Allocating Risk in Real Estate Leases: Contractual Indemnities, - - PowerPoint PPT Presentation

The audio portion of the conference may be accessed via the telephone or by using your computer's

• speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Allocating Risk in Real Estate Leases: Contractual Indemnities, Additional Insured Endorsements and Waivers of Subrogation

Structuring Lease Provisions and Coordinating With Insurance Coverage to Mitigate Landlord and Tenant Liability Risks

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, JUNE 25, 2015

Presenting a live 90-minute webinar with interactive Q&A Lyndon F . Bittle, Partner, Carrington Coleman Sloman & Blumenthal, Dallas Neal J. Suit, Partner, Carrington Coleman Sloman & Blumenthal, Dallas

Tips for Optimal Quality

Sound Quality If you are listening via your computer speakers, please note that the quality

• f your sound will vary depending on the speed and quality of your internet

connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-866-328-9525 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you email that you will receive immediately following the program. For additional information about CLE credit processing call us at 1-800-926-7926

• ext. 35.

FOR LIVE EVENT ONLY

Shifting Risk in Real Estate Leases: Indemnity and Insurance Provisions

Lyndon F. Bittle

lbittle@ccsb.com

Neal J. Suit

nsuit@ccsb.com

Carrington, Coleman, Sloman & Blumenthal, L.L.P. | 901 Main Street , Suite 5500 | Dallas, Texas 75202 | www.ccsb.com

• Focus: Commercial Real Estate Leases
• Representing Lessor or Tenant
• Provisions to Allocate Risk

PROGRAM OVERVIEW

5

• Indemnity Provisions
• Insurance Requirements
• Additional Insured Status
• Waiver of Subrogation

Risk-Shifting Mechanisms

6

7

Overview of Indemnity Clauses

• Broad form – Indemnitor assumes obligation

to indemnify regardless of fault.

• Intermediate form – Indemnitor assumes
• bligation to indemnify as long as any fault

rests with indemnitor.

• Limited form – Indemnitor obligated to

indemnify only to the extent of its own fault in contributing to loss.

8

Broad Form Indemnity Clause

Tenant indemnifies Lessor against:

“claims, damages, losses and expenses . . . arising out of or resulting from the ownership, maintenance or use of the leased premises, whether it is caused in whole or in part by the negligence of Tenant or Lessor. The indemnification obligation shall extend to injuries and damages caused, or alleged to be caused, by the sole or concurrent negligence of Lessor.”

9

Intermediate Form Indemnity Clause

Tenant indemnifies Lessor against:

“claims, damages, losses and expenses . . . arising out of or resulting, in whole or in part, from the negligence, errors, omissions, or failure to perform by Tenant.”

10

Limited Form Indemnity Clause

Tenant indemnifies Lessor against:

“claims, damages, losses and expenses . . . arising out of or resulting from the work, but only to the extent caused by the negligent acts or omissions

• f Tenant.”

11

Broad or Intermediate Indemnity

FAIR NOTICE REQUIREMENTS

• Express Negligence Doctrine – Must expressly

state the intent to require indemnification for the indemnitee’s own negligence.

• Conspicuousness Test – Indemnity clause must be

conspicuous within the contract, i.e., bold, large font, all caps, underline, etc.

12

Anti-Indemnity Statutes

• An increasing number of states have

anti-indemnity statutes that bar or limit scope of indemnity

• Generally prohibit or limit broad and

intermediate form indemnity

13

Anti-Indemnity Statutes

• Scope varies by state

Texas statute limited to construction  Other states--broader statutes or case law May have employee-injury exception (“third-party over” claims)

• May also limit additional insured coverage

14

Indemnity Include Defense?

• Duty to defend is independent of duty

to indemnify.

• Indemnity for defense costs might not

create duty to defend.

• Include “and defend” in indemnity

contract to create such duty. (Do you want it?)

15

16

Review Insurance Requirements

• Beware “cut and paste” agreements.
• Beware old form insurance requirements.
• Confirm insurance requirements can be

satisfied—talk to broker before signing.

• If you’re not a coverage lawyer, find one.
• Consider requesting specific ISO/AAIS forms,

and review any requested forms.

17

Insurance “Forms”

• ISO = Insurance Services Office
• AAIS = American Ass’n of Insurance Services
• Not mandatory – insurers can use, modify, or

write their own

• “Manuscript” policy – not based on form

18

ISO Form Numbers

Type Series Form Month Year

• CG

20 11 04 13

CGL, AI series # 11 (Managers/Lessors) published April 2013

• BP 04 02

07 13

Businessowner, AI series # 2 (Managers/Lessors) published July 2013

19

Insurance Requirements in Leases

• Insurance requirements in lease agreement should

parallel allocation of responsibility between landlord and tenant.

• Compare Tenant’s Obligations sections with

Tenant’s Insurance Requirements.

• Compare Indemnity sections with Insurance

Requirements.

• Beware of adjusters’ agreement without binding

parties to allocation.

20

Insurance Requirements in Leases

• General Liability

 Limits—aggregate per location?  Owner as additional insured

• Property: “physical damage”

 Full replacement cost  Causes of loss include flood, earthquake, etc.?  Owner as Loss Payee or Additional Insured?

21

Insurance Requirements in Leases

• Business Interruption (time element coverage)

 Causes of loss?

• Physical damage to property
• Other causes?

 Scope of coverage?

• Monthly limit? Aggregate sublimit?
• Period of Restoration
• Extra expense
• Extended Business Insurance (ramp-up)

22

Insurance Requirements in Leases

• Owner cannot be additional insured:

 Workers’ Compensation  Professional Liability

• 30-day notice of cancellation

 Will insurer or broker agree?  Endorsed in policy or separate agreement with broker

23

BEWARE UNDUE RELIANCE ON CERTIFICATES OF INSURANCE

24

ACORD CERTIFICATE OF INSURANCE

• “THIS CERTIFICATE IS ISSUED AS A MATTER OF

INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER.

• THIS CERTIFICATE DOES NOT AFFIRMATIVELY OR

NEGATIVELY AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.”

25

ACORD CERTIFICATE OF INSURANCE

• “THE INSURANCE AFFORDED BY THE POLICIES

DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES.”

• CANCELLATION

“Should any of the above described policies be cancelled before the expiration date thereof, notice will be delivered in accordance with the policy provisions.”

26

ACORD CERTIFICATE OF INSURANCE

• “IMPORTANT: If the certificate holder is an

ADDITIONAL INSURED, the policy(ies) must be endorsed.

• If SUBROGATION IS WAIVED, subject to the

terms and conditions of the policy, certain policies may require an endorsement.

• A statement on this certificate does not confer

rights to the certificate holder in lieu of such endorsement(s).”

27

28

Additional Insured Coverage

• Transfers risk to insurance purchased by

another party.

• Generally provides defense.
• Most contracts require both indemnity and

AI status.

29

SUBTLE DIFFERENCES

• Additional Named Insured

is not the same as Named as Additional Insured

“Additional Named Insured” generally limited to affiliated companies, officers, etc. “Named as Additional Insured” means given AI status by category or scheduled endorsement.

30

SUBTLE DIFFERENCES

• Additional Insured

generally does not include “employees, officers, agents, etc.”

• Contractual promise does not alter the policy.

31

SUBTLE DIFFERENCES

• Additional Insured

is not the same as Loss Payee

• Loss Payee is not an insured, but entitled to be

paid for losses to its property interest (landlord, mortgagee, secured lender, etc.)

32

Additional Insured Coverage

• Owners & Lessors obtain additional insured

status on Tenants’ liability policies.

• Additional insureds often request broad AI

coverage, including for their own negligence.

• Can Tenant comply with this request?

33

Limitations On Additional Insured Coverage

• Anti-Indemnity Act may limit AI coverage.

Texas: AI provision in contract “is void and unenforceable to the extent that it requires or provides coverage the scope of which is prohibited under [this statute] for an agreement to indemnify . . . .”

• Employee injury claim exception may apply.

34

CGL-AI Coverage Eroded Over Time

• 2001 form: liability “arising out of” your
• perations for the additional insured.
• 2004 form: “caused, in whole or in part, by

your acts or omissions or . . . those acting on your behalf” in performing operations for AI.

• 2013 form: Not broader than required by K.
• Lessor AI endorsements did not change that much

until 2013.

35

Additional Insured Endorsements

Two broad types:

• Scheduled (or named)

 Common for Lessors

• Automatic (by Contract)

 More common in construction

36

Additional Insured Endorsements

• Scheduled:

“. . . Who Is An Insured is amended to include as an additional insured the person(s) or

• rganization(s) shown in the Schedule . . . .”

[BP 04 02 07 13 or CG 20 11 04 13]

37

Additional Insured Endorsements

• Automatic (by Contract):

“. . . any person or organization for whom you are performing operations when you and such person or organization have agreed in writing . . . that such person or organization be added as an additional insured on your policy. . .” [CG 20 33 10 01 (and later versions)]

38

New ISO Endorsement Fills Gap

• Owner covered by subcontractor’s policy?

Courts split

• New CG 20 38 04 13 adds:

“2. Any other person or organization you are required to add as an additional insured under the contract or agreement described . . . above.”

• Alternative to CG 20 33

39

Owners’ AI Liability Coverage

• Business Owners Policy Endorsement:

“Additional Insurance—Managers or Lessors of Premises”

[BP 04 02 07 13 or CG 20 11 04 13]

• Amends liability section to add:

“The person(s) or organization(s) shown in the Schedule is also an additional insured, but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to you and shown in the schedule.”

• “Arising out of” interpreted broadly.

40

Owners’ AI Liability Coverage

• “. . . liability arising out of the ownership,

maintenance or use of . . . the [leased] premises”

• Cover accidents off leased premises?
• Depends on jurisdiction and facts
• “Strict construction” = NO

 Gillis v. Damarkles (Mass. Super. Ct. 1998) (citing cases)

41

Owners’ AI Liability Coverage

• Cover accidents off leased premises?
• Other states construe “arising out of use”:
• “Means of Access” Test

 Ambrosio v. Newburgh Sch. Dist. (NY A.D. 2004)

• “But-for Causation” Test

 Travelers v. Farmers (Colo. App. 2010)

• “Nexus” Test

 Liberty Village v. W. Amer. Ins. (NJ A.D. 1998)

42

Owners’ AI Liability Endorsement

“Additional Insurance—Managers or Lessors of Premises”

[BP 04 02 07 13 or CG 20 11 04 13]

• Exclusions:

“1. Any ‘occurrence’ that takes place after you cease to be a tenant in the premises . . . “  Includes “holdover” tenants  Beware of period just before lease begins

• Richard v. Metro Bingo (La. App. 2006)

43

Owners’ AI Liability Endorsement

“Additional Insurance—Managers or Lessors of Premises”

[BP 04 02 07 13 or CG 20 11 04 13]

• Exclusions:

“2. Structural alterations, new construction or demolition operations performed by or for the [additional insured].”  “Structural alteration” = substantial change

• Century Indem. v. Hanover (D. Utah 2007)

 Consider Builders Risk policy

44

Owners’ AI Liability Endorsement

“Additional Insurance—Managers or Lessors of Premises”

[BP 04 02 07 13 or CG 20 11 04 13]

• Coverage Limitations (new in 2013):

“a. The insurance afforded to such additional insured

• nly applies to the extent permitted by law; and
• b. If coverage provided to the additional insured is

required by contract . . . , the insurance afforded to such additional insured will not be broader than . . . required by the contract.”

45

Owners’ AI Liability Endorsement

“Additional Insurance—Managers or Lessors of Premises”

[BP 04 02 07 13 or CG 20 11 04 13]

• Policy Limits (new in 2013):

“C. . . . The most we will pay on behalf of the additional insured is the amount of insurance: 1. Required by the contract . . . with the additional insured; or 2. Available under the applicable Limits of Insurance . . . ; whichever is less.”

46

Does Contractual Indemnity Provision Limit Additional Insured Coverage?

47

Indemnity Limit AI Coverage?

Evanston Ins. v. ATOFINA Petrochems. (Tex. 2008)

• No contractual indemnity for ATOFINA’s negligence.
• AI = “A person or organization for whom you have agreed to provide

insurance as is afforded by this policy, . . . with respect to operations performed by you or on your behalf . . . .”

• Q: AI covered for claims for bodily injury/death of contractor’s

employee attributed to AI’s sole negligence? A: Yes.

• “[W]here an additional insured provision is separate from and

additional to an indemnity provision, the scope of the insurance requirement is not limited by the indemnity clause.”

• Court allowed AI coverage for ATOFINA’s sole negligence based on the

terms of the policy alone.

48

BP Deepwater Insurance Case

Ranger Ins. v. Transocean (5th Cir. 2013)

• Drilling Contract allocated liability for subsurface

pollution to BP

• BP was AI under Transocean’s policy, which did not

distinguish between subsurface / above surface damages.

• Court held only the policy can limit coverage, if

contract’s indemnity and insurance provisions are “separate and independent.”

49

Fifth Circuit Withdraws and Certifies

On rehearing, 5th Circuit withdrew its earlier opinion and certified this question to the Texas Supreme Court: Whether Evanston Ins. Co. v. ATOFINA . . . compelled the finding that BP is covered for the damages at issue, because the language of the umbrella policies alone determines the extent of BP’s coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the Drilling Contract are “separate and independent”?

50

Texas Supreme Court’s Answer

In re (Deepwater) Horizon (Tex. 2015)

• Transocean’s policy required reference to

Drilling Contract to determine AI status

• Drilling Contract allocated liability
• BP not covered as AI for liability it assumed

under Drilling Contract

51

52

Other Limitations on AI Coverage

Insured Conduct or Employee Injury Exclusion.

• Additional insured may have no coverage for

wrongful conduct by, or injuries to employees

• f, “any insured” or “an insured.”
• Broader coverage if exclusion limited to “the

insured” or “named insured.”

53

“Other Insurance” Provisions

• What if a party is potentially covered

under more than one policy?

• E.g., a named insured under one policy

and an additional insured under another policy.

54

“Other Insurance” Provisions

• Pro-rata Clause. Apportions liability among

concurrent insureds.

• Excess Clause. The policy is only triggered when

another insurer has paid up to its policy limits.

• Escape Clause. Attempts to avoid all liability if

there is another insurance policy.

55

“Other Insurance” Provisions

• But what if both policies contain an “escape

clause” or an “excess clause”?

• Courts are left to analyze the language in an

effort to harmonize conflict.

• Key: request “primary and non-contributory”

AI coverage. [CG 20 01 04 13]

56

“Insured Contract” Coverage

• Contractual Liability Exclusion

“. . . does not apply to liability for damages: (1) That the insured would have in the absence of the contract or agreement; or (2) Assumed in a contract or agreement that is an ‘insured contract,’ provided the ‘bodily injury’ or ‘property damage’ occurs subsequent to the execution of the contract or agreement.” [CG 00 01 12 07]

57

“Insured Contract” Defined

• “Insured contract” means:

“f. That part of any other contract or agreement pertaining to your business . . . under which you assume the tort liability of another to pay for ‘bodily injury’ or ‘property damage’ to a third party . . . , provided [it] is caused, in whole or in part, by you or by those acting on your behalf. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.”

58

“Insured Contract” Effect

• “Insured contract” provision covers named

insured for its indemnity obligations.

• Does not make indemnitee an additional

insured.

• But can pay indemnitee’s defense costs
• -if no conflict and other conditions met.
• Beware: can be deleted by endorsement

[BP 05 98 07 13 or CG 21 39 10 93]

59

60

WAIVER OF SUBROGATION

• What is subrogation?

 Insurer pays claim, recovers from third party “Steps into shoes” of policyholder Policyholder “must do all that is necessary to secure” insurer’s subrogation right, or risk losing coverage Property or Liability Policy

61

WAIVER OF SUBROGATION

• How waive subrogation?

 May be inferred in policy:

• “You may waive your right to recover from others in

writing before a loss occurs.”

 May be explicit by endorsement.

• “We waive any right of recovery we may have against the

person or organization shown in the Schedule above . . . .” [CG 24 04 05 09] quote endorsement]

62

WAIVER OF SUBROGATION

• Anti-subrogation rule

Cannot subrogate against own insured (including AI)

• Why waive subrogation?

Shifts risks to insurance

• Why not waive it?

May not be necessary Releases insured’s claim against other party

63

RECOMMENDATIONS

• Know what each party is promising.
• Beware old form insurance requirements.
• Confirm insurance requirements can be

satisfied—talk to broker before signing.

• If you’re not a coverage lawyer, find one.
• Request policy, not just certificate.

64