WHAT THE HOLD HARMLESS AGREEMENT MEANS IN CONSTRUCTION CONTRACTS
Hold
harmless agreements have become standard parts of construction contracts. In a
hold harmless agreement (also known as an indemnity agreement), one party (the
indemnitor) agrees to pay for damages assessed against another party (the
indemnitee) for its liability for injuries or property damage arising out of
the project. There are three basic forms
of hold harmless agreements and they have different implications for a
contractor's liability insurance.
Broad
Form: The indemnitor assumes all liability for accidents arising out of the
project, regardless of who was at fault. Under this form, a subcontractor pays for its
own sole negligence, its joint negligence with a general contractor for an
accident, and the sole negligence of the general contractor. Therefore, an electrical contractor is liable
if an employee injures another sub's employee with a dropped tool; if an
employee leaves materials in a walkway at the GC's direction, causing another
sub's employee to trip and injure himself; and if the scaffolding, set up by
the GC for the electrician to use, collapses on top of another sub's employee. Many states prohibit this form of agreement
unless the indemnitor finances the assumed liability with an insurance policy.
Intermediate
Form: The indemnitor assumes all liability for accidents arising out of the
project except for those where the indemnitee is solely negligent. Under this
form, the subcontractor pays for all accidents in which it is at least one
percent liable. In the above examples,
the sub would not assume liability for the incident involving the scaffolding,
but it would assume liability for the dropped tool and the materials left in
the walkway.
Limited
Form: The indemnitor assumes liability for accidents arising out of the
project, but only to the extent of its own liability. Under this form, in an
accident where each party was 50 percent liable, the sub would owe 50 percent
of the judgment amount to the GC. In the
case of the materials left in the walkway, if the jury held each party 50
percent liable and the award was $100,000, the GC would pay the $100,000 and
the sub would owe the GC $50,000.
The
ISO Commercial General Liability Coverage Form excludes coverage for injuries
or damage for which the insured is obligated to pay damages because it assumed
liability in a contract or agreement. However, the form makes an exception for
liability assumed in 'insured contracts,' including parts of contracts where
the insured assumes the tort liability of another party to pay for injuries or
damages to a third party. This exception
gives a subcontractor insurance coverage for liability it assumes in a hold
harmless agreement, if the injury or damage occurs after the contract's
execution. The policy will cover the GC's attorney fees if the hold harmless agreement
requires the sub to pay for them.
Another
way for a sub to insure assumed liability is to add the GC as an additional
insured under the CGL policy. However,
it is important to understand that ISO changed its additional insured
endorsements in 2004 so that they do not cover an additional insured for its
sole negligence. This could be a problem
if the contract contains a broad form hold harmless agreement. In the above examples, the additional insured
endorsement would not cover the GC for the scaffolding accident even with the
broad form agreement in place. To
recover, the GC would have to make a claim for damages under the insured
contract coverage.
Contractors
should work closely with their contract engineer to ensure that they understand
the terms of hold harmless agreements. They
should also consult their insurance agents to determine how their liability
insurance will apply to the agreements. The
time to identify and eliminate coverage gaps is before the job starts and an accident
occurs.
examination of THE
additional insured status under the CGL, umbrella and excess insurance policies
In this blog we
presented an examination of additional insured status under the CGL, umbrella
and excess, automobile, commercial property, and workers compensation insurance
policies. Thousands of times a day,
sophisticated companies around the globe negotiate commercial contracts. Virtually all of those contracts contain
indemnification agreements of one kind or another. The majority also include
“additional insured” provisions — requirements that one party be covered under
the other's insurance policies.
A Deepwater Horizon-related coverage dispute highlights the need for
corporations to square their commercial contracts with their insurance
policies. We discuss the interplay
between indemnification agreements and “additional insured” provisions and the
importance of retaining contract engineer to help navigate some very
significant pitfalls.
The topic of
additional insured status is a challenging one. Many misconceptions result when adding
contracting parties to one another's insurance policies as additional insureds.
There is also the tug-of-war between
insurers and indemnitors who want to limit the scope of additional insured
coverage under their policies and the indemnitees who want to maximize coverage
under the policies of the indemnitors. Added
to this, the interaction of additional insured status with indemnity clauses,
insurance requirements, and other contract provisions is unique and complex. These complications have resulted in numerous
coverage disputes and, consequently, a number of revisions to standard
insurance policy forms and additional insured endorsements. Litigation
continues unabated, however, and the controversy and confusion surrounding
additional insured status under primary and umbrella liability policies,
indemnity agreements, and certificates of insurance persists.
What is an additional
insured?
Many construction
agreements call for one company to name another company as an “additional
insured”. Before this occurs, each party
should have a general idea of what this means.
In most situations,
the insurance at issue is the Commercial General Liability (CGL) policy of the
lower tier party. A common scenario is a prime contractor asking a
subcontractor to name the prime contractor (and perhaps the owner or others) as
an additional names insured on the subcontractor's CGL policy. This request is
sometimes found within the terms and conditions of a proposed subcontract.
Before agreeing to
this, both parties should have a basic understanding of what it means. In
general, naming a company as an additional insured on your CGL policy enables
that company to make a claim directly against your policy.
In today’s world of
defective construction claims, prime contractors (and their insurance carriers)
are becoming more insistent on obtaining a certificate of insurance where the
prime contractor is a named additional insured. Then, if there is an allegation
of defective construction by a subcontractor, the prime contractor can make a
claim directly against that subcontractor’s CGL insurance. This can be
particularly important if the subcontractor is no longer in business.
Notwithstanding the
great importance of indemnification and “additional insured” provisions,
companies all too often include them without performing the proper due
diligence. Specifically, contracting parties fail to analyze and understand the
insurance policies that stand behind their commercial agreements. This occurs with high frequency and
understandably so because there may be numerous policies effective and only one
person in the organization may know anything about their limits and
coverages. Importantly, that person is
probably the CFO or a lawyer who may not know much about the day to day
operations or not familiar with the scope of work of the particular commercial agreement
being negotiated. Most of the time, the
insurance person inside the organization will ask few questions and s/he may
get some answers; but this does mean
that he either asked the right question or that he received the correct
answer. Quite often we get what is
called information exchanged “falling through the cracks”.
Although this
concern has always been top of mind for insurance coverage counsel, two recent
events have thrust the indemnity vs. insurance issue into a broader spotlight:
the latest Deepwater Horizon coverage battle, and the insurance industry's
promulgation of new policy language. Taken together, these two events
underscore how negotiating indemnity provisions without a comprehensive
understanding of the related insurance policies can lead to disastrous results.
The Deepwater
Horizon catastrophe in April 2010 left a devastating mark on people, businesses
and the environment around the Gulf of Mexico. Now, its ever-expanding ripples
are about to hit the world of insurance policy interpretation. A coverage
dispute pending before the Texas Supreme Court involving BP P.L.C., Transocean
Ltd. and their various subsidiaries, affiliates and insurers will have a
significant impact on countless insurance policies across the country.
It is a common
practice among commercial entities to indemnify one another for losses arising
out of their joint business operations. And it is equally common for such
entities to add themselves as “additional insureds” under the other's general
liability insurance policies. The question is: When a loss occurs, is the scope
of recovery determined by the indemnity agreement or the insurance policy? This
is the issue that the Texas Supreme Court is being asked to decide.
The scenario is
simple: Company A hires Company B to perform services on its behalf. Company A
insists that it be named as an “additional insured” on all of Company B's
insurance policies. In their services contract, Company A agrees to indemnify
Company B for any losses or claims attributable to Company A's negligence or
fault.
In the Deepwater
Horizon disaster, Company A was BP and Company B was Transocean, the owner of
the Deepwater Horizon rig. BP engaged Transocean pursuant to a drilling
contract, which required Transocean to maintain certain minimum insurance
coverages and to name BP as an “additional insured.” The drilling contract also
stated that BP would indemnify Transocean for any pollution- or
contamination-related liabilities deriving from below the surface of the water.
Transocean would indemnify BP for any pollution- or contamination-related
liabilities above the water's surface.
On April 20, 2010,
the Deepwater Horizon exploded and sank. After the explosion, it became apparent that
oil was leaking from the former drilling operation. The rest is well-documented history.
Over the past
several years, as the liability issues have been winding their way through the
courts, so too have the overriding insurance disputes. And now, in one of the Deepwater Horizon
disaster's highest-profile coverage battles, BP is seeking coverage under
Transocean's commercial general liability policies.
From the outset, BP
has asserted that, as an “additional insured,” it is entitled to full coverage
under Transocean's policies. Transocean's
insurers have disagreed and denied coverage. The insurers cite the drilling contract as
evidence that Transocean is only responsible for pollution claims arising from
incidents above the surface of the water. According to the insurers, the
drilling contract limits BP's entitlement to “additional insured” coverage
under Transocean's policy. In their
view, BP is an “additional insured” only for above-the-surface incidents.
The foregoing
disagreement frames the key legal question: Can the scope of an insurance
policy be altered by a separate commercial contract?
This issue was
first posed to the U.S. District Court for the Eastern District of Louisiana,
where the Deepwater Horizon multidistrict litigation is venued. The District
Court found that the drilling contract limited the insurance coverage and held
that BP could not avail itself of Transocean's policy.
BP appealed the
issue to the 5th U.S. Circuit Court of Appeals. In March 2013, the appeals
court reversed the District Court's decision. The 5th Circuit concluded that
the policy language should govern in situations where the insurance provision
in the parties' contract is “separate and independent” from the indemnification
provision in the parties' contract.
According to the
court, to be separate and independent, the insurance provision must be a
discrete requirement that is distinct from, and in addition to, any
requirements under the indemnity provision. Applying that definition to the
facts at bar, the 5th Circuit found that the BP/Transocean indemnity provision
was “separate and independent” and, therefore, that BP was entitled to
additional insured coverage under the Transocean policy.
After reviewing the
March 2013 opinion, Transocean's carriers requested a rehearing. And, in August
2013, the 5th Circuit withdrew its initial decision. Citing the significance of
the issue, the fact that Texas law governed the dispute and the lack of state
law on point, the 5th Circuit certified two questions to the Texas Supreme
Court:
• Whether the
language of the insurance policy alone determines the extent of BP's coverage
as an additional insured if, and so long as, the additional insured and
indemnity provisions of the drilling contract are “separate and independent”;
and
• Whether the
doctrine of contra proferentem (where ambiguous terms are construed against
their drafter — here, Transocean's insurers) applies in cases involving highly
sophisticated parties.
As of this writing,
the issues are fully briefed before the Texas Supreme Court. Oral argument took
place on Sept. 16, 2014. The case name
number is In Re Deepwater Horizon,
13-0670, 2014.
BP
contracted with Transocean to provide "additional insured" protection
covering Transocean's operations above the water line, while BP engaged in
drilling below the water line. That narrow limitation was contained in the
business contracts between the entities, while the insurance contracts
themselves (arguably, at least) did not mirror the same limitation.
The first
major issue is about construing the various contracts. BP contends that only the insurance policy
language matters in deciding whether it is an "additional insured,"
citing cases such as EVANSTON INSURANCE
COMPANY v. ATOFINA PETROCHEMICALS, INC., No. 03-0647. The insurers contend that the extent of
coverage they agreed to provide to BP was limited to the scope of Transocean's
agreement to provide that coverage, and thus excludes the claims here.
The
second major issue might have broader implications. BP contends that if there
is any ambiguity about whether it is covered, the policy should be construed
against the insurer and in favor of the insured. The insurers contend that the
doctrine does not apply in this sophisticated commercial context. They argue that Transocean agreed to
indemnify and add as an additional insured for all liabilities assumed by
Transocean under the terms of the contract.
Transocean argued that it assumed many liabilities but not subsea pollution
– that pollution was assumed by BP only.
We believe that the
Transocean insurers will win this argument.
Metropolitan
Engineering, Consulting & Forensics (MECF)
Providing Competent, Expert
and Objective Investigative Engineering and Consulting Services
P.O. Box 520
Tenafly, NJ 07670-0520
Tel.: (973) 897-8162
Fax: (973) 810-0440
E-mail:
metroforensics@gmail.com
Web pages:
https://sites.google.com/site/metropolitanforensics/
https://sites.google.com/site/metropolitanenvironmental/
http://metroforensics.blogspot.com/
We are
happy to announce the launch of our twitter account. Please make sure to follow
us at @MetropForensics or @metroforensics1
Metropolitan
appreciates your business.
Feel free
to recommend our services to your friends and colleagues.