In April, Governor Dayton signed into law legislation that promises to reduce litigation over indemnity claims by restricting the ability to require one party to insure another for the other's fault. The amendment applies only to agreements entered into after August 1, 2013.
History of Anti-Indemnification Law
In 1984, Minnesota passed an "anti-indemnification" law that prohibited agreements in "building and construction contracts" in which one party agreed to indemnify another for the other's own fault. This law protected contractors and subcontractors from having to assume the entire responsibility for damages or injuries related to their work, even when the damages or injuries were wholly or partly caused by the upstream owner or contractor. This law was intended to have each party be responsible for its own conduct.
The anti-indemnification law, however, included a significant exception that allowed one party to require the other to purchase insurance covering the other's liability. What could no longer be done by indemnification could still be done by insurance. The theory was that it would be less expensive for one insurer and one attorney to defend both the owner and contractor (or contractor and subcontractor) than for the contractor and owner to each have their own insurer and attorney and to waste resources arguing how to allocate blame.
The insurance exception did not live up to its promise of economic efficiency. The flashpoint was the "insure-the-indemnity" clauses commonly found in standard-form subcontracts. These clauses included broad indemnity clauses that were illegal standing alone because they required the subcontractors to indemnify the contractor for the contractor's own fault. By requiring the subcontractor to insure that broad indemnity, contractors were able to "end run" the law's indemnity restrictions, which became doubly problematic because the indemnity obligation was not fully insurable. Subcontractors breached the subcontract by failing to purchase insurance that simply was not commercially available to most of them. This insure-the-indemnity obligation generated hundreds of claims and dozens of lawsuits over the interpretation and application of the insurance exception in the anti-indemnification law.
Contractors, subcontractors, and their attorneys and insurers all hoped that the Minnesota Supreme Court would use the recent case of L. H. Bolduc v. ECI as an opportunity to clarify the scope and limits of the insurance exception and slow the flood of lawsuits. The Supreme Court, however, did not address the issue in its decision, which was issued in January 2013.
The 2013 Amendment
The Minnesota Legislature stepped in by amending the anti-indemnification statute to prohibit agreements in which one contracting party requires the other to purchase insurance covering the other party's fault. This prohibition is not limited to subcontracts but also applies to prime contracts, design contracts, purchase orders and all other "building and construction contracts." This eliminates a common practice in construction contracting. Owners, for example, will no longer be able to require contractors to cover owners as additional insureds for the owner's own fault. Any offending insurance requirements are not enforceable and will be written out of the contract by operation of law.
The amendment, however, includes several significant exceptions. First, one contracting party may still require the other to purchase additional-insured coverage for any liability for the additional insured's "vicarious" liability; that is, based upon the named insured's fault or breach of warranty. A contractor, for example, can require a subcontractor to name the contractor as an additional insured on the subcontractor's policy, but only to the extent that the subcontractor is at fault.
The second exception to the prohibition is "project-specific insurance, including, without limitation, builder's risk policies or owner or contractor-controlled insurance programs or policies." The statute does not define the term "project-specific." Some argue that project- specific means any coverage that a person is required to purchase for a specific project, which in this author's opinion is an overbroad interpretation that would in effect negate the prohibition against insuring another for the other's negligence. It is likely that courts will interpret the term to include only those types of polices that, like those types specifically listed in the amendment, cover the fault of everyone working on the project and not just the named insured.
The amendment should not affect the insurer's obligation to defend the additional insured against all claims asserted in a lawsuit, even claims based upon its own fault. The law has long been that, as long as a lawsuit includes any one claim that the named insured is at fault, the insurer must defend all claims, both covered and uncovered. The insurer, however, will only be required to reimburse the additional insured for those caused by the named insured's fault. For this reason, the additional insured may want its own attorney involved throughout the case and not rely upon the insurance defense attorney hired by the insurer.
Buying Too Much Insurance
Although a contractor cannot after August 1 be required to purchase insurance covering another's fault, the contractor's insurer will still be responsible for providing any additional coverage that the contractor voluntarily provides. Only the requirement of broader coverage is illegal.
This rule is best illustrated by example. An owner requires a contractor to name the owner as an additional insured covering only the contractor's fault. The contractor, however, goes further and provides an additional-insured endorsement that also includes the owner's own fault. The owner should be entitled to the additional coverage even though the owner could not have required it by contract. As one court* stated:
Contractor's obligations under the contract were only to provide insurance coverage to Owner for Owner's vicarious liability, not for Owner's liability as a result of its own negligence. If, however, Contractor in fact procured insurance which provided broader liability coverage than it was obligated to provide under the construction contract, the insurance policy would be valid and insurer would be obligated to provide coverage purchased by Contractor.
Contractors and their insurance agents, therefore, should be careful about buying more insurance than the law requires.
*Heat & Power Corp. v. Air Product & Chem., 578 A.2d 1202, 1208 (Md. 1990).
How to Word the Additional-Insured Requirement
Faced with this amendment, many in the industry are asking how to word the additional-insured requirements in their contracts and subcontracts and what endorsements to issue or provide. Owners, contractors and subcontractors may want to consult their attorneys, as no one clause is appropriate for everyone and different drafters may have different opinions about how to comply with the amendment to the law.
One clause to consider is:
Subcontractor shall name Contractor as an additional insured on Subcontractor's CGL policy covering liability arising out of Subcontractor's ongoing operations and completed operations, with coverage equivalent to that provided by ISO Forms CG 20 10 04 13 and CG 20 37 04 13. The additional-insured coverage shall be primary and non-contributory.
This provision specifies the April 2013 ISO additional insured endorsements, which include three major changes from previous versions. Under the new ISO forms, coverage is provided to the additional insured:
- Only to the extent permitted by law.
- Not broader than the coverage required by contract or agreement.
- For no more than the limit required by the contract or agreement or the policy limit, whichever is less.
These forms are intended to avoid giving an additional insured broader coverage than required. They were revised specifically to address the growing number of states that, like Minnesota, have passed legislation limiting the breadth of additional-insured coverage that can be required.
Unanswered Questions: Shifting the Battleground?
Many hope that the amendment will bring more predictability to insurance and indemnity clauses in construction contracts. Like most laws, however, this amendment may require the courts to clarify its scope and meaning through litigation. The term "project-specific" insurance will likely generate litigation over what policies qualify. So will the expected claims that the amendment does not restrict the ability to "end run" the statute with insure-the-indemnity clauses that require contractual liability coverage for the owner's or contractor's fault.