Running With Scissors: Inherently Dangerous Drafting Practices For Real Estate Attorneys

Transcription

1 Running With Scissors: Inherently Dangerous Drafting Practices For Real Estate Attorneys Charles E. Comiskey CPCU, CIC, CPIA, CRM, PWCA, CRIS, CCM President, RiskTech, Inc. Sr. V.P., Brady Chapman Holland & Associates, Inc.

2 2013, The Year of ISO Policy Revisions Commercial General Liability Commercial Umbrella Liability Commercial Property Equipment Breakdown Commercial Auto Business Owners 2

3 Antiquated, Problematic and Just Plain Wrong GL Terminology Comprehensive General Liability Blanket or Broad Form Contractual Liability Broad Form Property Damage Broad Form CGL Endorsements Deletion of personal injury employee exclusion 3

4 Antiquated, Problematic and Just Plain Wrong GL Terminology Cross Liability or Severability of Interest 30 days notice of cancellation, amendment, reduction of limits or nonrenewal Products/Completed Operations for years following completion of work 4

5 Antiquated, Problematic and Just Plain Wrong Property Terminology Fire Insurance Extended Coverage Vandalism & Malicious Mischief Special Extended Coverage All Risk or All Risk 5

6 How Indemnity Provisions Differ From Insurance Requirements Indemnity is between the Indemnitee and the Indemnitor Voluntary assumption Not liability imposed the Indemnitor has agreed to be liable What scope of risk can be transferred? What limit of risk can be transferred? 6

7 Indemnification $ Blank Check Exposure (any and all liabilities) 7

8 What Portion of Transferred Risk Is Insurable? Contractual liability insurance is funding mechanism for portions of the indemnification Provided as (1) definitions to (2) an exception to (3) an exclusion to (4) the coverage provision of BODILY INJURY and PROPERTY DAMAGE ONLY 8

9 What Portion of Transferred Risk Is Insurable? Problem: [Downstream Party] shall provide contractual liability insurance covering the liabilities assumed in the indemnification agreement. Insurance does not and can not cover an indemnity Not any and all liabilities, fines, penalties Only bodily injury and property damage Limited in amount Recommended: [Downstream Party] shall provide contractual liability insurance applying to the indemnification agreement. 9

10 Indemnification $ Uninsured Bodily Injury and Physical Injury to Tangible Property + Loss of Use Exposure (any and all liabilities) 10

11 But Wait! There s More! Potentially bankrupting to the Indemnitor And it gets much worse New exclusions may be added Defense provided in behalf of an Indemnitee erodes your limits of liability Who wins? 11

12 Additional Insured Advantages No fair notice rules Direct rights Separate defense Unlimited defense Can include concurrent and sole negligence Now who wins? 12

13 Indemnification vs. Additional Insured Complementary risk-transfer provisions Perform similar function but are totally independent Act as two entirely separate contracts Negotiate indemnification but fail to consider ramifications of additional insured status Practical advice 13

14 Practical Advice Problem: [Downstream Party] shall name [Upstream Party] as an additional insured. Meaningless Shell game Illusory 14

15 ISO ISO = Insurance Services Office ISO Properties, Inc., 20 Insurance Services Office, Inc., 20 15

16 What To Look For in an Additional Insured Endorsement Who is being added as an insured? What scope of negligence is being transferred? For what operations or premises? Any exclusionary wording added? 16

17 CG Managers or Lessors of Premises Includes the person(s) or organization(s) shown but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to you Excludes Occurrence taking place after cease to be a tenant Alterations, construction or demolition performed by or on behalf of [Additional Insured] 17

18 CG Construction Form # - CG Edition date CG Includes as an insured the person or organization shown in the Schedule but only with respect to liability arising out of your work Unavailability 18

19 Other CG Endorsements Same description of insured CG arising out of your on-going operations CG and CG caused in whole or in part by your acts or omissions; or the acts or omissions of those acting on your behalf in the performance of on-going operations 19

20 New ISO GL Additional Insured Editions New Editions to all Additional Insured endorsements Provides that insurance afforded to AI Applies to the extent permitted by law Will be no broader than required by contract Will provide no greater amount than required by contract 20

21 Other ISO Additional Insured Endorsements CG Includes as an insured any person or organization for whom you are performing operations On-going operations only Has 10 01, and editions CG New Adds any other person or organization you are required to add as an additional insured under the contract or agreement 21

22 Other ISO Additional Insured Endorsements CG Includes as an insured the person or organization shown in the Schedule Provides coverage for completed operations only Has both and editions 22

23 Additional Insured Editions All ISO editions use arising out of and cover joint, concurrent and sole negligence All ISO and most editions do not include arising out of and cover joint and concurrent negligence but not sole negligence 23

24 Still More Additional Insured Endorsements Blanket or Automatic Specific ISO rarely used Includes Copyrighted Material of Insurance Services Office, Inc., With Its Permission Beware! 24

25 Recap If you simply require additional insured status, who decides what will be provided? If adequate additional insured status is not provided, how is coverage potentially provided? Who wins? 25

26 Practical Advice Require a specific ISO endorsement or scope of coverage What does or equivalent mean? Require a copy & make sure you understand it 26

27 Practical Advice Real Estate Recommended: Tenant shall obtain additional insured coverage in favor of Landlord Parties on commercial general liability and excess liability policies. Additional insured status shall be provided on an unmodified ISO endorsement CG This option includes the sole negligence of the additional insured. 27

28 Practical Advice - Construction Recommended: Subcontractor shall obtain additional insured coverage in favor of Contractor Parties on commercial general liability and excess liability policies. Additional insured status shall be provided on a combination of unmodified ISO endorsements CG and CG This option includes the sole negligence of the additional insured. 28

29 Practical Advice - Construction Alternative: Subcontractor shall obtain additional insured coverage in favor of Contractor Parties on commercial general liability and excess liability policies. Additional insured status shall be provided on a combination of unmodified ISO endorsements CG or CG and CG This option excludes the sole negligence of the additional insured. 29

30 Liquor Liability Designated Location(s) Aggregate Limit CG

31 Primary Liability Problem: [Down-stream party s] insurance shall be primary All general liability policies start out providing primary liability coverage If both are primary, they share in payment of loss Excess where added as additional insured by endorsement Primary and non-contributory liability 31

32 New GL Primary & Noncontributory Endorsement ISO CG This insurance is primary to and will not seek contribution from any other insurance available to an additional insured under your policy provided that: The additional insured is a Named Insured under such other insurance; and You have agreed in writing in a contract or agreement that this insurance would be primary and would not seek contribution from any other insurance available to the additional insured 32

33 Primary & Noncontributory Requirement Recommended: It is the intent of the parties to this Agreement that all insurance coverage required herein shall be primary to and shall seek no contribution from all insurance available to [Upstream Parties], with [Upstream Parties] s insurance being excess, secondary and noncontributing. This CGL coverage shall be endorsed to provide such primary and noncontributory liability. 33

34 Primary Liability vs. Horizontal Exhaustion Problem: This does not resolve the horizontal exhaustion issue increasingly prevalent in some states. 34

35 Who Is Protected? Problem: Failure of consistency Indemnification v. waiver of subrogation v. additional insured Who wins? Recommended: Consider Owner Parties 35

36 Invisible GL Exclusions Contractual Liability Limitation CG Amendment of Insured Contract Definition CG Damage to Work Performed By Subcontractors On Your Behalf CG or CG Explosion, Collapse and Underground Property Damage CG and

37 Invisible GL Exclusions Employer s Liability manuscript exclusion changes This insurance does not apply to: Bodily injury to an employee of the insured arising out of and in the course of Employment by the insured; or Performing duties related to the conduct of the insured s business This exclusion does not apply to liability assumed by the insured under an insured contract. 37

38 Invisible GL Exclusions Construction Defect Completed Operations manuscript exclusion Excludes coverage for actual or alleged deficiency in new construction, conversion, reconstruction, rehabilitation, renovation, remodeling, repair, maintenance or demolition Classification manuscript exclusion Example, insurance sold to roofer that excludes roofing operations 38

39 Invisible GL Exclusions Residential or Habitational manuscript exclusion Subsidence manuscript exclusion Improper soil compaction, collapse of drains, earth movement of any type Insured vs. Insured manuscript exclusion Punitive, Exemplary, Multiplied Damages manuscript exclusion 39

40 Electronic Data Liability Invisible GL Exclusions This insurance does not apply to: Damages arising out of the loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data. As used in this exclusion, electronic data means information, facts or programs stored as or on, created or used on, or transmitted to or from computer software, including systems and applications software, hard or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment. 40

41 Invisible GL Exclusions Any many, many more! Problem: How would you know? Transparency Recommended: See Insurance Specifications 41

42 Is Workers Compensation Really Required? Problem: [Downstream Party] shall provide Workers Compensation insurance as required by law Recommended: [Downstream Party] shall provide Workers Compensation insurance. No alternative forms of insurance shall be permitted. Waiver of Subrogation endorsement required Additional Insured status is not available 42

43 Business Auto Why Demand Additional Insured Status? Definition of Who Is An Insured Includes anyone held liable for the conduct of an insured is also considered an insured, but only to the extent of that liability Designated Insured (a/k/a Additional insured endorsement) Each person or organization shown in the Schedule is an insured for Liability Coverage, but only to the extent that person or organization qualifies as an insured under the Who Is An Insured Provision. 43

44 Umbrella/Excess Liability Most umbrella liability policies are not umbrellas Most excess liability policies are not strictly excess Failure to follow form Recommended: Such insurance shall be excess over and no less broad than all coverages described above. Won t be excess of Professional, Pollution, Employment Practices, Directors & Officers, and similar liability coverages 44

45 Contractor s Professional Liability Exposures Consultative advice on feasibility, constructability, sequencing & scheduling Interior design or space planning services Oversight of subcontractors Shop drawings Value engineering Cost saving measures 45

46 Contractor s Professional Liability Exposures Design of sprinkler, fire safety, life safety, security, light use, acoustical, signage, landscaping, and Building Information Modeling (BIM) systems Construction management Services to support Leadership in Energy and Environmental Design (Leed) certification for a project Design-build What is it? Should never be added as additional insured on architect/engineer s professional liability policy 46

47 Contractor s Professional and Pollution Liability Commonly combined with on one policy If combined, higher limits Either or both may be Claims-Made Additional insured issues on Professional side Insured vs. Insured Acceptable if limited to within same economic family 47

48 New Property Forms 40+ changes Utility Services Overhead Transmission Lines Redefined to include distribution lines Limitations For Roof Surfacing ACV and excluding cosmetic damage to roof surface CP Increase In Rebuilding Expenses Following Disaster CP

49 Property Issues to Avoid Margin Clause Protective Safeguards 49

50 Triple Net Leases Loss payable provision: gives an insured little protection Claims must be paid jointly No protection is provided to owner against the policy being invalidated by actions of the tenant/insured No notice of cancellation will be provided to owner This form is really geared to miscellaneous machinery & equipment Lender s loss payable clause: Quite similar to the mortgageholder provision Can be used for buildings, machinery or equipment Protection is provided to the owner for the policy being invalidated by actions of the tenant/insured Notice of cancellation and nonrenewal is provided Fails to discuss handling of claim payment 50

51 Triple Net Leases Building owner loss payable clause: Building claim will be adjusted with building owner only and an improvements & betterments claim will be adjusted with tenant No protection is provided to the owner against invalidation of the policy by actions of the tenant/insured No notice of cancellation will be provided to the owner Additional insured-building owner: Makes the building owner a named insured for the building only Loss is adjusted with both the tenant and building owner ATIMA No protection is provided against invalidation of the policy by actions of the tenant/insured No notice of cancellation will be provided to the owner 51

52 Triple Net Leases None accomplish the desired combined results of: protection against invalidation notice of cancellation to the owner, and adjustment of building loss with the owner Combination of lender s loss payable and additional insured-building owner seems to be the best insurance option if tenant is to insure the building Other increased risks for the owner when the tenant is required to insure the owners assets 52

53 What Is The Best Risk Management Option? Have the owner insure the building and charge the cost back to the tenant Owner: controls the insurance placement meets its lender obligations doesn t have to worry about the tenant violating any policy conditions receives notice of cancellation is directly negotiating any claim adjustment, and controls issues regarding the damage and destruction provisions in the lease agreement 53

54 Self-Insured Retention Insurance carrier obligation not triggered until retention is met Self-insured = NOT insured Insurance requirements therefore do not apply 54

55 Self-Insured Retention Recommended: If Tenant elects to self-insure or to maintain insurance required herein subject to deductibles and/or retentions exceeding $25,000.00, Landlord and Tenant shall maintain all rights and obligations between themselves as if Tenant maintained the insurance with a commercial insurer including any Additional Insured status, Primary and Non-Contributory Liability, Waivers of Rights of Recovery, Other Insurance Clauses, and any other extensions of coverage required herein. Tenant shall pay from its assets the costs, expenses, damages, claims, losses and liabilities, including attorney s fees and necessary litigation expenses at least to the extent that an insurance company would have been obligated to pay those amounts if Tenant had maintained the insurance pursuant to this Exhibit. All deductibles, retentions, and/or uninsured amounts shall be paid by, assumed by, for the account of, and at Tenant s sole risk. Landlord shall not be responsible for payment of any deductible or self-insured retention or uninsured amount. 55

56 Notice of Cancellation, Nonrenewal, Reduction in Limits, Change, Etc. There is no such endorsement available Texas Notice of Cancellation or Material Change Most other Notice of Cancellation 56

57 Certificates of Insurance It is a tale, told by an idiot, full of sound and fury, signifying nothing. - Macbeth 57

58 Certificate Specifications ACORD 25, Certificate of Liability Insurance ACORD 28, Evidence of Commercial Property Insurance Both are replete with disclaimers 58

59 Court Decisions The certificate is a worthless document; it does no more than to certify that issuance existed on the day the certificate was issued. Certificate holder is warned that they are not entitled to rely on a certificate of insurance. Certificate holder is advised to look at the policy. Those who take certificate at its face value do so at their own risk. A certificate of insurance is unenforceable against the insurance company represented. 59

60 Texas Department of Insurance Certificate Rules Any explanatory information included in a completed certificate of insurance is limited to language in the referenced policy and any executed endorsements. A certificate of insurance may not refer to, describe, explain, or define obligations under a contract other than the underlying contract of insurance. A certificate of insurance may not alter the terms and conditions of a right to notice of cancellation, nonrenewal, or material change, or any similar notice concerning a policy of insurance. A certificate may not create a new or additional duty to notify. 60

61 Safeway Discontinues Requiring Certificates of Insurance The certificate tracking function was originally established to assist with pursuing third parties to defend and indemnify Safeway and to assist in subrogation recovery. We have determined that a singed contract with the correct coverage and indemnification wording on Safeway s behalf is the key/critical document needed in the process, not the certificate of insurance. 61

62 Insurance Specifications Insurance trigger is subject to a lot of whether conditions. Don t invite litigation by failing to handle these issue proactively Who wins? Detailed requirements 62

63 Insurance Specifications Remember your audience Exhibit, chart form Describe precisely what is expected Prohibit certain exclusions and limitations Demand copy of the Additional Insured endorsement(s) Demand copy of Schedule of Forms and Endorsements page of GL, listing of all exclusions and limitations added by endorsement 63

64 Questions? Charles E. Comiskey CPCU, CIC, CPIA, CRM, PWCA, CRIS, CCM

65 Charles E. Comiskey CPCU, CIC, CPIA, CRM, PWCA, CRIS, CCM Charles E. Comiskey is President of RiskTech, Inc., Houston s oldest risk management consulting firm, and Senior Vice President of Brady Chapman Holland & Associates, one of the largest privately held insurance brokerage firms in the U.S. Holding a variety of professional designations, Comiskey is a nationally recognized expert, author and frequent speaker on risk management and insurance issues to various legal, construction and real estate associations and similar groups across the country. He has served as a pre-trial consultant/expert witness in over 200 matters in State and Federal courts, serving for both defense and plaintiff testifying for and against insurance companies, insurance agencies, and insureds. Charles is also National Chairman of the Construction Practice Group of RiskProNet International, the 5th largest brokerage organization in the U.S. 65