Insurance Subrogation, Indemnity and Hold

Harmless Releases: Navigating the Complexities Protecting Subrogation Rights and Negotiating

Subrogation Waivers, Indemnities and Settlement Releases

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WEDNESDAY, MARCH 19, 2014

Presenting a live 90-minute webinar with interactive Q&A

Tarron Gartner, Shareholder, Cooper & Scully, Dallas

Steven K. Gerber, Member, Cozen O'Connor, Philadelphia

Stephen D. Palley, Founder, Palley Law, Washington, D.C.

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Insurance Subrogation,

Indemnity and Hold Harmless

Releases: Navigating the

Complexities

Tarron Gartner-Ilai

Cooper & Scully P.C.

214.712.9570

tarron.gartner@cooperscully.com

What Is Subrogation?

The Substitution of one party for another

whose debut the party pays, entitling the

paying party to the rights, remedies or

securities that would otherwise belong to

the debtor.

Black’s Law Dictionary, 9th Ed. (2004).

6

Why Is It Important?

Subrogation allocates loss to the party

who should actually bear the

responsibility.

Subrogation offsets the Company’s

overall indemnity payout.

Subrogation is a valuable claim service

that is part of the value-added proposition

afforded by the Company.

7

How Is Subrogation Recognized In Law?

Conventional Subrogation: Arises by contract.

Equitable Subrogation: Arises by operation of

law.

Statutory Subrogation: Legislatively mandated,

such as in worker’s compensation statutory

schemes.

8

How Does Subrogation

Apply To Insurance?

Insurer makes a payment under the

policy (typically first party property, auto

physical damage and/or UM/UIM physicsl

damage claims).

Insurer is entitled to seek reimbursement

from the tortfeasor?

9

Two Types Of Subrogation

Clauses

Transfer of Right Clause: Typically

provides that the “all rights are

transferred to the insurer” upon payment

under the policy to the extent of the

payment made.

Reimbursement Clause: Requires the

insured to reimburse all sums paid under

policy from any recovery realized.

10

What’s The Difference?

A Reimbursement Clause is not subject

to the “made whole rule.” A Transfer

Clause is.

11

Interests To Be Protected

Extracontractual Liability to the Subrogating Carrier – Putting the company’s (client’s) interest ahead of the insured.

Class Action Potential for Subrogating Insurer – Failure to comply with law; aggregate property damage claims.

Market Conduct Exams – Fines, penalties and damage to reputation and rank.

12

The Made Whole Rule

The insurer is not entitled to subrogation if the loss exceeds the amounts recovered

from the insurer and the third party covering the loss.

Ortiz v. Great Southern Fire & Cas. Ins. Co., 587 S.W.2d 342 (Tex. 1980).

13

What’s The Risk?

Putting the Subrogating Company’s financial interests ahead of the insured’s without Investigation

What if insured has significant uninsured loss?

What if insured has corresponding bodily injury claims?

What if insured and insurer are locked in a coverage dispute?

Could the insured put a constructive trust on thhe proceeds of recovery?

14

Best Practices

Increase client’s awareness of potential risks and inquire as to whether the client has communicated with the insured;

Encourage client communication to communicate with the insured and propose an allocation agreement; Disclose conflict of interest and obtain written waiver;

Encourage insured to seek the advice of counsel.

If the insured has an attorney, reach out to the attorney to negotiate a joint prosecution agreement allocating recovery and expenses.

15

Prorating Recovery, Deductibles

and Recovery Costs

Statutory rules in most states with regard

to recovery of auto physical damage

claims;

May require full reimbursement if staff

counsel is used;

All other lines of business subject to the

applicable common law made-whole rule.

16

Example

Deductible must be included in subrogated demands unless otherwise requested by

the insured. Proportionate sharing of attorneys’ fees is permitted provided

outside counsel is used.

2 A.A.C. §26.080

17

Allocation Agreements

Determines priority of recovery.

Serves as an assignment of claims for new consideration recited – becomes, in essence, contractual subrogation.

Shores up amount of uninsured losses claimed.

Bridges gaps caused by claim/coverage investigation – great customer service tool.

Allocates unassignable recoveries associated with insured’s personal claims that might otherwise prevent recovery on the subrogated claim.

Serves to protect both the insured’s and carrier’s legal and financial interests.

Determines allocation of costs.

Diminishes extracontractual liability.

18

Essential Elements

Recitals;

Statement as to policy terms;

Recital of amount of insured and

uninsured losses;

Consideration;

Identification of Joint Counsel;

19

Cont’d…

Assignment of non-personal causes of

action and/or claim retention;

Allocation of money associated with

punitive damages claimed;

Express waiver by insured of right of

recovery;

Prosecution of Recovery Suit;

20

Cont’d…

Advancement of Interim Costs;

Allocation of Interim Costs upon recovery

and expression of manner of calculation;

Allocation of net recovery and expression

of manner of calculation;

General terms and conditions.

21

Allocation Formula

Simple algebraic formula prorating the total

recovery to the deductible or uninsured

loss, and costs and attorney’s fees: Insured Loss = Percentage to which Insurer

Total Loss is entitled.

Uninsured Loss = Percentage to which Insured

Total Loss is entitled.

22

Allocation of Recoveries,

Deductibles and Expenses

If the Insurer pays a claim of for $47,500.00

($50,000.00 policy limits less a $2,500.00

deductible), and expends $6,600.00 recovering

$20,000.00 from the responsible party, the

insured is entitled to .01% of the $20,000.00

($200.00), and the Insurer is entitled to

$19,800.00. From that, the insured must pay

.01% of the costs, or $66.00, while the Insurer

must bear $6,534.00 of the responsibility.

23

Pursuing consumer protection

and punitive damages

Subrogating insurer may actually spend a lot of money supporting efforts at tort reform;

Some states do not allow for the assignment of certain types of claims;

Can the “real party” assert consumer protection claims? Is the insurer a “consumer”?

What happens if (however remotely), the subrogating insurer recovers more than what is paid under the policy? Assume that there is no uninsured loss and therefore no

allocation agreement;

Subrogating insurer’s policy likely provides subrogation only to “the extent of the payment made.”

24

Waivers of Subrogation

Stephen Palley Palley Law, PLLC

1750 K St, NW

Washington, DC 20006

202.847.3964

sdp@palleylaw.com

www.palleylaw.com

Waivers of Subrogation

Basic principles:

Common feature in commercial contracts.

Often ignored until after all a claim arises.

Scope can be broader than anyone realizes.

They are WAIVERS

(“of subrogation”)

State law varies widely

Different rules may apply where litigated between insurers, as opposed to insured v. insured.

26

Boilerplate

Language varies widely, but some common features issues can be identified.

Here’s an example from the AIA A201 general conditions (emphasis added):

11.3.1 Unless otherwise provided the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance written on a builder’s risk “all-risk” or equivalent policy form in the amount of the initial Contract Sum, plus value of subsequent Contract Modifications and cost of materials supplied or installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Section 9.10 or until no person or entity other than the Owner has an insurable interest in the property required by this Section 11.3 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Project.

27

What Is Being Waived?

The right of the parties to sue to the extent of “available” insurance coverage?

A third party insurance company’s rights?

Is a waiver of a third party’s rights really enforceable?

Why is it called a “waiver of subrogation”

cf. Robert Frost, “Mending Wall” (because people find comfort in things that have been around for a long time, even if they don’t necessarily make sense) (available at http://www.sparknotes.com/poetry/frost/section3.rhtml).

28

When Is The Waiver

Triggered?

Upon execution of the contract, before a claim even

arises?

When a claim arises but before it is paid?

After insurance is procured?

After a claim arises and an insurance company has paid?

29

Is Insurer Consent Required?

Policies may permit pre-loss waiver

On a blanket-basis (where required by written contract)

Or on a scheduled basis?

A “best practice” to coordinate between contract requirements and policy contents?

What if the policy doesn’t include a waiver?

Generally, insurer stands in insured’s shoes and the waiver is enforceable.

See e.g., North American Specialty Insurance Company vs. Payton Construction Corp., 80 Mass. App. Ct. 367 (2011)

Does the insurer have a claim back against their own insured?

30

In Insurer Consent Required?

If you’re an insured, does it matter?

Impact of anti-subrogation rules

See e.g., Allstate Ins. Co. v. Palumbo, 994 A.2d 174 (Conn.

2010).

An agreement to provide insurance company may be

deemed an implied waiver.

See e.g., Walker v. Vanderpool, 225 Va. 266, 271 (1983) (Va.

1983)

31

Third party beneficiaries?

If you’re not named in a contract that contains a waiver of

subrogation, can it still protect you?

Best practice is to get the waiver if you can, of course, but see cases like:

Gulf Ins. Co. v. Quality Bldg. Contractor, Inc., 58 A.D.3d 595 (N.Y. App. Div. 2009) (subcontractor protected by waiver of subrogation in prime contract where subcontract incorporated prime contract)

Best Friends Pet Care. Inc. v. Design Learned, Inc., 823 A.2d 329 (Conn. App. Ct. 2003) (subcontractor covered by waiver of subrogation in prime contract even where subcontract did not contain a waiver of subrogation provision).

32

How Much Is Waived?

Construction project:

Claims arising from ongoing operations?

Completed operations?

Does the waiver apply to “over/under” liability?

Does the waiver apply to claims between insurers

(equitable contribution, for example).

33

How Much Is Waived (cont)

Work v. non-work?

On the one hand . . . see, Copper Mountain. Inc. v.

Industrial Systems, Inc., 208 P.3d 692, 696 (Colo. 2009).

On the other hand . . . See, Lexington Insurance Co. v.

Entrex Communication Services, Inc., 749 N.W.2d 124

(Neb. 2008)

34

Are All Waivers Enforceable?

Waiver that extends to claims arising from “sole

negligence”

On the one hand . . . See Lexington Ins. Co. v. Entrex

Commc’n Servs., Inc., 749 N.W.2d 124, 130 (Neb. 2008).

On the other hand . . . See St. Paul Fire & Marine Ins. Co. v.

Turner Constr. Co., No. 08•2292, 2009 WL 738768, at *1

(3d Cir. 2009)

Workers compensation claims?

35

State Law Nuances

As always with insurance, there are many state law nuances. Here’s an example from Kansas:

K.S.A. 16-1803. . . .

(b) The following provisions in a contract for private construction shall be against public policy and shall be void and unenforceable:

. . .

(3) a provision that purports to waive, release or extinguish rights of subrogation for losses or claims covered or paid by liability or workers compensation insurance except that a contract may require waiver of subrogation for losses or claims paid by a consolidated or wrap-up insurance program, owners and contractors protective liability insurance, or project management protective liability insurance, unless otherwise prohibited under subsection (b)(5) of K.S.A. 2012 Supp. 40-5403, and amendments thereto.

36

Take-aways

If you are drafting a waiver of subrogation clause, think of it as a WAIVER.

Focus on scope of waiver:

Time

Property

Claims

Excess/under liability

The same holds true in litigation.

37

Some Light Reading

Subrogation Waivers, The Construction Lawyer, Vol. 31,

Number 4 (Fall 2011).

Insurance Update: 'Boilerplate,’ Subrogation Waivers and

Choice of Law, 14 Under Construction: The Newsletter

of the ABA Forum on the The Construction Industry

(Apr. 2012).

Available at: www.palleylaw.com/static_pages/publications.

38

Presented By:

Indemnity, Hold Harmless

and Confidentiality

Provisions In Property

Damage Subrogation

Releases

Steven K. Gerber

Cozen O’Connor

sgerber@cozen.com

(215) 665-2088

March 19, 2014

Strafford Publications Webinar

The Issue

In dealing with property damage subrogation

claims, reaching agreement on other issues,

especially indemnity, hold harmless and

confidentiality provisions, can be as difficult as

reaching agreement on the amount of the

Settlement.

40

What is “Indemnity”?

• According to Black’s Law Dictionary indemnity is:

“A collateral contract or assurance, by which one

person engages to secure another against an

anticipated loss or to prevent him from being

damnified by the legal consequences of an act or

forbearance on the part of one of the parties or of

some third person. Term pertains to liability for loss

shifted from one person held legally responsible to

another person.”

41

What is an “Indemnity

Contract”?

Black’s defines an “Indemnity Contract” as:

“A contract between two parties whereby the one

undertakes and agrees to indemnify the other against loss

or damage arising from some contemplated act on the part

of the indemnitor, or from some responsibility assumed by

the idemnitee, or from the claim or demand of a third

person, that is, to make good to him such pecuniary

damage as he may suffer.”

42

What is a “Hold Harmless Agreement”?

Black’s defines a “Hold Harmless Agreement”

as: “A contractual arrangement whereby one party assumes

the liability inherent in a situation, thereby relieving the other

party of responsibility. Such agreements are typically found in

leases, and easements. Agreement or contract in which one

party agrees to hold the other without responsibility for

damage or other liability arising out of the transaction

involved.”

43

Purpose?

The essential purpose of indemnity and hold

harmless provisions in a release is to protect the

settling party from future claims, costs,

expenses and/or attorneys fees after settling a

claim or lawsuit.

44

Reality of indemnity language

In reality, indemnity and hold harmless

language is whatever the releasing party

agrees to in the Release. It is therefore

critical that you know exactly what you

have agreed to on behalf of the

recovering subrogating insurer.

45

Who wants what?

• Defendants and liability insurers typically want

to make the protection – and language –

provided by a release as broad as they can.

• Conversely, subrogating insurers, and

plaintiffs in general, prefer to have no

indemnity language, and otherwise desire

language that is as narrow as possible.

• Reaching agreement on language that

bridges the gap between these opposite

positions can be challenging.

46

Know what you agree to!

• When you are in the position of the party

releasing claims, and the Defendant insists on

indemnity and/or hold harmless language, you

must make sure you read the language

carefully and understand exactly what you are

agreeing to do and provide “indemnity” for.

47

Some Key questions

• Who is being protected?

• Who is providing the protection?

• What protection is included?

• Is it only future indemnity payments or does it include

attorney’s fees and other costs or expenses?

• Are you agreeing to indemnify for actions of third

parties or strangers?

• Are you agreeing to indemnify actions you control?

• Has the statute of limitations run? Has the statute of

repose run?

• Does it matter if the statute of limitations or statute of

repose has run?

48

The Scope of the Language

For example, language which reads “Releasor

agrees to indemnify, hold harmless and defend

Releasee from and against any and all claims or

actions of any kind that might be brought

against the Releasee arising out of or incidental

to the occurrence” is exceedingly broad in scope

and potentially leaves the subrogating insurer at

risk should anyone ever file suit or make a claim

against the defendant arising out of the

occurrence which is the subject of the pending

action.

49

Problem with the Broader

Language

The broad scope language raises the potential

for problems for the settling subrogating insurer

because the settling subrogating insurer does

not have any control over whether someone

else files a lawsuit or claim. For example,

suppose a firefighter who fought the fire at the

insured’s premises files suit against the settling

defendant for injuries sustained in the fire.

Under the broad scope language, the

subrogating insurer may be required to

indemnify the defendant.

50

More Narrow Language

An example of more narrow language is “if

Releasor files a lawsuit or otherwise makes a

claim against anyone other than the released

parties as a result of the Occurrence, and if as a

result of that suit or claim, claims and/or

demands are made against any of the released

parties, releasor agrees to indemnify, hold

harmless and defend Releasee from and

against any such claims or demands.”

51

Effect of the More Narrow

Language

The more narrow language permits the

subrogating insurer to control whether the

indemnity becomes operable. The

indemnity is only triggered if the

subrogating insurer affirmatively chooses

to make a claim or file an action which

results in a claim or suit being made

against the releasee.

52

Confidentiality Provisions

Defendants and liability insurers, especially

product manufacturers, frequently include

confidentiality provisions in releases in order to

keep information from the lawsuit or settlement

confidential.

53

Purpose

There are legitimate reasons for keeping

sensitive information confidential or the amount

of the settlement confidential. The defendants

and liability insurers typically do not want

publicity or other potential plaintiffs and their

lawyers to be able to use information against

them.

54

What to Look for as a

Subrogating Insurer

Subrogating insurers, and plaintiffs in general, are

typically more interested in getting their cases

settled and are not concerned about a reasonable

confidentiality provision. Nevertheless,

confidentiality provisions must be carefully

reviewed to make sure you know exactly what you

are agreeing to and to make sure you do not

create a problem down the road.

55

An Issue for the

Subrogating Insurer

An issue raised by confidentiality provisions for

the subrogating insurer is ensuring that the

subrogating insurer may still use information

relating to the settlement both within the

company and outside of the company as

necessary in the ordinary course of business as

an insurer without violating the terms of the

release.

56

A Possible Solution

Adding the following language to a confidentiality

provision may provide a possible solution:

“Notwithstanding anything to the contrary, nothing in this

Release shall prevent the disclosure of confidential

information nor the terms thereunder to lawyers,

accountants, auditors, insurers, and re-insurers, together

with such insurers and re-insurers’ third-party providers,

actuaries or intermediaries, or regulators, provided the

disclosure of the information is reasonably necessary to

effectuate the terms of this Release, or is required for tax,

financial reporting or government compliance purposes, or

is otherwise necessary to transact the business of

insurance.”

57

Conclusion

Settling parties should be able to reach

agreement on reasonable indemnity, hold

harmless and confidentiality provisions in

conjunction with the settlement of a property

damage subrogation claim which represents an

effective compromise of the respective positions

and provides reasonable protection to both the

releasors and releasees.

58