Question and Answer

The following interesting question and answer comes from Don Malecki, CPCU, a contributing editor to FC&S.

Anti-Indemnification Statutes That Do Not Affect the Validity of Any Insurance

We have a question on the subject of anti-indemnity statutes that has troubled us for a long time and, despite our research, we have been unable to find a satisfactory answer.

Quite often, we hear that most states hold unenforceable hold harmless agreements involving construction projects where the indemnitee attempts to transfer the financial consequences of its sole or partial fault to the indemnitor. We have found this kind of conclusion to be largely untrue, since some states do not have anti-indemnity statutes, and others have an exception stating in effect that the statute does not affect the validity of any insurance contract. Some state statutes clarify this by stating the specific kinds of insurance that are specifically excepted.

What we would like to know is what the rationale for the kind of statement which says that “the anti-indemnity statute remains unaffected by the validity of insurance.” Since the state legislatures did not think to explain what they mean, it is up to those of us who want to know the answer to come to some conclusion. Having said that, and strictly from our frame of reference, we think it means that even though an anti-indemnification statute precludes the transfer (and assumption) of sole and partial fault or partial fault consequences, the issuance of insurance, such as under an additional insured endorsement providing sole or partial fault coverage, remains unaffected by the statute that makes this kind of exception.

For example, some of the latest 2013 ISO additional endorsements automatically provide partial fault coverage so long as that degree of fault is prescribed by written contract or written agreement, and it is otherwise permitted by law. If a written contract or agreement were to prescribe partial fault of the additional insured (indemnitee), and an anti-indemnity statute were not to permit that degree of coverage, the additional insured coverage would be nullified. However, when a statute is subject to one of the above exceptions, coverage can still be provided by the endorsement.

What we would like to know is whether you concur with our thinking in this matter and, if not, why not?

Kentucky Subscriber

To the extent those exceptions to anti-indemnity statutes apply as you say, your explanation appears to be quite cogent. However, we are not sure that your explanation is the only one or reasonable one. We say this, because we have seen court interpretations that differ from your view.

For those interested, a good case that discusses this subject is Shannon v. B.L. England Generating Station v. Industrial Process Solutions, 2013 WL 6199173. Rather than discussing this case from the United States District Court for New Jersey, we will extract from it the two schools of thought you raised on this subject.

One of the state anti-indemnification statutes mentioned in the above case is New Jersey, Ann. Sec. 2A:40A-1, which deals with construction, repair, maintenance or service of buildings, highways and railroads. This statute precludes indemnification of the indemnitee's sole negligence and, thereby, permits partial or contributory negligence. Despite holding sole negligence to be void and enforceable, this statute goes on to say that “this section shall not affect the validity of any insurance contract, workmens compensation or agreement issued by an authorized insurer.”

The court in the Shannon case stated, that consistent with the holdings of the high courts of Delaware (Chrysler Corp. v. Merrell & Garaguso, 796 A.2d 653 [2002]) and Maryland (Heat & Power Corporation v. Air Products & Chemicals, 578 A.2d 1208 [1990]), the portion of the New Jersey anti-indemnification statute containing the foregoing exception meant that had the subcontractor had insurance that by its terms covered the sole negligence of the property owner, the insurer could not attempt to avoid coverage by looking outside of the four corners of the subcontractor's policy and then relying on the statute to relieve it of its policy obligations. All of this assumed, of course, that there was no absence of clear and unequivocal language to the contrary insofar as the intent was concerned.

Discussing a prior amendment to New York's statute, which was stated to be somewhat similar to the statute of New Jersey, the court in Shannon, citing the court of appeals in the case of Quevado v. City of New York, 436 N.E.2d 1253 (1982), stated that the phrase “shall not affect the validity of any insurance contract” merely ensured that the contractor would not lose insurance coverage simply because the coverage may extend to liability sought to be imposed under an unenforceable agreement.

This second interpretation is a reminder of the so-called “savings clauses” in hold harmless agreements stating to the effect that even if an agreement is void and unenforceable, it does not necessarily affect the rest of an agreement.

Whatever the meaning of the exception to those anti-indemnification statutes, i.e., circumvention of a given anti-indemnification statute, a savings clause, or some other reason, the selection is likely to depend on the respective party's interest. An indemnitee, for example, is likely to view the exception as being a circumvention of the statute, whereas the indemnitor will likely rely on the second interpretation or, in other words, the savings clause.

In fact the U.S. District Court in the Shannon case said as much when it stated that the fact that different jurisdictions have arrived at different conclusions as to the application of analogous statutes indicates that there was more than one reasonable conclusion.

Additional Insured Case

The insurer sought a declaratory judgment ruling that it was not required to provide coverage or defend an additional insured in a faulty construction claim. This case is State Auto Insurance Companies v. Harrison County Commercial Lot, L.L.C., 2013 WL 5075241.

Harrison County Commercial Lot (HCCL) hired HGM and Myrick as general contractor for a planned office building and hired Shoemake as a subcontractor. HCCL sued HGM and Myrick in state court, alleging a variety of claims, including deficiencies in the building's drywall that HGM attributed to Shoemake's negligence.

Shoemake had purchased a general liability policy from State Auto that excluded coverage for property damage to “your work”. Also an endorsement added HGM as an additional insured but only with respect to property damage caused in whole or in part by “your acts or omissions”. However, State Auto sought the declaratory judgment that it was not obligated to defend HGM.

The trial court ruled against State Auto and the insurer appealed.

The United States Court of Appeals, Fifth Circuit, noted that the insurer contended that the policy's denial of coverage for Shoemake for property damage to his work precluded HGM, as an additional insured, from receiving coverage based on Shoemake's negligence. HGM claimed coverage based on the endorsement that modified the policy by adding HGM as an additional insured and expressly provided coverage of property damage caused by “your”, that is, Shoemake's acts or omissions.

The court decided that, in this case, the endorsement extends to HGM coverage for property damage caused by Shoemake's acts. Considering the relevant provisions of the general liability policy and of the additional insured endorsement, the court found ambiguity arising from internal conflict and construed the ambiguous terms in favor of coverage. The opinion of the trial court was affirmed.

Editor's Note: In general, an additional insured stands in shoes no larger than those worn by the primary policyholder; that is, the naming of additional insureds does not extend the nature of substantive coverage originally given by the policy, but merely gives to other persons the same protection afforded to the principal insured. However, in this instance, the Circuit Court found ambiguity and conflicting statements in the policy's exclusionary language and the additional insured endorsement, and so, as usual, ambiguity means a decision in favor of coverage.

More Additional Insured Litigation

United Parcel Service (UPS) brought a diversity action against Lexington Insurance Company seeking a declaratory judgment that Lexington is obligated to defend and indemnify UPS in an underlying personal injury lawsuit. This case is United Parcel Service v. Lexington Insurance Group, 2013 WL 5664989.

UPS entered into a guard services agreement with Adelis. The agreement provided that Adelis will furnish UPS with uniformed guards for a facility in New York. The agreement requires Adelis to carry general liability insurance and to name UPS as an additional insured. The additional insured coverage is for all claims, losses, damages, expenses, or liabilities that UPS may incur by reason of any act or omission by any employee of Adelis. Adelis purchased the appropriate coverage from Lexington Insurance.

Chase sued UPS, alleging that she was hit and injured by a tow car operated by a UPS employee while she was working as an Adelis security guard on the premises. UPS claimed the incident was caused by Chase's own negligence, so the insurance carrier for UPS tendered the claim to Lexington. Lexington denied coverage and said the incident was caused by the sole negligence of the UPS driver.

UPS then brought this action against Lexington Insurance in the United States District Court for the Southern District of New York.

The court said that the policy does cover UPS as an additional insured, but only “to the extent that bodily injury is caused by Adelis's negligence or the negligence of those performing operations on behalf of Adelis”. Thus, said the court, Lexington must indemnify UPS only to the extent that the injury was caused by Chase's negligence.

Lexington argued that its coverage of UPS pursuant to the additional insured endorsement is excess and that UPS has primary coverage through its own insurer, Liberty Mutual Insurance. Because Liberty was already providing a defense as a primary insurer, Lexington said its coverage is not triggered unless and until the Liberty policy is exhausted. The court, citing precedent, concluded that coverage was primary unless unambiguously stated otherwise.

The parties in this action also disagreed as to whether the Liberty policy required that insurer to share the costs of defense with Lexington. Both policies had “other insurance” clauses stating that coverage shall be primary unless the insured has other primary coverage through an additional insured endorsement, in which case the coverage shall be excess. Because the Lexington policy covers UPS as an additional insured and the Liberty policy covers UPS as a primary insured, the other insurance clause in the Liberty contract is triggered, while the other insurance clause in Lexington's policy is not. Thus, the court said, Liberty's coverage is excess while Lexington's remains primary. The two provisions did not cancel each other out.

The court also discussed the fact that, under the additional insured endorsement, Lexington must indemnify UPS to the extent that the accident was caused by Chase's negligence. Thus, Lexington owes UPS a duty to defend if there is a reasonable possibility that Chase could be found comparatively negligent in the underlying action. The facts of the incident showed that while Chase was following the safety protocol that she had been taught, a jury could still find that she was negligent in failing to move out of the way if the danger should have been obvious. Whether Chase should have foreseen the danger and taken steps to protect herself is a fact question, said the court, and so, because there is a reasonable possibility that Chase could be found negligent, Lexington owes UPS a duty to defend.

The motion by UPS for partial summary judgment was granted by the District Court. Lexington owed UPS a duty to defend and must reimburse UPS for reasonable attorneys' fees and litigation expenses incurred in defending the underlying action.

Editor's Note: The main thrust of this decision by the U.S. District Court was that there was a reasonable possibility that the injured party could be found by a jury to be at least partially responsible for her own injuries. So, since the injuries could have been caused by the negligence of one of Adelis's employees, the wording on the additional insured endorsement meant UPS was entitled to defense and indemnity from Lexington Insurance.