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

Insurance Requirement Provisions

in Commercial Contracts Mitigating Risk, Maximizing Coverage, Interplay With Indemnification

Today’s faculty features:

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

WEDNESDAY, DECEMBER 20, 2017

Katherine J. Henry, Partner, Bradley Arant Boult Cummings, Washington, D.C.

G. Benjamin Milam, Esq., Bradley Arant Boult Cummings, Charlotte, N.C.

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©Bradley Arant Boult Cummings LLP Attorney-Client Privilege.

Insurance Requirement Provisions in Commercial Contracts

December 20, 2017

Presented by:

Katherine J. Henry & G. Benjamin Milam

khenry@bradley.com bmilam@bradley.com

Topics Covered Today

• Best Practices for Allocation of Risk

• Allocation of Risk to Appropriate Party and Policy

• Allocation of Risk Through Additional Insured Status

• Documenting Proof of Coverage

6

Best Practices for

Allocation of Risk

Risk Allocation in Contracts

Contractual Insurance

Requirements

Indemnity and Hold

Harmless

Additional Insured Status

8

First Step: Assess Risks

9

Identify Assets

Determine and Rate Plausible

Risks

Strategize for Risk

Reduction

Identify Risk Gap

Allocate Remaining

Risks

Best Practices: Assessing Risk

What are we trying to protect?

What could go wrong?

How can we mitigate?

After mitigation, what risk remains?

10

Second Step: Allocate Risk Among

Parties

Risk transferred between parties by indemnification or

hold harmless agreement

– Provisions not always enforceable (especially in

construction context)

– Efficacy dependent on ability to pay

Party that bears risk may lay off all or portion of risk to

insurers

Contract should specify insurance requirements

11

Relationship Between Contractual

Indemnity and Insurance Coverage

Provisions

Many state statutes prohibit indemnification by one

party for the indemnitee’s sole negligence

Depending on jurisdiction, contracting party may

procure insurance coverage broader than permitted

indemnity

Contractual indemnification clause should be used

even where unenforceable under state law as it may

support coverage under “insured contract” exception

to contractual liability exclusion in a CGL policy

12

Insurer’s Defense of Indemnitee

Under CGL Policy

ISO Commercial General Liability Form CG 00 01 requires

insurer to defend indemnitee of insured if both are parties to

suit, but only when certain conditions satisfied:

– Suit seeks damages for which insured has assumed liability in

“insured contract”

– Insurance applies to liability assumed by insured

– Insured has also assumed obligation for and cost of defense of

indemnitee

– No known conflict of interest between indemnitee and insured

– Indemnitee and insured ask insurer to conduct and control

defense

– Indemnitee agrees to cooperate with insurer in suit

Cost of defense for indemnitee does not reduce limits of

liability

13

All Policy Components Relevant to

Contract

14

Declarations Page

Insuring Agreements

Exclusions

Conditions

Definitions

Form vs. Endorsement

Policy Limits Determine Amount of

Reallocated Risk

15

Financial Impact of Deductible vs. SIR

16

Best Practices: Allocating Risk

17

Recognize that allocation is a business decision

Recognize parties’ relative bargaining power

Identify each party’s leverage

Carrying risk acceptable if reflected in contract price

Third Step: Memorialize Risk Allocation

in Contract

Develop preferred contractual language

Recognize that obtaining preferred language may be

difficult in some circumstances

18

Best Practices for Contract Requirements

Keep language current

Ensure required coverages are appropriate

Keep provisions consistent

Specific requirements

Require A.M. Best Rating A:VII or S&P BBB or better

Waiver of subrogation from insurers

19

Allocation of Risk To

Appropriate Party and Policy

Allocate Risks to Appropriate Party

Contract to design new space

Accident due to

improper design

Injured party sues

Business

Architect’s Professional

Liability Policy

Architect Business

Risk of Loss

Policy follows risk

Business seeks indemnification from architect

Architect tenders defense and liabilities to Insurer 21

Waiver of Subrogation

Absent waiver, insurer generally subrogated to rights

of insured against third parties.

If insured has right of contribution from counterparty,

insurer may assert right to recovery, defeating the

desired risk transfer.

Insured’s agreement to waive rights against

counterparty could jeopardize coverage without

insurer consent.

Subrogation waiver added as endorsement to policy

constitutes insurer’s consent and acknowledgment of

risk transfer.

22

Rights of Insurer Absent Waiver

23

Example of Subrogation Waiver

24

Allocate Risks to Appropriate Policy

25

Liability for Bodily Injury and Property Damage

– Not arising out of professional services = CGL

– Arising out of professional services = professional liability or

errors & omission

Damage to Insured’s Property

– Commercial Property

– Business Interruption

– Builder’s Risk

Financial Losses

– Professional Liability and Errors & Omissions

– Employer’s Liability

– Workers Compensation

– Cyber Risk

Allocate Risk for Third Party Bodily Injury

or Property Damage

26

CGL coverage for bodily injury

and property damage not

arising from professional

services

Professional liability or Errors

and Omissions coverage for

bodily injury and property

damage, as well as financial

damages, arising from

professional services

Occurrence-Based Coverage

27

Occurrence-based CGL insurance covers event

regardless of when claim made

Bodily injury or property damage must happen

during policy period.

Policy may not respond if bodily injury or property

damage occurs outside of policy period, even if

the insured provided services during policy period.

Occurrence Form

28

Claims-Made Coverage

29

Claim must be made during policy period

Policy may have a retroactive date limiting when

events causing injury can have occurred

Coverage may be excluded if insured was aware

of potential liability for its prior acts before policy’s

inception

Claims-Made Form

30

CGL – Completed Operations

31

Covers bodily injury and property damage

occurring away from premises you own or rent

and arising out of your product or your work

Exceptions:

– Transportation of insured’s product

– Tools, uninstalled equipment, or abandoned or

unused materials at a job site

– Completed operations losses already covered

under CGL policy

Example of Best Practice

Goal: Protect Lender’s Interest in

Construction Project

Insurance Provisions

1. Name Borrower as “first named insured”

2. Name Lender as “mortgagee and first loss payee”

(ISO form CP 12 18) and use edition date

3. Requires Waiver of Subrogation in favor of Lender

4. Specifies “all risk”

32

Example of Best Practice

5. Mandates Collapse coverage as provided by ISO

form CP 11 20 or equivalent

6. Requires coverage for faulty work, materials, or

design

7. Sets maximum amount for deductible/self-insured

retention

8. Requires absence of key property exclusions

9. Waiver of coinsurance clause

33

Example of Best Practice

Casualty Insurance Provisions

1. Maximum deductible $25,000

2. Requires specific severability clause from CG 00 01

with preferred edition date,

3. Requires Lender be added as AI to general liability

and wrap up liability insurance under CG 20 26 with

preferred edition date

34

Example of Best Practice

Casualty Insurance Provisions

4. Waiver of subrogation clause

5. Requires separate commercial auto liability insurance

and specifies limits

6. Requires separate workers’ compensation and

employer’s liability insurance, and specifies limits

7. Requires umbrella coverage and specifies limits

8. Written notice of cancellation for all coverages

35

Example of Best Practice

Post-Construction Property Insurance

1. Post-construction property insurance requirements

mirror Builders’ Risk requirements where appropriate

2. Requires Loss Payee provision in favor of lender

3. Requires business income and rental value insurance

and specifies limits

4. Requires flood insurance if in FEMA flood zone

5. Requires earthquake insurance in areas with risk of

seismic activity, subject to lender approval

6. Requires equipment breakdown as a covered peril

7. Requires certain exclusions be absent from Policy

36

Example of Best Practice

Post-Construction Casualty Insurance

1. Post-construction casualty insurance requirements

mirror pre-construction requirements

2. Reduces deductible maximum to $5,000

3. Added requirement for liquor (dramshop) liability

insurance

4. Coordinates construction, repair, and alteration

insurance with property and builder’s risk insurance

to reduce potential gap in available coverage

37

Allocate Risk Arising Out of Professional

Services

38

Protects insured against liability for committing an

error or omission while performing professional

services

May be designated as “Professional Liability” or

“Errors and Omissions” coverage

Traditional professionals (doctors, lawyers,

accountants) as well as “quasi-professionals”

(e.g., real estate brokers)

Definition of professional services critical –

determines scope of coverage

Claims-made policy

Allocate Risk Arising Out of Professional

Services

39

Allocate Risk Arising out of Professional

Services – E&O

40

Successful Reallocation of Risk

41

Retail store contracts with printing company to advertise

event

Printing company agrees to indemnify owner for its own

negligence

Printing company three days late and retail store sustains

financial loss

Retail store sues printer for loss

Printer’s errors and omission policy provides defense and

indemnity for printer

Ultimate payment to retail store

Allocating Risk of Loss for Cyber-

Security Breach

42

Average cost of breach is $7.35 million

First-party costs

– Forensic investigation

– Legal advice to determine notice/regulatory obligations

– Notifying customers of breach

– Public relations

– Business interruption

Third-party costs

– Legal defense

– Settlements, damages, and judgments

– Liability to banks for re-issuing credit cards

– Regulatory liability

Successful Reallocation of Risk

43

Business contracts with billing vendor

Vendor names Business as AI on Vendor’s cyber liability

policy

Vendor discloses private information about Business’s

clients

Business’s clients sue Business for improper disclosure

Insurer defends and indemnifies Business (and Vendor)

Allocate Risk for Employee Bodily Injury

– Workers Compensation

44

Allocate Risk for Employee Bodily Injury

– Employer Liability

45

Allocate Risk to Appropriate Property

Policy

46

Commercial Property

Business income and extra expense

Builder’s risk

Flood

Contractor’s equipment/inland marine

Boiler and machinery

Property – Special Form (CP 10 30)

47

Allocate Risk of Loss for Business

Income

48

Unsuccessful Risk Allocation in Lease

49

Tenant Landlord

Tenant shall maintain

insurance against public

liability for personal injury

or death or damage to

property occurring in the

arising

out of the use and

occupancy thereof by

Tenant.

Landlord shall

maintain insurance

against public liability

for personal injury or

death or damage to

property

or arising

out of the use of the

common areas

Allocation of Risk Through

Additional Insured Status

Additional Insured by Category (Blanket)

Additional Insured By Name

Additional Named Insured

Allocate Risk Through Insured Party Status

51

Named Insured

Named Insured

52

Additional Named Insured

53

Additional Insured

54

Protects AI from NI’s negligence

Insures AI for liability arising from NI’s acts and omissions

(but not for AI’s sole negligence)

Benefits:

– Coverage without premium

– No responsibility for deductibles or SIRs

– No erosion of AI’s policies

By name or category (blanket)

Additional Insureds by Name

55

Additional Insureds by Name

56

Blanket Additional Insured

57

Standard blanket endorsement with privity requirement;

OR

Blanket endorsement extends to AI rights to any person

or entity that downstream party agrees to name as AI

Coverage Expansion: Privity vs. No

Privity

58

CG 20 33 Any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy

CG 20 38 1. Any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy; and 2. Any other person or organization you are required to add as an additional insured under the contract or agreement described in Paragraph 1. above

Documenting Compliance With

Contractual Insurance

Requirements

Memorialization of Coverage

60

Party requiring insurance should obtain proof of insured

status specified in contract

Should verify procurement of insurance, coverage

obtained, and any other matters specified in contract

Where contracting party cannot demonstrate satisfactory

proof of coverage, additional endorsements may be

necessary to implement bargained-for status

Certificates of Insurance may not be sufficient.

Require Proof of Insurance

61

Policy (including

endorsements)

Certificate of Insurance

Memorandum of Insurance

Endorsement Only

Certificate of Insurance Not Binding

62

Final Thoughts

63

Assess risk

Allocate risk

Memorialize risk allocation

Document insured status

• Document proof of coverage