The purpose of this article is to address potential issues and concerns that may arise between General Contractors (“GC”), Subcontractors (the “Sub”) and their insurers when claims by outside parties (also known as third-parties) for bodily injury or property damage may arise. This is a very broad area of law that varies from state to state. Spilman’s construction and insurance attorneys are prepared to help businesses navigate and address these state specific issues.
When a GC engages a Sub to perform work on projects, the parties should always have their expectations and agreements in a written document to which both sides agree and acknowledge the terms. These documents may go by many names, but at the end of the day, they are contracts that bind the parties to the terms. It is a common component of these agreements for the businesses or organizations to agree to take on the liability of someone else, which liability they would not otherwise have. This form of agreement, where one party takes on or assumes the liability of another by contract, is commonly called a “hold harmless” or “indemnity” agreement.
That indemnity may, in part, come in the form of providing insurance coverage for the other party. When these arrangements are made, it is typically the Sub who will not only be required to hold harmless the GC, but to a have the GC added as an “additional insured” to the Sub’s Commercial General Liability policy (“CGL”). Typically, the Sub’s insurance agent or its insurer is then requested to issue what is known as a “Certificate of Insurance” (“COI”) to confirm this status.
Many times the GC’s office will receive the COI and simply file it away. In the normal course of business, many of these projects get completed without incident. However, when a third-party is injured on the project site, businesses may anticipate a claim, and perhaps litigation, will soon follow. When this claim or litigation occurs, the question becomes not only who may be responsible, but in many instances, whose insurer may be called upon to investigate, defend and offer indemnity (if appropriate) to the injured third-party? As the claim or litigation ensues, the injured third-party will probably assert either the GC or the Sub (or perhaps both) were at fault for the accident.
If the claim or litigation is made only against the GC, the GC may have options to consider:
1. The GC may seek “indemnity” from the Sub pursuant to the “indemnity” agreement with the Sub;
2. If a lawsuit is filed, the GC may seek to “tender its defense” to the Sub and/or its insurer. (A “tender of defense” is an act by which one party places its defense, and all associated costs with that defense, upon another party.); or
3. If a lawsuit is filed, the GC may wish to file a Third-Party claim in the lawsuit against the Sub to enforce its rights to indemnity as set forth in their agreement.
The state-specific laws are very important as it is possible that even though an injured third-party might only assert the GC was solely negligent, it does not necessarily preclude an indemnification obligation from the Sub or the Sub’s insurer.
In West Virginia for instance, the Supreme Court of Appeals has noted the real issue in cases involving most indemnity agreements is an obligation to purchase insurance that will cover both the indemnitor and the indemnitee. See Riggle v. Allied Chemical Corp., 180 W. Va. 561, 378 S.E.2d 282 (1989).
Likewise, the Supreme Court of Appeals of West Virginia has stated that “the so-called ‘indemnity’ clause [of such contracts] is really only an agreement to purchase insurance, and thus would [protect a GC] even if the [GC] had been found 100 percent negligent.” Dalton v. Childress Service Corp., 189 W. Va. at 432, 432 S.E.2d at 102 (1993).
On the other hand, in Virginia, clauses that require any party to indemnify against claims caused solely by negligence of another party are unenforceable. See our previous article here and discussion of the Amtech Elevator case.
Conversely, if the injured third-party’s claim is pursued solely against the Sub, the Sub also has options to consider. Perhaps it is the Sub’s position it did nothing wrong and the negligence, if any, is solely the negligence of the GC. This may or may not be relevant depending upon your state laws. Perhaps there is mutual indemnification language within the agreement between the GC and the Sub. Similar to the GC’s options, the Sub may be in a position for one of the following actions:
1. Seek indemnification from the GC;
2. Tender its defense to the GC or the GC’s insurer; or
3. File a Third-Party Complaint against the GC for indemnification (assuming an appropriate legal basis exists to do so).
Significant to all the foregoing is the language typically found in a business’ CGL policy. Many CGL policies do not provide coverage for contractual liability – bodily injury or property damage for which the insured is obligated to pay damages by reason of the assumption of liability in contract or agreement. However, an important exception to this exclusion is for the liability “[A]ssumed in a contract or agreement that is an ‘insured contract.’” The previously mentioned “indemnity” or “hold harmless” agreements may very well be interpreted as “insured contracts” under the laws of various states. Thus, insurance coverage may exist.
If this is not confusing enough, just because a business is situated in the Carolinas, Pennsylvania, Virginia or West Virginia, one should not immediately assume the laws of a state will be the laws that will be applied to the interpretation of either one’s “indemnity” or “hold harmless” agreement or, for that matter, one’s CGL policy. A particular state’s “choice of law” laws may dictate what state law may apply to the interpretation of both the agreement and the CGL policy. This interpretation may be influenced by such things as the following: where the insurance policy was negotiated, the location of the “insured risk”, what state has the most “significant relations” to the insurance policy, the “justified expectations” of the parties, to name just a few.
The interrelationship between businesses, their “indemnity” and “hold harmless” agreements, and the available insurance coverage is likewise quite significant as litigation costs continue to escalate. A significant aspect of these agreements is the anticipated indemnification for attorney fees and costs in the event litigation ensues. The usual expectation is that by entering into such agreements, the business owner is being afforded the protection of being an indemnitee as well as an “additional insured.” Thus, the owner has avoided the prospect of the business having to internalize litigation defense costs.
Generally, the law in most states is that “the duty to defend is greater than the duty to indemnify.” The party, or its insurer, who may ultimately be responsible for these litigation costs is not a clear issue and is often subject to litigation between the parties and sometimes between the parties and their insurers. This can, and should, be a bottom-line issue of concern for business owners.
The practical purpose of this article is not to create a den of horrors in day-to-day interactions with other businesses and insurance companies. Rather, it is to help business owners avoid the pitfalls and dangers associated with any preconceived assumptions about these issues. Knowledge is beneficial and businesses should be prepared when, and if, they might be presented with such issues. The great former Yankee’s catcher Yogi Berra is attributed with saying, “If you don't know where you're going, when you get there you will be lost!” At Spilman, we do not want our clients to be lost. Business owners should be proactive in any situation when faced with a claim or lawsuit, and, for the purposes of this article, when such claims or lawsuits may involve the working relationships between GCs, Subs and their insurers. Such proactive measures include, but are not limited to the following:
- Pulling the insurance policy and reading it, every year. If there are questions, contact the agent or broker. There is a reason they are paid commissions on policies and that is to provide service. Likewise, one may wish to have counsel review one’s policy.
- If a business is added as an additional insured to another businesses’ policy, confirm this with the listed insured agent or insurer on the COI. Likewise, confirm the amounts of coverage are consistent with any agreements that are in force. Also, as insurance policy periods end, be sure to get updated COI’s.
- In many instances, a Sub may not be in a strong negotiation position to avoid the inclusion of “indemnity” and “hold harmless” provisions in a contract with a GC. Nevertheless, business owners should understand these implications both to themselves and their insurers on the front end, not after a claim or litigation begins.
- Keep in mind that a business may be responsible for indemnity costs if there is no insurance coverage in force, in spite of agreements and representations to procure insurance coverage.
- Business relationships are important, but common sense should not be checked at the door when entering into these agreements. Be sure to contact counsel to review these documents in advance of signing them. No proper business should be offended or slighted by this action. Likewise, don’t assume that last year’s agreement is the same as this year. Read them carefully.
- Don’t assume the validity of a COI naming a business as an additional insured. Trust in business relationships with clients is completely understandable, but trust and verify with the listed agent/broker and/or the insurer.
- When presented with a claim or litigation, immediately present it, in writing, to the insurer (the business insurer as well as any policy in which the business may be named as an additional insured). Insurance policies differ on reporting requirements and the timeliness of reporting a claim can impact coverage under “claims made” or “occurrence” type insurance policies.
Careful planning and preparation can assist and guide one in avoiding many future headaches.