Chapter 3 Hold Harmless and Indemnification Agreements and the Obligation to Procure and Maintain Insurance

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

CHAPTER 3 Hold Harmless and Indemnification Agreements and the Obligation to Procure and Maintain Insurance

Thomas S. Garrett and Jeffrey L. Cole

I. Overview of Named Insureds, Insureds, and Additional Insureds

As discussed elsewhere, there are several ways a person or entity may qualify as an insured other than by being a named insured under a policy. As discussed in Chapter 1, the "Who Is An Insured" section of the standard CGL policy describes the individuals and entities that enjoy "insured" status under a liability policy to the extent that they satisfy certain requirements of the policy.¹ Also significant are policy provisions that extend "automatic" or "blanket" coverage for a third party where a separate contract requires the named insured to name that party as an "additional insured." Endorsements are also commonly used to designate specific additional insureds by name.

II. Contractual Relationships Requiring Additional Insured or Contractual Liability Coverage

As discussed in Chapter 2, contracts often contain risk-shifting provisions that require one party to provide contractual indemnification to the other contracting party under certain enumerated circumstances. Such contracts will also often contain specific insurance requirements that obligate a contracting party to (1) procure insurance coverage for liability the named insured/indemnitor assumes under the indemnification provisions of the contract and (2) name the indemnitee as an additional insured under the policy.² Although they are sometimes mistaken as duplicative contractual rights, the obligations to provide contractual indemnity and to procure insurance are separate and distinct.³

There are a wide variety of contracts that contain indemnification and procurement-of-insurance requirements, including but not limited to property leases, equipment leases, vendor agreements, construction contracts, condominium agreements, and contracts between corporations and their directors and officers.⁴ The variations of procurement-of-insurance contract provisions are too numerous to recount. However, such provisions commonly address the types of insurance that must be procured (e.g., compensation, employee liability, automobile liability, general liability, and property) and may specify the required limits of coverage. Insurance procurement provisions may also (1) mandate that the procuring party name the other party as an additional insured under certain of the required insurance policies, (2) mandate that such additional insured coverage apply on a primary and noncontributing basis, (3) specify the types of required additional insured coverage forms (e.g., Insurance Services Office Form B [CG 20 10 11 85]) and/or the required insurance coverages such as completed operations coverage for the additional insured and contractual indemnification coverage for the named insured.⁵

The variations among contractual indemnification provisions are also too numerous to list.⁶ However, such provisions often contain a causal nexus requirement between the contracting party's work or operations, use of the leased, or rented equipment or premises and the resulting loss, damage, injury, or claim. Such provisions may also address the degree of required fault on the part of theindemnitor and may exclude claims based on the indemnitee's sole negligence or willful misconduct.⁷

There are multiple reasons for a party to insist on both indemnification provisions and insurance requirements in a single contract. For example, an insurance policy may be canceled, rescinded, or not renewed, in which case the insurance requirement may not provide the protection the parties anticipated. In addition, as discussed in Section V of this chapter, the protection afforded by indemnification and hold harmless provisions, on the one hand, and additional insured coverage, on the other, are in many instances complimentary and not co-extensive. Thus, to maximize one's protection, a party should include in the contract both an indemnification and hold harmless requirement and an additional insured requirement.

Importantly, when parties to a contract intend for one of them to be named as additional insured, that intent should be clearly expressed in their contract because a court will likely refuse to imply an obligation to obtain additional insured coverage. For example, one court found the following language to be ambiguous and construed it against the party seeking additional insured coverage:

[Subcontractor] shall maintain, at its own cost, such insurance as will protect it and [General Contractor] from (i) claims under the workmen's compensation law of the State in which the work is being performed, and (ii) any claim for bodily injury, including death, . . . in the limits as set forth in the contract documents.⁸

In RCS Group, the general contractor contended that the insurance could not "protect" the general contractor unless it was entitled to direct coverage as an insured. The court agreed that this was one possible reading of the insurance procurement requirement. Notably, however, the provision did not expressly use the "additional insured" magic words. The court therefore explained that the provision could also reasonably be construed to protect the general contractor to the extent that the subcontractor procured coverage for its contractual indemnification obligation to the general contractor. Because the provision was subject to two reasonable interpretations, the court construed the provision against the general contractor and held that the subcontractor was not obligated to name the general contractor as an additional insured under its insurance.⁹

III. The Failure to Procure or Maintain Insurance Coverage

A contract will often require the named insured to provide the contracting party with a certificate of insurance as evidence that it has been added as an additional insured under the policy. Most courts hold that the issuance of a certificate of insurance alone is insufficient to establish additional insured coverage where the named insured obtains the certificate from its insurance agent but the insurer has not, in fact, added the party to the policy as an additional insured.¹⁰

When a contract requires a named insured to obtain liability coverage for another party as an additional insured, and the named insured fails to do so, the named insured is generally not required to provide "substitute performance" (i.e., defend and indemnify the intended additional insured) in the absence of express language in the contract. As one court explained, the intended additional insured's claim that the breaching party must defend and indemnify the underlying claims based on its failure to procure insurance "fails because there is no language in the Lease that requires Lessee to provide substitute performance."¹¹ Instead, the intended additional insured's remedy is to seek damages for breach of contract. To establish a failure to procure claim, the intended additional insured must show that it would have been covered had the additional insured coverage been obtained.¹² The named insured may defend the claim by establishing that coverage would have been unavailable (i.e., barred by an exclusion) even if the additional insured coverage had been procured.¹³ To be sure, the typical measure of damages in a breach-of-contract case is to place the nonbreaching party as close as possible to the position he would have occupied had the breaching party performed its contractual obligation.

In the liability context, the governing terms of coverage for a failure-to-procure claim will likely be the policy issued to the party that was obligated to name the other party as an additional insured.¹⁴ However, the inquiry can be more complicated with respect to all-risk property coverage. In this situation, the owner, who failed to procure insurance for the project, seeks to recover damages from the negligent contractor. Many courts have held that the breaching owner may not assert a viable claim against the contractor under these circumstances.¹⁵ However, some courts do not apply an automatic bar and consider the failure-to-procure question. One court explained the coverage inquiry as follows:

In many instances, the construction contract itself will identify the policy to be purchased and from which insurer it is to be purchased. In other instances, the owner and contractor will have an established course of dealing. In such a situation, the best evidence of that which was intended to be purchased will be that which was purchased in the past. The more difficult is the one [where] the construction contract does not specify the insurance policy to be purchased, only the type of insurance to be purchased, and [the parties] did not have an established course of dealing.¹⁶

In Frank Coluccio Construction, the nonbreaching party proved coverage by establishing that an "all-risk" policy covers fortuitous losses unless excluded from coverage. The burden then shifted to the breaching party to establish an exclusion. The court articulated the following test for establishing an exclusion to coverage:

. . . we think it a better approach to afford the owner the opportunity to prove that every insurance policy it could have purchased to satisfy its obligation, without exception, would have excluded the losses claimed.¹⁷

The measure of damages in a failure-to-procure claim is typically the amount of coverage that the policy would have provided had the named insured fulfilled its contractual obligation to procure insurance.¹⁸ The fact that the intended additional insured had coverage of its own is irrelevant unless the "other insurance" clauses in the policies would have required the intended additional insured's own policy to provide primary coverage.¹⁹ Where the named insured fails to procure insurance, the intended additional insured's own insurer may have subrogation rights against the breaching party.²⁰

Where additional...