All contractors dread receiving the seemingly inescapable call that a preventable, yet too common, workplace accident occurred such as a crane collapse, the fall of an ironworker, or a delivery vehicle accident. Besides the human and project costs these accidents bring, claims and lawsuits nearly always follow. While defending claims and lawsuits may cause even the most seasoned contractors to suffer from sleepless nights, responsible parties may take solace in knowing that their counsel negotiated defense and indemnity agreements in their contracts. Why then do such parties sometimes learn that because of the language in an insurance policy, the indemnity clause in the construction contract provides little or no protection?
Construction agreements commonly include indemnification provisions that require subcontractors, material suppliers, vendors, and any “downstream” parties to hold owners, contractors, and other “upstream” parties harmless for their respective vicarious liabilities. Construction contracts also typically require downstream parties to name upstream parties as additional insureds under any applicable insurance, such as a commercial general liability policy or an employer’s liability policy. The widespread use of these popular methods of transferring risk in the construction industry fosters substantial litigation. Sometimes, substantive personal injury or property damages are not the most expensive aspect of the litigation. Parties are often required to expend additional time and money disputing an additional insured’s entitlement to coverage – particularly where an indemnity agreement – by its own language or by operation of a jurisdiction’s laws – prevents a liable party from being indemnified by another.
Brokers work with insurers to obtain additional insured endorsements that honor the language incorporated into the construction contracts of their clients. When confronted with a lawsuit and a subsequent tender of additional insured status, defense, and indemnity, insurers decide whether the tendering party is owed a defense or indemnity based on the allegations in the complaint and the language of any applicable contracts and insurance policies. Insurers are constantly updating their policies to reflect changes in the law; unfortunately, parties contracting for the protection such policies afford do not always stay as current.
The most widely incorporated additional insured endorsements, typified by ISO Form CG 2010 1185, provide broad coverage even for an additional insured’s own negligence. Even so, such endorsements provide additional insured coverage “only with respect to liability arising out of the operations performed by the named insured.” Various courts across the nation, including Pennsylvania, interpret this language to hold that the additional insured only needs to establish a causal connection between the work and the incident in question. With this low threshold, the additional insured is typically covered, even if a named insured is determined not to be at fault, and even if an additional insured is found to be only partially at fault.
The insurance industry did not anticipate or desire this interpretation of additional insured coverage endorsements. As a result, some insurers have inserted revised additional insured endorsements in policies, typified by ISO Form CG 2010 0704, that substantially alter the language by removing “arising out of,” and instead incorporating the following: “caused, in whole or in part, by the acts or omissions of the named insured...” With this language in policies, judicial interpretations often result in no duty to defend or indemnify an additional insured if the claimant or plaintiff does not allege injuries or damage that were caused in whole or in part by the named insured’s negligence.
These revised additional insured endorsements create a new problem when only independent negligence (in other words, not vicarious liability) is alleged against both a named insured and an additional insured, but the underlying construction contract explicitly provides there is no duty to indemnify for an indemnitee’s sole negligence. This is important to understand, particularly in Pennsylvania, because courts disfavor contractual agreements where one party is required to indemnify another party for its own sole negligence. Unless such an agreement is explicitly stated in the contract, courts will narrowly interpret the contract by limiting indemnification obligations to only vicarious liability.
Counsel frequently point to the language of the construction contracts and argue that there is no duty to defend or indemnify because the complaint only alleges independent negligence against the additional insured. Over the years, however, some courts have disagreed with this argument by holding that the indemnification provisions in the construction contracts are not part of the analysis. This leads to understandable frustration by parties who incur legal fees associated with the drafting and review of these intricate indemnification provisions, only to find out the protections afforded are not relevant in the additional insured coverage perspective.
Due to this unforeseen risk, additional insured endorsements were recently revised to intertwine contractual indemnity obligations to additional insured coverage. Typified by ISO form CG 2010 0413, these new endorsements explicitly limit additional insured status to the indemnity clause of the underlying contract, regardless of whether the endorsement incorporates the “arising out of” or “caused, in whole or in part” language. In other words, the additional insured coverage cannot be expanded beyond what is provided for in the underlying construction contract.
The necessity for the evolution of the additional insured coverage endorsement was no more apparent than in the biggest insurance coverage dispute of this decade, In re Deepwater Horizon. This case is a spectacular illustration of how easily courts can differ in their interpretations of these complicated provisions, in addition to being a court decision resulting from one of the greatest industrial accidents and environmental disasters of all time.
The Deepwater Horizon, a mobile offshore drilling unit, was owned by Transocean and operated by BP subject to a drilling contract. Following a catastrophic explosion that infamously burned for two days and a leak that released countless gallons of crude oil into the Gulf of Mexico, disputes ensued over who must shoulder the responsibility of paying for the cleanup of subsurface pollution. The drilling contract required Transocean to indemnify BP for a certain set of liabilities (above-surface pollution), and required BP to indemnify Transocean for all other pollutions risks, i.e. subsurface pollution. Transocean was also obligated to procure insurance and name BP as an additional insured “for liabilities assumed by [Transocean] under the terms of the [drilling] contract.” However, Transocean’s insurance policy did not incorporate the updated AI endorsement; thus, the AI coverage was not expressly limited by the scope of the drilling contract liabilities.
BP argued that the policy provided coverage for any pollution claims, including subsurface, because coverage was broadly defined and the drilling contract was not to be considered pursuant to the Texas “four corners” rule that limits review of a party’s indemnity duties to the “four corners” of the applicable insurance policy. Transocean and its insurers argued that the indemnification provisions of the drilling contract limited the scope of coverage available from the insurance policy; therefore, the “four corners” rule was inapplicable.
The district court initially ruled against BP, but the Fifth Circuit reversed, adhered to the
Texas “four corners” rule, and held that BP was covered as an additional insured for subsurface pollution claims “because the policy itself imposed no relevant limitations upon the extent to which BP [was] covered.” In re Deepwater Horizon, 728 F.3d 491(5th Cir. 2013). On rehearing, however, the Fifth Circuit withdrew its opinion and certified a question to the Texas Supreme Court to decide whether the underlying contractual indemnity obligations are to be considered above and beyond the four corners of the insurance policy. In a widely discussed Opinion, the Texas Supreme Court held that the insurance policy included language that compelled consultation of the drilling contract to determine BP’s status as an additional insured. The Court found that BP’s additional insured status was limited to liabilities assumed by Transocean in the drilling contract. BP assumed liability for subsurface pollution claims; therefore, BP was not entitled to coverage under Transocean’s insurance policy. In re Deepwater Horizon, 470 S.W.3d 452 (Tx. 2015).
In reaching this decision, the Texas Supreme Court highlighted an important principle that should be at the forefront of any downstream party’s (and their broker’s) thought process when negotiating terms of indemnity obligations, and procuring additional insured coverage endorsements:
a named insured may gratuitously choose to secure more coverage for an additional insured than it is contractually required to provide. This occurs when the language of an insurance policy does not link coverage to the terms of an agreement to provide additional-insured coverage. In that event, only coverage restrictions embodied in the policy will be given effect.
Simply put, the Texas Supreme Court stated that unless the contract is explicitly referenced in the policy, its indemnification provisions will not be given any consideration. This judicial interpretation should serve as validation for the recent amendments to the additional insured endorsement, which explicitly link the scope of liabilities assumed under the contract to the available coverage. Had the insurance policies in Deepwater Horizon included the updated version of the AI endorsements, years of costly litigation could have been easily avoided.
With the lessons of Deepwater Horizon given to us by the Texas Supreme Court, parties wishing to clarify their additional insured and indemnity obligations are well served to demand inclusion of the 2013 updated version of the CG 20 10 ISO Form in their commercial general liability policies. Contracting parties should not operate under the assumption that their insurance brokers use the most updated forms. Oftentimes older versions of additional insured endorsements are re-circulated into newly formed policies, and reuse of old forms occurs even more commonly with renewal policies. The bother of negotiating better insurance each renewal will pay off any time a dispute involving an additional insured and/or indemnity tender arises.