Most contracts executed in the course of business contain some form of indemnification clause designed to protect the interests granted under the contract by splitting potential liability among the contracting parties. Typically, service providers, contractors and vendors agree to “indemnify and hold harmless” their clients and customers for any liability arising out of their services, work or products.
In the construction industry, for example, project owners and general contractors will protect themselves by requiring all subcontractors to indemnify them from any liability, whether arising from the contractors”™ negligence or not. In other situations, contracts contain mutual indemnification clauses wherein both parties agree to hold each other harmless from the other”™s negligence. Customarily, the party being indemnified will ask the indemnifying party to provide evidence of insurance to cover the risk assumed and to name them as “additional insured” on the policy.
Surprisingly, this seemingly straightforward agreement complicates litigation as frequently as it creates clarity because the allocation of risk in the contract rarely mirrors the “other insurance” clause in the parties”™ insurance policies. So when an accident or loss occurs (and everyone “diligently” notifies their insurance provider), the insurance adjustors and attorneys have to figure out ”” or fight out ”” who responds to defend each party and who pays what share of any ultimate loss.
OTHER INSURANCE LANGUAGE
Insurance policies”™ “other insurance” language, like the contracts, is designed to determine which of several applicable policies will respond when “other valid and collectible insurance” is available to pay the same loss. Typically, the first element of an “other insurance” clause is language addressing the question of whether the policy is intended to be primary or excess. Where a policy is primary, it forms the first line of coverage and typically includes a duty to defend the insured against the claim. The commercial general liability (CGL) policies that businesses often purchase as a first defense will typically provide that, if other “valid and collectible insurance is available ”¦ this insurance is primary,” except when certain circumstances apply, in which case the policy becomes excess.
The exceptions are typically policies expressly intended to take the CGL”™s place ”” such as an event policy or a builders”™ risk policy that covers property under construction. However, policies may provide that they are primary as to certain risks and excess as to others, as when a distributor”™s otherwise primary policy declares that it will be excess to any manufacturer”™s policy that names the distributor as an additional insured. Likewise, a general contractor”™s policy may declare that it is generally primary but will become excess in the event the insured is added to a subcontractor”™s policy as an additional insured.
Finally, most “other insurance” clauses contain language addressing how the policies will share in the payment of expenses and loss in the event that other “valid and collectible” insurance is available. There are two typical methods of apportionment ”” equal sharing and pro rata allocation. Under an equal sharing approach, each carrier pays equal amounts of the loss regardless of its limits of liability. By contrast, under pro rata allocation, each insurer pays a share of the loss proportionate to its share of the overall limits of insurance available. Consider a simple two-insurer scenario where the carriers have limits of $1 million and $2 million, respectively. Under equal sharing, the loss would be split 50/50. By contrast, under the pro rata approach, the carrier with $1 million in limits would pay one-third of the costs, while the insurer with $2 million in limits would be responsible for two-thirds of the costs.
DETERMINING PRIORITY OF COVERAGE
The “priority of coverage” problems start when multiple policies provide primary coverage and the court must determine which applies ”” and when. For instance, the seller of a product may have a CGL policy intended to be primary, but it may also be named as an additional insured under the policies issued to the manufacturer and distributor of the product. Similarly, a general contractor will have its own CGL policy and require all subcontractors to name it as an additional insured.
In New York, determining the “priority of coverage” involves applying certain common law rules to create a coverage scheme as true as possible to the policies”™ language. Thus, courts will almost always find, for example, that a primary policy remains primary in relation to other policies written on an excess or umbrella basis. Conversely, excess or umbrella policies typically are found to create no duty to respond unless all scheduled or available primary insurance is exhausted.
When multiple primary policies are available, the court must compare their respective “other insurance” clauses and make a “priority of coverage” determination. In New York, the courts will cancel out comparable excess other insurance clauses and deem the policies “co-primary.” At that, point, the court will look to the “method of sharing” language to make a determination about how the insurers will split the cost of defense and loss.
Not every small business will have the risk-management resources necessary to compare all its insurance policies with all its contracts to determine where the other insurance language and indemnification provisions might conflict. Where possible, however, businesses are encouraged to consider this “ounce-of-prevention” approach to help ensure the best resolution of claims arising in the course of their work.
Carl J. Pernicone is a partner in the White Plains office of Wilson Elser Moskowitz Edelman & Dicker LLP and co-chairperson of the firm”™s national Insurance & Reinsurance Coverage practice. He can be reached at 914-872-7556 or carl.pernicone@wilsonelser.com. James Siewert, an associate in Wilson Elser”™s Stamford office, specializes in insurance coverage and policy interpretation. He can be reached at 203-388-2424 or james.siewert@wilsonelser.com.
