Practical Advice: Indemnification and Additional Insured Issues Revisited
Lawyers love writing about indemnification. There are seventeen blog articles on our website alone that deal with the subject. Before you click out of this email in disgust that we are rehashing a stale topic, this post contains some practical advice for contractors and subcontractors dealing with the perplexing issues of indemnification and additional insured provisions.
The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for the potential losses or damages caused by the other party. To indemnify someone means to protect that person or entity by promising to pay the cost of possible future damage, loss, or injury. When signing a contract, you should identify the indemnity obligations that could cost your business money. Finding the words “hold harmless” or “indemnify” in a proposed contract is not enough. The terms “hold harmless,” “save harmless,” or “indemnify” are a big part of the indemnification obligation. Although insurance requirements (“additional insured” clauses) accomplish virtually the same thing as very broad, unfair, or unlimited indemnity terms do, they result in an “end run” around the effort to limit the indemnification obligation.
Of course modifying the “hold harmless” terms in a contract is very important to limit your risk, which can be very challenging when there are a number of different, overlapping “hold harmless” terms scattered throughout a particular contract or subcontract which greatly complicate the task of negotiating or limiting all of them. The easiest solution is to prepare an addendum to a proposed contract providing that any “hold harmless” obligation in the contract is limited to the proportion of the contractor’s (subcontractor’s) fault or fault of its subtier subcontractors and suppliers. Something along the following lines is advisable:
To the fullest extent permitted by law, contractor [subcontractor] shall indemnify, defend, and hold [Customer], its employees, officers, directors, and affiliates harmless from any loss, cost, expense, or damage claimed by third parties for property damage and/or bodily injury, including death, to the proportionate extent such loss, cost, expense, or damage arises from the negligence or willful misconduct of contractor, its agents, officers, or directors in connection with the agreement [contract or subcontract] or project.
The suggested language limits the indemnity obligation to property damage and bodily injury, which is insurable. The indemnity obligation only applies to the extent of the contractor’s negligence or willful misconduct consistent with tort reform statutes in various states.
This takes care of the indemnity obligation, but we cannot stop there because you should also consider the insurance requirements, particularly any requirements to name your customer as an “additional insured.”
Another way that parties in a contract shift the risk of certain types of losses between each other is that one party requires the other to list it as a protected party, an “additional insured” on its own purchased insurance policy thereby giving the protected party [customer] access to insurance coverage. The additional insured status allows the protected party [customer] direct access to the other party’s [contractor’s] insurance coverage for losses within the scope of the additional insured designation. The protected party’s [customer’s] recourse is directly to the insurance coverage, rather than through a claim against the contractor. The protected party [customer] has a source of recovery for a covered loss that does not depend entirely on the financial condition of the contractor. Thus, there is an advantage to have a large insurance company provide a liability policy with a duty to defend (which is broader than the duty to indemnify/pay). The additional insured is entitled to coverage of its defense under the broad standards of an insurance policy, rather than the stricter standards found in many indemnity provisions. The problem for contractors is if claims are made against the contractor’s insurance policy by additional insureds, the contractor’s cost of insurance will increase in terms of higher premiums based on the contractor’s experience rating. Thus, listing an additional insured comes with a cost which the contractor bears. As outlined in the Comments section below, sometimes a contractor can obtain the protections sought by the customer in the form of an Owner’s and Contractor’s Protective Liability Insurance Policy. Generally, we have found it difficult to negotiate an additional insured provision out of the contract.
It is also important to properly designate the party being named as an “additional insured.” Obtaining the additional insured status occurs in two general ways:
An insurance policy can contain an endorsement that names the protected party as an additional insured or specifies that all parties to an expressly-listed contract are additional insureds. In such endorsements, you should list the protected party, as well as expressly designating all of the subsidiaries and corporate affiliates of the named entity as additional insureds, since their interests may appear in relation to the insured contract. Alternatively, parties can use broadly-worded endorsements that incorporate the obligations of a separate contract. Thus, it is important to confirm that the language of the additional insured endorsement matches the language of the separate risk-shifting agreement (contract). It should encompass all parties intending to be protected by that separate agreement (contract).
- Express entities that are to be considered as additional insureds in the agreement:
Here, also, care should be taken to avoid misnaming or failing to list a proper entity. Misnaming or failing to list the proper entity can lead to disputes regarding coverage, even where it is otherwise apparent which entity was intended to have additional insured status.
In certain instances, an entity may obtain additional insured status even though not properly listed on the policy. Courts around the country have held that entities intended to be protected by additional insured status should be granted that status. Even though the courts are lenient, an effort should be made to ensure that the additional insured language of the policy properly names those entities to be covered.
Comment: Regardless of how well you modify the indemnification provision, the additional insured clause may make the contractor responsible for any losses that can be connected in any possible way to its work, either directly or in the form of higher premiums after a loss experience, without regard to the contractor’s fault (or the lack thereof). When it comes to worker compensation issues and the waiver of immunity, an Owner’s and Contractor’s Protective Liability Insurance Policy protects general contractors and owners against any liability they have for their “general supervision” of project operations in lieu of an overbroad insurance product like additional insureds, and offers that insurance as an alternative to additional insured coverage.
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