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This article addresses potential issues and concerns, which may arise between General Contractors (“General”), Subcontractors (the “Sub”) and their insurers when claims by outside parties (also known as third-parties) may arise. This is a broad area of law, which varies from state to state. Spilman’s Construction Practice Group, with its multi-jurisdictional capacity, is prepared to help businesses navigate and address these state specific issues as they may arise.
When a General engages a Sub to perform work on projects, the parties should always reduce their expectations and agreements to a written document in which both sides agree and acknowledge the terms. These documents may go by many names, but they are contracts that bind the parties to the terms. It is a common component of these agreements for the businesses or organizations to take on the liability of another entity, which they might normally not otherwise have. This form of agreement, where one party takes on or assumes the liability of another party by contract, is commonly called a “hold harmless” or an “indemnity” agreement. That indemnity may, in part, come in the form of providing insurance coverage for another party. When these arrangements are made, it is typically the Sub who will not only be required to hold harmless the General, but to have the General 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 a “Certificate of Insurance” (“COI”) to confirm this status. Often the General’s office will receive the COI and simply file it away. In the normal course of business, many projects are completed without incident. However, when a third-party is injured or unanticipated damage occurs 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 often whose insurer may have 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 General or the Sub were at fault for the occurrence (or perhaps both).
If the claim or litigation is made solely against the General, the General may have options to consider.
The General may seek “indemnity” from the Sub under the “indemnity” agreement with the Sub.
- If litigation is instituted, the General 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).
- If litigation is filed, the General may wish to file a third-party claim against the Sub to enforce its rights to indemnity in their agreement.
The state specific laws are very important as it is plausible that even though an injured third-party might assert the General 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 “the so-called ‘indemnity’ clause [of such contracts] is really only an agreement to purchase insurance, and thus would [protect a General] even if the [General] had been found 100 percent negligent.” Dalton v. Childress Service Corp., 189 W. Va. 428, 432, 432 S.E.2d 98, 102 (1993).
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 is solely the negligence of the General. This might be relevant depending upon state laws. Perhaps, there is mutual indemnification language within the agreement between the General and the Sub. Similar to the General’s options, the Sub may be in a position to:
- seek indemnification from the General;
- tender its defense to the General or the General’s insurer; or,
- file a third-party complaint against the General for indemnification (assuming an appropriate legal basis exists to do so).
Significant to all the foregoing is the language typically in a business's 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 North Carolina, Pennsylvania, Virginia or West Virginia, one should not immediately assume the laws of that state will be the laws the courts apply to the interpretation of either the “indemnity” or “hold harmless” agreement or, for that matter, the CGL policy. A particular state’s “choice of law” laws may dictate what state law will apply to the interpretation of both the agreement and the CGL policy. This interpretation may be influenced by such things as:
- 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,
- or perhaps a "choice of law" provision within the agreement.
The interrelationship between businesses, their “indemnity” and “hold harmless” agreements, and available insurance coverage is likewise significant as litigation costs continue to escalate. A significant aspect of these agreements is the anticipated indemnification for attorneys fees and costs if litigation ensues. The usual expectation is that by signing such agreements, the business owner is being afforded the protection of being an indemnitee and an “additional insured.” The owner has avoided the prospect of the business having to internalize litigation defense costs. Generally, the law in most states is “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 insurance companies. This can, and should, be a bottom-line issue of concern for business owners.
The purpose of this article is not to create a den of horrors in day-to-day interactions with businesses and insurance companies. Rather, it is to help business owners understand the pitfalls and dangers associated with any assumptions (we all know what they say about assumptions). Knowledge is key and one should be prepared to at least recognize when, and if, one might be presented with such issues.
Business owners should always be proactive in any situation when faced with a claim or lawsuit, and when such claims or lawsuits may involve the working relationships between Generals, Subs and their insurers. Proactive measures include:
- 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. One likewise may wish to have counsel of one's choice to review the policy.
- If the 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 which may follow any such agreement. Also, as insurance policy periods end, be sure to get updated COI’s.
- Often 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 General. It is a cost of doing business. Nevertheless, business owners should understand the implications to both themselves and their insurers on the front end, not after a claim or litigation begins.
- Keep in mind the business could be responsible for indemnity costs if there is no insurance coverage in force, despite agreements and representations to procure insurance coverage.
- Business relationships are important, but common sense should not be checked at the door when signing these agreements. Be sure to contact counsel of one's choice to review agreements before signing them. No appropriate business should be offended or slighted by this action. Likewise, don’t assume last year’s agreement is the same as this year's. Read them carefully.
- Don’t assume the validity of a COI naming the business as an additional insured. Trusting relationships with clients is 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 and 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 affect coverage under “claims made” or “occurrence” type insurance policies. Also let a lawyer know.
Careful planning and preparation can assist and guide one in avoiding headaches. If you have questions about these, or other legal issues, the attorneys of Spilman Thomas & Battle are prepared to offer you and your business the solutions you need.
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