Miller
& McCarthy,
P.C.
Attorneys at Law
NEWS: INDEMNITY/ADDITIONAL INSURED
TABLE OF CONTENTS/QUICK REFERENCE GUIDE
Contractual Indemnity Language
I.
INTRODUCTION
The most common risk-shifting devices in contracts involve the use of
varying degrees of indemnity, insurance provisions, and pre-loss waiver
provisions. The intent
behind contractual risk-shifting is to deter litigation by allowing all
of the parties to know where they stand, from a liability exposure
perspective, before anyone begins the contracted work.
Greater certainty regarding which party has assumed the potential
liability benefits all parties, including the contractors (risk
management analysis, future insurance premium costs), the insurance
carriers (claims adjustment, underwriting, profit/loss), and the agents
(ensure that all requisite needs of clients have been met).
Texas courts seek to balance these business benefits of contractual
risk-shifting with the risks of potential inequity that may result,
particularly when (1) one party is not familiar with industry customs
and not aware of what it is agreeing to in the contract; (2) one party
has substantially greater bargaining position than another; and/or (3)
the results of a contractual risk provision cause one party to carry all
the liability costs on a project where they may have had only a small
role. This judicial
balancing is the nucleus for what amounts to a potential ‘minefield’
for the ill-informed, and a potential ‘goldmine’ for the
well-informed.
The interplay between the indemnity clause and additional insured provision
is becoming a greater source of litigation, as more interactive issues
arise that were not thought of during the drafting stage, such as: (1)
should the indemnity clause and additional insurance paragraphs be separate,
together, or both; (2) how may a general contractor best ensure triggering coverage under the subcontractor’s
policy (e.g. breach of insured contract and/or additional insured);
(3) can a GC draft a defective indemnity clause and still get coverage
as an additional insured under the sub’s policy; and (4) what defines
the scope of the GC’s status as an additional insured under the sub’s
policy?
This article in no way claims to be comprehensive, but it does seek to
address relevant issues regarding indemnity, additional insured
provisions, and waivers of subrogation.
Its intent is to provide (1) the conceptual and legal background
for why certain requirements exist and (2) propose some general
examples of how to meet those requirements.
It is hoped that, after reviewing this article, professional
risk-managers, either on behalf of the insured or insurer, will be aware
of the following:
·
How to draft or identify an enforceable
indemnity clause that also covers the scope of the intended work and
allows for insurance coverage
·
How to draft or identify an additional
insured clause that shows the parties’ intent for coverage on behalf
of the AI, including what to do about certificates of insurance
·
How to draft or identify an indemnity
clause that will not require an additional trial to a jury on the merits
of the claim merely to enforce indemnity
·
How to draft or identify an indemnity
clause and waiver of subrogation clause that prevents further lawsuits
by one party’s carrier seeking reimbursement from the already-indemnified
other party to the contract
·
What necessary facts will be needed
later to prove a duty to defend and/or indemnify
Additionally, there is a special section designed for agents with
pertinent caselaw regarding potential claims arising from the issuance
and reliance upon certificates of insurance.
There is an indexed appendix with (1) relevant samples of
petitions and discovery from suits on breach of indemnity and additional
insured issues and (2) relevant caselaw for future reference as needed.
II.
CONTRACTUAL INDEMNITY LANGUAGE
To
ensure that the indemnifying party knew what it was agreeing to do when
it signed the contract, agreements that indemnify another party for its
own negligence are enforceable in Texas only if they meet the following
fair notice requirements: (1)
the indemnity agreement is conspicuous and gives the indemnifying party
adequate notice of the obligations and (2) the express negligence
doctrine is met and the intent of the parties is obvious from the four
corners of the document. Ethyl
Corp. v. Daniel Const. Co., 725 S.W.2d 705, 707 (Tex. 1987); Enserch
Corp. v. Parker, 794 S.W.2d 2, 9 (Tex. 1990).
1.
Express Negligence
Under
the express negligence doctrine, a party seeking indemnity for the
consequences of its own negligence must express that intent in specific
terms within the four corners of the contract.
Permian Corp. v. Union Tex. Petroleum Corp., 770 S.W.2d
928, 929 (Tex. App.—El Paso 1989, no writ)(satisfied express
negligence with language of ‘and whether the same is caused or
contributed to by the negligence of [indemnitee], its agent or
employees’); B-F-W Const. Co. v. Garza, 748 S.W.2d 611, 612
(Tex. App.—Fort Worth 1988, no writ)(satisfied express negligence with
‘and regardless of any cause or of any fault or negligence or
contractor’ because it expressly stated the intent of the parties that
the subcontractor would indemnify contractor for the contractor’s own
negligence); Banner Sign & Barricade, Inc. v. Price Const., Inc.,
94 S.W.3d 692 (Tex. App.—San Antonio 2002, pet. denied)(satisfied
express negligence with ‘regardless of cause or of the sole, joint,
comparative or concurrent negligence or gross negligence of [indemnitee],
its officers, agents or employees’ because clause specifically
asserted that it covered the negligence of both parties).
An
indemnity clause may also be drafted to work the other way and purposely
avoid any indemnity for the other’s negligence through an
‘express exclusionary’ clause in the agreement.
In Gulf
Ins. Co. v. Burns Motors, Inc., 22 S.W.3d 417 (Tex. 2000), the Agreement did not contemplate Gulf
indemnifying an agent from the consequences of his own negligence when
the Agreement stated that Gulf would indemnify the agent for errors or
alleged errors in handling business, "except to the extent
[Gulf’s] Agent has caused, contributed to or compounded such
error." The express
negligence test was not met in this case since the agent was not being
indemnified for the consequences of his own negligence.
Because the Agreement unambiguously excluded indemnification, the
Agent was not entitled to indemnification from Gulf for his own
negligence.
2.
Conspicuousness
As
to the "conspicuousness" requirement, courts will look to
things such as size of font, title, whether the provision is in bold,
where it appears in a document and the length of the document, and
whether there is any evidence of "actual notice" by the
reader. Banzhaf v. ADT Security Sys., 28 S.W.3d 180 (Tex. App.--Eastland 2000, pet. denied).
In Banzhaf,
the indemnity provision was "conspicuous" where it: (1) was in dark, boldface type so it contrasted with the
lighter, smaller type of the remaining contractual paragraphs; (2) was
set forth in enlarged, all capital lettering; and (3) was directly above
the signature line where a reasonable person's attention would be
attracted to it when looking at the contract.
Conversely, in UPS Truck Leasing, Inc. v. Leaseway Transfer
Pool, Inc., 27 S.W.3d 174 (Tex. App.--San
Antonio 2000, no pet.), the indemnity provision was not conspicuous
because (1) it was paragraph 18 of 30 and (2) it was located on the back
side of a two-page, single-spaced standard form lease agreement.
Further, even though the indemnity language was contained in a
separate paragraph with a caption that was in upper case, bold type; the
title of the caption was merely "CUSTOMER AGREES."
The court held that the appearance
of upper case and bold type is of no avail when it does not specifically
reference the indemnity provision or indemnity language.
The mere presence of bold, upper-case type did not satisfy the
"conspicuousness" requirement when the title did not refer to
"indemnity" in any way, and accordingly, the indemnity
provision was not enforceable.
3.
Actual Notice
Texas
courts have shown a willingness to enforce indemnity provisions, even if
they arguably are not "conspicuous," if there is evidence of
actual notice by the indemnitor. A
signature or initials near the indemnity clause, and on the same page,
will aid in meeting this requirement because it will show that the
indemnitor read the clause. In
Coastal
Transport Co. v. Crown Central Petroleum,
20 S.W.3d 119 (Tex. App.--Houston [14th Dist.] 2000, pet. denied), the
fair notice requirement of conspicuousness was not applicable because
Coastal stipulated that its President read the Agreement when he signed
it on Coastal’s behalf. The
Agreement was less than two and one-half pages in length and the
indemnity provision was the largest paragraph of eight.
Under these facts, the court found the fact that Coastal's
President read the Agreement to be sufficient evidence to establish
actual notice of the indemnity provision.
The following two sample indemnity clauses are provided
by way of illustration only. They
have been drafted to track pertinent caselaw, with due consideration
on the enforceability issues above, as well as other issues below concerning
avoiding a second lawsuit, additional insured coverage, and scope of
the work covered in the agreement.
The differences between the samples are stylistic:
SAMPLE
ONE
INDEMNITY
SUBCONTRACTOR ASSUMES LIABILITY FOR ANY CLAIM OR ACTION BASED ON OR ARISING
OUT OF INJURIES, INCLUDING DEATH, TO PERSONS, OR DAMAGES TO OR DESTRUCTION
OF PROPERTY, SUSTAINED OR ALLEGED TO HAVE BEEN SUSTAINED IN CONNECTION
WITH, OR TO HAVE ARISEN OUT OF, OR INCIDENTAL TO, THE PERFORMANCE OF
THIS SUBCONTRACT BY SUBCONTRACTOR AND/OR CONTRACTOR, THEIR AGENTS AND
EMPLOYEES, AND THEIR SUBCONTRACTORS, THEIR AGENTS AND EMPLOYEES, REGARDLESS
OF WHETHER SUCH CLAIMS OR ACTIONS ARE FOUNDED IN WHOLE OR IN PART UPON
STRICT LIABILITY OR ANY DEGREE OF ALLEGED NEGLIGENCE, WHETHER SOLE,
CONCURRENT, OR GROSS, OF CONTRACTOR, ITS REPRESENTATIVES, OR THE
EMPLOYEES, AGENTS, INVITEES, OR LICENSEES THEREOF.
SUBCONTRACTOR FURTHER AGREES TO INDEMNIFY AND HOLD HARMLESS CONTRACTOR
AND ITS REPRESENTATIVES, AND THE EMPLOYEES, AGENTS, INVITEES AND LICENSEES
THEREOF IN RESPECT OF ANY SUCH MATTERS, AND AGREES TO DEFEND ANY CLAIM
OR SUIT OR ACTION BROUGHT AGAINST CONTRACTOR, ITS REPRESENTATIVES, AND
EMPLOYEES, AGENTS, INVITEES, AND LICENSEES THEREOF.
THIS OBLIGATION TO INDEMNIFY SHALL NOT BE ENFORCEABLE IF, AND
ONLY IF, IT BE DETERMINED BY JUDICIAL PROCEEDINGS THAT THE INJURY, DEATH,
OR DAMAGE COMPLAINED OF WAS ATTRIBUTABLE SOLELY TO THE GROSS NEGLIGENCE
OF CONTRACTOR. INSURANCE
COVERING THIS INDEMNITY AGREEMENT SHALL BE PROVIDED BY SUBCONTRACTOR.
SAMPLE TWO
INDEMNITY
TO
THE FULLEST EXTENT PERMITTED BY LAW, THE SUBCONTRACTOR IS LIABLE FOR AND
WILL DEFEND, INDEMNIFY, HOLD HARMLESS AND REIMBURSE CONTRACTOR
AGAINST:
(i)
all claims based on or arising out of any breach by Subcontractor
of this Subcontract, or a breach of any agreement relating to
Subcontractor’s work or any work done by any lower-tier subcontractor,
or any negligent act, gross negligence, error or omission by
Subcontractor or any lower-tier subcontractor arising out of the
performance of this Subcontract by Subcontractor or any of its
lower-tier subcontractors; and
(ii)
all liabilities, claims and demands for personal injury
(including death) or property damage (real, personal, tangible or
intangible), together with any resulting costs, legal fees and
consulting fees, based on or arising out of or caused by any act or
omission of the Subcontractor or any lower-tier subcontractor, their
agents or employees; and
(iii)
any claims resulting from the condition of the project
premises.
THIS
INDEMNIFICATION APPLIES REGARDLESS OF WHETHER SUCH CLAIMS OR ACTIONS
ARE FOUNDED IN WHOLE OR IN PART UPON STRICT LIABILITY OR ANY DEGREE
OF ALLEGED NEGLIGENCE, WHETHER SOLE, CONCURRENT, OR GROSS, OF CONTRACTOR.
THIS OBLIGATION TO INDEMNIFY SHALL NOT BE ENFORCEABLE IF, AND
ONLY IF, IT BE DETERMINED BY JUDICIAL PROCEEDINGS THAT THE INJURY, DEATH,
OR DAMAGE COMPLAINED OF WAS ATTRIBUTABLE SOLELY TO THE GROSS NEGLIGENCE
OF CONTRACTOR. INSURANCE
COVERING THIS INDEMNITY AGREEMENT SHALL BE PROVIDED BY SUBCONTRACTOR.
5.
Scope of the work covered by the indemnity clause
In
Banner Sign & Barricade, Inc. v. Price Const., Inc., 94
S.W.3d 692 (Tex. App.—San Antonio 2002, pet. denied), attached as
Tab Four, the general contractor, Price Construction, was sued for
personal injuries by motorists arising at Price’s construction site.
Price brought a declaratory action for enforcement of the
indemnity owed by Banner as its subcontractor.
Banner had contracted with Price to provide barricades, signs,
and traffic control devices at the worksite.
The question arose as to whether the claims by the motorists for
which Price was seeking to be indemnified were sufficiently related to
Banner’s work as the subcontractor.
The indemnification provision covered all claims and any injuries
of any nature whatsoever ‘arising in any manner, directly or
indirectly, out of or in connection with or in the course of or
incidental to, any of subcontractor’s work or operations hereunder or
in connection herewith.’ Because
the petition against Price, for which it was seeking indemnity, alleged
‘inadequate materials to be used as warning devices,’ the court held
that the claims were subject to the indemnity provision as a matter of
law. Banner Sign, 94
S.W.3d at 697.
It
should be noted that the construction of the language in the indemnity
agreement by the Banner court is not the same as construction in
an AI provision of an insurance policy construing, e.g.,
“arising out of.” Policy
terms such as “arising out of” on the AI endorsement have their own
caselaw, of which a key case, McCarthy Brothers Co., has been
attached to this article as Tab Eight.
If the scope of the indemnity qualifies under an otherwise
enforceable provision, then typically the GC, as indemnitee, triggers
coverage under the named insured subcontractor’s policy through its
“breach of insured contract” claim.
If, for some reason, the indemnity clause is not enforceable, or
simply as an alternative, the GC asserts its rights to coverage under
the sub’s policy as an AI, then the “arising out of” language on
the AI endorsement will be considered.
(Please see “Additional Insured Issues” below).
6.
Burden of proof necessary to be defended and indemnified
Any
obligation by the subcontractor or its carrier to provide a defense for
the general contractor under the indemnity clause will be determined
solely by the pleadings in the Underlying Suit.
Tesoro Petrol. Corp. v. Nabors Drilling USA, Inc., 106
S.W.3d 118, 125 (Tex. App.—Houston [1st Dist.] 2003, pet.
denied)(indemnitor’s duty to defend under an agreement may be
triggered solely by the pleadings in the underlying suit).
The
duty to indemnify under the agreement, however, requires facts and
evidence. A settling
general contractor may recover the amount paid in settlement from its
subcontractor if it shows the general contractor’s potential liability
to a claimant and that the settlement was reasonable, prudent and made
in good faith under the circumstances.
Amerada Hess Corp. v. Wood Group Prod. Tech., 30 S.W.3d 5,
10 (Tex. App.—Houston [14th Dist.] 2000, pet. denied).
In Gulf, Colorado & Santa Fe Railway Co. v. McBride,
322 S.W.2d 492, 495 (Tex. 1959), the Supreme Court addressed the status
of an indemnitee in a case where a settlement was made with the injured
party, after denial of liability on the part of the indemnitor.
The Court held that, having settled the claim without obtaining a
judicial determination of its liability, the indemnitee assumed the risk
of being able to prove the facts which might have rendered it liable to
the plaintiff as well as the reasonableness of the amount which it paid.
It will be necessary, therefore, for the indemnitee plaintiff to
establish that from its standpoint the settlement was made in good faith
and was reasonable and prudent under the circumstances. Id. As
the indemnitor denied liability under the contract, the indemnitee was
justified in making a reasonable and prudent settlement of the claim.
The only thing remaining to determine is whether or not the
indemnitee acted in good faith in making the settlement.
Id.
Thus, the duty to indemnify any settlement monies already paid,
or to be paid, requires evidence of “reasonable settlement,” which
ironically requires that the indemnitee (GC) show its own liability
exposure. However, the duty to defend is based solely on the pleadings.
So as a practical matter, any doubts regarding duty to provide a
defense should be resolved through a declaratory action as soon as
possible, even in the middle of the underlying suit.
The duty to contractually indemnify, on the other hand, will
typically require waiting until the underlying suit settles or is
otherwise resolved. Normally, any cross claims for contractual indemnity under
the subcontract are severed into a separate, second lawsuit for this
reason.
Technically,
the GC is seeking a defense from the subcontractor under the indemnity
clause, and/or a defense from the subcontractor’s carrier under the AI
clause. However,
practically speaking, the subcontractor will approach its own carrier
and ask that the carrier pick up the defense for the GC.
This is because the defense costs for the GC under the breach of
insured contract claim are considered ‘damages,’ as between the sub
and its own carrier, in the standard contractual liability policy that
contains an ‘insured contract’ clause which covers damages:
Assumed
in a contract or agreement that is an “insured contract,” provided
the “bodily injury” or “property damage” occurs subsequent to
the execution of the contract or agreement.
Solely for the purposes of liability assumed in an “insured
contract,” reasonable attorney fees and necessary litigation
expenses incurred by or for a party other than an insured are deemed to
be damages because of “bodily injury” or “property damage,”
provided: (1) liability to such party for, or for the cost of, that
party’s defense has also been assumed in the same “insured
contract”; and (2) such attorney fees and litigation expenses are for
defense of that party against a civil proceeding in which damages to
which this insurance applies are alleged.
“Insured
contract” means: That part of any other contract or agreement
pertaining to your business under which you assume the tort liability of
another party to pay for “bodily injury” or “property damage” to
a third person. Tort
liability means a liability that would be imposed by law in the absence
of any contract or agreement.
7.
Avoiding a second trial on the indemnity clause
One
scenario that comes up frequently is the following: After a general contractor has settled or defended any claims
against it, and now wants to bring a ‘simple’ action on the
indemnity language seeking reimbursement from the subcontractor, the
subcontractor responds by claiming that there must a determination of
fault as between the GC and the sub before the sub can know what
percentage, if any, of the contractor’s damages it owes in indemnity
on the underlying claim or suit. In other words, the sub claims a ‘trial within a trial’
must ensue, wherein the facts of the underlying claims are (re)litigated.
This obviously thwarts the risk-shifting intent of indemnity
clauses, which is to deter litigation.
In
American Indemnity Lloyd’s v. Travelers Prop. & Cas. Co.,
335 F.3d 429 (5th Cir. (Tex.) 2003), attached as Tab Five,
the Fifth Circuit Court of Appeals addressed this problem.
Applying Texas law, the court analyzed whether a finding of fault
of the indemnitor and/or indemnitee is necessary before an indemnity
clause may be enforced. The
court held that it is not necessary for the general contractor to
procure a finding of liability, in the Underlying Suit or otherwise,
before enforcing the indemnity clause in that case, since the clause
passed the fair notice tests and therefore should be enforced under the
Texas law ‘indemnity default’ standard.
American
Indemnity involved an ‘underlying lawsuit’ where the general
contractor was sued for damages from alleged injuries by an employee of
the subcontractor. The
general contractor settled the ‘underlying suit’ for $ 625,000.00,
with defense and indemnity paid by the carrier of the subcontractor, on
the contractor’s behalf, based upon the contractor’s additional
insured status conferred by the subcontract.
There was no finding of liability by any party in the underlying
suit.
The
carrier of the subcontractor then sought to be reimbursed half of the
paid settlement monies and defense costs from the contractor’s own
liability carrier, under an ‘other insurance’ clause.
Relying upon the indemnity clause in the subcontract, the
insurance carrier of the general contractor refused to pay any share of
the settlement monies or defense costs.
Instead, it claimed that it would owe no money since the
indemnity clause would just ‘bring the amounts paid back to it’
under a ‘circuity of payment’ due to the indemnity clause.
The carrier of the subcontractor countered that the indemnity
clause could not be enforced until there was a finding of liability as
between the subcontractor and contractor.
And since there had been no such finding in the settlement of the
underlying suit, the indemnity clause was not enforceable.
The trial court found the indemnity clause to be enforceable as a
matter of law and granted summary judgment on behalf of the
contractor’s carrier.
The
disputed indemnity clause in the subcontract provided in pertinent part
as follows:
[Subcontractor] agrees to indemnify [contractor] against and
hold [contractor] harmless from any and all claims, demands,
liabilities, losses, expenses, suits and actions (including attorneys
fees) for or on account of any injury which may arise (or which may be
alleged to have arisen) out of or in connection with the work covered by
this Subcontract, even though such injury may be (or may be alleged to
be) attributable in part to negligence or other fault on the part of
[contractor] or its officers, agents or employees.
This obligation to indemnify shall not be enforceable if, and
only if, it be determined by judicial proceedings that the injury,
death, or damage complained of was attributable solely to the fault or
negligence of [contractor] or its officers, agents, or employees.
The
American Indemnity Court contrasted Texas indemnity law (where
the default position requires a finding of indemnity if the fair notice
requirements are met) with California law where, for example, the
default position favors the party seeking to avoid indemnification until
that party can prove a finding of active-passive negligence.
Thus,
(1) since the express negligence doctrine and conspicuousness
requirements were met and (2) Texas only requires passing of these fair
notice requirements to enforce an indemnity provision, the court
defaulted to the last sentence of the indemnity provision itself where
it was clear that, absent a judicial determination of sole fault or
negligence on the part of the contractor, indemnification was required.
The indemnity clause was therefore enforceable as a matter of
law, even with no finding of liability between the parties in the
underlying suit.
III.
ADDITIONAL INSURED ISSUES
Almost
all subcontracts contain requirements that the subcontractor purchase
and maintain liability insurance that covers the GC as an additional
primary insured. There
is a minefield of issues that can and usually does arise, however, when
the GC seeks to enforce its additional insured status under the sub’s
policy by seeking defense and indemnity for claims made against the
GC. This is largely due
to the arrangement whereby the subcontractor is considered the named
insured, but the GC is merely an ‘additional insured’ under the subcontractor’s
policy. Some of the most
common grounds against coverage the GC may encounter will be the following:
·
The claims or damages the GC is complaining of did not
‘arise out of’ the subcontractor’s work or operations (especially
where pleading in underlying suit does not name subcontractor as
defendant)
·
Even if the claims or damages arose out of the
subcontractor’s work, the damages were caused after the
subcontractor’s work product was completed and are therefore excluded
under the completed operations exclusion
·
The subcontractor’s policy is excess to any policies owned
by the GC
·
The contractor failed to tender a proper request for defense
and indemnity because it sent notice only to the subcontractor, not
directly to the carrier
·
Any reliance by the GC on the certificate of insurance in
affirming its status as an additional insured is misplaced because
certificates of insurance do not create insurance coverage
·
Even if the policy does provide coverage, it is not in the
GC’s best interest to pursue it because the subcontractor’s carrier
threatens, under its ‘other insurance clause,’ to seek subrogation
from the GC’s direct carrier for any defense costs and/or indemnity
monies paid on the GC’s behalf (American Indemnity facts).
While
the GC must accept that its role with the subcontractor’s carrier is
more attenuated as an additional insured that never had direct contact
(in most cases) with the carrier, there are certain precautions the GC
can take. The subcontract
will not normally provide changes or additions to coverage since it is
outside the four corners of the insurance policy.
However, there are some steps that may be taken, and they begin
with an understanding of the scope of the GC’s additional insured (AI)
status under the subcontractor’s policy.
Some
policies purchased by the subcontractor will name the GC as an
additional insured in the main coverage part.
Far more common, however, is an endorsement of one kind or
another. The typical
blanket endorsement may read as follows:
under the ‘Who Is An Insured’ section, ‘any person or
entity that the [subcontractor/named insured] has a contractual
obligation to add as an additional insured under the policy.’
There are multiple variations to this language, with many
containing the limiting scope of AI status to: ‘but only with respect
to liability arising out of [subcontractor’s/named insured’s]
ongoing operations performed for that insured.’
The
two items mentioned above that potentially may impact the scope of
coverage deal with the subcontract requirements: (1)
subcontractor’s ‘contractual obligation’ to add GC as an
additional insured and (2) liability arising out of
subcontractor’s ongoing operations for the GC.
Thus, the insurance policy is looking to the subcontract
to (1) trigger and possibly (2) define the
GC’s AI status. The
present caselaw on this issue is attached in the appendix as Tab Ten: Crown
Central Petroleum Corp. and Tab Eleven:
Phillips Petroleum Co.
Taking
all of the above into consideration, all parties will be best served by
creating a separate, independent paragraph of SUBCONTRACTOR’S
INSURANCE AND WAIVER OF SUBROGATION.
(Please see Tab Seven: Emery Air Freight Corp. for
the added benefit that a free-standing, independent insurance provision
is not subject to fair notice requirements like the indemnity clause).
It should be titled in similar language so that it can be easily
referred to in any certificate of insurance.
A
sample ‘paragraph of insurance’ (along with any schedule of coverage
amounts, not included here) may look like the following:
SAMPLE
THREE
SUBCONTRACTOR’S
INSURANCE AND WAIVER OF SUBROGATION
1.
The Subcontractor shall purchase from and maintain in a company
or companies licensed to do business in the jurisdiction in which the
work is located such insurance as will protect Contractor and its agents
from claims which may be based on, related to, arise out of, or result
from the Subcontractor’s operations under the Subcontract, and for
which Contractor and its agents may be held liable, whether such
operations be by the Owner, Contractor, Subcontractor or by anyone
directly or indirectly employed by them or subcontracted with them or by
anyone for whose acts any of them may be liable.
2.
Such insurance shall specifically refer to this Subcontract, by
endorsement or otherwise, and shall specifically cover the liability
assumed by Subcontractor as stated within the “Indemnity” provisions
of this Subcontract, but such insurance shall expressly provide for
additional insured status of Contractor, as set forth in below paragraph
5 of this section, whether or not required by any other provisions of
this Subcontract.
3.
Such insurance shall specifically contain coverage, by
endorsement or otherwise, for any and all damages caused after the
Subcontractor’s work has been completed.
Such coverage shall be sufficient to negate and/or overcome any
“completed operations hazard exclusion.”
4.
For purposes of this Subcontract, and the purchased insurance in
support thereof, the parties agree that ‘based on’ or ‘arising out
of’ the Subcontractor’s work or operations is intended to have the
broadest meaning afforded by Texas law.
This includes any ‘causal connection’ between the
complained-of damages and the work contracted for, and does not require
any allegations of negligence against Subcontractor, nor Subcontractor
being named as any defendant, for Contractor to be an additional insured
under the policies described in this section.
The parties further agree that the ‘causal connection’ will
be considered met regardless of whether the negligence of Contractor is
the sole alleged cause of the damages.
5.
The additional insured status of Contractor under
Subcontractor’s insurance purchased under this Section shall:
a.
be as an additional named insured, by endorsement or otherwise;
b.
be primary and non-contributory, regardless of any other
policies of insurance that may cover the same losses, and regardless of
whether Contractor is a named insured of any other policy. Any liability insurance coverage maintained by Contractor
which may be subject to claims arising out of the Subcontractor’s work
shall be excess beyond the coverage provided in the policies referred to
herein; and in the event of any “other insurance” conflicts between
any policies, full defense and indemnity will be afforded Contractor as
additional insured under Subcontractor’s insurance first, to the
exhaustion of limits and without any pro-rata sharing of defense costs
and/or indemnity;
c.
offer Contractor the right to ‘first request’ for,
and shall provide upon such request,
a defense against any claims or suits for which Contractor may
qualify as an additional insured;
d.
offer Contractor the option of tendering its notice and first
request for defense and indemnity against any claim or suit directly
to Subcontractor, as named insured and agent for receipt of notice of
claim, on behalf of Subcontractor’s insurance carrier.
6.
The
Subcontractor shall deliver certificate(s) of insurance evidencing the
insurance coverages required by this Section prior to commencing its
work under the Subcontract and within forty-eight (48) hours after
demand by Contractor at any time during the Subcontractor’s work.
The certificate(s) of insurance shall name Contractor as
certificate holder. The
certificate(s) shall state that “Certificate Holder is Additional
Insured under the named insured’s policy per the Subcontract, with
rights and status as conferred in ‘Subcontractor’s Insurance and
Waiver of Subrogation’ section of the Subcontract.”
7.
WAIVER OF SUBROGATION:
The
Subcontractor waives all rights against Contractor, and any of
Contractor’s agents and employees, for damages or injuries by any
cause of loss to the extent covered by insurance obtained by
Subcontractor pursuant to this ‘SUBCONTRACTOR’S
INSURANCE AND WAIVER OF SUBROGATION.’
The policy of insurance obtained by Subcontractor shall provide such
waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to Contractor,
and its agents and employees, even though Contractor would otherwise
have a duty of indemnification, contractual or otherwise, and/or did not
pay the insurance premium directly or indirectly.
It would be unfortunate for a GC, or its own primary carrier, to
have successfully procured defense and/or indemnity under the sub’s
policy, under either an insured contract claim or as an AI (perhaps
after a declaratory action or otherwise), only to have the sub’s
carrier then institute another lawsuit to recoup those monies (1) under
its ‘other insurance’ provision or (2) by subrogating through the
subcontractor against the GC based upon the insured contract clause.
You will recall that, in American Indemnity above in
section II.7, the sub’s carrier sought reimbursement from the GC’s
carrier through its “other insurance” clause.
“Other insurance” clauses give a common-law right to the
sub’s carrier to equitably subrogate through the GC against its own
primary, unrelated carrier, seeking half of its monies paid as a
co-primary insurer. The
court held that the enforceable indemnity clause precluded such an
effort by shifting the entire loss to the sub’s carrier
notwithstanding the existence of its “other insurance” provision.
Similar to American Indemnity, the indemnity clauses in
the samples in this article both contain the following language to
render the indemnity enforceable: “This
obligation to indemnify shall not be enforceable if, and only if, it be
determined by judicial proceedings that the injury, death, or damage
complained of was attributable solely to the gross negligence of
contractor.” Tracking American
Indemnity, such language should be sufficient to overcome any
subrogation claims directly by the sub’s carrier under its “other
insurance” clause after it paid monies on behalf of the GC as an
additional insured.
But what if the GC recovered the monies under an “insured
contract” theory? The
sub’s carrier would have paid (and treated as damages paid under its
policy on behalf of the subcontractor) monies to a third person with
alleged tort claims against the GC.
This scenario would allow the sub’s carrier to be subrogated
through its subcontractor against the GC, seeking recovery of the monies
paid under the insured contract coverage on the grounds of the GC’s
alleged tort liability. For
these reasons, the waiver of subrogation clause at the end of
SUBCONTRACTOR’S INSURANCE AND WAIVER OF SUBROGATION is designed to do
one thing: prevent
attempted subrogation by the subcontractor’s carrier after it has
agreed to pick up the defense and/or indemnity of the GC under an
insured contract theory.
Subrogation is the substitution of one person in place of another
with reference to a lawful right or claim; subrogation may be equitable
or contractual.
Lancer Corp. v. Murillo, 909 S.W.2d 122, 127 (Tex. App.--San Antonio
1995, no writ). In Texas,
subrogation rights may be waived or altered by contract.
Id.
Waiver
is the intentional relinquishment of a known right or the intentional
conduct inconsistent with claiming that right.
Tenneco Inc. v. Enterprise
Products Co., 925 S.W.2d 640, 643 (Tex. 1996).
Waiver of subrogation may be used as an affirmative defense to
bar recovery of all insured losses.
Interstate Fire Ins. Co. v. First Tape, Inc., 817 S.W.2d 142 (Tex.
App.--Houston [1st Dist.] 1991, writ denied).
An insurance carrier has no greater rights then those possessed
by its insured. Id. (subrogees stand in shoes of one whose rights they claim, and
extent of subrogees' remedy and measure of their rights are controlled
by those possessed by subrogor).
Therefore,
one major way a party can avoid subrogation by an insurer is to include
a waiver of subrogation in a contract.
Patrick J. Wielinski, Waivers
of Subrogation under the AIA Documents, State Bar of Texas
Construction Law Section, State Bar Convention (June 2000).
Just as the insurer has the legal right to pursue subrogation, so
too does a party to a commercial transaction have the right to structure
it in order to prevent a specific insurer from subrogating against
another of the parties. Id. Technically,
subrogation itself is not waived. Id.
Rather, one or both parties to the contract waive their rights to
recover from the other for any damages arising out of the contract and
covered by insurance. Id.
Since
one party's right to recover from another party has been waived, the
first-party insurer's right to subrogate against that other party has
also been waived, even where the insurer pays the loss.
Id. at 8-9. Therefore, the actual "waiver of subrogation" is
found in the contract in connection with which the waiver is sought.
Id.
As
noted above, the most common source of waivers of subrogation are AIA
construction contracts. But
waivers can apply in any contract, and by tying the subcontractor’s
waiver to its procurement of insurance, the GC is tapping into a
plethora of caselaw construing waivers of subrogation under AIA
contracts—all holding strongly in favor of the public policy behind
waivers of subrogation to the extent insurance has been provided.
Tab Twelve: Walker
Engineering, Inc. provides a recent and detailed opinion by the Dallas
Court of Appeals outlining the state of Texas law on this issue.
A recent unpublished opinion, with petition denied, should be of consideration for both additional insureds and agents in the context of certificates of insurance. In Omni Metals, Inc. v. Poe & Brown, 2002 WL 1331720 (Tex. App.—Houston [14th Dist.] 2002, pet. denied), attached as Tab Six, the issue was whether the insurance agent had a duty to disclose based upon the past dealings and facts of the case, and whether the forwarding of a certificate of insurance to a party who relied upon the certificate to confirm expectations by the potential insured placed an obligation upon the insurance agent to the clear up any false conclusions on the part of the insured.
The
agent advised a customer of its named insured that the policy at issue
covered the desired claims. The
agent sent a certificate of insurance to its named insured Omni, knowing
that Omni wanted to make sure its property was covered as discussed
previously with Omni’s customer.
The certificate contained only partial disclosure as to coverage
under the policy. When
damage occurred to the property of Omni’s customer, Omni submitted a
claim to the carrier and was denied because the policy did not allegedly
cover property damage of that nature.
Omni sued the agent, and the agent won summary judgment on
essentially each defense it asserted, including: (1) lack of privity;
(2) insured had a duty to read the policy; and (3) mere issuance of the
certificate of insurance failed to create any duty as a matter of law.
Although the agent won at the trial level, on appeal, the Houston
Fourteenth Court of Appeals reversed and remanded the case for trial
against the agent.
The Omni Court held that the agent had a duty to disclose,
based upon the facts and circumstances of the case, and the issuance of
a certificate of insurance that could be misleading raised at least a
fact question as to whether only a partial disclosure through the
certificate of insurance misrepresented the coverage afforded by the
policy.
This is an important reminder that, even though the certificate
of insurance does not confer coverage, under some circumstances it may
create potential liability, and should be treated with due care.
The quagmire of construing risk-shifting devices is not designed
to increase litigation, but rather to decrease it.
When the system works, it ultimately enhances the business
practices of all involved by allowing everyone to know where they stand,
and ideally, know the final quotient to the business risk calculation
well before the risk is undertaken. However, the system can only work at its best when all
parties involved, indemnitees, indemnitors, named insureds, additional
insureds, carriers, and agents, are fully versed and knowledgeable as to
the principles and application involved with indemnity provisions,
additional insured provisions, and waiver provisions—before
they are needed.
APPENDIX
Tab One:
Sample Petition for indemnity brought by General Contractor
Against Subcontractor after GC settled underlying claims against it
Tab Two:
Sample Petition brought against subcontractor’s insurance
carrier, subcontractor, and insurance agent for breach of duties to
defend, indemnify, and obtain additional insured status for GC under the
subcontract
Tab Three: Sample discovery
sent to insurance carrier, agent, and subcontractor in suit for breach
of duties to defend, indemnify, and obtain additional insured status
for GC under the subcontract
INDEX OF CASES (Tabs Four through
Twelve include cases cited in the body of the article and other cases
for potential future reference, all with topical reference)
Tab
Seven: