Belt and Suspenders Risk Management for Not Getting Caught with Your Pants Down: Drafting Enforceable and Effective Indemnity and Insurance Requirements Provisions

Belt and Suspenders Risk Management for Not Getting Caught with Your Pants Down

Drafting Enforceable and Effective Indemnity and Insurance Requirements Provisions

By Michael S. Hale

Michael S. Hale is President of Clairmont Advisors, LLC, Managing Director and General Counsel of 360 Risk Management, Inc., and President of the Law Offices of Michael S. Hale & Associates, PLC, in Northville, Michigan.

Have you ever seen a person who wears a belt and a pair of suspenders? Isn’t that overkill for keeping your pants up? Depending on the person, maybe not. The same can be said for the ever-evolving yoke of insurance policies to contractual provisions in leases and contracts. This article analyzes both and provides practical recommendations for practitioners in the real property, trust, and estate areas.

Which Goes on First—the Belt or the Suspenders?

Most organizations and trusts (and individuals) purchase insurance as the primary source of risk management protection. In short, an insurance policy is a contractual transfer of risk from one party (the insured) to another party (the insurer) for a negotiated insurance premium. Such policies are an integral part of virtually all organizations, including coverage for liability for claims of bodily injury, death, property damage, and other torts like wrongful entry or eviction, discrimination, invasion of privacy, wrongful advertising, mismanagement by directors and officers, intellectual property liability, employment practices liability, and new and emerging areas such as cyber liability.

Despite the front row seat insurance policies often occupy in overall risk management, most insurance buyers give short shrift to the insurance buying process, assuming mistakenly that all policies are fungible commodities like soap and attempting to compare quotes for policies “apples to apples.” This is misguided, as most insurers, even where they use standardized forms such as those from the Insurance Services Office (ISO), often modify the policies through endorsements to address the risks the insurer is willing to assume. This has striking similarity to how indemnification and hold-harmless provisions are drafted and interpreted.

The Belt: The Insurance Policy

Below are some practical suggestions on transferring risk through the purchase of insurance policies that are based upon the author’s experience.

Commercial property insurance

and waivers of subrogation. These policies cover loss of a property owner or other interested party, such as a mortgagee or lienholder of the owner. Such policies vary considerably and should be carefully reviewed with knowledgeable insurance counsel, as this area is an often-litigated area. Moreover, there has been much litigation against insurance agencies, underscoring the importance of being certain that your client has a good agent. Insurers generally write the policy as requested by the insurance agents and may not otherwise include coverage enhancements where not requested. Further, when insurers pay claims, they have contractual subrogation rights to stand in the shoes of the insured to pursue any tortfeasor who may have caused the loss. This puts an emphasis on drafting appropriate waivers of subrogation in leases and contracts.

Triple net leases and property insur-

ance. Creating significant insurance and risk management issues are situations in which one party (such as a landlord) allows another party (such as a tenant) to insure its building--such as in triple net leases. This may create problems because the landlord is usually not properly listed as an insured rather than as a loss payee.

Workers’ compensation policies can also have waivers or subrogation pro-visions in favor of your clients.

Such policies provide broad statutory protection for employee injuries, but insurers who pay these losses also look to subrogate against other parties, such as property owners, when an employee may have become injured. Workers’ compensation insurers often agree to waivers of subrogation rights before the loss, but this is something that the better insurance requirement provisions include.

Outdated wording.

Insurance requirement provisions often use antiquated language such as “public liability insurance” or “comprehensive general liability insurance.” These terms are no longer recognized in the insurance industry and should be avoided.

Certificates of insurance.

In real estate closings, contractor agreements, and service agreements, many companies and counsel rely on insurance certificates and evidences of property insurance. These often do not bind the insurer. Consider the disclaimer language on such certificates that insurers often rely upon once a dispute arises. Moreover, a one-page certificate may not note all the coverage provisions, exclusions, and conditions of the policies. Obtaining copies of the actual policies, where possible, to see what coverage is being provided to your client as an additional insured, mortgagee, or other party.

Covering trusts.

Trusts are not automatically covered as insureds on insurance policies such as homeowners’ policies and commercial property or general liability policies. This can be devastating when a claim occurs. Add trust names to all policies, where applicable.

Additional insured endorsements.

Many attorneys place undue emphasis on the additional insured status of their clients on others’ insurance policies. Note that an additional insured is not the same as a named insured on a general liability insurance or other policy. Instead, such status gives only derivative liability coverage if the additional insured is named in a lawsuit arising from the negligence of the named insured. The author has seen cases where property owners have chosen not to purchase any commercial general liability (CGL) coverage because the property owner is listed as an additional insured on the general contractor’s policy. This is a major mistake. Although it may be advisable to also seek additional insured status of property owners on their lessee’s CGL policies, and for contractors working on their property, note there are more than 30 different types of additional insured endorsements in the commercial general liability insurance marketplace, each providing unique language. Please note insurance requirement provisions should not require additional insured language on every policy. There are times where a party would not want to be named as an additional insured on a policy of another such as on a professional liability insurance policy or environmental insurance policy. Such policies often include an insured versus insured exclusion that would bar coverage for lawsuits between a named insured (an owner, for example) and an environmental contractor or between multiple additional insureds.

Primary and noncontributory lan-

guage. When named as an additional insured, unless modified, the endorsement may provide only coordinating coverage with any other insurance coverage available to the additional insured. For this reason, not only should such language be included in insurance requirement provisions in leases and contracts, but also it should be verified on certificates of insurance and the actual endorsement itself.

“Blanket” additional insured endorsements are not always a pana-

cea. Many CGL insurers give automatic additional insured coverage for any party that the named insured agrees, in a written contract, to name as an additional insured. Although convenient, such endorsements often provide inferior coverage when compared to true additional insured endorsements.

Omnibus provisions requiring additional insured status of employees, members, officers, and agents may

not be properly insured. Many insurance requirement provisions in contracts require additional insured status for members, shareholders, employees, officers, agents, and others as a catchall. Note that additional insured endorsements often limit such coverage to the named insured and do not automatically include related parties like employees and officers of the additional insured, unless otherwise negotiated.

The Suspenders: Contractual Indemnity and Hold Harmless Provisions

Lawyers who draft contracts are wordsmiths of protection, often looking to words to transfer risk of liability, litigation, claims, demands, and other financial losses. This is a way to transition any risk or exposure to financial loss to a party their client is doing business with or for. Indemnity provisions often are interpreted similarly to insurance policies, according to their plain and unambiguous meaning, subject only to the statutory prohibitions such as indemnification for another’s sole negligence (as further examined below). These provisions may save the day where insurance coverage either does not exist for the liability in question, or even where such coverage does exist, by preventing financial loss from plaguing the loss history of the indemnitee. In short, such provisions can be powerful risk management techniques.

In representing indemnitors such as vendors or subcontractors doing business with owners, the objective, of course, is to limit the liability assumed in an indemnification and hold harmless provision in the agreement entered into between the parties, and if negotiating power to change such terms is lacking, to be certain that the client’s liability insurance picks up such indemnity, which is not always the case. Conflicting or inconsistent contractual indemnity provisions can complicate and delay the insurance claims process.

Here are some key points to consider when looking at indemnification provision “suspenders” based upon whether you are representing the indemnitor or the indemnitee:

If you are representing an indemnitor, consider the following:

Look carefully at what liability is being assumed. Although this seems obvious, it is often overlooked. For example, has your client agreed to assume the liability not only to indemnify the indemnitee but also to defend it? Does this indemnification obligation apply to actual or alleged claims of negligence? Does the language allow the indemnitee to choose counsel? Does the language, for example, state the indemnity applies to injuries arising “on or about” the leased premises? This could mean that slip-and-fall injuries in the parking lot could be within the indemnitor’s contractually-assumed liability.

Seek the involvement of the client’s insurance professional agreeing to the indemnification. It is important to note that although many CGL policies include coverage for contractually assumed liability of “insured contracts,” some insurers modify this to either exclude contractually-assumed liability of the insured or substantially limit it. Further, we often see that the indemnification provision itself assumes more liability than what is covered as an “insured contract,” such as in the area of non-bodily injury.

If you are representing an indemnitee, consider the following:

Reference attorney fees and litigation expenses as part of the indemnification. The ISO insurance standard CGL policy form also provides that reasonable attorney fees and litigation expenses are deemed to be damages if listed in the insured contract and attorney fees and costs are alleged in the underlying complaint.

Include the words “defend,” “hold harmless,” and “actual or alleged.” Too often the author sees situations in which an indemnitee relies upon a contractual indemnity provision that requires indemnity of the actual liability, claims, or damages. This is determined after the fact and would arguably not extend an obligation to defend the litigation. Using the phrases “actual or alleged,” “defend,” and “hold harmless” closes these gaps.

Be cognizant of anti-indemnity statutes, which vary among states. Is there a statutory carve-out for sole negligence for the indemnified party (the indemnitee)? Virtually all states prohibit indemnification in construction agreements for assuming liability for the sole negligence of the indemnified party. Michigan defines such construction contracts broadly to include things like building maintenance agreements, apparently applying to janitorial contracts. Mich. Comp. Laws § 691.991(1). Be cautious in analyzing the language being used in this area. Public policy generally disfavors releasing a party from liability for its own negligence. State laws governing indemnity vary widely. For example:

(i) New York. N.Y. General Obligations Law § 5-321 provides that agreements exempting lessors from liability for negligence are void and unenforceable, but certain exceptions apply.

(ii) California. Cal. Civ. Code §§ 2782.1, 2782.2, 2782.6. Although public policy does not permit indemnity for a party’s gross negligence or willful misconduct and disfavors a party being indemnified from its own negligent acts and omissions, exceptions apply in commercial circumstances in which an indemnity affirmatively includes the negligence of the indemnified party.

(iii) Michigan. Michigan law allows indemnification in commercial leases but significantly limits the scope of a residential tenant’s permitted indemnity in leases. Mich. Comp. Laws § 554.633(1) (e) (prohibiting exculpatory provisions except as to loss, damage, or injury caused by fire or other casualty for which insurance is carried by the other party); id. § 554.633(1)(g) (prohibiting contractual attorney fees). Michigan is an “intermediate form” state, which means that a party may receive indemnity except when the personal injury or property damage was caused by the indemnitee’s sole negligence. Id. § 691.991. A potential indemnitor may not escape its indemnity obligations by asserting that its indemnitee was “solely negligent” simply because the indemnitee is the only defendant named in the underlying suit. Lanzo Constr. Co. v. Wayne Steel Erectors, 477 Mich. 854 (2007). An indemnification agreement would properly require notice to the indemnitor of underlying lawsuits and may invoke indemnification; without such an express requirement, the indemnitee may not have been required to provide notice. It is also important to note that the Michigan Motor Carrier Act bars all contractual indemnity (even for intentional acts) in the context of motor carrier transportation agreements. Mich. Comp. Laws § 479.21.

(iv) Florida. Florida law looks to the seminal case of University Shopping Center, Inc. v. Stewart, where the Florida Supreme Court considered whether an indemnity for “any and all claims” includes an indemnity for the indemnitee’s negligence, noting that the general rule is that the negligence of the indemnitee is included only if the indemnity is expressed in “clear and unequivocal terms.” 272 So. 2d 507 (Fla. 1973). The court held, in summary, that an indemnity for “any and all claims” is not sufficient to cause the indemnitor to indemnify the indemnitee for its negligence and that the indemnitor was not required to indemnify the indemnitee for claims resulting from the negligence of the indemnitee. The court also observed that the indemnitor’s liability insurance policy will provide coverage only to the extent of the indemnitee’s liability. In addition, Florida Statute § 725.06 requires that any construction contract indemnify between an owner and a construction or design party.

Some states provide that where the contractual indemnification is prohibited, so, too, is any requirement that the indemnitee be named as an additional insured on the indemnitor’s CGL policy. For example, Arkansas provides that an entity’s insurer’s indemnification shall not exceed any amounts that are greater than that represented by the degree or percentage of negligence or fault attributable to the indemnitors. Ark. Code Ann. § 4-56-104(b), (e). Georgia bars indemnity provisions in construction agreements requiring one party to insure the sole negligence of the indemnitee. Ga. Code Ann. § 13-8-2 (2010).

Conclusion

When it comes to risk management, wearing both a belt (buying an insurance policy or policies) and suspenders (using effective and enforceable contractual transfer through indemnity and hold-harmless provisions and insurance requirement provisions) is usually required to avoid getting caught with your metaphorical pants down.

Published in Probate & Property, Volume 36, No 4 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.