The lede, unburied: contractual provisions for indemnity and insurance are intimately related and need to be coordinated. If not, you could be massively over-extending yourself for liabilities of counterparties. This is especially true of Additional Insured provisions.
Key to know is that, except where specified otherwise, Indemnity provisions and Additional Insured provisions are separate agreements.1 This means limitations on one do not translate to limitations on another. As both statues and contract language typically very beneficial limitations on indemnity obligations, if insurance isn’t coordinated to match then it receives none of those benefits. Ultimately this means you can be required to pay via insurance (e.g. via Additional Insured extension) what you are legally prohibited from paying otherwise.2 In fact an indemnity obligation could be completely voided by a court but a policyholder is still responsible to pay via AI!3
This is perhaps most imperative to those with self-insurance mechanisms as the insured will ultimately bear the cost. Meaning while you may be statutorily prohibited from indemnifying another party for (e.g.) their sole negligence, you could end up paying the exact same costs from your own pocket to your self-insurance.4
With full knowledge of this disparity an insured can make an informed business decision. However, many are already making this decision, though unwittingly. This is because us insurance professionals (rightly) strive to add the “broadest” AI forms to an insured’s policy. While this maximizes compliance, it does so by maximizing coverage extended to third parties beyond that to which they’re otherwise entitled.
It’s likely this is unintended, but an insured with (e.g.) blanket “10/01” AI forms is doing precisely that. Newer ISO (and proprietary language) attempts to prevent this, but such is insufficient since it attempts to do this by limiting AI to that “allowed by law”. But extending insurance beyond indemnity limitations is “allowed by law”!
Most insurance provisions I see pay no reference to indemnity obligations, or if they do it may be non-specific and in passing. I’d say most insurance provisions I’ve encountered, and assuredly some I’ve personally drafted, attempt to be as “vague” as possible since upstream parties often benefit from ambiguity. But even with meticulously crafted insurance provisions the problem persists – one needs to understand and align insurance with the indemnity provisions of that contact.
Insurance professionals have known for a long time that adding certain versions of AI forms to their clients policy extends coverage to include even the “sole negligence” of a named AI; it’s why those forms are demanded even if they are patently unfair to the providing party. So putting a positive spin on this: amending a contract’s insurance obligations to conform with indemnity obligations is a way to negotiate around overbroad AI requirements. Sure a third party may be provided (e.g.) 10/01s, but if that AI status is triggered pursuant only to satisfying indemnity obligations, and indemnity obligations are limited by contract or statute, then you have clawed back the overreaching portion of that AI coverage grant. That’s the theory, at least.
From my research, I’d say the key take-aways are:
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- Contractual indemnity and insurance obligations should always be assumed to be separate and distinct obligations with separate and distinct rules/permissions.
- Know your jurisdiction. Some have explicitly crafted legislation to prevent this issue, though most have not.5 However, even if in a favorable jurisdiction, such limitations can be circumvented via choice of venue, undeveloped case law, etc. So codify within the contract regardless.
- Draft indemnity and insurance obligations together; craft both provisions to be specific and symmetric. For bonus points, avoid using “minimum” or “no less than” or similar language when it comes to insurance obligations as that can over-extend limits.4
- Specifically identify that any insurance obligation, and Additional Insured obligations specifically, exist solely to satisfy requirements under the indemnity agreement. I.e., state contractually that AI coverage applies only to obligations under the contract’s own indemnity agreement.6 There should be standard language about this in all insurance requirement templates.
- Amend policy/AI wording. There is no “catch all” language here and, while tempting, inserting boilerplate to limit AI to (e.g.) only that which is allowed to be otherwise indemnified can pose an opposite problem: a policyholder is obligated to provide AI but coverage is not triggered. However, in general, you want to ensure you’re not providing a greater degree of coverage than is requested (especially as relates to specified form numbers/wording), and that coverage applies only to obligations assumed under contract or that would exist absent that contract. Again though, language on the policy forms themselves are useless without coordinating insurance/indemnity agreements.
Footnotes:
McCarter & English, Attys.
Contractual Indemnity and Additional Insured Coverage (2014), as presented at RIMS
http://cms4files.revize.com/ctvalley/CONTRACTUAL_INDEMNITY_AND_ADDITIONAL_INSURED_COVERAGE___Connecticut_Valley_RIMS___REVISED_c.pdf
[Benefits for Additional Insured] Can be independent of, and provide broader protection than, the indemnity obligation, i.e., for the additional insured’s negligence. – Important where applicable state’s law prohibits indemnification for one’s own negligence
Illinois Court of Appeals (Cook County)
W.E. O’Neil Construction v. General Casualty, quoting prior precedent (2001, 1981)
https://casetext.com/case/we-oneil-construction-v-general-casualty
A promise to obtain insurance is different from a promise to indemnify. Zettel v. Paschen Contractors, Inc., 100 Ill. App.3d 614, 617, 427 N.E.2d 189 (1981)
IRMI
2013 ISO Additional Insured Endorsements (2013)
https://www.irmi.com/articles/expert-commentary/2013-iso-additional-insured-endorsements-putting-the-changes-into-context-for-the-construction-industry
For many years, the construction industry has been able to avoid some of the effects of anti-indemnification statutes that prohibited the transfer of indemnitees’ concurrent negligence through contractual indemnity provisions. The construction industry did so by using the additional insured requirements to insure against losses that could potentially violate states’ anti-indemnification statutes.
Supreme Court of Minnesota
Eng’g & Constr. Innovations, Inc. v. L.H. Bolduc Co., quoting prior precedent (2013, 1996)
https://casetext.com/case/engg-constr-innovations
Therefore, when faced with questions about the enforceability of an indemnification provision in a construction contract, we must “consider[ ] the combined effect of sections 337.02 and 337.05,” and “even though an indemnification provision may be unenforceable under section 337.02, a promise to purchase insurance to cover any negligent acts by the promisee is valid and enforceable.” Katzner, 545 N.W.2d at 381.
Michael Rossi; Insurance Law Group, Inc.
Additional Insured Requirements in Contracts
https://www.linkedin.com/posts/michael-rossi-083743248_additional-insured-requirements-in-contracts-activity-7261403004837191681-0cZE
Foundation of the American Subcontractors Association, Inc.
via Kegler Brown Hill + Ritter
Anti-Indemnity Statutes in the 50 States: 2020
https://www.keglerbrown.com/content/uploads/2019/10/Anti-Indemnity-Statutes-in-the-50-States-2020.pdf
Illinois Court of Appeals (Cook County)
W.E. O’Neil Construction v. General Casualty, quoting prior precedent (2001, 1981)
https://casetext.com/case/we-oneil-construction-v-general-casualty
Cases have upheld the validity of provisions requiring the party named as indemnitee to be named as an additional insured on the indemnitor’s insurance policy where the insurance provision is not inextricably tied to a void indemnity agreement. E.g., Juretic, 232 Ill. App.3d 131, 596 N.E.2d 810 (despite a paragraph stating that the insurance would cover the contractor’s obligations to the owner under the indemnification clause of the agreement, other paragraphs stated that the insurance would also cover the contractor’s and owner’s liability to pay for injury and damages connected with or growing out of the contractor’s performance, and the owner was required to be added as an additional insured under these areas of coverage)
[…]
Although the insurance provision in the Blommaert subcontract requires insurance “to cover” the indemnity agreement and states that coverage is “afforded for” the indemnity provision, the provision also requires that O’Neil be named as an additional insured on Blommaert’s comprehensive general liability insurance. It stands separate and apart from the indemnity agreement as an agreement to purchase insurance for the general contractor. We conclude that the insurance provision is not tied inextricably to the indemnity agreement.