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Construction Contract Insurance and Indemnification Clauses: Presenting A Live 90 Minute Webinar With Interactive Q&A
Construction Contract Insurance and Indemnification Clauses: Presenting A Live 90 Minute Webinar With Interactive Q&A
a live 90‐minute webinar with interactive Q&A
Construction Contract Insurance and
Indemnification Clauses
Crafting Provisions to Allocate Risk and Minimize Liability
T d ’ faculty
Today’s f l features:
f
James P. Bobotek, Senior Associate, Pillsbury Winthrop Shaw Pittman, Washington, D.C.
Tamara L. Boeck, Of Counsel, Stoel Rives, Boise, Idaho
Scott D. Cahalan, Partner, Smith Gambrell & Russell, Atlanta
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Construction Contracts:
Crafting Insurance and
Indemnification Clauses
James P. Bobotek
Cl
Clearly
l identify
id tif each
h ttype off coverage required,
i d necessary
endorsements, limits and sublimits (ask the client’s risk
manager or insurance broker to weigh in on this);
Supplementary Payments
Insuring
I i Agreement
A t
What the insurer giveth
Exclusions
What the insurer taketh away
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.
Additional insureds
ISO Form CG 00 01 12 07
Your Product.
Product Includes goods or products manufactured
manufactured, sold
sold,
handled, distributed, or disposed of by the named insured, others
trading under the named insured’s name, and includes a person
or organization whose business assets a named insured has
acquired.
acquired
Does not apply if the work has not yet been completed or
abandoned. The work is considered to be completed the
earlier of:
When all the named insured’s work as required in a contract has been
finished.
When all the work at a job site has been completed if the named
insured’s contract requires work under the same contract but at another
job site.
For example, a mechanical sub has a contract to repair the HVAC systems for
at three different locations. Once the sub has completed the repair of the
HVAC equipment at the first location, that job is considered to be complete.
Thus, any bodily injury or property damage that may arise from that first
location is included within the products-completed operations hazard, even if
the other two jobs are not finished.
When that part of the work done at a job has been put to its intended use
by someone other than another contractor or subcontractor working on
the same project.
• Umbrella/Excess Insurance
• Workers’ Compensation
• Builder’s Risk
• Professional Liability
• Controlled Insurance Programs
• Umbrella/Excess Insurance
– Financial Practicality
– Does it correspond to the underlying coverage?
– Nature of the coverage – project or company
• Bureau of Recl
Recl’mm Contract Officer (CO) determined that insured
subcontract was responsible for defective siphons. Instead of
challenging CO’s decision in U.S. Court of Federal Claims,
Insured challenged the CO’s decision by appealing to Interior
Board of Contract Appeals (IBCA). Following 22 days of “trial,”
the Insured settled the claim for $10M and then sought to
recover the settlement and defense costs from primary and
excess insurers.
• Policy provided indemnification of “‘all sums which [Insured]
shall become legally obligated to pay as damages’” and provided
a defense
f duty for
f “‘any
“‘ suit against the Insured seeking
damages ….’” Policy did not define “suit” or “damages.”
• Workers compensation
Workers’
– Driven by state requirements
– Know whether there are state exceptions for indemnity,
e g Gonzales v.
e.g. v R.
R J.
J Novick Constr
Constr. CoCo. (1978) 20 C3d
798, 144 CR 408 (subcontractor paid via indemnity
clause with general contractor for its own workers’ injury).
• Builder s risk
Builder’s
– Understand the scope of the policy to dovetail with other
project insurance, e.g., special environmental, natural
resources, debris/waste removal, additional duration for
project.
– Ensure policy requirements are incorporated into the
construction contract, e.g., fire watch, security, off-site
off site
storage, etc.
• Professional liability
– Is the project a DB, and who is obtaining coverage for the
professionals?
– How broadly is “professional”
professional defined in the policy?
34
Selecting Insurance
Green Building Risks
Property damage
Certification denial or delay
Code compliance
Defects
D f t
Building performance
Personal
P l injury
i j
35
Selecting Insurance
Green Building Property & Casualty
Insurance
Green Building Replacement
Green Upgrade
Commissioning
36
Selecting Insurance
Green Building Liability Insurance
Indoor Environmental Endorsement
Reputation Endorsement
37
Selecting Insurance
Indoor Environmental Endorsement covers
bodily injury that is “sustained within a green
building and caused by any substance or odor
produced by or originating from HVAC
equipment
q p or anyy other equipment
q p or product
p
whose purpose is indoor climate, air quality, or
water quality control.”
Must be a certified green buildings at time of loss.
38
Selecting Insurance
Reputation Endorsement covers
Adverse green publicity event, and
Adverse green defense costs
39
Selecting Insurance
Adverse Green Defense Costs
Reimburses insured for the cost of defending
against an adverse green claim in a civil lawsuit
“demanding monetary or non-monetary relief,
and alleging
g g [the insured’s] failure to meet or
comply with industry recognized green building
standards at one or more insured buildings.”
Must be a certified green buildings at time of loss.
40
Selecting Insurance
Subcontractor Default Insurance ((“SDI”)
SDI )
Alternative to subcontractor performance bonds
41
Selecting Insurance
SDI Advantages over Bonds
Cost Savings
Longer
g Duration
Contractor Control
Consistencyy
Faster, Non-Adversarial Claims
Higher
g Limits
Broader damages
Bad faith damages
42
Selecting Insurance
SDI disadvantages
g over Bonds
Financial risk
Not appropriate for all contractors
No independent
i d d analysis
l i off subcontractors
b
Defaults more likely
No payment protection for subcontractors
No legal precedence
Single source
43
Selecting Insurance
The standard 2001 CGL policy form excludes most claims
for:
“Bodilyy injury”
j y and “property
p p y damage” g arisingg out of the
actual or threatened discharge, dispersal, release or escape of
pollutants into or upon land, the atmosphere or any water
course or body of water. Pollutants means any solid, liquid,
gaseous or thermal
th l irritant
i it t or contaminant,
t i t including
i l di smoke, k
vapor, soot, fumes, acids, alkalines, chemicals, or waste
materials.
44
Selecting Insurance
Exceptions to the CGL pollution exclusion include:
• Additional
Addi i l insured
i d
• Hostile Fire
• Building heating equipment (unless disbursed through ventilation
system)
• Away from Insured’s Premises but only if bodily injury or property
damage is
• Sustained within the building where the insured is performing operations
• Due to releases
l f
from parts off mobile
b l equipment designed
d d to contain such
h
pollutants
• Hostile Fire
• Products and Completed
p Operations
p ((but onlyy to the extent not
expressly excluded by other portions of the exclusion). ”
45
Selecting Insurance
Many believe that the exceptions to the CGL
pollution exclusion are inadequate because of
other limitations imposed by the exclusion,
exclusion
inconsistent application by the courts, and
the existence of sublimits.
sublimits
46
Selecting Insurance
Manyy insurance companies
p now offer Contractor’s
Pollution Liability Insurance, which generally
covers a Contractor’s liability for
Third party claims for environmental liabilities associated
with job-site operations of contractors
Claims for remediation costs stemming from pollution
incidents
c de ts resulting
esu t g from
o cocontractor’s
t acto s cove
covered
ed ope
operations
at o s
47
Additional Insureds
The Owner,
Th O the
th Architect,
A hit t theth Lender,
L d the th Owner’s
O ’ Representative,
R t ti other
th IIndemnified
d ifi d
Parties, and other persons or entities designated by the Owner in writing (together, the
“Additional Insureds” and each an “Additional Insured”) shall each be included in all
policies required hereunder to be maintained by the Contractor and Subcontractors
((except
p for workers’ compensation
p and p professional liability
y insurance)) as additional
insureds for claims against them relating to this Project, with the understanding that
any affirmative obligation imposed upon the insured Contractor and Subcontractor
(including without limitation the liability to pay premiums) shall be the sole obligation of
the Contractor and Subcontractor, and not of the Additional Insureds. All of the
Contractor’s
Contractor s and Subcontractors’
Subcontractors liability policies shall be endorsed so as to indicate
that such policies provide primary coverage (without any right of contribution by
any other insurance or self-insurance, including any deductible or retention,
maintained by an Additional Insured) for all claims against the Additional Insureds
arising out of the performance of this Contract by the Contractor or Subcontractors, or
anyone for whom the Contractor or a Subcontractor may be liable. These policies shall
include a separation of insureds/severability of interests clause for claims against
the Additional Insureds due to the negligence, act, omission or other conduct of the
Contractor or its Subcontractors, or anyone for whom the Contractor or a
Subcontractor may be liable.
liable
CG 20 10 11 85
CG 20 10 03 97
CG 20 10 10 01
Provides the additional insured with coverage only for liability arising out
of the named insured’s ongoing operations;
Expressly excludes injuries or damages suffered after (i) the “named”
insured’s work at the site of the cove operations has been completed, or
((ii)) the relevant portion
p of named insured’s work has been pput to its
intended use;
Intended to limit the term of the additional insured’s coverage to the time
period during which the named insured is actually performing operations;
Intended to deny coverage for completed operations;
Adopted in conjunction with CG 20 37 10 01, a new standard form
endorsement that will, if used in conjunction with this form, provide
coverage similar to the CG 20 10 11 85
CG 20 37 10 01
CG 20 10 07 04
Provides the “additional” insured with coverage only for liability caused in
whole or in part by the acts or omissions of either (i) the named insured
or (ii) someone acting on behalf of the named insured;
Limits coverage to ongoing operations for the additional insured;
Excludes injuries or damages suffered after (i) the named insured’s
insured s work
at the site of the covered operations has been completed, or (ii) the
relevant portion of named insured’s work has been put to its intended
use;
Intended to limit the coverage provided to the additional insured to liability
caused at least in part by the named insured’s ongoing operations;
Intended to eliminate coverage for the additional insured’s sole
negligence.
CG 20 37 7 04
Majority – no:
TIG Ins. Co. v. Sedgwick James of Washington, 184 F. Supp. 2d 591
(S.D. Tex. 2001), aff’d, 276 F.3d 754 (5th Cir. 2002);
Redmond
R d d v. St
State
t FFarm IIns. Co.,
C 728 A.2d
A 2d 1202 (D.C.
(D C 1999)
1999).
Minority - yes:
Marlin vv. Wetzel County Board of Education
Education, 569 S.E.2d
S E 2d 462 (W.
(W Va.
Va
2002).
5/2010 A
Acord
d fform llanguage:
Should any of the above described policies be cancelled
before the expiration date thereof, notice will be delivered in
accordance with the ppolicy
y provisions.
p
General Conditions of the Contract for Construction, Document A201, American Institute of Architects, 2007 edition.
• Indemnification provision was void.
Indemnification provision was void
– To the fullest extent permitted by law … from and against claims,
damages, losses and expenses, including but not limited to attorneys’
fees arising out of or resulting from performance of the Work
fees, arising out of or resulting from performance of the Work,
provided that such claim, damage, loss or expense is attributable to
bodily injury, sickness, disease or death, or injury to or destruction of
tangible property (other than the Work itself) including loss of use
resulting therefrom, but only to the extent caused in whole or in part
li h f b l h di h l i
by negligent acts or omissions of [Uniwest], a Subcontractor, anyone
directly or indirectly employed by them or anyone for whose acts
they may be liable, regardless of whether or not such claim, damage,
y y , g , g ,
loss or expense is caused in part by a party indemnified hereunder.
• Even
e tthough
oug indemnification
de cat o pprovision
o s o was as void,
o d, Subco
Subcontractor
t acto had
ad a
separate duty to defend and indemnify the prime contractor pursuant to
the terms of the prime contract clauses, which were incorporated by
reference into the subcontract. The terms of the prime contract provided:
– [Amtech] agrees to be bound to Uniwest by all the terms of the [Prime
Contract] and to assume toward Uniwest all of the obligations and
responsibilities that Uniwest has by the [Prime Contract] assumed
toward [Fountains]
[Fountains]. All terms and conditions contained in the [Prime
Contract] which, by the [Prime Contract] or by operation of law, are
required to be placed in [the] Subcontract[ ], are hereby incorporated
herein as if they were specifically written herein.
• Blaylock (cont.):
(cont ):
– The contract contained a “risk allocation” provision which
stated:
“[Defendants’ liability to plaintiff] for any and all injuries,
claims, losses, expenses, damages or claim expenses
arising out of this agreement, from any cause or causes,
shall not exceed the total amount of $50 $50,000,
000 the amount
of [defendants’] fee (whichever is greater) or other
amount agreed upon when added under Special
Conditions Such causes include
Conditions. include, but are not limited to to,
[defendants’] negligence, errors, omissions, strict liability,
breach of contract or breach of warranty.”
Construction Clauses: Insurance and Indemnity
J u n e 2 0 11 • Boeck – Boise/Sacramento
70728338.2 pptx 83
Example (cont.)
• Blaylock (cont.):
(cont ):
– Smith offered to pay his $50,000 and walk.
Blaylock
y rejected
j the offer and Blaylock
y
prevailed at trial.
– On appeal, the Court cited to a NC Supreme
Court decision upholding a similar risk
allocation provision. Bottom line: equal
bargaining strength allows the parties to
enforce their contact.
• Court
Court held that the inspector
held that the inspector’ss limitation of the
limitation of the
liability clause was valid.
– The court rejected homeowner’s argument that the
j g
clause was against public policy and unconscionable.
• Example:
– FL: Cannot require indemnification in a construction contract
for liability for damages to persons or property caused in whole
or in part by the indemnitee UNLESS the contract contains a
monetary limitation on the extent of the indemnification that
bears a reasonable commercial relationship to the contract and
it was part of the project specifications or bid documents, if any.
I no eventt can the
In th contract
t t require
i indemnification
i d ifi ti ffor
damages to persons or property caused by the indemnitee’s
gross negligence; willful, wanton, or intentional misconduct; and
punitive damages
p g ((unless caused by y the indemnitor).
)
• See also:
In Omaha Cold Storage Terminals, Inc. v. The Hartford Ins.
Co., No. 8:03CV445, 2006 WL 695456 (D. Neb. Mar. 17,
2006), the United States District Court for the District of
Nebraska held that a provision limiting a party’s liability for its
own negligence to $100,000 violated Nebraska’s anti-
indemnity statute, which prohibits indemnification for one’s
own negligence. The court concluded that any clause
insulating or limiting a person’s liability for its negligent acts
violated Nebraska’s public policy and anti-indemnity statute.
• See also:
– Saia Food Distribs. & Club, Inc. v. SecurityLink
from Ameritech, Inc., 902 So. 2d 46 ((Ala. 2004))
(holding maximum damages the owner could
recover was $5,800, the purchase price of the
equipment).
equipment)
Sacramento, CA
(916) 447-0700 Direct
(916) 447-4781 Fax
tlboeck@stoel.com
98
Interaction Between Insurance and
I d
Indemnification
ifi i
Insurance shifts risk of costs and liability
from the insured to its insurance company
99
Interaction Between Insurance and
I d
Indemnification
ifi i
Indemnification shifts risk of costs and
liability from one contracting party to
another.
another
100
Interaction Between Insurance and
I d
Indemnification
ifi i
While insurance may cover SOME risk
shifted to a party through indemnification,
insurance does not necessarily cover ALL
risks shifted to a party through
indemnification.
indemnification
101
Interaction Between Insurance and
I d
Indemnification
ifi i
Example: Owner shifts risk of pollution
clean up to Contractor through
indemnification but Contractor’s
indemnification, Contractor s CGL
policy excludes coverage for pollution clean
up.
up
102
Interaction Between Insurance and
I d
Indemnification
ifi i
A requirement to procure insurance for
another party may be an exception to an anti-
indemnification statute
statute.
103
Interaction Between Insurance and
I d
Indemnification
ifi i
Exceptions include:
• additional insured exception,
• the
h iinsurance policy
li exception,
i and
d
• the insurance cap on indemnity exception
104
Interaction Between Insurance and
I d
Indemnification
ifi i
CGL excludes liability assumed by the
insured under a contract or agreement,
UNLESS the insured purchases contractual
coverage endorsement
105
Interaction Between Insurance and
I d
Indemnification
ifi i
A/E s professional liability policy typically
A/E’s
excludes contractually assumed liabilities,
UNLESS such liability would have
attached to A/E in the absence of such
agreement.
106
Interaction Between Insurance and
I d
Indemnification
ifi i
A/E s indemnification obligations should be
A/E’s
limited to negligence to avoid loss of
coverage
107
Interaction Between Insurance and
I d
Indemnification
ifi i
Additional insured status allows direct
coverage in the event of a third-party claim,
but typically only if the claim derives from
the acts or omissions of the named insured.
108
Interaction Between Insurance and
I d
Indemnification
ifi i
Some courts have held that an additional insured
provision is void if it is inextricably tied to an
indemnification clause that is void under the
applicable State’s anti-indemnification statute. See,
e.g., Walsh Constr. Co. v. Mutual of Enumclaw, 92
P 3d 122 (Or.
P.3d (O Ct.
C App.
A 2003) W.E.
2003); W E O’Neil
O’N il Constr.
C
Co. v. General Cas. of Illinois, 748 N.E. 2d 667
(2001).
(2001)
109
Interplay Between Indemnification
P ii
Provisions and
d IInsurance
CGL excludes coverage for claims for bodily
injury incurred by insured’s employees
arising out of employment
But express obligation to indemnify for
injuries to employees may allow a claim
under the contractual coverage endorsement
110