Contractual Risk Transfer Additional Insureds and Certificates of

Contractual Risk Transfer, Additional Insureds, and Certificates of Insurance Christopher J. Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS Executive Director – Big “I” Virtual University

Today’s Conversations • Equity and Fairness in Business Relationships • Contractual Risk Transfer • Insured & Additional Insured Status • Primary and Noncontributary Requirements • Certificates of Insurance

Equity and Fairness in Business Key equity and fairness concepts, laws and disrupters

3 Key Financial Equity Concepts • Subrogation: • Contribution: • Indemnification:

Potential “Disrupters” of Equity • Contractual Requirements / Contractual Risk Transfer • • Indemnification Hold Harmless Defense requirements Waiver of Subrogation • Additional Insured Status • Primary and Noncontributory Requirements

Equity Laws (aka Contribution Statutes) • Pure Joint and Several Liability: • Pure Several Liability: • Modified Joint and Several Liability:

Anti-Indemnification Statutes and Common Law • Limited transfer: • Intermediate transfer: • Broad transfer:

Contractual Risk Transfer Why does it exist? Who is involved? How is it accomplished?

What is Contractual Risk Transfer • Non-insurance risk transfer mechanism • Ideal Use: Place the financial burden on the party closest to and best able to control the chances of a loss • NOT Equivalent to contractual insurance requirements

Why is Contractual Risk Transfer Necessary Vicarious liability • Relationship • Position • Contract Note: Right, duty or ability to control the actions of the other party!

Enforceability of Contractual Risk Transfer • Courts generally prefer not to alter or overturn contracts. However… • Contracts can be subject to statute • Contracts, as a rule, cannot be used to transfer or avoid a statutory duty, common law duties, criminal penalties or sole negligence in torts • Whether a contract is exculpatory and ultimately enforceable is judged against four criteria: 1. 2. 3. 4. The existence of a duty to the public The nature of the service performed Whether the contract was entered into fairly Whether the intentions of the parties are expressed in clear, unambiguous language

Potential Misuses of Contractual Risk Transfer • Exculpatory contracts • Violations of Statute • Transferor violates its own contract

3 Parties to Contractual Risk Transfer • Transferor: • Transferee: • Payor/Financer:

Accomplishing Contractual Risk Transfer • Indemnification • Hold Harmless • Defense requirements • Waiver of Subrogation

Contractual Risk Transfer Limited Transfer State Indemnity Wording: • “For and in exchange for fair and equitable consideration, TEC agree to indemnify, defend and hold harmless CSTE for and against any and all liabilities, costs, expenses, damages and losses (including any direct, indirect or consequential losses, loss of profit, loss of reputation and all interest, penalties and legal and other reasonable professional costs and expenses) suffered or incurred by CSTE arising out of or in connection with [the construction contract in question] except with respect to claims arising from CSTE’s separate negligence or willful acts committed individually or jointly with any party. ”

Contractual Risk Transfer Intermediate Transfer State Indemnity Wording: • “For and in exchange for fair and equitable consideration, TEC agree to indemnify, defend and hold harmless CSTE for and against any and all liabilities, costs, expenses, damages and losses (including any direct, indirect or consequential losses, loss of profit, loss of reputation and all interest, penalties and legal and other reasonable professional costs and expenses) suffered or incurred by CSTE arising out of or in connection with [the construction contract in question] except with respect to claims arising from CSTE’s sole negligence or willful acts. ”

Contractual Risk Transfer Waiver of Subrogation Wording (in a separate section of the contract): • CSTE and TEC mutually agree to waive any right of recovery either may have against the other as a result of payments made for injury or damage arising out of the contracted construction project committed individually or jointly.

How Insurance Responds to Contractual Risk Transfer • The contract sets the course – Sort Of • Commercial General Liability Insurance exists to finance the agreement made: o Minimum insurance requirements o Per-Project or Per-Location Aggregates o Additional Insured Status o Certificate of Insurance requirements • Insured must be able to finance what was agreed to and comply with all insurance requirements. • The Contract can’t require the carrier to do anything!

Contractual Risk Transfer Interpreting Contracts:

Insured & Additional Insured Status The purpose, effect and ridiculousness of Additional Insured status.

Who Qualifies as an “Insured” in the CGL Four possible classifications of “Insured” in the CGL: 1. Named Insureds (first named and additional named) – all considered "You" 2. Extended Insureds based on entity type (equal to a "You") 3. Automatic Insureds 4. Additional Insureds

Confirming the “You” is Correct

Extended Insureds in the CGL Protection for “Extended Insureds” is equivalent to the protection extended to the “You. ”

Automatic Insureds Protection is provided because of these “insured’s” relationship with and to the named insured. These individuals/entities are related to and/or contribute directly to the activities of the insured’s business or operation. Employees and Volunteer Workers Real Estate Managers Any person or entity having temporary custody of property if “You” die. Legal Representative if “You” die (given all the rights and duties under the coverage). • Newly Acquired or Formed Organizations over which “You” maintain ownership or majority interest. Automatic coverage afforded for only a limited amount of time. • •

Breadth of Protection “You’s” and “Extended Insureds” enjoy the BROADEST protection provided by the policy. “Automatic Insureds”: • Protection is provided because of their relationship with and to the named insured. Sometime INCLUDES “Additional Insureds” • Often subject to exclusions not applicable to “You’s” and “extended insureds” “Yous, ” “Extended Insureds, ” and “Automatic Insureds” are all related to and/or contribute directly to the activities of the insured’s business or operation.

Purpose of Additional Insured Status • Additional insured status is requested by one party in an effort to garner some level of protection under another entity’s CGL. • The level of protection extended to the additional insured is a function of the narrowest coverage grant found in: ―Statutory allowances / Common Law allowances; ―Contractual requirements; or ―Policy language

Protecting Additional Insureds Additional insured's provide benefit to OR receive benefit from the named insured but are not “related” to the named insured, so… • Protection is always extended by endorsement • Additional insureds are often extended the least amount of or very limited protection

Who Should be Added as an Additional Insured • Preferred that AI status be limited to those with Privity of Contract Insureds often asked to include a long list of entities:

Additional Insured Requests Licensee will furnish a certificate of insurance showing that VERBATIM “VAB Catering, Inc. (d/b/a Hot Tomato Creations), Gale Force Sports & Entertainment LLC, Gale Force Holdings LP, the RBC Center, their respective principals, members, officials, officers, directors, shareholders, employees, and agents, their respective parent and affiliate companies and their respective Successors or Assigns as now or hereafter may be constituted and the Centennial Authority, the City of Raleigh, North Carolina, the State of North Carolina and their departments, divisions, commissions, and boards and their respective principals, members, officials, officers, directors, shareholders, employees, and agents” have been named as additionally insured’s under said policy with respect to any legal liability arising out of the Licensee’s performance hereunder.

Additional Insured Requests The following are to be included as additional insured on the General Liability policy on a primary basis: ROSE ASSOCIATES, INC. ; 10 West 66 th Street Corp. ; 1010 Sixth Associates, LLC; Clinton 38 Developer; Clinton 38 Realty LLC; 1010 Sixth Low Income Operator LLC; Clinton Low Income Manager LLC; Clinton 66, Inc. ; New York State Housing Finance Agency; Fannie Mae ISAOA c/o Wells Fargo Commercial Mortgage Servicing; 110 Sennett Avenue UC; Black. Rock Realty Advisors, Inc. ; 1501 Associates, L. P. ; 1510 Associates LLC; 170 East End Avenue Condominium; 185 Claremont Avenue LLC; Black. Rock Realty Advisors, Inc. ; 231 East 76 th Street LLC; Black. Rock Realty Advisors, Inc. ; 299 West 12 th Street Condominium; 299 West 12 th Street Condominium Board of Managers; 3 Hanover Square Owners Corp. ; 3 Hanover Square Board of Directors; 300 East 85 th Housing Corp. ; 308 East 38 th Street Apartment Investors, LLC; 340 East 52 nd Street LLC; Black Rock Realty Advisors, Inc. ; 400 Owners Corp. ; 434 Holding II; The Board of Managers of the 322 W. 57 th Street Condominium, its Directors, Officers, and Employees; UT BORROWER LLC; 520 West 43 rd Street Partners UC; Clinton 43 GP Associates LP; Clinton 43 Developer LLC; Picket Realty Construction Consultants, LLC; Sun America Inc. ; Sun America Asset Management Corporation; Sun America Affordable Housing Partners Inc. ; US Realty Advisors; Gotham Supervisory Construction Services LLC; New York City Housing Development Corporation. Th; Fannie Mae ISAOA c/o Wells Fargo Commercial Mortgage Servicing; 55 th & 9 th LLC; HK 55 Developer LLC; HK 55 Realty UC; Picket Realty Construction Consultants LLC; Gotham Organization Inc. ; Gotham Construction Co. LLC; 55 th & 9 th Investor LLC; 55 th & 9 th Associates UC; New York City Housing Development Corporation; Fannie Mae ISAOA c/o Wells Fargo Commercial Mortgage Servicing; 60 E. 9 th St. Owners Corp. ; 60 E. 9 th St. Board of Directors; 60 East Ninth Street Condominium Board of Managers; 60 East 8 th Street Condominium; Georgetown Plaza Owners Corp. ; 615 Building Company LLC; 725 West 184 th Street LLC; Black. Rock Realty Advisors, Inc. ; 89 th and Madison Owners Corp. ; The 45 East 89 th Street Condominium; Aspenly Co. ; 98 Riverside Drive LLC; Black. Rock Realty Advisors, Inc. ; Armed Realty Co; Clarendon Management Corp. ; Chelsea Associates LLC; Prudential Insurance Company of America; New 77 West LLC; RECAP Chelsea Investment LLC; Albanese Organization, Inc. ; Chelsea Mercantile Condominium; TF Cornerstone; Continental Towers Condominium; East 57 th Street LLC; Eastmore Owners Corp. ; The 240 East 76 th Street Condominium; FC 80 Dekalb Associates LLC; First New York Partners Management, LLC; Forest City Ratner Companies LLC; I&M 93 rd Street LLC; I&M Commercial 93 LLC; Lexington Belvedere LLC; Lionshead 53 Development II, LLC; Sapir Organization; Monarch Real Estate; World Wide Holdings Corp. ; Marine Estates LLC; River Terrace Associates LLC; Albanese BPC LLC; Albanese Organization Inc. ; Northwestern Mutual Life Insurance Company, Northwestern Investment Company; New York State Housing Finance Agency as Mortgagee c/o American Property Financing Inc, acting as administrative agent and servicer as well as successors in such capacity for itself and any co-lenders; Fannie Mae, ISAOA, ATIMA; c/o American Property Financing, Inc. ; Battery Park City Authority d/b/a Hugh I. Carey Battery Park City Authority; Rivercross Tenants' Corp. ; Fannie Mae c/o NCB FSB; Rockwood Owners Corp. ; The 20 East 68 th Street Condominium; Rose Associates, Inc: . The 306 Gold Street Condominium; 147 Flatbush Avenue Property Owner, LLC; Whitehall Tenants Corp. , dba 110 Bennett; 150 East 57 th Street; 1510 Lexington; 170 East End Avenue; 185 Claremont; 231 East 76 th Street; 299 West 12 th Street; 3 Hanover Square; 340 E. 52 nd St. ; 4 East 89 th Street; 400 West End Ave; 45 East 89 th Street (Co-op); 45 East 89 th Street (Condo); 53 Park Place; 60 E. 9 th Street Condo; 725 West 184 th Street; 80 De. Kalb Avenue; 800 Fifth Avenue; 98 Riverside Drive; Atlas New York; Carnegie Hill Place II; Chelsea Landmark; Continental Towers (Condo); Eastmore (Condo); Georgetown Plaza (co-op); Georgetown Plaza (Condo); New Gotham; Park Ten; Rivercross; Rockwood {Condo); Rose Associates, Inc. ; The America; The Chelsea Mercantile; The Melar; The Metropolis; The Montrose; The Nicole; The Oro; The Sheffield; The Solaire; The Vanguard Chelsea; The Whitehall (Co-op) AND THEIR SUBSIDIARIES, AFFILIATES, LENDERS, DIRECTORS, OFFICERS, MEMBERS, MANAGERS, AGENTS, PARTNERS, EMPLOYEES, SERVANTS AND ASSIGNEES.

Entertaining Omnibus Wording Should such omnibus wording be entertained? • Depends on ridiculousness. • Depends on the “level” of transfer contractually required vs. amount allowed by statute. • May not matter depending on the AI endorsement used.

Primary and Noncontributory The necessity of primary and noncontributory requirements!

Two Goals of the Primary and Noncontributory Requirement • Force the transferee’s insurance policy to respond on a primary basis; • Eliminate the transferee’s insurance carrier’s ability to seek contribution from either the transferor or its insurance company.

Is Primary and Noncontributory Necessary • Primary and Noncontributory conditions were created to address situations in which both the lower tier’s and upper tier’s insurance policy asserted primacy in certain loss situations. • In 1997, ISO introduced a required endorsement changing the Other Insurance condition (CG 00 55 03 97) to read: “This insurance is excess over: (2) Any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement. ” • This language was incorporated into the 07/98 edition of the CG 00 01.

Evolution of “Excess” Wording • Prior to 1997: • In 1997: • 07/98 Edition: • 12/07 Edition: • 04/13 Edition:

Back to the question: Is Primary and Noncontributory Necessary? The question of “primacy” (primary): • The lower tier’s policy provides coverage to all insured’s (including additional insureds) on a primary basis. • Depending on the policy wording, the upper tier’s policy provides excess protection when it is named as an additional insured on another entity’s policy. • The combined effect of both conditions is coverage extended to the additional insured from the named insured on a primary basis.

Back to the question: Is Primary and Noncontributory Necessary? The question of “noncontribution”: • Non-insurance methods: • Contractual Risk Transfer (Indemnity Contracts): • Contractual Waiver of Subrogation (improper term) • The insurance method • Additional Insured status • CG 24 04 – Waiver of Transfer of Rights of Recovery Against Others to Us

Is PNC Necessary? ? NO!!

Is Primary and Noncontributory Ethical • It may not be unethical, but it seems like poor risk management for the upper tier to place its confidence, and protection, in the hands of a lower tier contractor. • The PNC is not, itself, unethical; what is unethical are the actions of the upper tier surrounding the PNC requirement.

What is a Certificate of Insurance?

What is a COI

What is a COI NOTHING!!

What is a COI • A COI certifies to a third party that: • The named insured has liability coverage • Coverage is provided by specified insurance carriers • A COI is a matter of information ONLY

COI Information and Questions You Must Consider

Information & Questions to Consider What limits should be listed in the CGL section? • Actual policy limits • Limits requested • Reduced limits • Policy vs. Per Project vs. Per Location • 2013 AI wording changes

Information & Questions to Consider What has to be correct in the Umbrella section? • Umbrella vs. Excess • Deductible vs. Retention

Information & Questions to Consider Workers’ Compensation Section: • Is anyone excluded? • Is coverage provided as per statute or on some other basis? • Employers’ Liability limits.

Information & Questions to Consider What is acceptable language in the Description of Operations?

Information & Questions to Consider Who should/can sign the COI?

Information & Questions to Consider To whom should copies of the forms be sent? Certificate holder? Named insured? Insurance company?

How does a Certificate of Insurance Respond to Contractual Risk Transfer (CRT)?

COIs and CRT • Insurance is a “slave” to the contract • The COI can be a slave to the law

COIs and CRT • What did the insured contractually agree to? • Does the contractual risk transfer agreement compel the insurer to comply?

Listing Additional Insureds

Listing Additional Insureds • What did the contract require? • What are the carrier guidelines? • Does the additional insured endorsement match the contractual requirements? • What if the carrier can’t/won’t comply?

Listing Certificate Holders

Listing Certificate Holders “To Whom It May Concern”

Listing Certificate Holders Leaving the holder BLANK

Listing Certificate Holders Matching contractually-required language

Altering the Certificate of Insurance

Altering the COI • What did the contract require? • What are the carrier guidelines? • Is it allowed by law?

Altering the COI • What is the most dangerous phrase to use on a COI?

Altering the COI Weird and dangerous requests: • “…contains no residential exclusions” • “Waiver of Subrogation applies in favor of Certificate Holder with respects to General Liability. ” • “…as broad as the CG 20 10 11 85” • “Notwithstanding…” • “Certificate holder is an Additional Insured. ”

Altering the COI • If it’s not illegal, a misrepresentation of policy terms, or in violation of your agency contract, what is placed on the COI is a business decision.

Does the COI Affect Coverage?

Does the COI Affect Coverage Technically – No Practically – Maybe, depending on what is typed in the Description of Operations

Addendum Requests

Sample Request

Who Should be Involved in COI Completion? Simple Warnings

Who Should be Involved • Basic request • Anything other than “basic” request? • Some with sufficient insurance knowledge to understand the implications of specific requests

Simple Warnings • Always confirm the policy is in effect when the COI is issued; • Always confirm coverage amounts are correct (and current); • Confirm any/all policy coverages and/or conditions indicated on the COI are actually on the policy; • Confirm any entity you list as an additional insured is actually an additional insured; and • Remember to attach the AI endorsement to the COI.

Chris Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS Executive Director, Big “I” Virtual University Chris. boggs@iiaba. net 703 -706 -5380