Chapter 2 Common Provisions

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 2 Common Provisions

Lyndon F. Bittle

This chapter introduces two common methods by which one party may seek to contractually transfer certain risks to another party: indemnity provisions and requirements to procure additional insured coverage. Even though additional insured requirements and indemnity provisions arise out of the same goal—to shift risk from one party to another—they accomplish this goal in different ways and are viewed differently by courts that interpret them.

Indemnification and insurance are distinguishable in a number of respects, although both can provide protection from loss. In essence, indemnification is a shifting of financial responsibility from the indemnified party to the indemnifying party, for example, shifting the financial risk to the subcontractor on a construction project, or shifting the risk to the company in an employment contract with a director or officer. The protection afforded by an indemnification provision often depends on the financial vitality of the indemnifying party, and in the case of financially troubled companies, subcontractors, individuals, or similar entities, an indemnification provision may not provide much protection at all. Insurance, on the other hand, is a mechanism that shifts risk to a third party, an insurer, which expects to make a profit from accepting this risk because it anticipates premiums will exceed loss payouts. Insurance, however, generally does not cover known, preexisting problems, whereas indemnification often expressly covers known, historical events.

Further, indemnification provisions often require a determination of the party responsible for causing the damage or injury, but insurance coverage for an additional insured may not require the same analysis. Accordingly, a party may prefer not to invoke an indemnification provision but rather look to available insurance coverage to shift its risk to the indemnitor's insurer. On the other hand, where the indemnitor is financially capable of accepting liability, an indemnitee may focus on the indemnity agreement to avoid complications arising from the indemnitor's insurance policy terms and exclusions, which the indemnitee did not procure and cannot control.

I. Contractual Indemnification

A. Purpose and General Provisions

A contractual indemnity agreement has been defined as "a collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or of some third person."¹ Black's Law Dictionary defines indemnity simply as "[a] duty to make good any loss, damage, or liability incurred by another."² At its essence, a contractual indemnity seeks to shift certain risks from one party to another party under the terms of the contract. Most indemnity agreements identify the following elements:

1. Party potentially owing the indemnity ("indemnitor").
2. Party to be indemnified ("indemnitee").
3. Type(s) of losses covered. Often an indemnity agreement will either cover "damages" or "liability" of the indemnified party. These terms are often construed as providing for different breadth of indemnity. For instance, under Texas law, if the indemnification is limited to "damages," the indemnitee is protected only from damages, and only after being compelled to pay a judgment or debt.³ On the other hand, where the agreement protects the indemnitee against "liability," the indemnitor is obligated to pay covered losses as they become due, and the indemnitee is not required to pay the losses before asserting a claim for indemnification.⁴ Further, many indemnity agreements will cover attorneys' fees and costs,⁵ or may place a duty to defend on the indemnitor.⁶
4. Triggering event. This is sometimes called a "nexus" between the claim and the indemnitor's acts or omissions. Examples of broad nexus terms include "arise out of," "in connection with," or "occasioned by." More narrow nexus terms may require that the claim arise out of the indemnitor's "acts or omissions" or "negligence."⁷
5. Conduct of the indemnitee. In most cases, contractual indemnities fall into one of two categories: (1) those in which the indemnitor agrees to provide indemnity irrespective of the indemnitor's negligence or intentional misconduct, and (2) those in which the indemnitor's fault is a necessary predicate for the obligation to indemnify. In some cases, the indemnity will require indemnification for negligent acts of the indemnitee. Limitations on such provisions imposed by statutes or case law are discussed in more detail below.

Whereas indemnity agreements can take many different shapes and forms and are hard to define and categorize, they fall generally into three categories:

• A "Narrow Form" clause provides for indemnification for harm caused by the indemnitor (usually due to negligence). This is a comparative fault clause that places liability on the indemnitor only for harm that the indem-nitor caused and, as a result, requires a comparison of negligence. A Narrow Form clause is almost always enforceable.
• An "Intermediate Form" clause requires "all or nothing" indemnification, even though the indemnitee contributed to the harm, but was not the sole cause—for instance, part of the harm may have been caused by the negligence of the indemnitee. As such, this clause places the entire responsibility on the indemnitor, though there may be several causes for the harm. Whether the Intermediate Form clauses are enforceable depends on the circumstances, and often on the scope of an anti-indemnity statute in the relevant jurisdiction.
• A "Broad Form" clause requires that an indemnitor indemnify even though the liability was caused solely by the negligence of the indemnitee. Such provisions are unenforceable in many jurisdictions where legislatures or courts consider it inequitable to require a non-negligent party to indemnify a solely negligent party or have concluded that such a provision operates to minimize deterrence for negligent acts on the part of the indemnitee.

B. Common Scenarios and Terms

The most common type of indemnity agreement is an insurance contract whereby the insurer agrees to pay for another's loss or damage under certain circumstances. However, contractual indemnification agreements that attempt to shift a risk of loss from an allegedly legally responsible party to another party can be found in many other types of contracts, including construction contracts, employment agreements, commercial lease agreements, manufacturing and distribution agreements, and asset purchase agreements. Indeed, indemnity provisions can cover almost any subject and can affect any type of claim or damage, including liability arising from the negligence of a party to be indemnified and claims for gross negligence or punitive damages.⁸

1. Construction Contracts

Contractual indemnity provisions are extremely pervasive in construction agreements, due to the nature of the work to be performed, the fact that the work is often performed by subcontractors or other contracted parties, the frequency with which construction-related lawsuits arise, and the myriad insurance issues often involved in construction lawsuits.

Many construction projects will involve an owner or developer (owner), a general contractor selected by the owner (contractor), and a variety of subcontractors, usually selected by the contractor with the owner's consent (subcontractor). In many cases, the owner may have little control of the conditions of a construction job, and yet be sued for damages along with the contractor and subcontractor.

The most common type of indemnity agreement is a promise by which a subcontractor promises the owner or contractor that the subcontractor will pay specified damages arising out of certain accidents or activities, often including bodily injury and damage to the property. Many agreements between the owner and contractor will also contain an indemnity provision. Contractors may also seek to be indemnified against claims arising out of the design of a project, where they were not responsible for the design.

The following is a sample construction indemnification provision between a contractor and owner:

To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner from and against all claims, damages, losses and expenses, including but not limited to attorneys' fees arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to injury to or destruction of tangible property including loss of use resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions of the Contractor or a Subcontractor.

The following is a sample construction indemnity provision from the American Institute of Architects concerning subcontractors:

To the fullest extent permitted by law, the Subcontractor shall indemnify and hold harmless the Owner, Architect, Architect's consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys' fees, arising out of or resulting from performance of the Subcontractor's Work under this Subcontract, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Subcontractor, the Subcontractor's subcontractors, anyone directly or indirectly employed by them or anyone for whose acts they may be liable hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity which would otherwise exist as to a party or person described in this Agreement.⁹

Due to anti-indemnity statutes and express...