Jeffrey J. Vita – Saxe Doernberger & Vita, PCTimothy B. Walker – Willis North America

San Antonio, TexasSeptember 20, 2012

Indemnity – Downstream party agrees to indemnify upstream party from project related losses

Insurance – Downstream party agrees to purchase insurance which covers upstream party as an “additional insured”

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Upstream Parties (Owners and Contractors) goal: transfer as much risk as possible

Downstream Parties and Insurers goal: avoid as much risk from upstream parties as possible

Same objective: Minimize loss exposure, retain limits in own policies, and maintain good insurance loss history/rating

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State statutes and more restrictive AI endorsements limit Upstream Parties’ ability to transfer risk

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Three Main Categories:1.Indemnitor (Downstream Party) is solely negligent2.Indemnitee (Upstream Party) is solely negligent3.Both parties are partially (concurrently) negligent

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Most states have anti-indemnity statutes

Legislative response to perceived inequities caused by greater bargaining strength and leverage of the Upstream Party

– All states allow for indemnification of sole negligence of indemnitor

– Approximately 25 states allow for partial indemnification for concurrent negligence

– Approximately 16 states allow for full indemnification for concurrent negligence

– A small minority of states allow indemnification for sole negligence of the indemnitee

The trend is towards greater indemnity restrictions, reducing upstream party advantage 6

Some states void the entire indemnity provision

Some states void only the offending language

Some states allow “savings” language such as “to the fullest extent permitted by law” 7

Sizeable advantages for Upstream Party:

Usually covers own negligencePotentially avoid claims between partiesProhibits subrogationProtects own corporate insurance program

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Scope of AI Coverage “Arising Out Of” “Ongoing Operations” “Caused in Whole or in Part By” “When you and such person have agreed in writing”

Limits Of Liability – Policy Limits (shared), Minimum amount required by contract.

“Other Insurance” and Exhaustion – Primary and Non-Contributory, Pro-Rata

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CG 20 33 07 04Only applies

“when you and such person or

organization have agreed in writing

in a contract”

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Insuring industry response to adverse case law

“Caused in whole or in part by” is narrower than “arising out of”

GC 20 10 10 93, CG 20 10 10 01, and CG 20 10 07 04 only apply to ongoing operations and only while the sub is on the job

Privity requirement of CG 20 33 07 04 can have effect of abolishing AI coverage for CM and/or Owner, which do not have written contracts with the named insured subs

Shrinking the Pie of Coverage Available to AI’s

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Sample Language:

Subcontractor is required to add contractor as an additional insured per (CG 20 10 11 85) endorsement or equivalent (CG 20 10 10 01 is acceptable if it is accompanied by CG 20 37 10 01). All insurance, whether issued on a primary or excess basis, afforded the additional insureds shall be primary insurance to any other insurance available to the additional insureds and that any other insurance carried by the additional insureds shall be excess of all other insurance carried by the Subcontractor and shall not contribute with the Subcontractor’s insurance.

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Handful of states prohibit Upstream Party from requiring Sub to obtain AI Coverage that protects CG from its own negligence.

Ex. Colorado, Georgia, Montana, New Mexico, Oklahoma, Oregon and Texas.

The Pie Continues to Shrink! 13

AI Endorsement may limit coverage to that which is minimally required by contract; E.g.:

The limits of insurance afforded to such person(s) or organization(s) will be: a.The minimum limits of insurance which you agreed to provide, orb.The limits of insurance of this policy whichever is less.

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1. POLICY LANGUAGE CONTROLS - Review language of competing policies’, primary/excess language and “other insurance” clauses

2. TRADE AGREEMENT CONTROLS - Determine intent of parties regarding risk transfer by reviewing underlying contract

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Two Schools of Thought:

Compare Horizontal Exhaustion All available primary policies must exhaust first Focus on policy language, not underlying contract Excess policy is a payer of last resort (as reflected by premium)

With Vertical Exhaustion

AI policies (primary & excess) exhaust before Upstream Party’s primary policy Focus on underlying contract’s indemnity obligation, not policy language / Reflects intent of parties Avoids circuity of litigation

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Vertical exhaustion avoids time and cost of litigation incurred by horizontal exhaustion because the loss is ultimately paid by sub’s carrier any way

Stringent anti-indemnity statutes diminish circuity argument - as AI coverage does not mirror indemnity coverage provided to sub

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Know the law of the relevant jurisdiction

Conform trade contracts to relevant law, to maximize recovery and avoid forfeiture by offensive language.

Always obtain and review AI endorsements

Consider consolidated insurance (“wrap-up”) programs, which may help avoid indemnity and AI issues involved in traditional programs 18

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