Contractual Reviews
The following is a list of what will be reviewed:
Review Indemnity Provisions
The first line of defense in any risk transfer program will be the terms of the indemnification provided to the general contractor. Below are several issues we would analyze as part of our review.
- Broad Indemnification – It is important that the insured be provided indemnification, for both defense and indemnity costs, for any liability arising in whole or in part out of the sub-contractor’s operations.
- Broad, but not too broad – General Obligations Law §322.1 (applicable in New York) precludes owners and general contractors from receiving “pre-indemnification,” i.e., indemnification arising out of their own negligence, from their sub-contractors. Case law in New York is unsettled as to whether agreements containing overly broad indemnification are enforceable in part, or completely void, where the indemnities is actively (as opposed to vicariously or as an owner) negligent. As such, any indemnification language should be “to the fullest extent allowed by law.” We will consider whether an explicit reference to §322.1 (with respect to projects in New York) is appropriate.
- Indemnification for coverage fees – We would propose including language shifting the cost of pursuing coverage (or indemnification) to the sub-contractor, irrespective of any insurance coverage. This type of language would encourage sub-contractors to ensure the insured is properly named as an additional insured under their policies.
- Upstream Indemnification – We would want to ensure that the contract does not call for “reciprocal indemnification,” whereby each party (general contractor and sub-contractor) indemnifies the other for liability arising out of the other’s negligence. This is important because reciprocal indemnification can significantly limit the protection provided by even the broadest indemnity. Namely, if the parties have to litigate out of whose negligence the liability arose, this would render the indemnification worthless, at least as respects the duty to defend.
- Owner Indemnification – We would propose having the sub-contractor indemnify the owner (as well as the general contractor). A claim for indemnification by the owner (particularly where violations of NY Labor Law 200, et. seq. are alleged, raising the possibility of strict liability) can often significantly impact the general contractor’s carrier.
Solvency of Indemnities – An indemnification is only as strong as the party offering it. To the extent a sub-contractor’s solvency is in doubt, confirming appropriate “additional insured” status (by more than a mere insurance certificate) is particularly important.
- Waivers of Subrogation – An agreement by sub-contractor to waive subrogation against the insured and other sub-contractors would decrease the need for litigation between the parties, and focus attention on minimizing liability (the prime concern of the insured).
- Waiver of Workers Compensation §11 – Under Workers Compensation Law §11, common law (as opposed to contractual) indemnity is precluded, except in the case of a “grave injury.”Seeking a waiver of this provision may allow for coverage for contribution claims arising employee injuries under the sub-contractor’s WC/EL 1.B. coverage (which is typically provided without policy limits). Obtaining such a waiver would potentially create coverage for the sub-contractor under two separate policies: general liability (based upon the “insured contract” exception to the employee injury exclusion) subject to the policy limit and Workers Compensation/Employee Liability (based upon a common law indemnification claim, citing to the waiver) with potentially unlimited coverage.
Review Insurance Procurement Provisions
Many agreements put a sub-contractor in breach of contract when they fail to procure the proper insurance. Below are several issues we would review in regard to the insurance procurement requirements:
- Insured/Carrier Named an Interested Party – We would propose having the Agreement require sub-contractors to name the insured and carrier as interested parties on their insurance, requiring notification of any changes to their coverage (cancellation, reduction in limits, non-renewal).
- Additional Insured Endorsement – There are several approved additional insured endorsements ranging from broad (“arising out of, or in anyway relating to, your work“) to narrow (“to the extent the additional insured may be held liable for your negligence”). The scope of additional insured status is often a key issue in whether a sub-contractor’s carrier agrees to defend an additional insured in the first instance, or instead awaits resolution of the underlying litigation.
- Endorsements Limiting Coverage– We would require confirmation that the policies procured by sub-contractors do not contain endorsements that potentially limit coverage, including:
– Designated Project Limitation
– Classification Limitation (i.e., covering only particular types of work)
– Amendments to Pollution Exclusion (broadening from “at or from” exclusion to “total” exclusion
- Other Insurance Provisions (Primary v. Excess) – In light of evolving law on this issue, we would seek to require that the sub-contractor’s policy specifically provide that it is primary to any insurance issued to any additional insured. Conversely, we would advise that the policy issued to the general contractor provide that it is excess of any insurance naming the general contractor as an additional insured (by endorsement or otherwise). Tightly worded “other insurance language” can avoid the need for unnecessary and costly coverage litigation.
- Review Insurance Claim Notification Provisions – As you may be aware Ins. Code §3420(d) was recently amended to prevent “no prejudice” disclaimers based upon late notice, effective January 17, 2009 (i.e., for all policies issued in New York after that date). However, we would propose that the Agreement require sub-contractors to copy the insured (and potentially, the carrier) on all claim correspondence with their carriers.