Insurance Provisions in Commercial Contracts
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This document summarizes a presentation about allocating risk between parties through commercial contracts and insurance. It discusses identifying risks, designating which party is responsible for each risk, and documenting risk allocation in contracts. It provides examples of successful and unsuccessful risk allocation. Specifically, it examines a case where a general contractor was left responsible for millions after a subcontractor's insurance lapsed, highlighting the importance of confirming required insurance is maintained. The presentation stresses carefully considering each risk, placing it with the responsible party, and specifying coverage details in contracts to avoid litigation over unintended liabilities.
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Insurance Provisions in Commercial Contracts
- 1. babc.com ALABAMA I DISTRICT OF COLUMBIA I FLORIDA I MISSISSIPPI I NORTH CAROLINA I TENNESSEE Insurance Provisions in Commercial Contracts July 21, 2015 Presented By: Katherine J. Henry
- 2. © 2015 Bradley Arant Boult Cummings LLP Contract Insurance & Indemnity Provisions Reallocate Risk
- 3. © 2015 Bradley Arant Boult Cummings LLP Today’s Presentation Discuss contractual allocation of risk between parties and their insurers Examples of successful risk allocation and unsuccessful risk allocation Three steps to successful risk allocation – Deliberate – Designate – Document
- 4. © 2015 Bradley Arant Boult Cummings LLP Risk Allocation Step 1 Deliberate – identify the risk – Type of risk determines relevant coverage • Bodily injury or property damage = CGL • Financial loss = professional liability or E&O – Amount of risk • What is the potential financial exposure? – Availability of existing insurance program to address the risk
- 5. © 2015 Bradley Arant Boult Cummings LLP Risk Allocation Step 2 Designate the placement of the risk – Different risks with different parties or insurers – Risks typically with party in best position to control risk – Insurance typically runs with the risk
- 6. © 2015 Bradley Arant Boult Cummings LLP Risk Allocation Step 2 (cont.) Which portion of risk should be insured? – Type – Amount (consider limits, sublimits, SIRs, deductibles) All risks need not be insured through contract – Role of parties’ existing insurance programs Not all risks can be insured – Deliberate wrongdoing, e.g., is not insurable
- 7. © 2015 Bradley Arant Boult Cummings LLP Risk Allocation Step 3 Document – Contractual terms and conditions – Proof of counterparty’s insurance
- 8. © 2015 Bradley Arant Boult Cummings LLP Potential Gaps In Coverage
- 9. © 2015 Bradley Arant Boult Cummings LLP Unsuccessful Risk Allocation Valley Crest Regis (Owner) Valley Crest (GC) Mission Pools (Sub) Regis = Additional Insured Defense & indemnity by contract CGL with National Union
- 10. © 2015 Bradley Arant Boult Cummings LLP Unsuccessful Risk Allocation Valley Crest Accident 2001: Project Completed 2007: Diving Accident Epps v. Valley Crest Tender to Mission Pools Mission Pools 2001- 2004 CGL Policy “Cancelled”
- 11. © 2015 Bradley Arant Boult Cummings LLP Unsuccessful Risk Allocation Valley Crest Settlement Regis paid Epps $4.5 million Valley Crest paid $50,000 – $20,000 to Epps – $30,000 to Regis Mission Pools paid $200,000 – $130,000 to Epps – $70,000 to Regis
- 12. © 2015 Bradley Arant Boult Cummings LLP Unsuccessful Risk Allocation Valley Crest Defense Costs Valley Crest: $200,000 to defend Regis Valley Crest: $400,000 to defend itself Valley Crest paid first $250,000 under its own CGL’s SIR National Union paid $400,000 – $50,000 paid to Epps and Regis – $350,000 in defense costs Regis responsible for $4.4 million
- 13. © 2015 Bradley Arant Boult Cummings LLP Unsuccessful Risk Allocation Valley Crest Litigation Epps v. Valley Crest National Union Valley Crest v. Mission Pools National Union v. Mission Pools Assumes Defense Under Valley Crest Policy
- 14. © 2015 Bradley Arant Boult Cummings LLP Unsuccessful Risk Allocation Valley Crest Litigation Trial Court – $400,000 to National Union under equitable subrogation – $250,000 to Mission Pools under express indemnity Appellate Court – Upheld equitable subrogation – Reversed for jury trial on express indemnity claim
- 15. © 2015 Bradley Arant Boult Cummings LLP Unsuccessful Risk Allocation Valley Crest Lessons Learned Dispute may have been avoided if Mission Pools had CGL coverage in place – Policy was cancelled prior to injury • Cancelled in 2004 • Injury in 2007 • Query whether contract required notice of cancellation No waiver of subrogation precluding suit by National Union
- 16. © 2015 Bradley Arant Boult Cummings LLP Avoid Valley Crest Risk Allocation Steps 1 and 2 Determine Risk Designate Risk Allocation
- 17. © 2015 Bradley Arant Boult Cummings LLP Allocate Risk Through Waiver of Subrogation
- 18. © 2015 Bradley Arant Boult Cummings LLP Allocate Risks to Appropriate Policy Bodily Injury and Property Damage – Not arising out of professional services = CGL – Arising out of professional services = professional liability or errors & omission Financial Losses – Professional services – Errors & omission
- 19. © 2015 Bradley Arant Boult Cummings LLP CGL Coverage for Bodily Injury and Property Damage
- 20. © 2015 Bradley Arant Boult Cummings LLP Occurrence Form
- 21. © 2015 Bradley Arant Boult Cummings LLP Claims-Made Form
- 22. © 2015 Bradley Arant Boult Cummings LLP CGL – Completed Operations
- 23. © 2015 Bradley Arant Boult Cummings LLP Allocate Risk Arising out of Professional Services - PL
- 24. © 2015 Bradley Arant Boult Cummings LLP Allocate Risk Arising out of Professional Services – E&O
- 25. © 2015 Bradley Arant Boult Cummings LLP Claims-Made Professional Liability
- 26. © 2015 Bradley Arant Boult Cummings LLP Potential Gap in Professional Liability Policy A “all sums in excess of any applicable Self-Insured Retention that the Insured is legally obligated to pay as Damages or Claim Expenses because of a Claim for an actual or alleged negligent act, error or omission in the rendering of Policy B Professional Services exclusion: “based upon or arising out of any Wrongful Act in connection with the performance of by or on behalf of the Insured Entity for the benefit of any other entity or natural person . . . .”
- 27. © 2015 Bradley Arant Boult Cummings LLP Successful Risk Allocation Professional Liability Policy Architect Business Risk of Loss Policy follows risk Business tenders defense and liabilities to Architect’s insurer Architect’s Professional Liability Policy Contract to design new space Accident due to improper design Injured party sues Business
- 28. © 2015 Bradley Arant Boult Cummings LLP Allocate Risk Through Insured Party Status Chances of Coverage Named Insured Named Additional Insured Additional Insured By Name Additional Insured by Category (Blanket)
- 29. © 2015 Bradley Arant Boult Cummings LLP Named Insured
- 30. © 2015 Bradley Arant Boult Cummings LLP Additional Named Insured
- 31. © 2015 Bradley Arant Boult Cummings LLP Additional Insured Protects AI from NI’s negligence (except sole negligence) Insures AI for its own negligence Benefits: – Coverage without premium – No responsibility for deductibles or SIRs – No erosion of AI’s policies By Name or category (Blanket)
- 32. © 2015 Bradley Arant Boult Cummings LLP Additional Insureds by Name
- 33. © 2015 Bradley Arant Boult Cummings LLP Additional Insureds by Name
- 34. © 2015 Bradley Arant Boult Cummings LLP Blanket Additional Insured
- 35. © 2015 Bradley Arant Boult Cummings LLP Construction Endorsements
- 36. © 2015 Bradley Arant Boult Cummings LLP Construction Endorsements
- 37. © 2015 Bradley Arant Boult Cummings LLP Successful Reallocation of Risk Retail store contracts with printing company to advertise event Printing company agrees to indemnify owner for its own negligence Printing company three days late and retail store sustains financial loss Retail store sues printer for loss Printer’s errors and omissions policy provides defense and indemnity
- 38. © 2015 Bradley Arant Boult Cummings LLP Successful Reallocation of Risk Business contracts with billing vendor Vendor names Business as AI on Vendor’s professional liability policy Vendor discloses private information about Business’ clients Business’ clients sue Business for improper disclosure Insurer defends and indemnifies Business (and Vendor)
- 39. © 2015 Bradley Arant Boult Cummings LLP Allocate Financial Risk
- 40. © 2015 Bradley Arant Boult Cummings LLP Policy Limits Determine Amount of Reallocated Risk $2,000,000 $1,000,000
- 41. © 2015 Bradley Arant Boult Cummings LLP Financial Impact of Deductible vs. SIR $100,000 Deductible $100,000 SIR $100,000 $900,000 $1,000,000 $100,000
- 42. © 2015 Bradley Arant Boult Cummings LLP Consider Impact on Existing Insurance Program
- 43. © 2015 Bradley Arant Boult Cummings LLP Step 3: Document Contract terms should specify the responsible parties for each risk Contract terms should specify the types of coverage for each risk – Best to specify forms or equivalents – Best to specify particular coverages – Contract should specify the amount of coverage
- 44. © 2015 Bradley Arant Boult Cummings LLP All Policy Components Are Relevant to Contract
- 45. © 2015 Bradley Arant Boult Cummings LLP Declarations
- 46. © 2015 Bradley Arant Boult Cummings LLP Insuring Agreements
- 47. © 2015 Bradley Arant Boult Cummings LLP Exclusions (CGL)
- 48. © 2015 Bradley Arant Boult Cummings LLP Exclusions (Professional Liability)
- 49. © 2015 Bradley Arant Boult Cummings LLP Conditions
- 50. © 2015 Bradley Arant Boult Cummings LLP Conditions
- 51. © 2015 Bradley Arant Boult Cummings LLP Form vs. Endorsement
- 52. © 2015 Bradley Arant Boult Cummings LLP Require Proof of Insurance Policy Additional Insured Endorsement Form Numbers Certificate of Insurance Proof of Coverage Memorandum of Insurance
- 53. © 2015 Bradley Arant Boult Cummings LLP Certificate of Insurance Not Binding
- 54. © 2015 Bradley Arant Boult Cummings LLP Take Aways Deliberate Designate Document Avoid Valley Crest outcome – Unfunded liabilities – Unintended litigation
- 55. © 2015 Bradley Arant Boult Cummings LLP Questions? Katherine J. Henry 202.719.8244 khenry@babc.com
- 56. © 2015 Bradley Arant Boult Cummings LLP Please contact Pam Wiener, pwiener@babc.com, to be added to our BABC blog, newsletters and alerts. By signing up for our newsletters, you’ll also be invited to special events and seminars of note to your expertise.
Editor's Notes
- In part one, Katherine Henry will address the importance of coordinating indemnity and insurance contractual provisions with your company's insurance coverage.
- Purpose Allocate risk of loss between contracting parties Shift certain losses to insurers for one or both parties
- Discuss importance of coordinating contract terms with your insurance program and your company’s desired risk allocation. Discuss contractual allocation of risk between parties and their insurers. Examine successful as well as unsuccessful risk allocation. Focus on commercial general liability, professional liability, and errors and omission coverage. Will not cover other coverages that may be addressed by contract, such as property insurance, builders risk insurance, employers liability, workers comp. Same process can be applied to each of these risks. Three steps to successful allocation Deliberate – determine the parties’ risk Designate – allocate the parties’ risk Document – in both the contract and the insurance program
- Deliberate
- Designate
- Document If you are seeking coverage, require as much proof as bargaining position allows If you are providing coverage, ensure that counterparty understands your coverage so that counterparty can procure any additional coverage In everyone’s interest that all parties understand the parties’ obligations and coverage provided Hiding the ball benefits no one in the long run
- If risk not properly analyzed If contract not properly drafted Risk not properly shifted to appropriate party or insurer Face gaps in coverage
- Decided by the state appellate court in California on June 26th, published on July 2nd. Wonderful illustration of the pitfalls of contractual insurance requirements and the interplay between contracts and insurance policies. This case arose out of a construction contract for a St. Regis Hotel. Valley Crest was the General Contractor. Regis was the owner of the property. Mission Pools was a subcontractor responsible for building four swimming pools at the property. Multiple contracts involved. Contract between Valley Crest and Regis; required VC to defend and indemnify Regis Contract between Valley Crest and Mission Pools Multiple insurance policies involved Valley Crest’s own CGL policy with National Union with Valley Crest as Named Insured and Regis an Additional Insured Mission Pools CGL policy naming Valley Crest as Additional Insured
- The construction project was completed in 2001 In 2007, Mr. Epps dove in one of the pools while under the influence and was rendered a quadriplegic Epps eventually sued every potentially liable party, including Regis, Valley Crest, and Mission Pools Regis tendered its defense to Valley Crest Valley Crest tendered its defense to Mission Pools But Mission Pools had no available insurance policy to respond Mission Pools did not accept the tender
- Dispute settled with contributions from all three parties Regis paid the Epps $4.5 million Valley Crest and Mission Pools paid the other $250,000 -- $150,000 to the Epps and $100,000 to Regis Valley Crest paid a total of $50,000 Regis $30,000 Epps $20,000 Mission Pools paid $200 Regis $70,000 Epps $130,000
- Defense costs: Valley Crest incurred $200,000 to defend Regis Valley Crest incurred $400,000 to defend itself Valley Crest paid first $250,000 under SIR National Union paid the rest of the defense costs (approximately $400,000) and the $50,000 settlement Regis paid $4.4 million
- Resulted in claims among the parties to allocate these losses Litigation because contract terms failed National Union, Valley Crest’s CGL, sued Mission Pools Sought to recover the $650,000 paid by Valley Crest through its SIR and National Union for defense and indemnity of Valley Crest and Regis
- Because the contract did not include a waiver of subrogation, National Union asserted equitable subrogation on its own behalf and express indemnity on Valley Crest’s behalf under the contract Bench trial Trial court awarded National Union $400,000 under the equitable subrogation claim Trial court awarded Valley Crest $250,000 under the express indemnity claim Appellate court upheld award to National Union but reversed and remanded for new trial on Valley Crest’s express indemnity claim because no jury the first time So Valley Crest faced with yet another trial
- Although we have discussed reallocation to contracting parties and their insurers, without waiver of subrogation, risks not reallocated despite contract Use waiver of subrogation to reallocate risk Contract should require parties to: waive their recovery rights against one another for insured losses – to extent of insurance obtain a waiver of subrogation from their insurers Policies must include explicit waivers to comply with contract ISO form CG 29 88 10 93 – Waiver of Transfer of Rights of Recovery Against Others to Us Note in our example no waiver of subrogation. Insurer relied on doctrine of equitable subrogation to pursue subcontractor.
- Also important to allocate risk to appropriate policy. Note in the Valley Crest case the risk was allocated to two CGL policies – Valley Crest’s own CGL policy and Mission Pool’s CGL. We will focus on policies involving third-party liability. For bodily injury and property damage not arising out of professional services = CGL. For bodily injury and property damage arising out of professional services = PL or E&) Financial losses = PL or E&O
- So you have assessed risk and allocated it Need to allocate to appropriate insurance policy by type CGL for bodily injury and property damage not arising out of professional services and bodily injury (professional services exclusion) PL & E&O for bodily injury and property damage as well as financial damages arising out of professional services Issues to consider: Occurrence or claims-made? Completed operations? Professional Services?
- Broadest coverage Covers event regardless of when claim made Here bodily injury sustained in 2007; claim made in 2008. 2007-2008 policy triggered.
- Can purchase a claims-made CGL Claim made during policy period Event after retro date More limited coverage If claims made, then perhaps 2008-2009 policy would have been triggered.
- Includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work“ subject to some exceptions.
- Protects insured against liability for committing an error or omission while performing professional services Traditional professionals (doctors, lawyers, accountants) Definition of professional services critical – determines scope of coverage Understand your business Ensure that form or endorsements capture your business’ practices and exposures
- Protects insured against liability for committing an error or omission while performing professional duties Narrowly tailored to professions in question (for example, real estate brokers, lawyers, etc.) Used to be for “quasi-professionals” but now often used interchangeably with professional liability Definition of professional services critical
- PL always claims-made Retro date important – event must occur after the retro date If new coverage, policy inception date = retro date
- Policy A = Professional Liability – narrow definition Policy B: Management Liability and Crime – no definition Covers exposures for ds and os, managers, and business entities arising from governance, finance, benefits, and management activities (also called "executive liability insurance"). Includes D&O liability, employment liability, fiduciary liability, crime (kidnap, ransom, and extortion) Policy A coverage incorporated a narrow definition of “Professional Services” Policy B’s exclusion did not define “Professional Services” Gap created tension in seeking coverage under both policies False Claims Act complaint Argue that allegations met definition of Professional Services in Policy A But do not constitute the broader Professional Services contemplated by the exclusion in Policy B Could end up with two coverages or no coverages Who pays depends on interpretation of these terms
- Insurance policy should follow the risk of loss. Business hires Architect to re-model its space. Contract imposes risk of loss on party most able to control risk – Architect. Contract names Business as AI on architect’s policy for claims alleging Architect’s negligence – except Business’ sole negligence. Architect negligent. Business customer injured and sues Business. Business tenders claim to Architect’s insurer. Unlike other professional liability policies, architect’s professional liability does not exclude bodily injury or property damage because that is the greatest exposure for architects and engineers Architect’s insurer defends and indemnifies Business.
- Let’s look at how the parties attempted to allocate risk through insured party status Valley Crest was NI on its own CGL Mission Pools was NI on its own CGL (which was cancelled) Regis was AI on Valley Crest’s CGL Regis likely AI on Mission Pool’s CGL Named Insured Named Additional Insured Additional Insured By Name By Category Designations Lead to Different Rights and Obligations In our example, Valley Crest was the Named Insured on its own CGL policy with National Union. St. Regis Hotel was an Additional Insured – we don’t know whether by name or category. Similarly, Valley Crest was an AI on Mission Pool’s 2001-2004 policy, either by name or category. Had Mission Pool had a policy in place in 2007 that provided contractual liability coverage, Valley Crest would have been insured under that policy.
- Purchases policy Pays premium Assumes all obligations All conditions and exclusions apply, including business risk exclusions for your work and your product Primary Named Insured or First Named Insured if more than one Named Insured First Named Insured on Declarations Page Valley Crest on its policy Mission Pools on its policy Controls its own coverage
- Other Named Insureds typically listed on an additional named insured endorsement (blank endorsement, not a form) Conditions and exclusions arguably apply based on the form language Named Insured and Additional Named Insured not defined terms
- Owners and general contractors require subcontractors to add them as additional insureds. If owner/general contractor sued for subcontractor’s negligence, subcontractor’s insurance policy should provide coverage. Disadvantage to AI – no control Disadvantage to Named Insured – Shares Limits Valley Crest was an AI on Mission Pool’s policy. St. Regis Hotels was an AI on Valley Crest’s policy.
- Example of specified additional insured Valley Crest may have been named
- This form names a specific vendor as additional insured
- Additional forms for numerous categories Engineers, architects, surveyors When required in construction agreement Vendors Lessors Franchisors Mortgagees Trustees Users of Golf mobiles Users of teams, draft, or saddle animals
- Form Number ISO CP 1030 Most comprehensive – insures against loss to covered property from all causes except those that are specifically excluded. Don’t require basic form Don’t require broad form Require special form
- Business Income (and Extra Expense) (ISO form CP 00 30) Additional coverage for loss of earnings and/or extraordinary additional expenses May be purchased without the extra expense coverage (ISO Form CP 00 32). Business Income/Rental Value Protects landlord against loss of rents during reconstruction.
- Lease requires each party to insure against liability arising from its own acts or omissions within the areas under its control Lease required tenant to insure against damages arising from use and occupancy of premises Landlord responsible for common areas Customer assaulted on tenant’s premises Customer sued Landlord for negligent security in common areas Landlord sued Tenant and its insurer for coverage as AI Tenant did not breach contract even though no coverage for landlord under tenant’s policy Injury resulted from negligent security in common areas under landlord’s control Tenant not required to insure landlord for negligent security in common areas under landlord’s control
- Provides coverage to employers when employees are injured Workers’ compensation liability (statutory) Important that subcontractors have this coverage for their employees
- Work-related injuries that do not fall under workers’ compensation (non-statutory liability) Also important employee coverage
- Insurance policies pay for losses Key question – what are the potential losses? What is your companies’ financial exposure in relation to the particular contract?
- What limits do you need? Umbrella coverage (own terms and conditions) Excess coverage (follows form)
- $100 deductible reduces policy to $990k $100 sir preserves $1 million Here Valley Crest had a $250,000 SIR, so if it had a $1 million policy, $1 million would have remained
- Potential erosion of limits Limits shared with AI Primary/secondary Valley Crest’s own CGL policy limits eroded by the Regis loss Regis’ own CGL policy may well have been eroded by the uncompensated portion of the Regis loss
- Declarations Page Insuring Agreements Exclusions Conditions Definitions Form vs. Endorsement
- Named insured Policy period Policy limits Scope of coverage Policy form # Endorsement # Use ISO # if you can look at them
- Tells what the insurer agrees to cover Broad terms, usually defined elsewhere in policy Example from professional liability policy CGL: “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.”
- Exclusions narrow scope of coverage Workers’ Compensation Liability exclusion Pollution exclusion Contractual Liability exclusion Contractual liability coverage can be endorsed to policy Variations on contractual liability coverage Can be limited to insurance amount required by contract, e.g., even though policy requires higher limits
- Professional liability policies also contain various exclusions misconduct exclusions like this one Important to obtain final adjudication requirement Not misconduct triggering exclusion unless finally determined Preferably in underlying dispute as opposed to in coverage case
- Policies also incorporate various conditions, such as notice and cooperation. Insurers argue that conditions are prerequisites to coverage Insurers often use cooperation condition as a weapon against insureds Cooperation addresses insureds obligation to provide the insurer with cooperation in defending and resolving the underlying suit Insurers are fond of using the cooperation condition as justification for obtaining information clearly designed to build their coverage defenses. Beware of this strategy.
- Notice is one of the most important conditions CGL – as soon as practicable PL – as soon as practicable but within policy period or an extended reporting period PL – triggers can differ, e.g., notice when a risk manager or general counsel becomes aware of a claim as opposed to when insured entity becomes aware of a claim Late notice gives insurers an immediate coverage defense On occurrence policies, some jurisdictions they must show prejudice to win a late notice defense In other less favorable jurisdictions, prejudice not required and late notice can forfeit coverage On claims-made policies, late notice can be an absolute defense to coverage
- Policy form: uniform document that describes coverage, exclusions, conditions, definitions Endorsement: external page or pages that changes coverage. Endorsement may add, remove, or narrow coverage. Because of the key role that endorsements play, the policy form is not enough to confirm appropriate coverage.
- Listed in order of value Where you are on the chart depends on your bargaining position and role Are you providing the coverage? Are you requesting proof of coverage? Best evidence: policy Run through the list Form numbers on the dec page Endorsement numbers on the dec page COI will discuss in just a moment MOI now offered by some companies as their only proof of insurance coverage
- ACCORD Certificates of Insurance (“COI”) COIs do not grant coverage Informational only Issued by broker or agent Do not rely on COIs if your bargaining position allows you to request more If you do use COIs, make sure that you get them and keep them Have a system for managing COIs
- Deliberate Assess risk Determine which contracting party should have risk Determine which portion of risk should be insured Designate Include clear contractual language to communicate parties’ intent Identify the required coverages by type and amount Document Party seeking coverage require as much proof as bargaining position allows If you are party providing coverage, ensure that counterparty understands your coverage so that counterparty can procure any additional coverage In everyone’s interest that all parties understand the parties’ obligations and coverage provided