Insurance Subrogation, Indemnity and Hold Harmless Releases:...
Transcript of Insurance Subrogation, Indemnity and Hold Harmless Releases:...
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Insurance Subrogation, Indemnity and Hold
Harmless Releases: Navigating the Complexities Protecting Subrogation Rights and Negotiating
Subrogation Waivers, Indemnities and Settlement Releases
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Presenting a live 90-minute webinar with interactive Q&A
Tarron Gartner, Shareholder, Cooper & Scully, Dallas
Steven K. Gerber, Member, Cozen O'Connor, Philadelphia
Stephen D. Palley, Founder, Palley Law, Washington, D.C.
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Insurance Subrogation,
Indemnity and Hold Harmless
Releases: Navigating the
Complexities
Tarron Gartner-Ilai
Cooper & Scully P.C.
214.712.9570
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What Is Subrogation?
The Substitution of one party for another
whose debut the party pays, entitling the
paying party to the rights, remedies or
securities that would otherwise belong to
the debtor.
Black’s Law Dictionary, 9th Ed. (2004).
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Why Is It Important?
Subrogation allocates loss to the party
who should actually bear the
responsibility.
Subrogation offsets the Company’s
overall indemnity payout.
Subrogation is a valuable claim service
that is part of the value-added proposition
afforded by the Company.
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How Is Subrogation Recognized In Law?
Conventional Subrogation: Arises by contract.
Equitable Subrogation: Arises by operation of
law.
Statutory Subrogation: Legislatively mandated,
such as in worker’s compensation statutory
schemes.
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How Does Subrogation
Apply To Insurance?
Insurer makes a payment under the
policy (typically first party property, auto
physical damage and/or UM/UIM physicsl
damage claims).
Insurer is entitled to seek reimbursement
from the tortfeasor?
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Two Types Of Subrogation
Clauses
Transfer of Right Clause: Typically
provides that the “all rights are
transferred to the insurer” upon payment
under the policy to the extent of the
payment made.
Reimbursement Clause: Requires the
insured to reimburse all sums paid under
policy from any recovery realized.
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What’s The Difference?
A Reimbursement Clause is not subject
to the “made whole rule.” A Transfer
Clause is.
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Interests To Be Protected
Extracontractual Liability to the Subrogating Carrier – Putting the company’s (client’s) interest ahead of the insured.
Class Action Potential for Subrogating Insurer – Failure to comply with law; aggregate property damage claims.
Market Conduct Exams – Fines, penalties and damage to reputation and rank.
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The Made Whole Rule
The insurer is not entitled to subrogation if the loss exceeds the amounts recovered
from the insurer and the third party covering the loss.
Ortiz v. Great Southern Fire & Cas. Ins. Co., 587 S.W.2d 342 (Tex. 1980).
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What’s The Risk?
Putting the Subrogating Company’s financial interests ahead of the insured’s without Investigation
What if insured has significant uninsured loss?
What if insured has corresponding bodily injury claims?
What if insured and insurer are locked in a coverage dispute?
Could the insured put a constructive trust on thhe proceeds of recovery?
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Best Practices
Increase client’s awareness of potential risks and inquire as to whether the client has communicated with the insured;
Encourage client communication to communicate with the insured and propose an allocation agreement; Disclose conflict of interest and obtain written waiver;
Encourage insured to seek the advice of counsel.
If the insured has an attorney, reach out to the attorney to negotiate a joint prosecution agreement allocating recovery and expenses.
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Prorating Recovery, Deductibles
and Recovery Costs
Statutory rules in most states with regard
to recovery of auto physical damage
claims;
May require full reimbursement if staff
counsel is used;
All other lines of business subject to the
applicable common law made-whole rule.
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Example
Deductible must be included in subrogated demands unless otherwise requested by
the insured. Proportionate sharing of attorneys’ fees is permitted provided
outside counsel is used.
2 A.A.C. §26.080
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Allocation Agreements
Determines priority of recovery.
Serves as an assignment of claims for new consideration recited – becomes, in essence, contractual subrogation.
Shores up amount of uninsured losses claimed.
Bridges gaps caused by claim/coverage investigation – great customer service tool.
Allocates unassignable recoveries associated with insured’s personal claims that might otherwise prevent recovery on the subrogated claim.
Serves to protect both the insured’s and carrier’s legal and financial interests.
Determines allocation of costs.
Diminishes extracontractual liability.
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Essential Elements
Recitals;
Statement as to policy terms;
Recital of amount of insured and
uninsured losses;
Consideration;
Identification of Joint Counsel;
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Cont’d…
Assignment of non-personal causes of
action and/or claim retention;
Allocation of money associated with
punitive damages claimed;
Express waiver by insured of right of
recovery;
Prosecution of Recovery Suit;
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Cont’d…
Advancement of Interim Costs;
Allocation of Interim Costs upon recovery
and expression of manner of calculation;
Allocation of net recovery and expression
of manner of calculation;
General terms and conditions.
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Allocation Formula
Simple algebraic formula prorating the total
recovery to the deductible or uninsured
loss, and costs and attorney’s fees: Insured Loss = Percentage to which Insurer
Total Loss is entitled.
Uninsured Loss = Percentage to which Insured
Total Loss is entitled.
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Allocation of Recoveries,
Deductibles and Expenses
If the Insurer pays a claim of for $47,500.00
($50,000.00 policy limits less a $2,500.00
deductible), and expends $6,600.00 recovering
$20,000.00 from the responsible party, the
insured is entitled to .01% of the $20,000.00
($200.00), and the Insurer is entitled to
$19,800.00. From that, the insured must pay
.01% of the costs, or $66.00, while the Insurer
must bear $6,534.00 of the responsibility.
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Pursuing consumer protection
and punitive damages
Subrogating insurer may actually spend a lot of money supporting efforts at tort reform;
Some states do not allow for the assignment of certain types of claims;
Can the “real party” assert consumer protection claims? Is the insurer a “consumer”?
What happens if (however remotely), the subrogating insurer recovers more than what is paid under the policy? Assume that there is no uninsured loss and therefore no
allocation agreement;
Subrogating insurer’s policy likely provides subrogation only to “the extent of the payment made.”
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Waivers of Subrogation
Stephen Palley Palley Law, PLLC
1750 K St, NW
Washington, DC 20006
202.847.3964
www.palleylaw.com
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Waivers of Subrogation
Basic principles:
Common feature in commercial contracts.
Often ignored until after all a claim arises.
Scope can be broader than anyone realizes.
They are WAIVERS
(“of subrogation”)
State law varies widely
Different rules may apply where litigated between insurers, as opposed to insured v. insured.
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Boilerplate
Language varies widely, but some common features issues can be identified.
Here’s an example from the AIA A201 general conditions (emphasis added):
11.3.1 Unless otherwise provided the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance written on a builder’s risk “all-risk” or equivalent policy form in the amount of the initial Contract Sum, plus value of subsequent Contract Modifications and cost of materials supplied or installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Section 9.10 or until no person or entity other than the Owner has an insurable interest in the property required by this Section 11.3 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Project.
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What Is Being Waived?
The right of the parties to sue to the extent of “available” insurance coverage?
A third party insurance company’s rights?
Is a waiver of a third party’s rights really enforceable?
Why is it called a “waiver of subrogation”
cf. Robert Frost, “Mending Wall” (because people find comfort in things that have been around for a long time, even if they don’t necessarily make sense) (available at http://www.sparknotes.com/poetry/frost/section3.rhtml).
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When Is The Waiver
Triggered?
Upon execution of the contract, before a claim even
arises?
When a claim arises but before it is paid?
After insurance is procured?
After a claim arises and an insurance company has paid?
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Is Insurer Consent Required?
Policies may permit pre-loss waiver
On a blanket-basis (where required by written contract)
Or on a scheduled basis?
A “best practice” to coordinate between contract requirements and policy contents?
What if the policy doesn’t include a waiver?
Generally, insurer stands in insured’s shoes and the waiver is enforceable.
See e.g., North American Specialty Insurance Company vs. Payton Construction Corp., 80 Mass. App. Ct. 367 (2011)
Does the insurer have a claim back against their own insured?
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In Insurer Consent Required?
If you’re an insured, does it matter?
Impact of anti-subrogation rules
See e.g., Allstate Ins. Co. v. Palumbo, 994 A.2d 174 (Conn.
2010).
An agreement to provide insurance company may be
deemed an implied waiver.
See e.g., Walker v. Vanderpool, 225 Va. 266, 271 (1983) (Va.
1983)
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Third party beneficiaries?
If you’re not named in a contract that contains a waiver of
subrogation, can it still protect you?
Best practice is to get the waiver if you can, of course, but see cases like:
Gulf Ins. Co. v. Quality Bldg. Contractor, Inc., 58 A.D.3d 595 (N.Y. App. Div. 2009) (subcontractor protected by waiver of subrogation in prime contract where subcontract incorporated prime contract)
Best Friends Pet Care. Inc. v. Design Learned, Inc., 823 A.2d 329 (Conn. App. Ct. 2003) (subcontractor covered by waiver of subrogation in prime contract even where subcontract did not contain a waiver of subrogation provision).
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How Much Is Waived?
Construction project:
Claims arising from ongoing operations?
Completed operations?
Does the waiver apply to “over/under” liability?
Does the waiver apply to claims between insurers
(equitable contribution, for example).
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How Much Is Waived (cont)
Work v. non-work?
On the one hand . . . see, Copper Mountain. Inc. v.
Industrial Systems, Inc., 208 P.3d 692, 696 (Colo. 2009).
On the other hand . . . See, Lexington Insurance Co. v.
Entrex Communication Services, Inc., 749 N.W.2d 124
(Neb. 2008)
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Are All Waivers Enforceable?
Waiver that extends to claims arising from “sole
negligence”
On the one hand . . . See Lexington Ins. Co. v. Entrex
Commc’n Servs., Inc., 749 N.W.2d 124, 130 (Neb. 2008).
On the other hand . . . See St. Paul Fire & Marine Ins. Co. v.
Turner Constr. Co., No. 08•2292, 2009 WL 738768, at *1
(3d Cir. 2009)
Workers compensation claims?
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State Law Nuances
As always with insurance, there are many state law nuances. Here’s an example from Kansas:
K.S.A. 16-1803. . . .
(b) The following provisions in a contract for private construction shall be against public policy and shall be void and unenforceable:
. . .
(3) a provision that purports to waive, release or extinguish rights of subrogation for losses or claims covered or paid by liability or workers compensation insurance except that a contract may require waiver of subrogation for losses or claims paid by a consolidated or wrap-up insurance program, owners and contractors protective liability insurance, or project management protective liability insurance, unless otherwise prohibited under subsection (b)(5) of K.S.A. 2012 Supp. 40-5403, and amendments thereto.
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Take-aways
If you are drafting a waiver of subrogation clause, think of it as a WAIVER.
Focus on scope of waiver:
Time
Property
Claims
Excess/under liability
The same holds true in litigation.
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Some Light Reading
Subrogation Waivers, The Construction Lawyer, Vol. 31,
Number 4 (Fall 2011).
Insurance Update: 'Boilerplate,’ Subrogation Waivers and
Choice of Law, 14 Under Construction: The Newsletter
of the ABA Forum on the The Construction Industry
(Apr. 2012).
Available at: www.palleylaw.com/static_pages/publications.
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Presented By:
Indemnity, Hold Harmless
and Confidentiality
Provisions In Property
Damage Subrogation
Releases
Steven K. Gerber
Cozen O’Connor
(215) 665-2088
March 19, 2014
Strafford Publications Webinar
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The Issue
In dealing with property damage subrogation
claims, reaching agreement on other issues,
especially indemnity, hold harmless and
confidentiality provisions, can be as difficult as
reaching agreement on the amount of the
Settlement.
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What is “Indemnity”?
• According to Black’s Law Dictionary indemnity is:
“A collateral contract or assurance, by which one
person engages to secure another against an
anticipated loss or to prevent him from being
damnified by the legal consequences of an act or
forbearance on the part of one of the parties or of
some third person. Term pertains to liability for loss
shifted from one person held legally responsible to
another person.”
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What is an “Indemnity
Contract”?
Black’s defines an “Indemnity Contract” as:
“A contract between two parties whereby the one
undertakes and agrees to indemnify the other against loss
or damage arising from some contemplated act on the part
of the indemnitor, or from some responsibility assumed by
the idemnitee, or from the claim or demand of a third
person, that is, to make good to him such pecuniary
damage as he may suffer.”
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What is a “Hold Harmless Agreement”?
Black’s defines a “Hold Harmless Agreement”
as: “A contractual arrangement whereby one party assumes
the liability inherent in a situation, thereby relieving the other
party of responsibility. Such agreements are typically found in
leases, and easements. Agreement or contract in which one
party agrees to hold the other without responsibility for
damage or other liability arising out of the transaction
involved.”
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Purpose?
The essential purpose of indemnity and hold
harmless provisions in a release is to protect the
settling party from future claims, costs,
expenses and/or attorneys fees after settling a
claim or lawsuit.
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Reality of indemnity language
In reality, indemnity and hold harmless
language is whatever the releasing party
agrees to in the Release. It is therefore
critical that you know exactly what you
have agreed to on behalf of the
recovering subrogating insurer.
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Who wants what?
• Defendants and liability insurers typically want
to make the protection – and language –
provided by a release as broad as they can.
• Conversely, subrogating insurers, and
plaintiffs in general, prefer to have no
indemnity language, and otherwise desire
language that is as narrow as possible.
• Reaching agreement on language that
bridges the gap between these opposite
positions can be challenging.
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Know what you agree to!
• When you are in the position of the party
releasing claims, and the Defendant insists on
indemnity and/or hold harmless language, you
must make sure you read the language
carefully and understand exactly what you are
agreeing to do and provide “indemnity” for.
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Some Key questions
• Who is being protected?
• Who is providing the protection?
• What protection is included?
• Is it only future indemnity payments or does it include
attorney’s fees and other costs or expenses?
• Are you agreeing to indemnify for actions of third
parties or strangers?
• Are you agreeing to indemnify actions you control?
• Has the statute of limitations run? Has the statute of
repose run?
• Does it matter if the statute of limitations or statute of
repose has run?
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The Scope of the Language
For example, language which reads “Releasor
agrees to indemnify, hold harmless and defend
Releasee from and against any and all claims or
actions of any kind that might be brought
against the Releasee arising out of or incidental
to the occurrence” is exceedingly broad in scope
and potentially leaves the subrogating insurer at
risk should anyone ever file suit or make a claim
against the defendant arising out of the
occurrence which is the subject of the pending
action.
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Problem with the Broader
Language
The broad scope language raises the potential
for problems for the settling subrogating insurer
because the settling subrogating insurer does
not have any control over whether someone
else files a lawsuit or claim. For example,
suppose a firefighter who fought the fire at the
insured’s premises files suit against the settling
defendant for injuries sustained in the fire.
Under the broad scope language, the
subrogating insurer may be required to
indemnify the defendant.
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More Narrow Language
An example of more narrow language is “if
Releasor files a lawsuit or otherwise makes a
claim against anyone other than the released
parties as a result of the Occurrence, and if as a
result of that suit or claim, claims and/or
demands are made against any of the released
parties, releasor agrees to indemnify, hold
harmless and defend Releasee from and
against any such claims or demands.”
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Effect of the More Narrow
Language
The more narrow language permits the
subrogating insurer to control whether the
indemnity becomes operable. The
indemnity is only triggered if the
subrogating insurer affirmatively chooses
to make a claim or file an action which
results in a claim or suit being made
against the releasee.
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Confidentiality Provisions
Defendants and liability insurers, especially
product manufacturers, frequently include
confidentiality provisions in releases in order to
keep information from the lawsuit or settlement
confidential.
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Purpose
There are legitimate reasons for keeping
sensitive information confidential or the amount
of the settlement confidential. The defendants
and liability insurers typically do not want
publicity or other potential plaintiffs and their
lawyers to be able to use information against
them.
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What to Look for as a
Subrogating Insurer
Subrogating insurers, and plaintiffs in general, are
typically more interested in getting their cases
settled and are not concerned about a reasonable
confidentiality provision. Nevertheless,
confidentiality provisions must be carefully
reviewed to make sure you know exactly what you
are agreeing to and to make sure you do not
create a problem down the road.
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An Issue for the
Subrogating Insurer
An issue raised by confidentiality provisions for
the subrogating insurer is ensuring that the
subrogating insurer may still use information
relating to the settlement both within the
company and outside of the company as
necessary in the ordinary course of business as
an insurer without violating the terms of the
release.
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A Possible Solution
Adding the following language to a confidentiality
provision may provide a possible solution:
“Notwithstanding anything to the contrary, nothing in this
Release shall prevent the disclosure of confidential
information nor the terms thereunder to lawyers,
accountants, auditors, insurers, and re-insurers, together
with such insurers and re-insurers’ third-party providers,
actuaries or intermediaries, or regulators, provided the
disclosure of the information is reasonably necessary to
effectuate the terms of this Release, or is required for tax,
financial reporting or government compliance purposes, or
is otherwise necessary to transact the business of
insurance.”
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Conclusion
Settling parties should be able to reach
agreement on reasonable indemnity, hold
harmless and confidentiality provisions in
conjunction with the settlement of a property
damage subrogation claim which represents an
effective compromise of the respective positions
and provides reasonable protection to both the
releasors and releasees.
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