A Potential Gap in Indemnity Coverage
By David S. Lynch, Teia Moore Kelly, Construction Executive
Commercial contracts in the construction industry generally contain indemnity provisions in which one party (the indemnitor) agrees to assume the liability of the other party (the indemnitee) as a result of personal injury or property damage. Historically, one party indemnifies the other regardless of fault—meaning the indemnitor assumes liability for all damage to its own property and people, regardless of who caused the damage. To the extent allowed under state law, this obligation also can include indemnity for damage caused by the sole negligence of the indemnitee.
The underlying reason for agreeing to assume liability for damage caused by another is that the indemnitor typically has insurance to cover damage for its own people and property. In this respect, while the standard insurance general liability policy contains a contractual liability exclusion, an exception to such exclusion exists for “insured contracts,” a term defined in the policy to include coverage for contracts in which the named insured, as indemnitor, has agreed to assume the tort liability of the additional insured, as indemnitee.
Recently, an insured contract endorsement has been added to some policies limiting the scope of contractual indemnity coverage by narrowing the definition of “insured contracts.” Under this endorsement, the definition of “insured contract” is limited to damages caused by the acts or omissions of the named insured or those acting on behalf of the named insured. The word “caused” and the phrase “acts or omissions” are not defined in the policy, nor is any guidance offered regarding the meaning of the phrase “acting on behalf of the named insured.”
The consequence of these undefined terms is that resolution of their meaning—and the ultimate determination of whether the contractual indemnity obligations are covered by the policy under an “insured contract”—will be inherently inconsistent from jurisdiction to jurisdiction.
This new endorsement raises two major concerns:
- whether insurance coverage for contractual indemnity will now require some level of fault by the named insured; and
- if so, to what extent the named insured must be liable.
While there are currently no cases construing this endorsement, courts across the country have reviewed identical language in additional insured endorsements, providing insight into the future. If the last few years are any indication of what’s to come, the issue of whether the named insured’s policy will provide coverage for contractual indemnity obligations under an “insured contract” will depend on the meaning the particular jurisdiction applies to the terms “caused,” “acts and omission,” and “those acting on behalf of the named insured.”
ACTING ON BEHALF OF THE NAMED INSURED
Assume that a company hires a contractor to perform work, and a company contractually agrees to indemnify a contractor for damage to the company’s property and people.
In Wyoming and West Virginia, the language under this new endorsement likely will trigger insurance coverage under the company’s policy to protect the contractor for damage to the company’s people or property so long as the contractor is performing work for, at the request of, or on behalf of the company—even if the company is not responsible for the damage, and in some cases even if the contractor is solely liable for the damage. States such as Wyoming and West Virginia interpret the phrase “those acting on behalf of the named insured” broadly to include anyone acting on behalf of the named insured. As long as someone acting on behalf of the named insured causes the damage, coverage likely will be triggered under this endorsement.
On the other hand, states such as Texas and Illinois interpret the phrase narrowly and limit the language to mean acts by the agents or employees of the named insured. Jurisdictions following this approach likely will require some amount of fault by either the named insured or its agents or employees in order to trigger coverage under the new endorsement. Additionally, jurisdictions following this standard most likely will bar coverage if the additional insured is solely at fault.
JUDICIAL INTERPRETATION OF THE WORD ‘CAUSED’
The majority of jurisdictions appear to interpret “caused” to mean proximate cause (i.e., a cause that is the substantial factor in bringing about the harm). However, jurisdictions such as New York interpret caused to mean the same as “arising out of” (i.e., a cause originating from, incident to, or having a connection with the harm). Furthermore, some jurisdictions equate the term “acts or omissions” in insurance policies to mean negligence.
Accordingly, in jurisdictions that require some level of fault by the named insured to trigger coverage under the new endorsement, the majority likely will require that the damage is substantially caused by the acts or omissions (or negligence) of the named insured. However, jurisdictions following New York’s interpretation of the word caused likely will require a less demanding standard and simply require that the damages be somehow connected to the acts or omissions (or negligence) of the named insured.
POLICY AND CONTRACT REVIEW
In light of the potential for this new endorsement to limit the scope of indemnity coverage, contractors should review their own policies to ensure they satisfy their contractual obligations owed to others Contractors also should request and review endorsements from those providing contractual indemnity obligations to ensure the indemnitor’s policies provide appropriate insurance for the obligations owed to the contractor.
Contractors also should analyze how this new endorsement will affect future contracts—both as the named insured and as the additional insured—based on whether some amount of fault by the named insured will be required so that the contractor can effectively negotiate indemnity protection.