Construction Contract Insurance and Indemnification Clauses: Presenting A Live 90 Minute Webinar With Interactive Q&A

Presenting
a live 90‐minute webinar with interactive Q&A
Construction Contract Insurance and
Indemnification Clauses
Crafting Provisions to Allocate Risk and Minimize Liability
TUESDAY, JUNE 14, 2011
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
T d ’ faculty
Today’s f l features:
f
James P. Bobotek, Senior Associate, Pillsbury Winthrop Shaw Pittman, Washington, D.C.
Tamara L. Boeck, Of Counsel, Stoel Rives, Boise, Idaho
Scott D. Cahalan, Partner, Smith Gambrell & Russell, Atlanta
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Construction Contracts:
Crafting Insurance and
James P. Bobotek
Pillsbury Winthrop Shaw Pittman LLP

Tips for drafting insurance provisions
 Carefully consider the type of project and all potential risks so

that they may be properly allocated and/or transferred;
 Cl
Clearly
l identify
id tif each
h ttype off coverage required,
i d necessary
endorsements, limits and sublimits (ask the client’s risk
manager or insurance broker to weigh in on this);
 Identify the duration of each type of coverage, taking into

consideration applicable statutes of limitations and statutes of
repose;
 Require that certificates of insurance and copies of policies

with all required endorsements be provided before any work
commences and also as a condition precedent to payment;
6 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Tips for drafting insurance provisions
 Require that certificates of insurance and policies be provided

upon each policy renewal or inception of new coverage;
 Identify the specific forms and/or coverages under which your

client is to be made an additional insured;
 Ensure that deductibles and/or self-insured retentions may be

satisfied by payment by anyone.
 AVOID OUTDATED TERMS AND POLICIES!

Coverages
g Under a Typical
yp CGL Policy
y
 Coverage A – Bodily Injury and Property

Damage
 Coverage B – Personal and Advertising Injury
 Supplementary Payments

Coverage A – Bodily Injury and
Property Damage
 Insuring
I i Agreement
A t
 What the insurer giveth
 Exclusions
 What the insurer taketh away

C
Coverage A - Insuring
I i Agreement
A t
We will pay those sums that the insured

becomes legally obligated to pay as
damages because of "bodily injury" or
"property damage" to which this
insurance applies.
pp
ISO Form CG 00 01 12 07

Coverage A - Insuring Agreement
We will pay those sums that the insured becomes legally obligated
to pay as damages because of "bodily injury" or "property damage"
to which this insurance applies.
 Who is “the insured”?

 Named Insured – important to ensure dec page is correct
 Insured (Who Is An Insured section)
 employees, officers, directors (acting in scope of employment)
 real estate managers
 newly formed/acquired organizations (grace period)
 Additional insureds

C
Coverage A - Insuring
I i Agreement
A t
We will pay those sums that the

insured becomes legally obligated
to pay as damages because of "bodily
bodily
injury" or "property damage" to which
thi insurance
this i applies.
li
ISO F
Form CG 00 01 12 07

"Bodily injury" means bodily
injury, sickness or disease
sustained by a person,
person
including death resulting
from any y of these at any
y
time.
ISO Form CG 00 01 12 07

"Property damage" means:
a. Physical injury to tangible property, including all

resulting loss of use of that property. All such loss of
use shall be deemed to occur at the time of the physical
injury that caused it; or
b. Loss of use of tangible property that is not physically

injured. All such loss of use shall be deemed to occur at
the time of the "occurrence"
occurrence that caused it.
it
ISO Form CG 00 01 12 07

Coverage
g A - Insuring
g Agreement
g
This insurance applies to "bodily injury" and

property damage"
"property damage only if:
(1) The "bodily injury" or "property damage" is caused
by an "occurrence" that takes place in the "coverage
territory";
(2) The "bodily injury" or "property damage" occurs
during the policy period . . .

"Occurrence" means an accident
accident,
including continuous or repeated
exposure to substantially the
same ggeneral harmful conditions.
Seems straightforward – but not
Major
j issue in construction defect cases –
is faulty workmanship an occurrence?

Products-Completed Operations
 Separate sub-limits in a CGL policy
 Failure to obtain and procure leads to many breach of contract

claims.
 Three-part test for coverage.

Products-Completed
Products Completed Operations
 Must Occur Away from Your Premises.
 To be included within the products

products-completed
completed operations hazard
hazard,
the bodily injury or property damage must occur away from
premises owned or rented by the named insured.
 Bodily injury or property damage that takes place on the named

insured premises is not within the products-completed operations
hazard (this can be amended by endorsement, however).

Products-Completed Operations
 Must arise out of “Your Product” or “Your Work,” terms

defined in the CGL.
 Your Product.
Product Includes goods or products manufactured
manufactured, sold
sold,
handled, distributed, or disposed of by the named insured, others
trading under the named insured’s name, and includes a person
or organization whose business assets a named insured has
acquired.
acquired
 Your Work. Includes operations performed by the named

insured or on the named insured’s behalf, including material,
parts, or equipment in connection with the operations. Operations
or work performed on behalf of the named insured means that
work done by a subcontractor is still considered your work.

Products-Completed
Products Completed Operations
 Does not apply if the work has not yet been completed or
abandoned. The work is considered to be completed the
earlier of:
 When all the named insured’s work as required in a contract has been
finished.
 When all the work at a job site has been completed if the named
insured’s contract requires work under the same contract but at another
job site.
 For example, a mechanical sub has a contract to repair the HVAC systems for
at three different locations. Once the sub has completed the repair of the
HVAC equipment at the first location, that job is considered to be complete.
Thus, any bodily injury or property damage that may arise from that first
location is included within the products-completed operations hazard, even if
the other two jobs are not finished.
 When that part of the work done at a job has been put to its intended use
by someone other than another contractor or subcontractor working on
the same project.

Products-Completed Operations:
Sample Clause
The Contractor shall maintain all required insurance coverage in

full force and effect until Final Completion of the Work, except
that the products and completed operations coverage under the
CGL and pollution legal liability insurance, and coverage under
the professional liability insurance, required under this
Exhibit shall be maintained (or if applicable, an extended
reporting period will be exercised) for the period of any applicable
statute of limitations or five years following Final Completion of
the Work, whichever is longer.

CONSTRUCTION CONTRACTS:
Insurance and
Tamara L. Boeck
June 2011 • Boise/Sacramento
Construction Clauses: Insurance and Indemnity

J u n e 2 0 11 • Boeck – Boise/Sacramento
70728338.2 pptx 22
Selecting Insurance
• Umbrella/Excess Insurance
• Workers’ Compensation
• Builder’s Risk
• Professional Liability
• Controlled Insurance Programs

70728338.2 pptx 23
Selecting Insurance (cont.)
• Umbrella/Excess Insurance
– Financial Practicality
– Does it correspond to the underlying coverage?
– Nature of the coverage – project or company

70728338.2 pptx 24
Primary and excess insurer may be obligated to defend and indemnify
insured who participates in an adjudicative administrative proceeding.
Ameron International Corp
Corp. vv. Insurance Co
Co. of the State of Penn
Penn., 50
Cal. 4th 1370 (2010)
• Bureau of Recl
Recl’mm Contract Officer (CO) determined that insured
subcontract was responsible for defective siphons. Instead of
challenging CO’s decision in U.S. Court of Federal Claims,
Insured challenged the CO’s decision by appealing to Interior
Board of Contract Appeals (IBCA). Following 22 days of “trial,”
the Insured settled the claim for $10M and then sought to
recover the settlement and defense costs from primary and
excess insurers.
• Policy provided indemnification of “‘all sums which [Insured]
shall become legally obligated to pay as damages’” and provided
a defense
f duty for
f “‘any
“‘ suit against the Insured seeking
damages ….’” Policy did not define “suit” or “damages.”

70728338.2 pptx 25
International Corp. (cont)
• Trial court and appellate
pp court applied
pp holding
g of Foster-Gardner, Inc. v. National
Union Fire Ins. Co., 18 Cal. 4th 857 (1998), in which the court applied the “literal
meaning” of the word “suit” to mean an action filed in a court of law, and therefore,
ruled that none of the policies provided coverage.
• Supreme Court reversed, stating that its holding in Foster
Foster-Gardner,
Gardner, which
concerned an administrative action designed to obtain a negotiated settlement of
the insured’s liability for environmental pollution, was based on its concern that
the order did not provide insurance companies with sufficient notice of the
parameters of the action against the insured. In this instance, however, the
Supreme Court found that the adjudicative IBCA proceeding did not raise the
same concern in that a complaint filed in the IBCA gave “as much, if not more,
notice to insurers” as would a complaint filed in court, and noting the similarities
between
bet ee a court
cou t and
a d ana IBCA
C proceeding
p oceed g (t(the
e latter
atte be
being
g aut
authorized
o ed to coconduct
duct
trials, determine liability and award damages).

70728338.2 pptx 26
• See also Clarendon America Insurance Co Co. vv.
StarNet Ins. Co., 186 Cal. App. 4th 1397 (2010),
(California Calderon Alternative Dispute Process is
“th first
“the fi t step
t – ini a continuous
ti liti
litigation
ti process,
and therefore, it meets the definition of “suit” in
insurance policy).
– As a result, developer was able to recover
defense costs incurred in defending against
Calderon Notice.
Notice

70728338.2 pptx 27
“Legally Obligated To Pay” Language in Primary and Umbrella Polices
Important In Determining Whether Additional Insureds Will Be Paid
Ohio Cas
Cas.. Ins. Co. v. Time Warner Entm’t Co.,, L.P.,,
(2008) 244 S.W.3d 885
• As additional insured on subcontractor’s p primary y and umbrella p

polices, the
GC brought declaratory judgment action against subcontractor’s insurers to
recover cost of removing and replacing fiber optic cable that subcontractor
installed improperly.
• The umbrella policy included standard liability policy language:
– “We will pay on behalf of the ‘insured’ those sums in excess of the
‘Retained Limit’ that the ‘Insured’ becomes legally obligated to pay by
reason of liability imposed by law or assumed by the ‘Insured’ under an
‘insured
insured contract
contract’ because of ‘bodily
bodily injury,
injury ’ ‘property
property damage
damage,’ or
‘advertising injury’ that takes place during the Policy Period and is
caused by an ‘occurrence’ happening anywhere.”
• Holding – Because GC elected to repair and replace the defective cabling,
the GC was at no time “legally
legally obligated to pay”
pay those sums
sums. Therefore
Therefore, the
court concluded that the GC failed to establish that it was owed a duty as an
additional insured.

70728338.2 pptx 28
• Workers compensation
Workers’
– Driven by state requirements
– Know whether there are state exceptions for indemnity,
e g Gonzales v.
e.g. v R.
R J.
J Novick Constr
Constr. CoCo. (1978) 20 C3d
798, 144 CR 408 (subcontractor paid via indemnity
clause with general contractor for its own workers’ injury).

70728338.2 pptx 29
• Builder s risk
Builder’s
– Understand the scope of the policy to dovetail with other
project insurance, e.g., special environmental, natural
resources, debris/waste removal, additional duration for
project.
– Ensure policy requirements are incorporated into the
construction contract, e.g., fire watch, security, off-site
off site
storage, etc.

70728338.2 pptx 30
• Professional liability
– Is the project a DB, and who is obtaining coverage for the
professionals?
– How broadly is “professional”
professional defined in the policy?

70728338.2 pptx 31
• Controlled insurance programs
– Who is obtaining the program?
– What does it encompass?
– Limits sufficient? Project
j or rolling?
g
– Who can satisfy the SIR?
• Forecast Homes, Inc. v. Steadfast Insurance Company
(2010) 181 CA4th 1466,105 CR3d 200 (holding that only the
named insured subcontractors, not the general contractor,
had the right to satisfy the SIR per occurrence amounts).

70728338.2 pptx 32
SIR “Per Claim” Applies to Whole Action
Clarendon America Insurance Co. v. North American Capacity Insurance Co.
(2010) 186 CA4th 556, 112 CR3d 339
(2010) 186 CA4th 556 112 CR3d 339
reh'g denied
• Plaintiff insurer sued defendant insurer seekinggap proportionate

p or
equitable share of sums expended to defend a residential
developer, which they both insured under separate and consecutive
general commercial liability policies, in a construction defect action
involving eight homes in a residential development
development.
• Policy provided a $25,000 “per claim” SIR, and defendant insurer
argued that it had no duty to defend insured unless and until
insured expended $200,000 (eight times $25,000).
• Court of Appeal reversed.
– Insured (homebuilder) had objectively reasonable expectation
that SIR would apply
pp y to class action as a whole rather than
each of the homes constructed after the policy was issued.

70728338.2 pptx 33
Insurance and
d
I d
Indemnification
ifi i
Scott D. Cahalan
34
Selecting Insurance
 Green Building Risks
 Property damage
 Certification denial or delay
 Code compliance
 Defects
D f t
 Building performance
 Personal
P l injury
i j
35
Selecting Insurance
 Green Building Property & Casualty
Insurance
 Green Building Replacement
 Green Upgrade
 Commissioning
36
Selecting Insurance
 Green Building Liability Insurance
 Indoor Environmental Endorsement
 Reputation Endorsement
37
Selecting Insurance
 Indoor Environmental Endorsement covers
 bodily injury that is “sustained within a green
building and caused by any substance or odor
produced by or originating from HVAC
equipment
q p or anyy other equipment
q p or product
p
whose purpose is indoor climate, air quality, or
water quality control.”
 Must be a certified green buildings at time of loss.
38
Selecting Insurance
 Reputation Endorsement covers
 Adverse green publicity event, and
 Adverse green defense costs
39
Selecting Insurance
 Adverse Green Defense Costs
 Reimburses insured for the cost of defending
against an adverse green claim in a civil lawsuit
“demanding monetary or non-monetary relief,
and alleging
g g [the insured’s] failure to meet or
comply with industry recognized green building
standards at one or more insured buildings.”
 Must be a certified green buildings at time of loss.
40
Selecting Insurance
 Subcontractor Default Insurance ((“SDI”)
SDI )
 Alternative to subcontractor performance bonds
41
Selecting Insurance
 SDI Advantages over Bonds
 Cost Savings
 Longer
g Duration
 Contractor Control
 Consistencyy
 Faster, Non-Adversarial Claims
 Higher
g Limits
 Broader damages
 Bad faith damages
42
Selecting Insurance
 SDI disadvantages
g over Bonds
 Financial risk
 Not appropriate for all contractors
 No independent
i d d analysis
l i off subcontractors
b
 Defaults more likely
 No payment protection for subcontractors
 No legal precedence
 Single source
43
Selecting Insurance
The standard 2001 CGL policy form excludes most claims
for:
“Bodilyy injury”
j y and “property
p p y damage” g arisingg out of the
actual or threatened discharge, dispersal, release or escape of
pollutants into or upon land, the atmosphere or any water
course or body of water. Pollutants means any solid, liquid,
gaseous or thermal
th l irritant
i it t or contaminant,
t i t including
i l di smoke, k
vapor, soot, fumes, acids, alkalines, chemicals, or waste
materials.
44
Selecting Insurance
Exceptions to the CGL pollution exclusion include:
• Additional
Addi i l insured
i d
• Hostile Fire
• Building heating equipment (unless disbursed through ventilation
system)
• Away from Insured’s Premises but only if bodily injury or property
damage is
• Sustained within the building where the insured is performing operations
• Due to releases
l f
from parts off mobile
b l equipment designed
d d to contain such
h
pollutants
• Hostile Fire
• Products and Completed
p Operations
p ((but onlyy to the extent not
expressly excluded by other portions of the exclusion). ”
45
Selecting Insurance
Many believe that the exceptions to the CGL
pollution exclusion are inadequate because of
other limitations imposed by the exclusion,
exclusion
inconsistent application by the courts, and
the existence of sublimits.
sublimits
46
Selecting Insurance
Manyy insurance companies
p now offer Contractor’s
Pollution Liability Insurance, which generally
covers a Contractor’s liability for
 Third party claims for environmental liabilities associated
with job-site operations of contractors
 Claims for remediation costs stemming from pollution
incidents
c de ts resulting
esu t g from
o cocontractor’s
t acto s cove
covered
ed ope
operations
at o s
47
Additional Insureds
 Naming additional insureds requires a separate endorsement

to the basic CGL coverage, which can either specifically name
the parties that are additional insureds or designate a general
category of persons entitled to such coverage under a blanket
endorsement.
 The terms of the endorsement will control the nature and
extent of such additional insured coverage.
 General Rule – the more words included, the narrower the
coverage.
 Some additional insured endorsements specifically omit
coverage for completed operations; others don’t.
 One size does not fit all.

Tips For Drafting Additional Insured Requirements
 Specify the form endorsements through which the

additional insured coverage is provided.
 Require that the additional insured coverage be “primary

and non-contributory.”
 Understand the difference between additional insured and

additional named insured.
 Do not rely on certificates of insurance to confirm

additional insured status – require copies of policies and
endorsements.

Additional Insureds – Sample Provision
The Owner,
Th O the
th Architect,
A hit t theth Lender,
L d the th Owner’s
O ’ Representative,
R t ti other
th IIndemnified
d ifi d
Parties, and other persons or entities designated by the Owner in writing (together, the
“Additional Insureds” and each an “Additional Insured”) shall each be included in all
policies required hereunder to be maintained by the Contractor and Subcontractors
((except
p for workers’ compensation
p and p professional liability
y insurance)) as additional
insureds for claims against them relating to this Project, with the understanding that
any affirmative obligation imposed upon the insured Contractor and Subcontractor
(including without limitation the liability to pay premiums) shall be the sole obligation of
the Contractor and Subcontractor, and not of the Additional Insureds. All of the
Contractor’s
Contractor s and Subcontractors’
Subcontractors liability policies shall be endorsed so as to indicate
that such policies provide primary coverage (without any right of contribution by
any other insurance or self-insurance, including any deductible or retention,
maintained by an Additional Insured) for all claims against the Additional Insureds
arising out of the performance of this Contract by the Contractor or Subcontractors, or
anyone for whom the Contractor or a Subcontractor may be liable. These policies shall
include a separation of insureds/severability of interests clause for claims against
the Additional Insureds due to the negligence, act, omission or other conduct of the
Contractor or its Subcontractors, or anyone for whom the Contractor or a
Subcontractor may be liable.
liable

Additional Insureds - Policy Endorsements
 CG 20 10 11 85
 Provides the additional insured with coverage

g for liability
y arising
g
out of the named insured’s work for the additional insured;
 Provides coverage not only while the named insured’s work is in
progress, but also for the named insured’s completed operations;
 Meets a contractual requirement that owners impose on general
contractors, and general contractors require of subcontractors --
that the additional insured has coverage for claims arising out of
the completed work

 CG 20 10 03 97
 Provides the additional insured with coverage g onlyy for liability

y
arising out of the named insured’s ongoing operations;
 Intended to limit the term of the additional insured’s insurance
coverage to the time period during which the named insured is
actually
t ll performing
f i operations;
ti
 Does not include coverage for completed operations.

 CG 20 10 10 01
 Provides the additional insured with coverage only for liability arising out
of the named insured’s ongoing operations;
 Expressly excludes injuries or damages suffered after (i) the “named”
insured’s work at the site of the cove operations has been completed, or
((ii)) the relevant portion
p of named insured’s work has been pput to its
intended use;
 Intended to limit the term of the additional insured’s coverage to the time
period during which the named insured is actually performing operations;
 Intended to deny coverage for completed operations;
 Adopted in conjunction with CG 20 37 10 01, a new standard form
endorsement that will, if used in conjunction with this form, provide
coverage similar to the CG 20 10 11 85

 CG 20 37 10 01
 Provides additional insured with coverage

g pproducts-completed
p
operations hazard arising out of the named insured’s work;
 Only applies to completed operations;
 No coverage for premises or operations;
 When used in conjunction with CG 20 10 10 01, provides
coverage similar to CG 20 10 11 85.

 CG 20 10 07 04
 Provides the “additional” insured with coverage only for liability caused in
whole or in part by the acts or omissions of either (i) the named insured
or (ii) someone acting on behalf of the named insured;
 Limits coverage to ongoing operations for the additional insured;
 Excludes injuries or damages suffered after (i) the named insured’s
insured s work
at the site of the covered operations has been completed, or (ii) the
relevant portion of named insured’s work has been put to its intended
use;
 Intended to limit the coverage provided to the additional insured to liability
caused at least in part by the named insured’s ongoing operations;
 Intended to eliminate coverage for the additional insured’s sole
negligence.

 CG 20 37 7 04
 Provides the additional insured with coverage for the products-

completed
l t d operations
ti h
hazard d causedd iin whole
h l or iin partt b
by th
the
acts omissions of either (i) the named insured or (ii) someone
acting on behalf of the named insured;
 Intended to limit the coverage provided to the additional insured
to liability caused at least in part by the named insured’s
completed operations;
 Not intended to provide coverage for the additional insured’s sole
negligence;
 When used in conjunction with CG 20 10 07 04, meets typical
contract requirement to provide additional insured coverage
coverage for both ongoing and completed operations.

Certificates of Insurance
 Most certificates of insurance are issued on a standard form

prepared by ACORD Corporation for the insurance industry.
 A standard certificate identifies the producer (an agent or
broker), the insured, and the insurers affording coverage.
 The certificate also gives basic information about the policies
to which it refers, including the names of the insurance
companies affording coverage, the type of insurance, the
policy numbers, the effective dates and expiration dates of the
policies, and the liability limits of the policies. There is space
to describe operations, exclusions, etc., added by
endorsement to the policies listed, or to identify special policy
provisions.

 What they are:

 Evidence of insurance issued to the policy’s named insured.
 What they are not:

 Evidence of coverage for additional insureds.
 Evidence of waivers of subrogation.
 Evidence of any other special endorsements to the named
insured’s insurance policies.
 Clarendon AmAm. Ins

Ins. Co
Co. vv. Aargus Sec
Sec. Sys
Sys., Inc
Inc., 870 N
N.E.2d
E 2d
988, 994 (Ill. App. Ct. 2007);
 Rodless Props., L.P. v. Westchester Fire Ins. Co., 40 A.D.3d 253,
835 N.Y.S.2d 154, 155 (2007).

 Can certificates of insurance be used to support an estoppel

theory?
 Majority – no:
 TIG Ins. Co. v. Sedgwick James of Washington, 184 F. Supp. 2d 591
(S.D. Tex. 2001), aff’d, 276 F.3d 754 (5th Cir. 2002);
 Redmond
R d d v. St
State
t FFarm IIns. Co.,
C 728 A.2d
A 2d 1202 (D.C.
(D C 1999)
1999).
 Minority - yes:
 Marlin vv. Wetzel County Board of Education
Education, 569 S.E.2d
S E 2d 462 (W.
(W Va.
Va
2002).

Acord Certificate of Insurance – 5/2010

This certificate is issued as a matter of information only and

confers no rights upon the certificate holder.
holder This certificate
the coverage afforded by the policies below. This certificate
of insurance does not constitute a contract between the
issuing insurer(s), authorized representative or producer,
and the certificate holder.

IMPORTANT: If the certificate holder is an ADDITIONAL

INSURED the policy(ies) must be endorsed
INSURED, endorsed. If
SUBROGATION IS WAIVED, subject to the terms and
conditions of the policy, certain policies may require an
endorsement. A statement on this certificate does not
confer rights to the certificate holder in lieu of such
endorsement(s).

Notice of cancellation provision changes
 Prior Acord form language:

 Should any of the above described policies be cancelled
before the Expiration date thereof, the issuing insurer will
endeavor to mail _______ days written notice to the
certificate holder named to the left, but failure to mail such
notice shall impose no obligation or liability Of any kind
upon the insurer, its agents or representatives.
 5/2010 A
Acord
d fform llanguage:
 Should any of the above described policies be cancelled
before the expiration date thereof, notice will be delivered in
accordance with the ppolicy
y provisions.
p

 Suggested language in response to the 5/2010 Acord form:
 All policies shall be endorsed to state that such insurance

shall be non-renewed, canceled or modified to reduce the
limits only after written notice to the Owner from such
i
insurance company or companies, i mailed
il d to
t the
th Owner
O in
i
the same method as would be required under the law of the
jurisdiction in which the Project is located for mailing such
notice to the first named insured,, no less than thirty
y (30)
( )
days in advance.

INDEMNITY AGREEMENTS
 Intermediate Form Indemnity
 Broad Form Indemnity
 Comparative (Limited) Form Indemnity

TYPES OF INDEMNITY AGREEMENTS
Broad Form Indemnity: The indemnitor agrees to

be responsible for any and all liability arising out of
the contractually-provided products or services,
including liability that is the result of the sole
negligence of the indemnitee. Most states prohibit,
or se
o severely
e e y limit,t, tthe
e use o
of b
broad
oad form
o indemnity
de ty
provisions in construction contracts.

Intermediate Form Indemnity: The indemnitor

agrees to be responsible for liability arising out of
the contractually-provided products or services that
is the result of the indemnitor's
indemnitor s sole fault or
negligence, as well as liability for which the
indemnitee and indemnitor are jointly at fault. The
indemnitor is not responsible for liability incurred as
a result of the sole fault or negligence of the
indemnitee.

Comparative (Limited) Form Indemnity: The

indemnitor agrees to be responsible for liability
arising out of the contractually-provided products or
services that is the result of the indemnitor's fault or
negligence, but only to the extent of such fault or
negligence.
eg ge ce This s type o
of ag
agreement
ee e t mirrors
o s tthe
e
obligations imposed by tort law.

AIA A201 Indemnity Provision
The unedited AIA A201 provides that the contractor

(indemnitor) will indemnify the owner (indemnitee)
for loss caused by the negligent acts or omissions
of the contractor,
contractor its subcontractors
subcontractors, or others
providing goods or services on behalf of these
entities. This constitutes a comparative form
indemnity provision,
provision which limits the contractor's
contractor s
indemnification obligation "only to the extent of" its
negligence.

AIA A201 Indemnity Provision
3.18.1 To the fullest extent permitted by law, the Contractor shall

indemnify and hold harmless the Owner, Architect, Architect's
Consultants, and agents and employees of any of them from and
against claims, damages, losses, and expenses, including but not
li it d tto attorneys'
limited tt ' ffees, arising
i i outt off or resulting
lti from
f performance
f
of the Work, provided that such claim, damage, loss, or expense is
attributable to bodily injury, sickness, disease or death, or to injury to
or destruction of tangible property (other than the Work itself), but
only to the extent caused by the negligent acts or omissions of
the Contractor, a Subcontractor, anyone directly or indirectly
employed by them or anyone for whose acts they may be liable,
regardless of whether or not such claim, damage, loss, or expense is
caused in part by a party indemnified hereunder. Such obligation
shall
h ll nott b
be construed
t d tto negate, t abridge,
b id or reduce
d other
th rights
i ht or
obligation of indemnity which would otherwise exist as to a party or
person described in this Paragraph 3.18. [Emphasis added.]
General Conditions of the Contract for Construction, Document A201, American Institute of Architects, 2007 edition.

Sample Comprehensive Indemnity Provision:
Basic Indemnification
To the fullest extent permitted by law, the Contractor shall defend,

indemnify and hold harmless the Owner, Lender, Lender’s construction
consultant, Architect, consulting engineers, Owner’s Representative, and
their respective agents and employees (the “Indemnified
Indemnified Parties
Parties” and each
an “Indemnified Party”) from and against any and all claims, damages,
fines, penalties, losses and expenses, including reasonable attorney’s fees
and expert witness fees (“Indemnified Claims” and each an “Indemnified
Claim”)), arising,
Claim arising directly or indirectly
indirectly, from the performance of the Work
Work,
breach of this Contract, or a Contractor Party’s negligence or willful
misconduct with respect to the Project, provided that such Indemnified
Claim is attributable to bodily injury, sickness, disease, or death or to injury
t or destruction
to d t ti off tangible
t ibl propertyt (other
( th than
th the
th WWorkk itself
it lf to
t th
the extent
t t
amounts are recovered pursuant to builder’s risk insurance), regardless
of whether or not such Indemnified Claim is caused in part by an Indemnified
Party.

Economic Loss Indemnification
The Contractor shall also indemnify, defend, and hold harmless

the Indemnified Parties from and against Indemnified Claims for
economic loss (that is, Indemnified Claims not attributable to
bodily injury, sickness, disease, or death or to injury to or
destruction of tangible property), but only to the extent such
economic loss was caused by a breach of this Contract or a
Contractor Party’s negligence or willful misconduct with respect
to the Project, regardless of whether such Claim is caused in part
by an Indemnified Party.

Catch-all Provision
Such obligations shall not be construed to negate, abridge, or

otherwise reduce any other right or obligation of indemnity which
would otherwise exist as to any Indemnified Party. Nothing herein
shall be construed to require the Contractor to indemnify an
Indemnified Party for an Indemnified Claim caused by or resulting
solely from that Indemnified Party’s own negligence. It is agreed
that with respect to any legal limitations now or hereafter in effect
and affecting the validity and enforceability of the indemnification
obligation under this Section _____, such legal limitations are
made a part of the indemnification obligation to the minimum
extent necessary to bring Section _____ into conformity with the
requirements of such limitations, and as so modified, the
g
indemnification obligation shall continue in full force and effect.

Tips for drafting solid indemnity clauses
 “To the fullest extent permitted by law”;

 Do not run afoul of state-specific statutory anti-indemnity
provisions;
 Don’t forget to consider indemnity for economic loss – this
may require revisions to the waiver of consequential damages
provision;
 Make first-party damages, or damages sustained directly by
the indemnitee, a part of the indemnity agreement;
 Include language that allows for fees and costs associated
with enforcing the indemnity obligation.

James P. Bobotek
Senior Associate
Washington DC
Washington,
2300 N Street, NW
Washington, DC 20037-1122
+1.202.663.8930
james.bobotek@pillsburylaw.com

Anti-Indemnity Statutes and
Anti-
Li it ti off Liability
Limitation Li bilit Clauses
Cl
• Minority view – invalidates limitation of liability
clauses
• Majority view – upholds limitation of liability
clauses. These courts recognize that there is a
difference between indemnification, which
removes the incentive to act with due care, and a
limitation of liability, which merely allows parties to
allocate risk through contract and, assuming that
the limitation is reasonable
reasonable, does not remove the
incentive to act with due care.
70728338.2 pptx 76
Overview of Anti-
Anti-Indemnification Statutes
• Generally, four broad types of anti-indemnification

statutes:
1) Prohibiting indemnification for negligence and willful acts;
2)) Mixed pprohibiting
g full risk shifting
g for certain claims or requiring
q g it
meet certain standards;
3) Viewed as “risk allocation” verses anti-indemnity; and
4) Requests to procure insurance (i.e. additional insured provisions)
do not generally violate anti-indemnity statute.
– OR and OK are exceptions to this general rule.

70728338.2 pptx 77
Anti--Indemnity Statutes (cont.)
Anti
• Examples:
– CA: Restricts transfer of risk for sole negligence or willful
misconduct. Additional provisions include greater restriction
related to residential housing. Allows owner and design
professional
f i l tto allocate
ll t risk
i k more ffreely.
l
– NC: Restricts indemnification in a design or construction
contract for liability arising out of bodily injury or property
d
damage proximately
i t l caused dbby or resulting
lti ffrom th
the negligence,
li
in whole or in part, of the indemnitee.

70728338.2 pptx 78
Untwist Construction v. Amtech Elevator
Services
Se
Services,
ces,
ces,
(VA 2010) 699 S.E.2d 223
• Court held that even though the subcontract’s
subcontract s
indemnification provision violated anti-
indemnification statute, the subcontractor had a
separate
t duty
d t to
t defend
d f d and d indemnify
i d if th
the prime
i
contractor pursuant to the terms of the prime
contract clauses, which were incorporated by
reference into the subcontract.

70728338.2 pptx 79
Untwist Construction (cont.)
• Indemnification provision was void.
Indemnification provision was void
– To the fullest extent permitted by law … from and against claims,
damages, losses and expenses, including but not limited to attorneys’
fees arising out of or resulting from performance of the Work
fees, arising out of or resulting from performance of the Work,
provided that such claim, damage, loss or expense is attributable to
bodily injury, sickness, disease or death, or injury to or destruction of
tangible property (other than the Work itself) including loss of use
resulting therefrom, but only to the extent caused in whole or in part
li h f b l h di h l i
by negligent acts or omissions of [Uniwest], a Subcontractor, anyone
directly or indirectly employed by them or anyone for whose acts
they may be liable, regardless of whether or not such claim, damage,
y y , g , g ,
loss or expense is caused in part by a party indemnified hereunder.

70728338.2 pptx 80
Untwist
U t st Co
Construction
st uct o
• Even
e tthough
oug indemnification
de cat o pprovision
o s o was as void,
o d, Subco
Subcontractor
t acto had
ad a
separate duty to defend and indemnify the prime contractor pursuant to
the terms of the prime contract clauses, which were incorporated by
reference into the subcontract. The terms of the prime contract provided:
– [Amtech] agrees to be bound to Uniwest by all the terms of the [Prime
Contract] and to assume toward Uniwest all of the obligations and
responsibilities that Uniwest has by the [Prime Contract] assumed
toward [Fountains]
[Fountains]. All terms and conditions contained in the [Prime
Contract] which, by the [Prime Contract] or by operation of law, are
required to be placed in [the] Subcontract[ ], are hereby incorporated
herein as if they were specifically written herein.

70728338.2 pptx 81
Example
• Blaylock Grading vv. Neal Everett Smith

(NC 2008):
– Blaylock hired Smith to perform land surveying.
Smith mis-surveyed the marks by about
1.7 feet. It required Blaylock to import fill,
costing Blaylock in excess of $500
$500,000
000 in
additional expenses.

70728338.2 pptx 82
Example (cont.)
• Blaylock (cont.):
(cont ):
– The contract contained a “risk allocation” provision which
stated:
“[Defendants’ liability to plaintiff] for any and all injuries,
claims, losses, expenses, damages or claim expenses
arising out of this agreement, from any cause or causes,
shall not exceed the total amount of $50 $50,000,
000 the amount
of [defendants’] fee (whichever is greater) or other
amount agreed upon when added under Special
Conditions Such causes include
Conditions. include, but are not limited to to,
[defendants’] negligence, errors, omissions, strict liability,
breach of contract or breach of warranty.”
70728338.2 pptx 83
Example (cont.)
• Blaylock (cont.):
(cont ):
– Smith offered to pay his $50,000 and walk.
Blaylock
y rejected
j the offer and Blaylock
y
prevailed at trial.
– On appeal, the Court cited to a NC Supreme
Court decision upholding a similar risk
allocation provision. Bottom line: equal
bargaining strength allows the parties to
enforce their contact.

70728338.2 pptx 84
Example (cont.)
• For similar outcome

outcome, see:
– Moore & Associates, Inc. v. Jones & Carter, Inc., Case
No. 3:05-0167, U.S. Dist. Ct. Middle Dist. Nashville,
Tennessee (December 13 13, 2005) (holding maximum
damages at $18,109.98 in lieu of the claim for over
$200,000 in damages).
• “In
In order for [contractor] to obtain the benefit of a fee which
includes a lesser allowance for risk funding, [contractor]
agrees to limit J&C’s liability arising from J&C’s professional
acts, errors or omissions such that the total liability of J&C
shall
h ll nott exceed
d J&C’
J&C’s ttotal
t l ffees ffor the
th services
i rendered
d d
on the project.”

70728338.2 pptx 85
Limitation of liability enforceable against homeowner
Zerjal
j v. Daech & Bauer Constr.,, Inc.
(Ill. App. 2010) 939 NE 2d 1067
• Homeowners filed breach of contract alleging that inspector

did not inform them that the foundation was insufficient to
support the home's load, the underlayment was decayed and
structurally unstable, the walls were unstable and unable to
support the necessary loads, water was entering the home at
the footing and the foundation, the HVAC unit was blowing
moist air against wooden components of the house and the
home’s electrical system was installed and maintained in an
unsafe manner. By the terms of the contract, the inspector’s
liability was limited to the cost of the inspection, or $175.

70728338.2 pptx 86
Zerjal (cont.)
• Court
Court held that the inspector
held that the inspector’ss limitation of the
limitation of the
liability clause was valid.
– The court rejected homeowner’s argument that the
j g
clause was against public policy and unconscionable.

70728338.2 pptx 87
Anti--Indemnity
Anti
• California – enacted an exception
p that explicitly
p yp
permits pparties
to continue to limit their respective liability to each other.
– Markborough California, Inc. v. Superior Court (1991) 227 CA3d
705,, 277 CR 919 (holding
( g that “a p provision in a construction
contract limiting a party’s liability to the developer of the property
for damages caused by the engineer’s professional errors and
omissions is valid under [the exception to the anti-indemnity
statute] if the parties had an opportunity to accept, reject or
modify the provision.”).

70728338.2 pptx 88
Possible Change In CA Law
• Proposed Senate Bill – May overrule

holding of court in Markborough California,
Inc.
– In effect, this legislation may bar limit of liability
provisions
• Residential Construction Contracts?

70728338.2 pptx 89
Anti--Indemnity (cont.)
Anti
• Example:
– FL: Cannot require indemnification in a construction contract
for liability for damages to persons or property caused in whole
or in part by the indemnitee UNLESS the contract contains a
monetary limitation on the extent of the indemnification that
bears a reasonable commercial relationship to the contract and
it was part of the project specifications or bid documents, if any.
I no eventt can the
In th contract
t t require
i indemnification
i d ifi ti ffor
damages to persons or property caused by the indemnitee’s
gross negligence; willful, wanton, or intentional misconduct; and
punitive damages
p g ((unless caused by y the indemnitor).
)

70728338.2 pptx 90
Anti--Indemnification Statutes (cont.)
Anti
• Example:
– AL 45.45.900: A provision, clause, covenant, or agreement contained in,
collateral to, or affecting a construction contract that purports to indemnify the
promisee against liability for damages for (1) death or bodily injury to persons,
(2) injury to property, (3) design defects, or (4) other loss, damage or expense
arising
i i underd (1)
(1), (2)
(2), or (3) off this
hi section
i ffrom the
h solel negligence
li or willful
illf l
misconduct of the promisee or the promisee’s agents, servants, or independent
contractors who are directly responsible to the promisee, is against public policy
and is void and unenforceable; however, this provision does not affect the validity
off an insurance
i contract
t t workers’
k ’ compensation,ti or agreementt issued
i dbby an
insurer subject to the provisions of AS 21, or a provision, clause, covenant, or
agreement of indemnification respecting the handling, containment, or cleanup of
oil or hazardous substances as defined in AS 46.

70728338.2 pptx 91
Anti
• City of Dillingham v. CH2M Hill Northwest, Inc., 873 P.2d
1271 (Al
(Alaskak 1994)
1994).
– The Alaska Supreme Court held that AS 45.45.900
barred parties from negotiating away liability to any
extent. Note that the court specifically found that the
Alaska legislature had considered – and rejected – an
amendment to the anti
anti-indemnity
indemnity statute that would
have explicitly exempted limitation of liability clauses.

70728338.2 pptx 92
Anti
• See also:
In Omaha Cold Storage Terminals, Inc. v. The Hartford Ins.
Co., No. 8:03CV445, 2006 WL 695456 (D. Neb. Mar. 17,
2006), the United States District Court for the District of
Nebraska held that a provision limiting a party’s liability for its
own negligence to $100,000 violated Nebraska’s anti-
indemnity statute, which prohibits indemnification for one’s
own negligence. The court concluded that any clause
insulating or limiting a person’s liability for its negligent acts
violated Nebraska’s public policy and anti-indemnity statute.

70728338.2 pptx 93
Anti
• See also:
– Saia Food Distribs. & Club, Inc. v. SecurityLink
from Ameritech, Inc., 902 So. 2d 46 ((Ala. 2004))
(holding maximum damages the owner could
recover was $5,800, the purchase price of the
equipment).
equipment)

70728338.2 pptx 94
Common Law Impact
• What is the impact on the clause?

– Early example: W. William Graham, Inc. v. City
of Cave City, y 709 S.W.2d 94 ((Ark. 1986))
(holding that a limitation provision in an
engineer’s contract was enforceable, but
finding that it applied only to limit the engineer’s
engineer s
liability for negligence, not contract claims).

70728338.2 pptx 95
Common Law Impact (cont.)
• How is the clause

clause, if otherwise valid under the
anti-indemnity statute, or if no such statute exists,
viewed by the jurisdiction?
– Clear and plain language
– Conspicuous
– Bargaining strength of the parties
– Public policy
– Can it be construed as a “cap”
cap rather than an
indemnity restriction?

70728338.2 pptx 96
Tamara L. Boeck
Of Counsel
Boise, ID
((208)) 387-4256 Direct
(208) 389-9040 Fax
Sacramento, CA
(916) 447-0700 Direct
(916) 447-4781 Fax
tlboeck@stoel.com

70728338.2 pptx 97
Interaction Between Insurance and
I d
Indemnification
ifi i
Risk allocation is the common thread
between insurance and indemnification
98
I d
Indemnification
ifi i
Insurance shifts risk of costs and liability
from the insured to its insurance company
99
I d
Indemnification
ifi i
Indemnification shifts risk of costs and
liability from one contracting party to
another.
another
100
I d
Indemnification
ifi i
While insurance may cover SOME risk
shifted to a party through indemnification,
insurance does not necessarily cover ALL
risks shifted to a party through
indemnification.
indemnification
101
I d
Indemnification
ifi i
Example: Owner shifts risk of pollution
clean up to Contractor through
indemnification but Contractor’s
indemnification, Contractor s CGL
policy excludes coverage for pollution clean
up.
up
102
I d
Indemnification
ifi i
A requirement to procure insurance for
another party may be an exception to an anti-
indemnification statute
statute.
103
I d
Indemnification
ifi i
Exceptions include:
• additional insured exception,
• the
h iinsurance policy
li exception,
i and
d
• the insurance cap on indemnity exception
104
I d
Indemnification
ifi i
 CGL excludes liability assumed by the
insured under a contract or agreement,
UNLESS the insured purchases contractual
coverage endorsement
105
I d
Indemnification
ifi i
 A/E s professional liability policy typically
A/E’s
excludes contractually assumed liabilities,
UNLESS such liability would have
attached to A/E in the absence of such
agreement.
106
I d
Indemnification
ifi i
 A/E s indemnification obligations should be
A/E’s
limited to negligence to avoid loss of
coverage
107
I d
Indemnification
ifi i
 Additional insured status allows direct
coverage in the event of a third-party claim,
but typically only if the claim derives from
the acts or omissions of the named insured.
108
I d
Indemnification
ifi i
 Some courts have held that an additional insured
provision is void if it is inextricably tied to an
indemnification clause that is void under the
applicable State’s anti-indemnification statute. See,
e.g., Walsh Constr. Co. v. Mutual of Enumclaw, 92
P 3d 122 (Or.
P.3d (O Ct.
C App.
A 2003) W.E.
2003); W E O’Neil
O’N il Constr.
C
Co. v. General Cas. of Illinois, 748 N.E. 2d 667
(2001).
(2001)
109
Interplay Between Indemnification
P ii
Provisions and
d IInsurance
 CGL excludes coverage for claims for bodily
injury incurred by insured’s employees
arising out of employment
 But express obligation to indemnify for
injuries to employees may allow a claim
under the contractual coverage endorsement
110

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TUESDAY, JUNE 14, 2011

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Pillsbury Winthrop Shaw Pittman LLP

 Carefully consider the type of project and all potential risks so

 Identify the duration of each type of coverage, taking into

 Require that certificates of insurance and copies of policies

6 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

 Require that certificates of insurance and policies be provided

 Identify the specific forms and/or coverages under which your

 Ensure that deductibles and/or self-insured retentions may be

 AVOID OUTDATED TERMS AND POLICIES!

7 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

 Coverage A – Bodily Injury and Property

 Coverage B – Personal and Advertising Injury

8 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

9 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

We will pay those sums that the insured

10 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

 Who is “the insured”?

11 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

We will pay those sums that the

12 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

13 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

a. Physical injury to tangible property, including all

b. Loss of use of tangible property that is not physically

14 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

This insurance applies to "bodily injury" and

15 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

16 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

 Separate sub-limits in a CGL policy

 Failure to obtain and procure leads to many breach of contract

 Three-part test for coverage.

17 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

 Must Occur Away from Your Premises.

 To be included within the products

 Bodily injury or property damage that takes place on the named

18 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

 Must arise out of “Your Product” or “Your Work,” terms

 Your Work. Includes operations performed by the named

19 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

20 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

The Contractor shall maintain all required insurance coverage in

21 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

Construction Clauses: Insurance and Indemnity

Construction Clauses: Insurance and Indemnity

Construction Clauses: Insurance and Indemnity

Construction Clauses: Insurance and Indemnity

Construction Clauses: Insurance and Indemnity

Construction Clauses: Insurance and Indemnity

• As additional insured on subcontractor’s p primary y and umbrella p

Construction Clauses: Insurance and Indemnity

Construction Clauses: Insurance and Indemnity

Construction Clauses: Insurance and Indemnity

Construction Clauses: Insurance and Indemnity

Construction Clauses: Insurance and Indemnity

• Plaintiff insurer sued defendant insurer seekinggap proportionate

Construction Clauses: Insurance and Indemnity

 Naming additional insureds requires a separate endorsement

48 Construction Contracts: Crafting Insurance and Indemnity Clauses James P. Bobotek

 Specify the form endorsements through which the

 Require that the additional insured coverage be “primary

 Understand the difference between additional insured and