What is Illinois Doing?? A Construction Walk Through of the Legal Maze OBJECTIVES Discuss indemnity & hold harmless agreements Discuss Changes in the Law with Virginia Surety and Kajima Construction Cases Clarify purpose of Additional Insured Endorsements Provide Solutions to the Challenges Caused by the Recent Illinois Case Law Provide key issues to consider when underwriting contractors and providing sureties Virginia Surety Case, Illinois Supreme Court, 2007 Not wanting to duplicate protection provided by workers' compensation insurance, CGL policies exclude coverage for injuries sustained by the policyholder's employees. However, there is an important exception to this exclusion for "insured contracts." The Big Three • Limited Form • Intermediate Form • Broad Form Limited Form Only covers indemnitor’s negligence Does not cover indemnitee’s negligence Possible reimbursement of legal fees Example: The Subcontractor shall indemnify and hold harmless the General Contractor….from and against all claims, damages….. arising out of the work of the subcontractor, but only to the extent caused by the negligent act or omission of the Subcontractor….. Intermediate Form The most common form Covers negligence of indemnitee Does not cover sole negligence of indemnitee May include active negligence Is it enforceable? Example: - The Subcontractor shall indemnify and hold harmless the General Contractor ….from and against all claims, damages….. arising out of the subcontractor’s work provided it is caused in whole or in part by any negligent act or omission of the Subcontractor….. Broad Form Indemnification for sole negligence Most comprehensive form Is it enforceable? Clear and Unequivocal Example: Subcontractor assumes and agrees to hold harmless, indemnify, protect and defend General Contractor against any and all liability including the sole negligence of the General Contractor……..resulting from any and all operations performed by the Subcontractor………….. Which is the Excellent Risk? You receive applications for two General Contractors. Based on the following indemnity agreements, which is a better risk: • The Subcontractor shall indemnify and hold harmless the General Contractor ….from and against all claims, damages….. arising out of the subcontractor’s work provided it is caused in whole or in part by any negligent act or omission of the Subcontractor….. • Subcontractor assumes and agrees to hold harmless, indemnify, protect and defend General Contractor against any and all liability including the sole negligence of the General Contractor……..resulting from any and all operations performed by the Subcontractor………….. Trick Question General Contractor = The Broader the Better Maximize the risk transfer allowable by state Which is the Excellent Risk? When reviewing applications for Subcontractors which State presents the excellent risk: • State that allows Broad form indemnity agreements? • State that does not allow Broad form indemnity agreements? Answer State that does not allow Broad form indemnity agreements Subcontractor = As Limited as Possible Third Party Actions Over Third Party Actions Over Intermediate form of the indemnification agreement The entire purpose of indemnification agreements is to transfer risk from one party to another. GC requires “indemnification and hold harmless” for “concurrent” liability or liability caused “in part”. Virginia Surety Case- Importance The case signals a change for what had been recognized law in Illinois and supported law in nearly all of the state jurisdictions which recognize the intermediate form agreement as valid. Virginia Surety Case, Illinois Supreme Court If a policyholder assumes liability for the negligence of another party, as part of a written contract with a client, then this exception to the exclusion provides insurance coverage for the assumed tort liability of another. Virginia Surety Case, Illinois Supreme Court 2007 Where a subcontractor waives the so-called “Kotecki cap” and promises to "indemnify" the general contractor -- these commonplace provisions are not "insured contracts" as defined by CGL. Virginia Surety Problems Illinois construction contracts, every single "insured contract" will involve an unenforceable contract (Not for Maintenance Contracts) Risk Transfer is Huge for GC's versus Subcontractors Uninsured Gap for Contractually Responsible Losses Are Surety Bonds on the Hook For Contractual Performance? Virgina Surety Solutions Remedy this risk transfer- mandating strict adherence to “AI's” being named on the policy by the GCs before the job starts. Specifically request a declaration sheet, and policy provided to the general or subcontractor from the lower tier contractor before any work to obviate this risk. Modify exclusions under both the EL and CGL Policies. Insuring Transfer of Risk Applicability to the Policy Loss date vs. execution of contract Is the contract an “insured” contract Does not cover breach of contract, only liability assumed under contract Prior contracts may be included Indemnitee as an “additional insured” Master Pak- Additional Insured Requires a written contract Executed prior to the loss Arise out of real property Caused by ongoing operations No coverage for sole negligence Key Master Pak Considerations Limits of coverage General Contractor- no limits in agreement Subcontractor- limits in agreement Excess unless specified primary* General Contractor- specified primary and non- contributory Subcontractor- no specification of primary Kajima Construction- Illinois Supreme Court 2007 Order of coverage Supreme Court to decide if additional insured status on both a primary and excess policies forced the subcontractor's insurer to bear the entire risk for the loss. "the deselected insured or insurer's primary policy must first answer for the loss before they may invoke coverage under any excess policy." Kajima Construction- Illinois Supreme Court 2007 1) Coverage for Additional Insureds under the Primary policy pursuant to the contract 2) Coverage under your own policy of insurance for your primary insured amount 3) Coverage as Additional Insured under any excess policy pursuant to the contract 4) Coverage under your own policy for your excess amounts. What about Multiple Tenders???? Kajima Problems General Contractor who may have believed that they were insulated from exposure with the requirements of excess insurance may not need to rewrite their contracts. What is the risk for insurance carriers and underwriters due to account for this change? Kajima Solutions Multiple Tenders under “Targeted Tender” Rule in Illinois Solid Additional Insured Contracts with Sub and Sub of Sub. “Primary Non-Contributory” Receive policy before agreeing to start work. Questions?? He that is surety for a stranger shall smart for it: and he that hateth suretyship is sure.
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