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Presenting a live 90-minute webinar with interactive Q&A
Insurance Requirement Provisions
in Commercial Contracts Mitigating Risk, Maximizing Coverage, Interplay With Indemnification
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, DECEMBER 20, 2017
Katherine J. Henry, Partner, Bradley Arant Boult Cummings, Washington, D.C.
G. Benjamin Milam, Esq., Bradley Arant Boult Cummings, Charlotte, N.C.
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©Bradley Arant Boult Cummings LLP Attorney-Client Privilege.
Insurance Requirement Provisions in Commercial Contracts
December 20, 2017
Presented by:
Katherine J. Henry & G. Benjamin Milam
Topics Covered Today
• Best Practices for Allocation of Risk
• Allocation of Risk to Appropriate Party and Policy
• Allocation of Risk Through Additional Insured Status
• Documenting Proof of Coverage
6
Best Practices for
Allocation of Risk
Risk Allocation in Contracts
Contractual Insurance
Requirements
Indemnity and Hold
Harmless
Additional Insured Status
8
First Step: Assess Risks
9
Identify Assets
Determine and Rate Plausible
Risks
Strategize for Risk
Reduction
Identify Risk Gap
Allocate Remaining
Risks
Best Practices: Assessing Risk
What are we trying to protect?
What could go wrong?
How can we mitigate?
After mitigation, what risk remains?
10
Second Step: Allocate Risk Among
Parties
Risk transferred between parties by indemnification or
hold harmless agreement
– Provisions not always enforceable (especially in
construction context)
– Efficacy dependent on ability to pay
Party that bears risk may lay off all or portion of risk to
insurers
Contract should specify insurance requirements
11
Relationship Between Contractual
Indemnity and Insurance Coverage
Provisions
Many state statutes prohibit indemnification by one
party for the indemnitee’s sole negligence
Depending on jurisdiction, contracting party may
procure insurance coverage broader than permitted
indemnity
Contractual indemnification clause should be used
even where unenforceable under state law as it may
support coverage under “insured contract” exception
to contractual liability exclusion in a CGL policy
12
Insurer’s Defense of Indemnitee
Under CGL Policy
ISO Commercial General Liability Form CG 00 01 requires
insurer to defend indemnitee of insured if both are parties to
suit, but only when certain conditions satisfied:
– Suit seeks damages for which insured has assumed liability in
“insured contract”
– Insurance applies to liability assumed by insured
– Insured has also assumed obligation for and cost of defense of
indemnitee
– No known conflict of interest between indemnitee and insured
– Indemnitee and insured ask insurer to conduct and control
defense
– Indemnitee agrees to cooperate with insurer in suit
Cost of defense for indemnitee does not reduce limits of
liability
13
All Policy Components Relevant to
Contract
14
Declarations Page
Insuring Agreements
Exclusions
Conditions
Definitions
Form vs. Endorsement
Policy Limits Determine Amount of
Reallocated Risk
15
Financial Impact of Deductible vs. SIR
16
Best Practices: Allocating Risk
17
Recognize that allocation is a business decision
Recognize parties’ relative bargaining power
Identify each party’s leverage
Carrying risk acceptable if reflected in contract price
Third Step: Memorialize Risk Allocation
in Contract
Develop preferred contractual language
Recognize that obtaining preferred language may be
difficult in some circumstances
18
Best Practices for Contract Requirements
Keep language current
Ensure required coverages are appropriate
Keep provisions consistent
Specific requirements
Require A.M. Best Rating A:VII or S&P BBB or better
Waiver of subrogation from insurers
19
Allocation of Risk To
Appropriate Party and Policy
Allocate Risks to Appropriate Party
Contract to design new space
Accident due to
improper design
Injured party sues
Business
Architect’s Professional
Liability Policy
Architect Business
Risk of Loss
Policy follows risk
Business seeks indemnification from architect
Architect tenders defense and liabilities to Insurer 21
Waiver of Subrogation
Absent waiver, insurer generally subrogated to rights
of insured against third parties.
If insured has right of contribution from counterparty,
insurer may assert right to recovery, defeating the
desired risk transfer.
Insured’s agreement to waive rights against
counterparty could jeopardize coverage without
insurer consent.
Subrogation waiver added as endorsement to policy
constitutes insurer’s consent and acknowledgment of
risk transfer.
22
Rights of Insurer Absent Waiver
23
Example of Subrogation Waiver
24
Allocate Risks to Appropriate Policy
25
Liability for Bodily Injury and Property Damage
– Not arising out of professional services = CGL
– Arising out of professional services = professional liability or
errors & omission
Damage to Insured’s Property
– Commercial Property
– Business Interruption
– Builder’s Risk
Financial Losses
– Professional Liability and Errors & Omissions
– Employer’s Liability
– Workers Compensation
– Cyber Risk
Allocate Risk for Third Party Bodily Injury
or Property Damage
26
CGL coverage for bodily injury
and property damage not
arising from professional
services
Professional liability or Errors
and Omissions coverage for
bodily injury and property
damage, as well as financial
damages, arising from
professional services
Occurrence-Based Coverage
27
Occurrence-based CGL insurance covers event
regardless of when claim made
Bodily injury or property damage must happen
during policy period.
Policy may not respond if bodily injury or property
damage occurs outside of policy period, even if
the insured provided services during policy period.
Occurrence Form
28
Claims-Made Coverage
29
Claim must be made during policy period
Policy may have a retroactive date limiting when
events causing injury can have occurred
Coverage may be excluded if insured was aware
of potential liability for its prior acts before policy’s
inception
Claims-Made Form
30
CGL – Completed Operations
31
Covers bodily injury and property damage
occurring away from premises you own or rent
and arising out of your product or your work
Exceptions:
– Transportation of insured’s product
– Tools, uninstalled equipment, or abandoned or
unused materials at a job site
– Completed operations losses already covered
under CGL policy
Example of Best Practice
Goal: Protect Lender’s Interest in
Construction Project
Insurance Provisions
1. Name Borrower as “first named insured”
2. Name Lender as “mortgagee and first loss payee”
(ISO form CP 12 18) and use edition date
3. Requires Waiver of Subrogation in favor of Lender
4. Specifies “all risk”
32
Example of Best Practice
5. Mandates Collapse coverage as provided by ISO
form CP 11 20 or equivalent
6. Requires coverage for faulty work, materials, or
design
7. Sets maximum amount for deductible/self-insured
retention
8. Requires absence of key property exclusions
9. Waiver of coinsurance clause
33
Example of Best Practice
Casualty Insurance Provisions
1. Maximum deductible $25,000
2. Requires specific severability clause from CG 00 01
with preferred edition date,
3. Requires Lender be added as AI to general liability
and wrap up liability insurance under CG 20 26 with
preferred edition date
34
Example of Best Practice
Casualty Insurance Provisions
4. Waiver of subrogation clause
5. Requires separate commercial auto liability insurance
and specifies limits
6. Requires separate workers’ compensation and
employer’s liability insurance, and specifies limits
7. Requires umbrella coverage and specifies limits
8. Written notice of cancellation for all coverages
35
Example of Best Practice
Post-Construction Property Insurance
1. Post-construction property insurance requirements
mirror Builders’ Risk requirements where appropriate
2. Requires Loss Payee provision in favor of lender
3. Requires business income and rental value insurance
and specifies limits
4. Requires flood insurance if in FEMA flood zone
5. Requires earthquake insurance in areas with risk of
seismic activity, subject to lender approval
6. Requires equipment breakdown as a covered peril
7. Requires certain exclusions be absent from Policy
36
Example of Best Practice
Post-Construction Casualty Insurance
1. Post-construction casualty insurance requirements
mirror pre-construction requirements
2. Reduces deductible maximum to $5,000
3. Added requirement for liquor (dramshop) liability
insurance
4. Coordinates construction, repair, and alteration
insurance with property and builder’s risk insurance
to reduce potential gap in available coverage
37
Allocate Risk Arising Out of Professional
Services
38
Protects insured against liability for committing an
error or omission while performing professional
services
May be designated as “Professional Liability” or
“Errors and Omissions” coverage
Traditional professionals (doctors, lawyers,
accountants) as well as “quasi-professionals”
(e.g., real estate brokers)
Definition of professional services critical –
determines scope of coverage
Claims-made policy
Allocate Risk Arising Out of Professional
Services
39
Allocate Risk Arising out of Professional
Services – E&O
40
Successful Reallocation of Risk
41
Retail store contracts with printing company to advertise
event
Printing company agrees to indemnify owner for its own
negligence
Printing company three days late and retail store sustains
financial loss
Retail store sues printer for loss
Printer’s errors and omission policy provides defense and
indemnity for printer
Ultimate payment to retail store
Allocating Risk of Loss for Cyber-
Security Breach
42
Average cost of breach is $7.35 million
First-party costs
– Forensic investigation
– Legal advice to determine notice/regulatory obligations
– Notifying customers of breach
– Public relations
– Business interruption
Third-party costs
– Legal defense
– Settlements, damages, and judgments
– Liability to banks for re-issuing credit cards
– Regulatory liability
Successful Reallocation of Risk
43
Business contracts with billing vendor
Vendor names Business as AI on Vendor’s cyber liability
policy
Vendor discloses private information about Business’s
clients
Business’s clients sue Business for improper disclosure
Insurer defends and indemnifies Business (and Vendor)
Allocate Risk for Employee Bodily Injury
– Workers Compensation
44
Allocate Risk for Employee Bodily Injury
– Employer Liability
45
Allocate Risk to Appropriate Property
Policy
46
Commercial Property
Business income and extra expense
Builder’s risk
Flood
Contractor’s equipment/inland marine
Boiler and machinery
Property – Special Form (CP 10 30)
47
Allocate Risk of Loss for Business
Income
48
Unsuccessful Risk Allocation in Lease
49
Tenant Landlord
Tenant shall maintain
insurance against public
liability for personal injury
or death or damage to
property occurring in the
arising
out of the use and
occupancy thereof by
Tenant.
Landlord shall
maintain insurance
against public liability
for personal injury or
death or damage to
property
or arising
out of the use of the
common areas
Allocation of Risk Through
Additional Insured Status
Additional Insured by Category (Blanket)
Additional Insured By Name
Additional Named Insured
Allocate Risk Through Insured Party Status
51
Named Insured
Named Insured
52
Additional Named Insured
53
Additional Insured
54
Protects AI from NI’s negligence
Insures AI for liability arising from NI’s acts and omissions
(but not for AI’s sole negligence)
Benefits:
– Coverage without premium
– No responsibility for deductibles or SIRs
– No erosion of AI’s policies
By name or category (blanket)
Additional Insureds by Name
55
Additional Insureds by Name
56
Blanket Additional Insured
57
Standard blanket endorsement with privity requirement;
OR
Blanket endorsement extends to AI rights to any person
or entity that downstream party agrees to name as AI
Coverage Expansion: Privity vs. No
Privity
58
CG 20 33 Any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy
CG 20 38 1. Any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy; and 2. Any other person or organization you are required to add as an additional insured under the contract or agreement described in Paragraph 1. above
Documenting Compliance With
Contractual Insurance
Requirements
Memorialization of Coverage
60
Party requiring insurance should obtain proof of insured
status specified in contract
Should verify procurement of insurance, coverage
obtained, and any other matters specified in contract
Where contracting party cannot demonstrate satisfactory
proof of coverage, additional endorsements may be
necessary to implement bargained-for status
Certificates of Insurance may not be sufficient.
Require Proof of Insurance
61
Policy (including
endorsements)
Certificate of Insurance
Memorandum of Insurance
Endorsement Only
Certificate of Insurance Not Binding
62
Final Thoughts
63
Assess risk
Allocate risk
Memorialize risk allocation
Document insured status
• Document proof of coverage