In our last issue, we alerted you to Arizona’s revised anti-indemnification statutes (A.R.S. §§34-226 and 41-2586) regarding state and city public construction projects which became effective September 13, 2013. In this issue, we address the effect of those statutes on the use of insurance to shift risk to an insurance company.
The public policy behind the broadened scope of the statute is that an indemnitor should not be responsible for the indemnitee’s own negligence. Arkansas and other states have, while prohibiting indemnity provisions that shift risk for the indemnitee’s own negligence to the indemnitor, expressly approved such risk-shifting to an insurance company. Other states have expanded their anti-indemnity statutes to also void contract provisions that seek to transfer risk via additional insured coverage. It appears that these states find the additional insured approach of protecting oneself against one’s own negligence as equally inequitable as the indemnity approach.
The above Arizona anti-indemnity statutes allow for contractual provisions that require insurance coverage that complies with the statutes, including the designation of any person as an additional insured in a Commercial General Liability (CGL) policy. “Nothing in this section shall prohibit the requirement of insurance coverage that complies with this section, including the designation of any person as an additional insured on a general liability policy or as a designated insured on an automobile liability policy provided in connection with a construction contract or subcontract or design professional services contract or subcontract.” Clearly, contract provisions that require additional insured endorsements that provide coverage for the promisee’s own negligence are prohibited. The question remains whether Arizona’s anti-indemnification statutes prohibit any other type of “requirement of insurance coverage”.
The Insurance Services Office (ISO) recently made changes to its CGL policy forms and to its additional insured endorsements (2013 AI Forms) that became effective April 1, 2013. The changes are: (1) limiting coverage to the additional insured “only to the extent permitted by law”; (2) providing that coverage to the additional insured will not be broader than that which the named insured is required by the contract or agreement to provide; and (3) limiting the amount the insurer is required to pay out to the amount of insurance (a) required by the contract or (b) available under the applicable limits of insurance shown in the declarations, whichever is less.
The first limitation is applicable to states like Arizona that have enacted anti-indemnity statutes that extend to naming a party as an additional insured as well as limiting the extent to which an indemnitor may be required to indemnify an indemnitee from the indemnitee’s own negligence. This change acts as a “savings clause” and ensures that the endorsement does not run afoul of Arizona’s anti-indemnity statutes.
The second change applies in those instances in which the insurance coverage that the contractor is required to maintain pursuant to the construction contract is narrower in scope than what the contractor actually carries. In those circumstances, the owner, as an additional insured, is entitled and limited to what is actually required by the contract.
The third change provides that an owner would be provided insurance coverage limited to the amount required by the contract even if the CGL policy limits are greater. Under pre-2013 AI Forms, the owner would have coverage in the same amount of the CGL policy limit regardless of the contractually requirement for less insurance coverage.
We now return to the question of whether the above Arizona anti-indemnity statutes prohibit a variant of the insurance approach to risk shifting by which a party requires the second party to purchase a separate insurance policy in the name of the first party insuring the first party for its own negligence. Does a separate insurance policy that provides coverage for the first party’s own negligence conflict with the above anti-indemnity statutes’ public policy prohibiting the shifting of risk for one’s own negligence?
The above Arizona anti-indemnity statutes do not expressly prohibit a requirement that a party purchase a separate insurance policy in the name of the other party insuring that party for its own negligence. But, a requirement that the second party procure liability insurance coverage for the first party’s own negligence under a separate insurance policy appears to be flatly contrary to Arizona’s stated public policy of prohibiting additional insured endorsements that make an insurer responsible for the first party’s own negligence. In terms of Arizona’s public policy, it is difficult to see how the separate insurance policy approach is distinguishable from the prohibited additional insured endorsement approach to risk-shifting. However, the language of the above Arizona anti-indemnity statutes does not provide a clear and unambiguous answer to this question. We will probably need to wait for a court opinion to find out for sure.