Mastering Hold Harmless Clauses - American Subcontractors ...

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This white paper explains, in layman's terms, how a subcontractor can use subcontract language to minimize exposure to l
Mastering Hold Harmless Clauses

Published by American Subcontractors Association, Inc. Foundation of the American Subcontractors Association, Inc. 1004 Duke Street Alexandria VA 22314-3588 (703) 684-3450 [email protected] www.ASAonline.com

Copyright © 2017 by the American Subcontractors Association, Inc. and the Foundation of the American Subcontractors Association, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the American Subcontractors Association, Inc. Disclaimer: This publication does not contain legal advice. The discussion is intended to provide information and guidance to individual subcontractors. Specific circumstances vary widely, so subcontractors may need to consult their attorneys before acting on the premises described herein. Each subcontractor should decide for itself the contract terms and conditions which it believes will best protect its interests. Subcontractors should not agree among themselves as to the form of contract terms and conditions they will use. Such agreements may violate federal or state antitrust laws and could result in the imposition of civil and/or criminal penalties.

Table of Contents Introduction

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Types of Indemnity Clauses Broad-Form Indemnity Intermediate-Form Indemnity Mutual Limited- or Comparative-Form Indemnity

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Indemnity Terms Reaching a Fair Indemnity Agreement Insurance Implications

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Responding to Typical Unfair Language Documenting Changes Revised Broad-Form Indemnity Clause

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Insurance Considerations Additional Insured Contractual Insurance

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Case Study A subcontractor was the loser in a case involving an employee who was seriously hurt after falling from a makeshift board-across-two-buckets seat. The construction manager provided the seat for workers changing clothes on the jobsite at the beginning and end of each work day. A trial jury found the construction manager to be 45 percent negligent, the employee to be 20 percent negligent and apportioned 35 percent of the blame to the subcontractor. Still, the subcontractor wound up paying all the bodily injury costs by failing to insist on a safer system for workers changing clothes. Why? Because the subcontractor signed a contract holding it liable for the total cost of an injury for an accident that involved any fault at all on its part.

Mastering Hold Harmless Clauses Introduction Subcontractors are vulnerable to paying large amounts of money for the negligence of others—both on contracts directly with owners, as well as those with prime contractors. This white paper explains, in layman’s terms, how a subcontractor can use subcontract language to minimize exposure to losses beyond the extent of its own negligence. It also addresses why insurance may not be a viable long-term means for avoiding costs associated with such losses.

Case Study A subcontractor accepted a contract which made it liable for all losses, no matter how caused, related to its work. Scaffolding was erected by the prime contractor for the subcontractor’s later use. A forklift, belonging to the owner, struck the scaffolding causing several serious injuries. The subcontractor had not yet started its jobsite work or obtained contractual insurance coverage. However, it was required to pay a large claim that almost put it out of business.

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Almost all construction contracts include indemnity provisions. Some of these terms represent an equitable allocation of responsibility among the members of the construction team for their negligence. Too often, though, the subcontract makes subcontractors responsible for the costs of job-related injuries or damages over which they have no control. The subcontract also may make a subcontractor liable for purely economic or consequential losses claimed by others that arise out of, or relate to, a subcontractor’s performance. These costs can be high for companies of all sizes, both in money and time lost. Some businesses have lost everything or have been severely crippled because of an inequitable indemnification provision in a contract. A general definition of indemnity is: An obligation of one party to protect the other party against loss or damage that may occur after the agreement is entered and that is related to the rest of the contract or the performance of the contract, including an obligation to repay that other party for demonstrated losses. In short, indemnity agreements simply identify the kinds of potential losses and the basis upon which one party or another will pay for those losses. Many construction subcontracts include indemnification provisions designed to shift the burden of loss from one party to another. Such a provision typically provides that the subcontractor assumes its own liabilities, as well as certain liabilities of the prime contractor or others. These liabilities may extend beyond bodily injury and property damage through inclusion of items such as Occupational Safety and Health Administration or other government agency penalties and project delay costs. If a contract is silent about indemnification, under common law each party is liable only for its own negligence, including the acts or omissions of its employees, agents and similar parties working for it. This represents an equitable basic apportionment of liability, though it lacks certainty where joint- or third-party negligence is involved. Therefore, one way to reduce one’s exposure to unfair claims for losses is simply to delete a hold-harmless provision, instead of attempting to modify wording that goes beyond the common law result. Many owners and prime contractors insist that they feel more comfortable with construction contracts that spell out who is to bear the cost for losses such as bodily injury, property damage or even for direct or consequential damages if work is not completed on time. Also, the contract documents usually include an indemnity provision as part of the general conditions. Because it’s not always possible to delete the holdharmless provision from the contract, negotiation for fair language may be the only alternative. ASA, along with the other associations that are part of the ConsensusDocs coalition, believes that a given risk should be assigned to the party to the contract best able to 2

evaluate, control, manage and bear the risk. This is a good standard to use in evaluating indemnity language.

Standard contract and subcontract documents developed by ConsensusDocs and the American Institute of Architects limit liability for losses to the extent caused by the party providing indemnification. For example, both the ConsensusDocs 750, Standard Agreement Between Constructor and Subcontractor and the American Institute of Architects A401, Standard Form of Agreement Between Contractor and Subcontractor, contain language that may be helpful in illustrating prevailing industry practice. ConsensusDocs Form 750 ¶ 9.1.1 states: “…. but only to the extent caused by the negligent or intentionally wrongful acts or omissions of Subcontractor, Subcontractor’s subcontractors, or anyone employed directly or indirectly by any of them or by anyone whose acts any of them may be liable.” The AIA Form 401 ¶ 4.7.1 states: “… but only to the extent caused by the negligent acts or omissions of the Subcontractor, the Subcontractor’s Sub-subcontractors, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable ….”

Types of Indemnity Clauses In the construction industry, the terms “hold harmless” and “indemnify” are synonymous. These terms are used interchangeably within this white paper. There are three basic types of indemnity provisions. These are known as: 1. Broad form. 2. Intermediate form. 3. Limited form. This white paper explores each of these, starting with the worst for subcontractors (broad form) and continuing to the most equitable for all parties (limited form). Broad-Form Indemnity Under broad-form indemnity, a subcontractor agrees to hold harmless other parties (known as indemnitees) from claims, damages and liabilities. This includes losses caused solely or partially by that other party’s active or passive negligence. Some hold-

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harmless provisions in subcontracts are so broad in scope that they cover not only the prime contractor, but the owner, the design professional and others. Some states have prohibited the enforcement of broad-form indemnity agreements as being against public policy. These laws recognize that only a party responsible for its own negligence is fully motivated to work safely. However, some owners and prime contractors still try to avoid responsibility for their acts and omissions through the inclusion of broad-form indemnity language in their contracts. The key phrase in typical broad-form indemnity language is: “… whether or not such liability, damage, loss, claim, demand or action was caused in part or in whole by the active or passive negligence or other fault of a party indemnified hereunder.” Of particular importance are the words “caused in whole or in part by the party being held harmless.” The net effect is that the subcontractor must pay the costs of claims, even for an incident caused totally by the party indemnified. The words, “to the extent permitted by law,” is essentially window dressing since existing laws and court decisions are going to apply whether stated in a contract or not. Here is a typical broad-form indemnity clause: “To the fullest extent permitted by law, the Subcontractor shall indemnify, defend, save and hold the Owner, the Contractor and Architect, their respective partners, officers, employees and anyone else acting for or on behalf of any of them (herein after collectively called “indemnitees”) harmless from and against all liability, damage, loss claims, demands and actions of any nature whatsoever which arise out of or are connected with, or are claimed to arise out of or be connected with: 1. The performance of the Subcontractor Work; or 2. Any accident or occurrence that is alleged to have happened in or about the place where such Work is being performed or in the vicinity thereof; or 3. While any of the Subcontractor’s property, equipment or personnel are in or about such place or vicinity, whether or not such liability, damage, loss, claim, demand or action was caused in part or in whole by the active or passive negligence or other fault of a party indemnified hereunder.” I

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Intermediate-Form Indemnity Intermediate-form indemnity limits one’s liability to losses that were caused either in whole or in part by an indemnitor, such as a subcontractor. It includes persons and entities hired or engaged by the subcontractor. Under intermediate-form indemnity, one can be held 100 percent liable for a loss despite having only a small fraction of responsibility for that loss. As a result, potential damage costs can be unfairly high. These provisions also lead to the lost time of key employees and legal costs incurred by defending lawsuits. Many such legal actions are taken solely because of the prospect of a claimant collecting all of a loss by demonstrating only the slightest active or passive negligence by a subcontractor. Intermediate hold-harmless provisions are a source of frustration when there clearly has been joint or contributory negligence. The key wording in a typical intermediate hold-harmless provision is: “… whether or not caused by the active or passive negligence or fault of a party indemnified hereunder.” This disclaimer means that the prime contractor is not liable, and is entitled to full indemnity by the subcontractor, even if a loss was caused in substantial part, but not wholly, by that prime contractor. Sometimes, the prime contractor will simply state that it does not accept liability for accidents unless they were caused solely by the prime contractor. Both phrasings saddle the subcontractor with liability for the full cost of accidents caused partly by the prime contractor, and for losses due to third parties, such as other subcontractors, jobsite visitors or unknown persons. The following is a typical intermediate-form hold-harmless provision: “To the full extent permitted by law, the Subcontractor agrees to indemnify and save harmless the Contractor and Owner from and against any claim, cost, expense or liability (including attorney fees), attributable to bodily injury, sickness, disease or death or damage to property caused by, arising out of, resulting from, or occurring in connection with the performance of the Work by the Subcontractor, its sub-subcontractors and suppliers, or their agents, servants or employees, whether or not caused in part by the active or passive negligence or fault of a party indemnified hereunder.” Mutual Limited- or Comparative-Form Indemnity A typical clause with equitable apportionment of liability is as follows: 5

“The Contractor and Subcontractor each agree to indemnify the other for the direct cost of losses due to bodily injury (including death) and property damage to the extent caused by indemnitor during the performance of its work on the project. In no event shall this agreement be affected by any insurance certificate provided by the parties and neither party shall be liable to the other for any consequential or indirect damages.” The intent of limited-form indemnification is to restrict a subcontractor’s liability for losses to the extent caused by the subcontractor and those working for or under its direction. For reasons discussed later in this white paper, it is necessary to be sure that hold-harmless language does not leave one responsible for: 1. Defending other parties in the event of a claim alleging one’s involvement. 2. Losses that occur other than during the performance of one’s work. 3. Accepting liability for delays other than those such as liquidated damages that were specifically agreed to for unexcused late completion. A subcontractor should consider extending indemnification through reciprocal holdharmless agreements with its customers. The example above shows typical language for mutual limited-form indemnification. The advantage of a mutual hold-harmless provision is that a prime contractor is much less prone to seek onerous wording, because the prime contractor is bound by mirrorimage terms itself. Note that mutual limited-form language includes the important words, “to the extent caused,” which represents an equitable apportionment of risk. Also note the clarification about insurance certificates not affecting the indemnity agreement. This is intended to prevent the equitable indemnity terms from being overridden by a separate subcontract requirement calling for the subcontractor to name the prime contractor as an additional insured under the subcontractor’s liability insurance policy.

Case Study A subcontractor was forced to defend a claim by an injured jobsite visitor who suffered a fall near the subcontractor’s installation site. There was no allegation of fault against the subcontractor. However, the subcontractor had to retain legal counsel for the prime contractor, because the subcontractor accepted liability for accidents happening near its work through a subcontract indemnity clause.

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Summary: Types of Indemnity Broad Form includes losses due to:  The other party’s sole negligence.  The other party’s partial negligence.  A subcontractor’s own negligence. Intermediate Form includes losses due to:  The other party’s partial negligence.  A subcontractor’s own negligence. Limited Form includes losses due to:  The extent of a subcontractor’s own negligence.

Indemnity Terms This section will help a subcontractor identify and respond to typical unfair indemnity terms. Note that the suggestions are phrased in the context of an agreement between a subcontractor and a prime contractor. The same principles apply when contracting directly with an owner. Reaching a Fair Indemnity Agreement One approach that can be used to reach an agreement with a prime contractor is simply to delete any indemnity provision in a subcontract unless it clearly limits one’s liability for losses due to bodily injury and property damage to the extent caused by one’s own negligent acts or omissions during performance of the work. A more specific approach is to substitute a limited-form indemnity provision, such as the mutual language shown in the example, “Mutual Limited- or “Comparative-Form Indemnity” on page 5. When the prime contractor-subcontractor agreement includes a hold harmless clause that flows both ways, a prime contractor is likely to be genuinely interested in seeing that the wording is fair. To consider the possible need for changes to indemnity language prior to active negotiations, first read through each of the prime contractor’s indemnity provisions, and list the unfavorable features. Be prepared to counter any points that the prime contractor may use to justify its provisions. Below are suggestions on how to deal with specific unfavorable indemnity language. This white paper concludes with sample changes to a typical one-sided hold-harmless provision.

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Insurance Implications In situations when one must negotiate changes based upon a prime contractor’s indemnity language, the principal goal is to limit one’s exposure to claims as much as possible. A subcontractor should limit its exposure, even if it maintains blanket contractual general liability insurance, which automatically insures an unfavorable indemnity clause. After all, the cost of that insurance, and one’s ability to renew it, depends upon keeping a good experience rating. There are many horror stories about subcontractors that received staggering insurance renewal rate increases or retrospective premium adjustments following a major claim. The extra cost could not be recovered on their fixed-price contracts. Similarly, insurance carriers have canceled subcontractors’ policies due to major claims. These subcontractors had to find replacement coverage, at any price, just to stay in business. An unfavorable loss experience, which implies unsafe work practices, can even limit a subcontractor’s ability to bid on projects on which the owner or the prime contractor prequalifies subcontractors using safety experience as a major rating factor.

Case Study Shortly after entering into a major subcontract, a subcontractor was informed by its insurance agent that its liability insurance rate was being increased by nearly 5 percent. The higher rate was largely due to an expensive lawsuit from a previous job. The lawsuit became the subcontractor’s responsibility because of a broadform hold-harmless provision requiring that the subcontractor defend an action against the prime contractor. Not able to get a lower price from another carrier, the subcontractor had to incur the higher insurance costs throughout the new project, without the ability to recoup its increased costs.

Responding to Typical Unfair Language Example No. 1: “To the extent permitted by law.” Some prime contractors will contend that clauses containing this wording are a benefit to subcontractors because a subcontractor is entitled to all the protection of statutes in the state where the jobsite is located. However, no additional protection is afforded, because the subcontractor already is entitled to all legal remedies, whether the subcontract language says so or not. Further, if a law changes, or a court’s

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interpretation of a law shifts, the subcontractor could be held to different terms than expected. Example No. 2: “Subcontractor shall indemnify, defend and save harmless Contractor.” The troublesome word in this sentence is “defend.” Generally, it is appropriate for each party to provide its own defense. If the subcontractor must defend both its own legal position and that of its prime contractor, separate attorneys usually are necessary due to a conflict of interest. Both out-of-pocket costs and demands on one’s time will arise, even when there are only vague claims asserting minor subcontractor involvement. Thus, a subcontractor should consider deleting the word “defend” from indemnity provisions. It is not found in the ConsensusDocs or AIA subcontract forms. Besides, many prime contractors prefer to use their own attorney to defend them, despite language in their proprietary contracts. Example No. 3: “Subcontractor shall indemnify Contractor, Owner and Architect and anyone working for any of them.” Indemnification should be limited to the prime contractor as part of a two-way holdharmless agreement. On occasion, a prime contractor will be able to show that the prime contract documents require subcontractors to indemnify the owner, and, perhaps the architect. This may even involve a broad-form indemnification that has been agreed to by the prime contractor in its contract with the owner. Under those circumstances, a subcontractor may decide to agree, albeit reluctantly, to accept the prime contract wording, but only as applied to an owner or architect, who is not likely to have an active job presence. A subcontractor should resist the notion that just because the prime contractor has unfavorable indemnity wording in its contract with the owner, there is any justification for the subcontractor to have to provide the same indemnity to the prime contractor. After all, a construction firm and its employees are much more likely to cause jobrelated accidents and losses than an owner or architect. A subcontractor can explain to the prime contractor that it is not in the insurance business, and that the prime contractor’s insistence on the same indemnity provisions as the owner is unwarranted. Example No. 4: “Losses of any kind or nature caused by the Subcontractor.” Prevailing construction industry practice is to limit contractor and subcontractor indemnification to losses involving bodily injury (including death) or property damage. A 9

subcontractor should avoid generalized wording that exceeds its insured risks and, even worse, may include liability for consequential damages due to late completion or the indirect impact of accidents. This language opens the possibility of delay claims or back charges for an owner’s or prime contractor’s lost profits, loss of use of a building, additional financing costs and other indirect expenses alleged to have been incurred due to subcontractor slowness. When a completion date is essential, a bonus and/or liquidated damages provision provides a more effective means of achieving project-wide adherence to the schedule. Additional wording often is necessary to limit a subcontractor’s liability to loss due to bodily injury (including death) and property damage during performance of the work, and to disclaim liability for consequential damages. As a matter of law, a subcontractor is vulnerable to claims for indirect costs alleged to have resulted from an accident or for late completion if the subcontract is silent about consequential damages. An example of appropriate wording is: “The Subcontractor accepts liability under this indemnity provision only to the extent of direct costs of claims or losses for bodily injury or property damage caused by negligent acts or omissions of the Subcontractor during performance of its Work and not to the extent caused by others. In no event shall the Subcontractor be liable for any consequential or indirect damages.”

Case Study A developer inserted a consequential damages provision in its indemnity language. The prime contractor accepted the provision. After the bids were taken, the prime contractor then insisted that all subcontractors protect the prime contractor’s position by including the same wording in their subcontracts. One subcontractor resisted the requirement, and the prime contractor agreed to delete the consequential damages provisions if the owner exempted the subcontractor from that requirement. The subcontractor called the developer and received an exemption. Sure enough, when the completion date was not met, the owner invoked the consequential damages provision. All the major subcontractors had to pay substantial consequential damages, with the exception of the one that had successfully fought the provision.

Example No. 5: “Contractor’s liability is specifically limited to losses caused by it or its employees, agents and representatives.” 10

It is customary for a company entering into a hold-harmless agreement to accept responsibility for the acts or omissions of those for whom it has legal responsibility. This includes employees, agents, servants, representatives, officers, officials, suppliers, subsubcontractors, etc. There generally is no objection to this elaboration. Sometimes, the prime contractor’s indemnity wording will call for subcontractors to be responsible, as well, for losses due to third parties by limiting the prime contractor’s liability to its own acts or omissions and thereby leaving all other liability to their subcontractors. This wording can be overcome by substituting the phrase: “Subcontractor’s liability if specifically limited to losses to the extent caused by its or its employees, agents and representatives.” Because subcontractors do not have control of the overall jobsite, they should not be asked to bear the cost of accidents caused by persons wandering around the site or accidents caused by unknown parties. Thus, the contract language should be modified to limit the subcontractor’s liability to losses caused by its own acts or omissions or those of its employees, agents or representatives. Example No. 6: “Subcontractor indemnifies Contractor for losses caused in whole or in part by Subcontractor.” As indicated above, it is necessary to recognize that two or more parties may cause a loss through their joint or contributory negligence. Accordingly, it is not enough to simply restrict liability to losses caused by one’s own company. Clarification may be achieved by inserting words such as: “Only to the extent caused in whole or in part by the Subcontractor’s negligence” in place of the words “caused in whole or in part by Subcontractor.” In court cases, the percentage of responsibility for each party frequently is defined. As an alternative, it is reasonable that the party with the preponderance of fault to pay the total cost. This simply is another way of allocating risk based on the relative or comparative negligence of the parties. Example No. 7: “Subcontractor accepts liability for losses that arise out of, are connected with, or occur in the vicinity of Subcontractor’s work.” Instead of accepting hold-harmless language that makes a subcontractor responsible for the cost of accidents that “arise out of, relate to, or occur in the vicinity” of one’s work, a subcontractor should consider limiting indemnification to “during performance” 11

of its work. Unusual things can happen at or near one’s installation area at a jobsite— things over which a subcontractor has no control. Only losses directly caused by one’s negligence in performance of its field work should be included in a hold-harmless agreement. A typical clarification is: “The Subcontractor indemnifies the Contractor for bodily injury and property damage losses to the extent caused by the Subcontractor during the performance of its work.” Example No. 8: “Subcontractor agrees to reimburse contractor for any OSHA or other government agency fines or penalties imposed on Contractor related to Subcontractor’s work.” Terms regarding fines may be found in the indemnity section of a subcontract or elsewhere in the contract documents. A subcontractor should consider deleting such terms. OSHA or other government agency fines and penalties are matters to be addressed with the government by the party cited. It is dangerous to seek a trade-off, whereby a subcontractor’s OSHA fines related to the prime contractor’s work are reimbursed to the subcontractor by the prime contractor. That’s because prime contractors frequently have more repeat citations, and thus are subject to higher levels of fines and penalties than subcontractors. In addition to OSHA fines, there also may be environmental and other state fines to protect against. Documenting Changes Documenting changes agreed upon after negotiations may be accomplished by a mutually agreed upon set of clarifications or by making changes to the customer’s subcontract form. A sample clarification for initialing by the parties, or as a part of an overall set of subcontract modifications, is as follows: “Anything to the contrary notwithstanding, the Contractor and the Subcontractor each agree to indemnify the other for the direct cost of losses due to bodily injury (including death) and property damage to the extent caused by the indemnitor during performance of its work on the project. In no event shall either party be liable to the other for any consequential or indirect damages.” Revised Broad-Form Indemnity Clause This is an example of modifications used to convert an unsatisfactory indemnity provision to make it more equitable. It is a revised version of the sample broad-form indemnity clause used earlier in this white paper. Deletions are indicated by overstrikes; additions are underlined.

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“To the fullest extent permitted by law, the Contractor and Subcontractor shall indemnify, defend, save and hold each other and the Owner, the Contractor and Architect, their respective partners, officers, employees and anyone else acting for or on behalf of any of them (herein after collectively called “indemnitees”) harmless from and against all liability, damage, loss, claims, demands and actions of any nature whatsoever which arise out of or are connected with, or are claimed to arise out of or be connected with, (1) directly caused by the negligence of indemnitor during the performance of Subcontractor’s its work, (2) resulting in bodily injury (including death) or property damage and (3) limited to demonstrated direct damages, exclusive of any consequential or indirect damages, (2) any accident or occurrence that is alleged to have happened in or about the place where the work is being performed or in the vicinity thereof or (3) while any of the Subcontractor’s property, equipment or personnel are in or about such place or vicinity, whether or not but only to the extent such liability, damage, loss, claim, demand or action was caused in part or in whole by the active or passive negligence or other fault of a party indemnified hereunder the party providing this indemnification.” Insurance can offer short-term relief to subcontractors. However, for major losses, it usually is a case of pay-me-now or pay-me-later, since premiums are heavily influenced by loss experience. Thus, it is necessary to minimize a subcontractor’s exposure to losses. A subcontractor should try to mesh indemnity obligations with its insurance coverage, and resist any uninsurable obligations, such as consequential damages.

Insurance Considerations Additional Insured Even a fair indemnity clause may not offer protection for a subcontractor that agrees to name the prime contractor, owner or others as additional insureds on an unrestricted basis. Many state laws say that certain types of indemnity provisions are unenforceable, because they are against public policy. However, most of these same laws permit a subcontractor to insure the prime contractor and owner for risks that would otherwise be unenforceable in that state. Naming others as additional insureds under a subcontractor’s policy means that those other parties have a right to invoke the subcontractor’s defense and liability coverages arising out of their negligence. They have the same right to claim against the subcontractor’s insurance policy as the subcontractor has itself. One observer said that only those who feel comfortable in letting other people write checks on their bank accounts should find the additional insured practice to be acceptable.

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Typical prime contractor additional insured subcontract wording looks like the following: “The Subcontractor shall have endorsement added to its Commercial General Liability Policy to include the Prime Contractor and Owner as additional insureds with respect to liability arising out of the operations of the named insureds.”

Case Study Workers of a trade contractor were overcome by chemical fumes before getting to their work stations at a refinery job. The owner admitted causing their serious injuries. Still, the court ruled that the trade contractor had to pay all the costs associated with the injuries. Those costs included a $250,000 deductible, legal court costs for both sides and drastically higher insurance premiums for years to come. The contractor’s mistake was naming the owner as an additional insured on the contractor’s liability insurance policy.

Further considerations are that: 1. Any deductibles that a subcontractor may have become immediately at risk each time a claim is filed by others. In the case study above, the subcontractor’s $250,000 deductible became one of the out-of-pocket costs paid by that subcontractor. 2. Separate legal defense generally is necessary if both the contractor and the subcontractor have been sued. 3. Valuable time can be tied up pursuing the defense of claims against the other parties. There are several ways of limiting one’s exposure to loss when negotiating indemnity and insurance terms: 1. Add wording such as the following to insurance certificates and policy endorsements: “This insurance certificate does not amend, extend or alter the coverage afforded by the general liability policies described above nor any contracts between the parties with respect to allocation of risk between the parties.” It is important that the use of any such restriction on insurance certificates be approved, in advance, by one’s insurance carrier. Many insurance policies impose a 14

positive duty on the insurance company to defend claims received by them from a party named as an additional insured. That duty usually continues, even if the subcontractor has attempted to limit coverage on its insurance certificates without modifying the underlying policy. The bottom line is that one’s insurance agent or carrier should approve the wording of any restrictions on insurance policies or certificates. In doing so, the carrier should confirm that it would have no obligation to defend claims going beyond the insurance policy restrictions. It is not only necessary to react to additional insured requirements in contract documents, but to do so using a method acceptable to the insurance company. 2. Identify on the insurance certificates any deductibles as applying to all claims under the policy, including claims filed by additional insureds. This can be done by notation on the insurance certificate, which states that each claim is limited by the stated dollar deductible amount. Again, it is important to work out arrangements such as this with one’s insurance carrier in advance. 3. Explicitly provide that the subcontractor’s policy will not be considered primary coverage. 4. Substitute Owners and Contractors Protective (OCP) Insurance in lieu of naming others as additional insureds. OCP coverage basically is limited to owner and prime contractor directives relating to the performance of the work by a subcontractor’s employees, and the premium cost is modest. Unfortunately, few owners and prime contractors are willing to accept OCP.

Case Study One specialty contractor thought that its insurance company had no obligation to accept a claim from an owner who had issued a purchase order for service work, which specified that the owner was to be named as an additional insured. The subcontractor, which provided only its usual liability certificate, was surprised to hear of a demand on its insurance company by the owner to defend a claim for an accident near the subcontractor’s worksite. There was no assertion of negligence or fault against the subcontractor. Still, the carrier’s position was that its underlying duty under the policy to defend claims was unaffected by the subcontractor’s failure to confirm to the owner that coverage existed. The subcontractor had to pay the legal cost to defend an action caused by others. That cost was then charged to the subcontractor’s experience rating, just as if it had been a claim directly against the subcontractor.

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Contractual Insurance Contractual coverage is insurance against any added liability imposed by the indemnity language in contract terms. Blanket contractual insurance automatically covers these risks. This insurance protects against any contract provisions that might slip through unnoticed or be granted due to compelling commercial considerations. However, it can be dangerous to routinely rely on this insurance to cover risks of losses caused by others. Major claims are quickly translated into higher premiums and may even jeopardize continued insurability. Thus, avoidance of exposure is far superior to undue reliance on contractual insurance. Some prime contractors contend that subcontractors should include an amount in the selling price of each job to cover the prime contractor’s negligence. There is no easy way to do that. Adding large sums results in noncompetitive bids. On the other hand, adding token amounts leaves one vulnerable to major out-of-pocket losses. Some subcontractors report good results by negotiating a firm price without any extra insurance, and then quoting a substantial extra amount for added coverage. This tactic works best on major jobs, on which sufficient additional revenue may be generated to cover a major claim. Simply stated, a subcontractor either finds itself in the insurance business or else must limit its exposure to losses caused by its own negligence.

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