Interplay of Insurance, Indemnity and Limits of Liability
At the 2019 RIMS Annual Conference, Simon Keshishian, Senior Director of Risk Management and Risk Counsel with Red Bull North America, Inc talked about risk management concerns around the interplay of insurance, indemnity agreements and limits on liability.
When you are a risk manager, contracts can pose a particular challenge. It is important for the operations side of the business to involve risk managment in the review of all their contracts to ensure they are not creating additional risk for the organization. One way to make sure this happens is to require the operations side to have skin in the game if they agree to waive liability or hold harmless without the consent of risk managment. If the issue has potential to impact their department budgets, it tends to get their attention.
The issue around contracts and risk management are very different in the United States than the rest of the world. Contingent attorney fees are not allowed in most countries. Also, many other countries require the losing party to pay all attorney fees in litigation. This tends to result in significantly less litigation outside the US.
Keep in mind that the role of the risk manager is not to say no to a business agreement because of risk. Instead, it is to make sure informed decisions are being made.
Indemnity is Compensation given to make another whole from a loss already sustained. It includes reimbursement by one person or entity of the loss or damages sustained by another. Indemnity provides security or protection agains a loss or other financial burden. An Indemnity Agreement has one party guaranteeing compensation for losses or damages incurred by other. Indemnity can be dealt with under both Common Law or Contractural Law. Some states have passed laws to limit indemnity agreements.
Overview of Commercial General Liability Insurance Policies
The standard CG 01 ISO policy form is what most carriers use because of consistency with coverage and a history of litigation around coverage associated with the policy.
The Insuring Agreement defines what will be paid under the policy. The Exclusions section defines what is specifically excluded under the policy. There are 16 basic exclusions under the standard CG policy. One of the biggest exclusions is bodily injury or property damage assumed by contract.
Keep in mind that being named as an “additional insured” on a policy does not give you the same protections of the named insured. You are only protected for events caused by the named insured. This is an endorsement on the standard CGL policy. Also, the “additional insured” coverage is limited to what the contract says. For example, if the contract agrees to indemnify for up to $1 million then that is the limit of the coverage regardless of the amount of the loss.
“Equitable relief” may not be covered under the CGL policy as it only applies to “sums” the insured is legally obligated to pay as damages because of bodily injury or property damage caused by accident under the policy period.
It is important to understand what liabilities can be covered under insurance, and what cannot. When something cannot be covered under insurance the business needs to carefully consider the risks associated with the activity.
Examples of things not covered under CGL include:
- Intentional acts
- Knowing or volitional conduct
- Contractual liability
- Willful misconduct
- Breech of warranty
- Criminal conduct
- Injunctive relief
- Economic damages not flowing from a covered loss
- Deceptive trade practices
- Workers’ compensation and employers liability
- Auto and watercraft liability
- Damage to your work or your product
- Product recalls
- “Any and all” claims agreements
Common Issues to Watch For in Contracts
- “Comprehensive” general liability coverage – This has not existed in the marketplace since the mid 1980s.
- Coverage for Contractural Coverage.
- Insurance covering “all of the foregoing indemnification obligations”.
- Specific form numbers of their equivalents.
- Liability coverage for “any and all” claims.
- “Full coverage”.
- “Claims made” language for “occurrence” risks.
- Exact amounts vs “at least or not less than”.
- Narrowing language.
Any of these things in contracts should be a red flag as the terms are outdated, poorly defined, or do not exist in the insurance marketplace and they will lead to additional litigation.
People will argue that “we have been using the same contracts for 30 years” but that doesn’t mean that their language is current or accurate based on the marketplace.
Watch for the word “defend” in the contracts not just indemnify. This leaves you open to second guessing and litigation over the defense costs. Also watch for who gets to select counsel. The contract should be very specific in terms of the location covered or you could end up agreeing to indemnify for something that is outside the coverage of your insurance. Notice provisions should be clear and not limit coverage without prejudice.
Limits of Liability Carve Outs to Consider
- Third party indemnification obligations.
- Infringement or misappropriation of intellectual property rights.
- Breach of any data protection or privacy laws.
- Fraud or fraudulent misrepresentation.
- Bad faith.
- Failure to comply with laws or violation of laws.
You should also have a severability clause in all contracts and indemnity agreements so that if the courts find a portion of the contract is not allowed it does not invalidate the entire contract.