at least one of the contracting parties. Those provisions should typically track a company s (whether a premises owner/operator or service contractor who subcontracts its services) principal place of business and/or state of incorporation so as to be upheld upon challenge. The key is to select the laws of a state which are favorable to defense/ indemnity provisions within private contracts and, of note, permit contractual indemnity provisions whereby an indemnitee (i.e., a premises owner/operator or service contractor who utilizes subcontractors/independent contractors) seeks indemnity for its own negligence. Moreover, some states, including Pennsylvania for example, permit parties to contract whereby one party must defend and indemnify the other party (and its customers, if provided via contract) even for that party s sole negligence. Because some states laws either do not permit indemnity for an indemnitee s own negligence or indemnity for the indemnitee s sole negligence (but do permit indemnity for partial negligence), it is extremely important to research the laws of any state which could be selected to govern the outcome of litigation between the parties when drafting choice of law and venue provisions.
3 Venue provisions are further beneficial because the drafting party can direct the use of a venue convenient to itself but not necessarily to the other contracting party (i.e., the subcontractor/ independent contractor) which may encourage the non-drafting party to provide the relief sought (defense/indemnity). Furthermore, many nationally recognized arbitration forums are not parochial, where attorneys presenting arbitration matters pursuant to their rules are not required to be admitted to the state where the arbitration is venued. Also of note, while companies may be concerned with the expense of having to fund a second litigation matter for each claim (where a valid defense tender is denied), some arbitration forums provide for expedited cases discouraging the use of discovery. Moreover, these arbitration matters can be resolved on the papers often without the need for a hearing, thereby even further limiting the cost of arbitration to merely a fraction of the defense costs incurred in defending a typical personal injury action. Contractual Provisions Notwithstanding the foregoing, proper contract drafting should also provide that the prevailing party may obtain all costs of litigation arising under the contract, including attorneys fees, and including any future appeals, so that the filing party, if successful, will obtain the following: 1. a ruling that the indemnitor assume the defense of the indemnitee (and its customer, if contractually provided); 2. a ruling that the indemnitor reimburse the indemnitee all costs incurred relative to the underlying personal injury claim; and 3. a ruling that the indemnitor reimburse the indemnitee all costs incurred relative to the instant arbitration action and any future appeals. This strategy applies to both contracts between premises owners/operators and service contractors (whereby the owner/ operator would seek defense and indemnity from the service contractor for any claims related to the contractual services) and contracts between contractors and subcontractors/independent contractors (whereby the contractor would seek defense and indemnity for itself and its customer). Once a contract has been drafted which adequately provides provisions for liability insurance, defense/indemnity, and comprehensive service specifications, a party which is owed defense/indemnity need only tender its defense and proceed to arbitration to enforce the defense/indemnity provision if the tender is not accepted. Under this scenario, a party who is owed defense and indemnity need not rely upon the filing of a cross claim against the other party (indemnitor) for breach of contract. Rather, once a personal injury suit is filed against an indemnitee (premises owner/operator or service contractor who utilizes subcontractors/ independent contractors) and the indemnitee has issued a tender demand to the indemnitor, the indemnitee need only file an arbitration demand for expedited arbitration setting forth a breach of contract claim seeking a ruling that the indemnitor is obligated to defend the indemnitee (and its customer, if contractually provided) and reimburse all defense costs incurred relative to the underlying personal injury claim. Those costs would consist of the costs of a TPA and all litigation costs. This protocol enables a company/indemnitee to secure an arbitration award on an expedited basis well in advance of the actual resolution of the underlying claim. Typically, the arbitration award will require the indemnitor (subcontractor/ independent contractor) to defend the contractor and/or their customer, to reimburse all defense costs incurred, to pay any future verdict in the underlying action and pay all costs of arbitration. Because the arbitration award is obtained during the discovery phase of the underlying action, there is the obvious benefit of not having to fund the defense of the underlying suit through settlement, verdict or appeal. This practice has resulted in successfully reducing and, in some cases, completely eliminating the cost of liability claims arising from the work of subcontractors/independent contractors retained to perform various facility-management chores on behalf of retailers who have retained a service contractor. Moreover, this strategy is equally available to any company who utilizes another entity for the performance of services whereby defense/indemnity is demanded via contract. And while proper contract drafting contemplates the award of litigation costs to the prevailing party for both the arbitration and any future appeals, it should be noted that an appeal from an arbitration award is rare. Further, it is extremely difficult to modify or vacate an arbitration award, especially where the contract provides that certain arbitration rules will govern any appeals. The funding of arbitration cases can be handled in either of two ways: 1) the company s liability carrier (which is funding the defense of the underlying personal injury claim) can include the arbitration matter as defense costs associated with
4 that underlying defense which is obviously the preferred method or 2) the company can fund the arbitration. The typical expedited arbitration case can cost between $7,500 (if decided on paper submissions without a hearing) to $12,000 (assuming a hearing occurs). Bear in mind that, if successful, these costs are also recoverable. Self-Insured Retentions As a result of the protection provided through this protocol, companies can significantly increase their self-insured retention limits and significantly reduce their insurance premiums. As an example, after utilizing this protocol for approximately a year, a national facilities management company had realized such substantial liability cost savings that it changed its commercial general liability structure from a self-insured retention of $25,000 per claim to $250,000 per claim, thereby saving millions in annual liability premiums. No doubt, the company s insurance carrier, which included within the reserves of the underlying personal injury lawsuit the costs of arbitration, saw the benefit of arbitration. In this particular company s case, the arbitration protocol resulted in the recovery of over $2,500,000 in approximately four years time. Moreover, the company and its insurance carrier were able to cease contributing towards settlement in nearly all claims involving an independent contractor. Conclusion To recap, defense and indemnity contractual provisions can be given teeth and enforced as intended rather than the status quo cross claim strategy which is never resolved favorably. With proper contract drafting and active pursuit of defense and indemnity, companies can effectively shift liability claims costs to independent contractors, realizing significant reductions in both claims costs and insurance costs, whereby their bottom line can go from: $$$ to lawyers for all phases of personal injury lawsuits; $$$ to plaintiffs via settlement or verdict; $$$ towards insurance reserves; and $$$ towards higher liability premiums to: Obtain defense/indemnity for company and its customer from subcontractor/independent contractor; Stop the bleeding by cutting off defense costs during early phase of litigation; Get all defense costs reimbursed, including costs of arbitration; Avoid contributing toward settlement or verdict; Reduced insurance reserves per claim; and Reduced annual insurance premiums. About the Authors Tricia A. Swann, an attorney in the Philadelphia office of Obermayer Rebmann Maxwell & Hippel LLP, concentrates her practice on the representation of facilities management corporate entities in a wide variety of service industries within the commercial sector, with a focus on contract drafting with respect to insurance, defense/indemnity and claim resolution provisions. Lars J. Lederer, an attorney in the firm s Philadelphia office, concentrates his practice in the area of premises liability defense. Mr. Lederer also has extensive experience handling product liability, commercial motor vehicle and construction law matters. The authors can be reached at and respectively. This article was published in the March 2014 Insurance Coverage Law Report.
5 For more information, or to begin your free trial: Call: Online: FC&S Legal guarantees you instant access to the most authoritative and comprehensive insurance coverage law information available today. This powerful, up-to-the-minute online resource enables you to stay apprised of the latest developments through your desktop, laptop, tablet, or smart phone whenever and wherever you need it. NOTE: The content posted to this account from FC&S Legal: The Insurance Coverage Law Information Center is current to the date of its initial publication. There may have been further developments of the issues discussed since the original publication. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice is required, the services of a competent professional person should be sought. Copyright 2014 The National Underwriter Company. All Rights Reserved.
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