Jeffrey M. Tonks
YCPARMIA
THE IMPORTANCE OF RISK
TRANSFER
October 5, 2007
Bill Kerwin, Risk Services Manager
Jeffrey M. Tonks
YCPARMIA
The object of risk transfer is to shift potential risks to another party.(legal and financial liability)
PURPOSE OF RISK TRANSFER
RISK = Uncertainty Of Loss
Risk Management Theory
CONTRACTINSURANCE
CLAIM MANAGEMENT
AVOID CONTROL
RISK
FINANCE
PREVENTION RETAIN TRANSFER
Factors Affecting Contractual Risk Transfer
Control of Risk (minimization) Knowledge of Risk (awareness of possible concerns) Legal Limitations on Risk Transfer
(statutory/insurance) Existing Custom and Practice (industry specific) Bargaining Position of Each Party to a Contract
Size Competitive Marketplace for Services Reputation of the Parties
Key Contract Provisions
Indemnity Clauses
Liability Limitation and Exculpatory Provisions
Waivers of Subrogation
Insurance Requirements Assure the financial viability
Provide a coordinated insurance program
Fund a recovery of third party damages
Support the indemnity provisions of the contract
Strategies for Transferring Risk to Others
Observe Legal Limitations Back up Indemnity Provisions with Insurance
Requirements Reasonable Flexible Update Requirements Additional Insured Status
Shared Limits Completed Operations Coverage “Other Insurance”
Strategies for Transferring Riskto Others
Verify Compliance with Insurance Requirements
Certificates of Insurance
Errors
Notice of Cancellation – note the “endeavor clause”
Jeffrey M. Tonks
YCPARMIA
INDEMNITY AGREEMENTS
Indemnity Agreements
Hold Harmless and Indemnification are the same thing
The indemnitor assumes the liability of the indemnitee
Completely independent of insurance coverage
The Agreement does not relieve the indemnitee of all liability
to the injured party
Are classified based on the scope of obligation to indemnify
Indemnity TypesWhat is the “scope of the obligation?”
1. Broad Form - transfers the entire risk = All
claims arising from or in “connection with”
“Should do so expressly and unequivocally so
that the contracting party is advised in definite
terms of liability to which it is exposed.”
Cal. Civil Code 2782 prohibits transferring
indemnitee’s sole negligence in construction or
design contracts
Indemnity Types
2. Intermediate Form Assumes all liabilities except those caused by
indemnitee’s sole negligence
3. Limited Form (or Comparative Fault) Obligates indemnitor only to extent of its own fault
4. Hybrid Form Broad form for some risks and comparative for other
risks
CCCD Contractor Indemnity Clause Sample (Construction Projects)
CONTRACTOR agrees, to the fullest extent permitted by law, to indemnify and hold harmless DISTRICT, its officers, directors and employees against all damages, liabilities or costs, including reasonable attorneys’ fees and defense costs, to the extent caused by CONTRACTOR’s negligent performance of professional services under this AGREEMENT or acts in connection with the PROJECT, or any actions of CONTRACTOR’s consultants, subcontractors or anyone for whom CONTRACTOR is legally liable.
(cont’d next slide)
CCCD Contractor Indemnity Clause (Continued)
The coverage of such indemnification shall include, without limitation, reasonable attorneys’ fees and court costs incurred by DISTRICT with regard thereto. Said indemnity is intended to apply during the period of this AGREEMENT of CONTRACTOR’S performance and shall survive the expiration or termination of this AGREEMENT until such time as any action against DISTRICT on account of any matter covered by such waiver or indemnity is barred by the applicable Statute of Limitations.
(cont’d next slide)
CCCD Contractor Indemnity Clause (Continued)
The obligation to defend shall arise regardless of any claim or assertion that DISTRICT caused or contributed to the losses. CONTRACTOR’s reasonable defense costs (including attorney and expert fees) incurred in providing a defense for DISTRICT shall be reimbursed by DISTRICT except to the extent such defense costs arise, under principles of comparative fault, from CONTRACTOR’s (a) negligent acts or omissions; (b) breach of any of the provisions of this AGREEMENT; or (c) willful misconduct.
Indemnity Issues Does the injury or damage fall within the subject
matter of the hold harmless clause? Arising from or arising under
Arising out of the project
Arising out of, incident to, or in connection with the
agreement or the performance of the work or services
hereunder…
Arising out of or resulting from the performance by …
Broad interpretation with a “but for” test
Narrow interpretation of “clear and unequivocal” (CA)
Indemnity Issues
Indemnity Clauses Scope (broad or narrow)
Subject Matter (of the indemnity)
DURATION (upon completion, or longer?) When a contract terminates the clauses within also
generally terminate Absent clear and unequivocal language
Contrast Additional Insured Status under the insurance
policy
Sample Standard of Skill/Care/Experience Clause for Contracts (CCCD Contract)
By this AGREEMENT, CONTRACTOR accepts the relationship of trust and confidence established between CONTRACTOR and DISTRICT. CONTRACTOR covenants with DISTRICT to furnish its professional skill and judgment in accordance with the level of care and skill exercised by members of the profession or occupation currently practicing under similar conditions and in similar locations, and under California law applicable to those specializing in providing CONTRACTOR services for projects of the type, scope and complexity of the PROJECT in performing all services under this AGREEMENT. CONTRACTOR shall use its best professional efforts to complete the PROJECT in an expeditious and economical manner consistent with the interests and goals of DISTRICT. DISTRICT expects that CONTRACTOR shall take all special precautions necessary to protect the CONTRACTOR’s employees, DISTRICT’s employees, and members of the public from risk of harm arising out the nature of the work.
Jeffrey M. Tonks
YCPARMIA
Contractual Liability Coverage
INSURANCE:
THE MONEY BEHIND THE PROMISE
Contractual Liability Coverage
ISO forms and edition dates
Manuscript and non-ISO forms
Contractual Liability Coverage (Standard Forms)
Commercial General Liability Policy (CGL) Automatically provides insureds with “broad form blanket contractual
liability coverage” Insuring Agreement – We will pay those sums that the insured
becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which the insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage to which this insurance does not apply. We may at our discretion investigate any “occurrence” and settle any claim or “suit” that may result.
Contractual Liability Coverage (Standard Forms)
Watch for Contract Exclusion Language – e.g.
This insurance does not apply to… “Bodily Injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.
This exclusion does not apply to liability for damages: (1) that the insured would have in the absence of the contract or agreement; or (2) 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.”
When in Doubt - Confirm with your insurance administrator…
Contractual Liability Coverage (Standard Forms)
Examples of Insured Contracts Include:
a) A contract for a lease of premises…
b) Any easement or license agreement…
c) An elevator maintenance agreement
d) A contractor, architect, or other construction agreement
e) Also many other types of agreements…
That you seek to have insurance and endorsements issued pursuant to the terms within the contract
Contractual Liability Coverage (Under Standard Forms)
Umbrella and Excess Policies
(Catch all policies)
Language varies among insurers
Coverage for contracts has traditionally been very broad
Contractual Liability Coverage (Standard Forms)
Professional Liability Policies
CGL policies generally exclude professional services
Language varies among insurers and types of professionals
Coverage for assumption of another’s professional liability is
usually limited to the same kind for which the insured is covered
Contract exclusion might limit coverage to acts of the insured
CGL is needed for non-professional indemnity agreements
Contractual Liability Coverage (Standard Forms)
Pollution Liability Insurance (CPL) CGL usually excludes CPL coverage
Written on a scheduled project basis
Has contract exclusion subject to exceptions for
“covered contracts” Indemnity agreement between the named insured
contractor and the client is a “covered contract”
Some require a schedule of indemnity agreements
Contractual Liability Coverage (Standard Forms)
Named insureds There are more stringent occurrence reporting requirements
Make sure your Employees, executive officers and directors are insured
Certain exclusions only apply to the named insured
Must pay the deductible
Must pay the premium
May cancel the policy
Only the “first” named insured receives the cancellation notice (unless you
contract to be copied with same)
Other persons who qualify as insureds based on their relationship
with the named insured (such as a subsidiary or by CONTRACT)
Other entities may be added as insureds by means of an
“endorsement”
Additional Insured
Problems with the Hold Harmless
Chevron USA v Bragg Crane – while there is a limit to the amount of risk that can
be transferred under an indemnity contract, there is no such limit on obtaining
insurance
Note: scope of coverage will not always match up with indemnity agreement-
Additional insured status is not an alternative
Direct right of defense can be contracted/bargained for by your entity
Subrogation- generally an insurer cannot subrogate against its insured
Protection maybe limited so consider a waiver of subrogation
Personal injury coverage is added only if indemnitee is an insured
Obtaining coverage not otherwise available (ex. Malpractice,
Professional Services…)
Reasons To RequireAdditional Insured Status
Interplay between the indemnitee’s CGL and the Indemnitor’s CGL (additional insured)
Standard pre-1997 CGL coverage is primary but contributory
Your Current CGL Coverage: generally acts as excess coverage over any other primary insurance for which you have been added as an additional insured by “attachment of endorsement”
“Primary and non-contributory” endorsement Breach of contract on primary issue
Umbrella policies are not standard forms
“Other Insurance” - CGL
Losses that arise after the work has been
completed and accepted
Pre-1993 additional insured endorsements
included completed operations coverage- arising
out of “your work”
Post-1993 additional insured endorsements limit
coverage to “liability arising out of your ongoing
operations (the insured’s)”
Completed Operations
CG 20 10 – Owners, Lessees or Contractors Most widely used “Arising out of”
CG 20 09 – Owners, Lessees or Contractors Attached to policies that do not provide contractual liability coverage Covers vicarious liability and general supervision (for subs / agents / under
control) CG 20 11 – Managers or Lessors of Premises
Coverage ends when no longer a tenant Only that part of the premises leased to you
CG 20 12 – State or Political Subdivisions—Permits CG 20 33 – Owners, Lessees or Contractors—Automatic Status
When Required in Construction Agreement Does not have to be issued naming the specific party Limited to the time during which operations are actually being performed
CG 20 07 – Engineers, Architects or Surveyors: excludes professional liability
Endorsements (forms)
Umbrella policy will usually follow underlying
policy
No endorsement, but handled in the policy
Cancellation Notice
Policy only requires notice to the “first named insured”
California Insurance Code section 677.2(b) “…named
insured at the mailing address shown on the policy…”
Endorsements
Vicarious Auto Liability extended in the “who is an
insured” section by covering anyone liable for the
conduct of an insured
CA 20 48 form – Designated Insured Endorsement-
restates “who is an insured” (limits vicarious liability)
Additional InsuredAuto Liability
Requires an insurable interest in the insured property
Loss payee
No standard additional insured form
The main advantage would be to cut off subrogation liens
Builder’s Risk—shifting interests and no subrogation
Additional InsuredCommercial Property
Generally others cannot be named as an additional insured Organization may be responsible if contractor fails to purchase
So - Require the contractor to have coverage
Subrogation Require the contractor to name you on the CGL Hold-harmless clause in contract to limit your exposure
A waiver of subrogation (does not protect against an employee action)
Additional InsuredWorkers’ Compensation
Injured employee of contractor collects on workers
comp from contractor, then
Sues a third party contributing to the injury (you!);
The third party (you!) tenders suit back to the
employer under an indemnity contract/additional
insured provision
Additional InsuredThird-Party-Over Action
Jeffrey M. Tonks
YCPARMIA
INSURANCE
Commercial General Liability (CG 00 01) = CGL Covers BI, PD, Personal and advertising injury
Insured premises and operations in progress, products and
completed operations, contractual assumption of liability
Occurrence or claims made (rare)
Per occurrence limits and aggregate limits
Per-project and per location general aggregate endorsements
Exclusions – WC, Auto, EPL, Pollution, E&O
Types Of Insurance
Business Auto Coverage Form (CA 00 01) Covers BI, PD and Physical Damage for “any
auto” Subject to an “each accident” single limit- no
aggregate Coverage for “insured contract” Severability of interests clause Exclusions
Types Of Insurance
Workers’ Compensation (W 00 00 01) Covers statutory benefits, employer liability, other
states coverage
Policy limits are subject to sublimits for employer
liability
“Additional insured” status is generally not
available
Types Of Insurance
Commercial Property (CP 00 01)
Physical damage to buildings and contents
Named perils or all risk coverage
ACV or replacement coverage
Coinsurance clause
Types Of Insurance
Environmental Impairment Liability – no set forms Pollution Legal Liability
Covers liability for the release of pollutants from specified locations and includes clean up costs
Claims-made form
Contractors Pollution Legal Liability Specialized version of PLL for contractors Specific project or blanket Claims made
Environmental Professional Liability E&O Coverage for professionals
Types Of Insurance
Professional Liability E&O
Malpractice
Failure to use due care and the degree of skill expected of
a person in the same profession (set the desired level of
skill expected in your contracts/agreements)
Some occurrence based but usually claims made basis
Types Of Insurance
Insurance operates independently of the indemnity agreement
Do not reference insurance in the indemnity agreement (refer to elsewhere in
your contract)
Reflect your agency’s risk philosophy concerning the degree of protection
by demanding insurance and indemnification
Be sensitive to the insurance market
Modifications to standard policies or modifications to existing insurance
program causes problems, additional cost (that is buried and passed on)
and delays
so choose your modifications requested based on the degree of risk
exposure…
Insurance Requirements
Evidence of Insurance – “Must be required” Certificate
Certificate with amendments and attachments
Endorsements
Copy of the policy At least reserve the right for copy if a dispute later arises
Include punitive measure if not provided
General Provisions
Notice of Cancellation – needed to encourage replacement coverage Standard certificates do not require notice to
holders Insurer will “endeavor to” provide 30 days
advance notice Insurers might modify time A requirement of notice is refused by most insurers
General Provisions
Deductibles and Retentions – less is best
Require the amount be declared and subject to prior approval
Judge how much your contractor can afford
Allocate responsibility for paying to the insurance purchaser
Consistent with the indemnity agreement
Self-Insurance – is it insurance?
Need to evaluate a self-insurance program to determine if it will
meet its obligations (self-insured public entities are generally
sound)
“Other Insurance” is not self-insurance in California
General Provisions
A.M. Best
A VII or better
Insurance Company Ratings
• A++ and A+ Superior• A and A- Excellent• B++ and B+ Very Good• B and B- Fair• C++ and C+ Marginal• C and C- Weak• D Poor• E Under regulatory supervision• F In liquidation• S Rating suspended• NR 1-5 Not rated due to insufficient
info or request
Insurance Company Ratings
Financial Size – Reserves in millions of dollars XV greater than 2000 XIV 1500 to 2000 XIII 1250 to 1500 XII 1000 to 1250 XI 750 to 1000 X 500 to 750 IX 250 to 500 VIII 100 to 250 VII 50 to 100
Insurance Company RatingsVII or Better
Limits of Liability Set your agency’s guidelines for minimum
levels/not exact amounts Each contract can be reviewed looking at the
following factors: Prevailing practices in the industry The size of the business providing the service The current insurance market place The type of service being provided The risk involved in the service contracted for
Limits Of Liability
Jeffrey M. Tonks
YCPARMIA
It keeps going and going…It keeps going and going…
INSURANCE CERTIFICATES
Certificate holder vs. Additional Insured
Standard certificate is the ACORD form
Insurance Certificates
Standard Certificate
Manuscript certificate
Certificate holders right to notice of cancellation
“Endeavor to” and “but failure to do so…”
(This is not “Committed” Language)
Conflicts between the certificate and actual coverage
Disclaimer: “This certificate is issued as a matter of information
only and confers no rights upon the certificate holder. This
certificate does not amend, extend or alter the coverage afforded
by the policies below.”
Do you have insurance protection or not!
This can be resolved by being named as Additional Insured
Problems with Insurance Certificates
Insurance Certificate Issues
Watch for Underlying contract insurance requirements Disclaimer: “The policies of insurance listed below
have been issued…notwithstanding any requirement, term or condition of any contract…”
Certificate Tracking Verify the required coverages are in force Monitor ongoing compliance (expiration/termination) Should be an assigned duty of someone who is
organized
Some Indemnity and Insurance Language Samples for Contracts and Purchase Orders
Purchase Order example: The vendor agrees to defend, indemnify, and hold harmless the
Entity (You), its board of trustees, directors, officers, employees and
agents for any and all liability caused by the negligence or wrongful
act of the vendor arising out of the performance of this agreement, or
any act of omission of vendor, its agents, employees and servants, or
for product liability or breach or warranty by vendor, either expressed
or implied, and to pay all claims, damages, judgments, legal costs,
adjuster fees and attorney fees related thereto.
Some Contracts/Agreement Language Samples
Insurance: (referring to exhibit attached specifying coverages)
CONTRACTOR, at his sole cost and expense, shall obtain and maintain
throughout the entire term of this contract, the insurance set forth in Exhibit A
attached hereto.
Contractor Indemnity Provision
CONTRACTOR shall defend, indemnify, and hold harmless the Entity (you?),
its board of trustees, directors, officers, employees and agents from any and
all claims, demands, liability, damages, cost or expenses (including but not
limited to attorney fees) in law or equity that may at any time arise or be
asserted based in whole or in part upon any negligent or other wrongful act or
omission of the CONTRACTOR, it’s officers, agents, or employees.
CCCD Sample Insurance Requirements
CONTRACTOR shall purchase and maintain during the term of this AGREEMENT, with insurance companies duly licensed by the State of California with a rating by Best’s Insurance Rating Service of not less than AVII, policies of insurance which will protect CONTRACTOR and DISTRICT from claims which may arise out of or result from CONTRACTOR’s actions or inactions relating to this AGREEMENT or PROJECT, whether by CONTRACTOR or by any subcontractor or by anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be liable. The aforementioned insurance shall include coverage for: (see next slide)
CCCD Sample Insurance Requirements (cont’d)
Commercial bodily injury and property damage liability insurance in the combined single limit of not less than One Million Dollars ($1,000,000.00) for each occurrence for personal injury and/or death and Two Hundred Fifty Thousand Dollars ($250,000.00) as to property damage including, but not limited to, personal injury liability, broad form property damage liability, blanket contractual liability and products liability, covering the activities of CONTRACTOR under this AGREEMENT, and shall provide DISTRICT with a Certificate of Insurance and Additional Insured Endorsement evidencing such policies. The insurance policies shall contain covenants by the issuing company that the policies shall not be cancelled without thirty (30) days’ prior written notice to DISTRICT. DISTRICT and DISTRICT’S Board of Trustees, shall be named as additional insureds under such policy of insurance to be maintained pursuant to this section, and such policy shall contain a cross-liability endorsement. (cont’d next slide)
CCCD Sample Insurance Requirements (cont’d)
Worker’s Compensation and Employers’ Liability Insurance in the amounts required by law covering all personnel employed on the premises during the term of this AGREEMENT whether said personnel are employed by CONTRACTOR or supplied by persons or entities other than DISTRICT. CONTRACTOR shall maintain during the term of this AGREEMENT, Workers’ Compensation insurance with an insurance company duly licensed and admitted by the State of California with a rating by Best’s Insurance Rating Service of not less than AVII. (cont’d next slide)
CCCD Sample Insurance Requirements (Cont’d)
Comprehensive General and Auto Liability Insurance with an insurance company duly licensed and admitted by the State of California with a rating by Best’s Insurance Rating Service of not less than AVII. Said insurance shall have limits of not less than $1,000,000 combined single limit, bodily injury and property damage liability per occurrence with no annual aggregate limits, including:
Owned, Non-owned and Hired Vehicles Blanket Contractual Broad Form Property Damage Products/Completed Operations Personal Injury
(cont’d next slide)
CCCD Sample Insurance Requirements (cont’d)
Insurance Covering Special Hazards: The following special hazards shall be covered by rider or riders to above-mentioned public liability insurance or property damage insurance policy or policies of insurance, or by special policies of insurance in amounts as follows:* Automotive and truck where operated in amounts as above* Material hoist where used in amounts as above.
Professional Liability insurance, including Contractual Liability, with limits of $1,000,000. Such insurance shall be maintained during the term of this AGREEMENT and renewed for a period of at least five (5) years thereafter. In the event CONTRACTOR subcontracts or assigns any portion of its duties, it shall require any such subcontractor to purchase and maintain insurance coverage as provided in this subparagraph.
(cont’d next slide)
CCCD Sample Insurance Requirements (cont’d)
CONTRACTOR’s Builder’s Risk Insurance.
CONTRACTOR shall obtain and maintain Builder’s Risk “All Risk” Insurance, in accordance with Article 17 of the General Conditions; as set forth in Article 17 of the General Conditions; the coverage under the CONTRACTOR’s Builder’s Risk Insurance shall include coverage for damage arising out of earthquakes.
(cont’d next slide)
CCCD Sample Insurance Requirements (cont’d)
Each policy of insurance required above (with the exception of Worker’s Compensation) shall name DISTRICT and its trustees, officers, agents, and employees as additional insureds; shall state that, with respect to the operations of CONTRACTOR hereunder, such policy is primary and any insurance carried by DISTRICT is excess and non-contributing with such primary insurance, shall state that not less than thirty (30) days’ written notice shall be given to DISTRICT prior to cancellation, and shall waive all rights of subrogation against DISTRICT and its trustees, officers, agents, and employees. CONTRACTOR shall notify DISTRICT in the event of material change in, or failure to renew, each policy. Prior to commencing work, CONTRACTOR shall deliver to DISTRICT certificates of insurance and additional insured endorsements as evidence of compliance with the requirements herein to be attached hereto as EXHIBIT “C,” or this AGREEMENT will automatically be canceled. (cont’d next slide)
CCCD Sample Insurance Requirements (cont’d)
In the event CONTRACTOR fails to secure or maintain any policy of insurance required, DISTRICT may, at its sole discretion, secure such policy of insurance in the name of and for the account of CONTRACTOR and in such event CONTRACTOR shall reimburse DISTRICT upon demand for the cost thereof.
~~THE FINISH LINE~~
Summary:Well drafted Contracts and Agreements can shift much of the liability burden for contracted services from your entity to others through clear and defined contractual indemnification provisions and through the use of strong insurance language demanding additional insured status with accompanying endorsements…