28/11/2011

Contracts, Indemnity and Insurance

Bob Picken, Risk Management Services

Thank You
Marsh Canada
Thomas Gold Pettingill LLP
General Council Office Diane Alguire
RSO Tricia Waddell

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Discussion of the Basics of:

Contracts
Contract Indemnity Clauses
Contract Insurance Clauses
University Insurance

How do Indemnity Clauses and Insurance inter-

relate?
Other Insurance Contract Issues

Presentation Outline

Contracts
As with most organizations we
issue to and receive from others
In each we are trying to protect our
interests, but may need to do so in
contradictory ways

Contracts

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Service Contracts
Research, Maintenance, Food Service, IT
Related other services
Related,
Construction Contracts
Building Leases
Purchase / Sale Agreements
Bills of Lading

Types of Contracts

What is a Contract?
A mutual exchange of promises that will be
enforced by law
law.
A decision is made to enter into an agreement
(Offer, Acceptance, Consideration).

Contract Basics

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As a general rule Contracts will be interpreted according to

the following (Fridman, Law of Contract in Canada, 5th ed.
(Toronto: Carswell, 2006) at 454-462):
(i) Where there is no ambiguity in a written contract it must be
given
gi en its literal meaning.
meaning

(ii) Words must be given their plain, ordinary meaning, at least

unless to do so would result in absurdity.

(iii) The contract should be construed as a whole, giving effect to

everything in it if at all possible.

(iv) In cases of doubt,

doubt as a last resort
resort, language should always be
construed against the grantor or the promisor under the contract;
verba fortius accipiuntur contraproferentem.

(v) The ejusdem generis rule.

Contract Basics

There is always a risk within Contracts:

A Party may not fulfill / deliver upon their Promise
A Party may injure another party while completing
their Promise

Contract Basics

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Risk response strategies can include:

Terminate
T i t (Avoid)
(A id) Not
N t proceed
d with
ith the
th activity
ti it (contract)
( t t)
Treat (Reduce) - reduce likelihood or impact internal processes
Transfer - Share through contract
Tolerate (Accept)

A conscientious decision is made

Risk Control Strategies

Two ways to transfer risk by contract:

1. Contractual language (Responsibilities,
Warranties Indemnity)
Warranties,
2. Insurance provision
Belt and Suspenders

Risk Control Strategies

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Indemnity Clauses

Contract Review

Allocate responsibility for damage,

costs, et al
Regardless of financial viability
Regardless of whether insurance will respond
Indemnitor - Party agreeing to indemnify
the other
Indemnitee - Party being indemnified
As an exclusion they are strictly
interpreted as they limit and shift liability
to another

Indemnity Agreements

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Indemnify and Hold Harmless

used synonymously, but:
Principle of contract interpretation that
different words are intended to have
different meanings
Indemnity is a voluntary agreement of one
party to compensate the other (restore by
payment, repair or replacement) (usually
understood to be for Third Party claims)

Indemnity Agreements

Indemnify and Hold Harmless

used synonymously, but:
Hold Harmless is a direct relationship between the
two contracting
gpparties,, where one will not p
pursue
compensation from the other and will pay defense
costs
Indemnitor will not put hand in the Indemnitees
pocket (Stewart Title Guarantee Co v. Zeppieri
ruled Hold Harmless had different meanings, and
defense costs required to be paid on an ongoing
basis)
Some contracts use even broader language to
ensure that there is an ongoing defence obligation:
to indemnify, save harmless, and defend.

Indemnity Agreements

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One-way Hold Harmless / Indemnity

One Party agrees to be responsible for certain
or all losses and/or to indemnify the other
May be exceptions for gross negligence or
wilful misconduct
Typical for most contracts
Mutual Hold Harmless / Indemnity
Both Parties agree
g to be responsible
p for losses
and/or to indemnify each other (third party
damages are typically excluded)
Knock-for-Knock

Indemnification

The Supplier shall:

Be liable to the University for; indemnify and hold harmless the
University, its Board, directors, officers, agents, advisors and
employees from and against; any and all liabilities, claims, suits or
actions costs,
actions, costs damages and expenses (and without limiting the
generality of the foregoing, any losses, costs, damages and expenses
of the University, including costs as between a solicitor and his own
client) which may be brought or made against the University or which
the University may pay or incur as a result of or in connection with:
any breach, violation or non-performance of any covenant,
condition or agreement set forth in this Agreement and required to
be fulfilled, kept, observed and performed by the Supplier;
any act or omission of the Supplier
Supplier, its agents
agents, employees or sub
sub-
contractors or suppliers in connection with the provision of
Services.

SMS Services Agreement

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11.1 Subject to Section 11.2, each party will defend, indemnify and hold
harmless the other party, its officers, directors, employees, students and
agents from any and all claims, demands, actions and costs whatsoever
that arise, directly or indirectly, out of the negligence or willful misconduct
in the performance of the Research Project by such indemnifying party
or the indemnifying partys officers, directors, employees, students or
agents.

11.2 Notwithstanding the provisions of Section 11.1, the Sponsor will

hold harmless the University, its officer, directors, employees, students
and agents from all liabilities, demands, damages, expenses (including
l
legall ffees on a solicitor
li it andd th
thatt solicitors
li it own client
li t bbasis)
i ) and
d llosses
arising out of the use by the Sponsor of the Research Results or out of
any use of products made by use of the Research Results.

RSO Research Agreement

Indemnity
Notwithstanding any other provision of this Lease to the contrary, the Tenant:
(a) shall be liable to the Landlord for;
(b) shall hold harmless and indemnify the Landlord from and against;
all costs, liabilities, claims, damages, expenses, suits or actions (including,
without limiting the generality of the foregoing, direct losses, costs, damages and
expenses of the Landlord, including costs as between a solicitor and his own
client) resulting from:
(i) any breach, violation, or non-performance of any covenant,
condition or agreement in this Lease set forth and contained on the part of the
Tenant to be fulfilled, kept, observed or performed;
(ii) any damage to property, including property of the Landlord,
occasioned by the operation of the Tenant's business on, or the Tenant's
occupation of, the Leased Premises or arising out of any work done by, or any
act, neglect, or omission of, the Tenant or its employees, agents, contractors,
invitees, concessionaires, or licensees in or about the Land and Building;
(iii) any injury to person or persons,
persons including death at any time
resulting therefrom, occasioned by the operation of the Tenant's business on, or
the Tenant's occupation of, the Leased Premises or arising out of any work done
by, or any act, neglect, or omission of, the Tenant or its employees, agents,
contractors, invitees, concessionaires, or licensees in or about the Land and
Building;

Real Estate Agreement

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Of no value if the Indemnitor has

insufficient assets to back-up the
Indemnity; thus the Insurance
requirement.

Indemnity

Just because its in the contract

doesnt mean its insured or
insurable

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Insurance

Typical Clause
Company X shall, at its own cost and expense, maintain in full force and effect the
following insurance policies and acknowledgements for:

Property Insurance to insure all owned and/or leased property that may be used in the
performance of this Agreement against perils of all risks of direct physical loss or
damage in amounts adequate to cover the replacement value of such property.

Commercial General Liability Insurance covering legal liability for bodily injury
(including death), property damage and personal injury in an amount not less than five
million dollars ($5,000,000) per occurrence. Coverage is to include contractual liability,
tortious liability, and completed operations liability , and contain a cross liability and
severability of interest clause.

Automobile and Non-Owned Automobile Insurance in an amount not less than three
million dollars ($3,000,000) per occurrence.

Workers Compensation and/or employers liability insurance as may be required by

the provisions of law or otherwise deemed reasonably necessary, in an amount
sufficient to provide indemnification against any and all claims.

Insurance Language

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General Liability (GL) Insurance

CGL Commercial, Comprehensive
Provides that the Insurance Company will pay
on behalf of the Insured all sums that the
Insured shall become legally obligated to pay as
damages because of Bodily Injury, Personal
Injury, or Property Damage sustained by any
third party.
Sums include:
- Payment of any damages awarded by the courts
- Settlement costs arranged by insurance company
- Defense costs

Universitys Insurance

Key Exclusions:
Intellectual Property GL will not cover claims
based on the infringement of patent, copyright
or trademark or any other violation of
intellectual property.
Product Liability and Contractual Liability
are covered provided suit fits into the Bodily
Injury, Personal Injury, Property Damage Box
Does not include Completed Operations
coverage

Universitys Insurance

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Negligence or Ordinary Negligence

is covered by a GL policy

Gross Negligence
An extremely careless action or an omission that is wilful or in
reckless disregard for the consequences to the safety or
property of another

Wilful Misconduct
Knowledge that an action will probably result in injury or
damage; reckless disregard of the consequences of an action; or
deliberately failing to discharge a duty related to safety

Negligence

Ordinary Gross Wilful

Negligence Negligence Misconduct

insured may be insured not insured -

except for
vicarious
liability

Negligence Continuum

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How do they interrelate?

The sexy world of Indemnity and
Insurance clauses

Indemnity and Insurance Clauses

CONTRACTOR AGREES TO DEFEND, HOLD HARMLESS AND

INDEMNIFY OWNER, ITS PARENT, THEIR SUBSIDIARIES AND
AFFILIATES, AS WELL AS THE EMPLOYEES, AGENTS, OFFICERS,
DIRECTORS, PARTNERS("INDEMNITEES") FROM AND AGAINST
ANY AND ALL CLAIMS
CLAIMS, LIABILITIES,
LIABILITIES EXPENSES
EXPENSES, LOSSES
LOSSES,
DAMAGES, FINES AND CAUSES OF ACTION CAUSED BY, ARISING
OUT OF, OR RELATED TO THE WORK, OR THE ACTUAL OR
ALLEGED ACTS OR OMISSIONS OF CONTRACTOR,
SUBCONTRACTORS, AGENTS, SERVANTS OR EMPLOYEES, AS
WELL AS ANY JOINT NEGLIGENCE OR FAULT OF THE
INDEMNITEES, PROVIDED, HOWEVER, THAT CONTRACTOR'S
OBLIGATIONS HEREUNDER SHALL NOT APPLY TO ANY CLAIM,
LIABILITY, EXPENSE, LOSS, DAMAGE, DEMAND, FINE OR CAUSE
OF ACTION ESTABLISHED TO BE THE RESULT OF THE SOLE
NEGLIGENCE OF AN INDEMNITEE.

Indemnity Verbiage Pitfalls

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A GL policy usually provides defence for the

Insured if the claim allegations trigger the policy
Bodily Injury, Property Damage, Loss of Use of Tangible
Property, or Personal Injury

Pay on Behalf provides defence, but:

No defence for suits that dont trigger policy but since the
Insured has promised in the contract to do so, hell be defending
on his own dollar
For defence provision to another Party, they must be an
Additional Insured

Indemnify wording does not advance costs,

Hold harmless does

Defend, Indemnify, Hold Harmless

The GL policy agrees to pay legal liabilities to a

Third Party for Personal Injury, Bodily Injury or
Property Damage
Losses alleging other damages are not covered (ie: pure
financial loss, breach of contract)

Coverage may include consequential damages, but only if first

triggered by Property Damage (loss of use)

Any response by the GL is subject to policy conditions and

exclusions
l i

so the GL will not respond to any and all

claims (What is the risk?)

Any and All Claims

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University GL covers
Damages legally obligated to pay for tort liability assumed under
contract

Excludes
Punitive / Exemplary Damages damages in excess of those
awarded in tort, imposed as punishment

Liquidated Damages are not insured

Fines and Penalties are excluded

Damages, Fines

Agreeing to assume the negligence of another

Party can be agreed to contractually, however:
Must be explicitly agreed to in the contract
Must fall within the policy wording

Try to avoid assuming the negligence of others

As well as any joint negligence.

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Difficult to prove!!!

sole negligence

Insurance -
And IP

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Key Exclusion is Intellectual Property

GL will not cover claims based on the
infringement
g of patent,
p , copyright
py g or
trademark or any other violation of
intellectual property.
So

Universitys Insurance

How do they interrelate?

The so-so sexy world of
Indemnity and Warranty clauses

Indemnity and Warranty Clauses

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Universitys Standard Research Warranty

Clause
Informs the other party that they are assuming
the risk of using the research in any way, that
there may be competing technology, and their
may be error (due to the nature of research)
Ideally our Indemnification Clause matches this
they indemnify us from their use and any
resulting third party claims.

Indemnity and Warranty Clauses

Keep wording simple

University Indemnity to others
Ideally restrict to our negligence or for PI, BI
and Property Damage
Restrict damages via limitations
Exclude consequential damages

Words of Wisdom

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Supplier Indemnity
They indemnify University unless we are
negligent

Reflect Universitys Risk Tolerance

because we dont insure
everything

Words of Wisdom

Company A assumes all liability for damages which may arise from
its use, handling, storage or disposal of the Material. Company B
will not be liable to Company A for any loss, claim or demand made
by Company A, or made against Company A by any other party, due
to or arising from the use,
use handling,
handling storage or disposal of the
Material by company A except to the extent caused by the
negligence of Company B.

Company B shall indemnify and hold harmless Company A from

and against all liability, damage, loss, cost (including reasonable
attorneys' fees) and expense resulting from any claim of personal
injury or property damage arising as a result of the use by
Company B of the Report. Notwithstanding the foregoing, in no
event will Company A be entitled to indemnification under this
section against any claim of personal injury or property damage to
the extent resulting from Company As negligence or misconduct.

Words of Wisdom

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The Consultant shall be liable for and indemnify and save harmless
the Client, its Board members, officers and employees from and
against all losses, damages, costs (including costs as between a
solicitor and his client), expenses, claims, proceedings and suits of
every kind or nature whatsoever which may be brought against or
suffered by any of them or which any of them may sustain, pay or
incur arising out of or as a result of the breach of this Agreement
by the Consultant or the acts (negligence or willful misconduct) of
the Consultant, its employees, agents or subcontractors in
connection with, related to or arising out of the performance,
purported performance or non-performance of this Agreement.

The Consultant, its directors, officers and employees shall not be

liable to the extent that any losses, damages, costs, expenses,
claims, proceedings and suits arise from the breach of this
Agreement by the Client or as a result of the negligence or willful
misconduct of the Client or its employees.

Words of Wisdom

Parties attempt to either remove all their liability, or

at least include a Limitation of Liability (Risk
Mitigation)
Amount must be reasonable in relation to the
contract price or it may not be upheld in court
May be linked to contract value or to insurance limits
Applies to the contracting Parties only, not to Third
Parties
may affect the insurance response for Additional
I
Insureds:
d
If asking for defence and claim payment for a Third
Party loss, a Limitation of Liability may apply also
to that loss

Limitation of Liability

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Insurance -
Other Issues

Additional Insured NOT Additional Named Insured

A Named Insured has full rights to the policy, may claim directly,
and has his operations covered
Additional Insured provides coverage to the AI in certain
circumstances

- Loss must be tied to Named Insureds operations

- Can include the AIs negligence if assumed by contract

University covers tort liability of others that the Insured

assumes (Additional Insured) but only with respect to the
operations
ope at o s performed
pe o ed by or o ono behalf
be a ofo the
t e Named
a ed
Insured (Curie believes this provides broader coverage)
Standard wording is arising out of the operations of the
Named Insured

Additional Insured Status

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Policy Canada United States

General Yes Yes
Liability
y
Workers No No
Compensation
Employers Yes (cover is on GL) No
Liability

Professional No No
Li bilit
Liability

Automobile Insurers will refuse, Yes

Liability but it can be done

Which Policies Allow Additional Insured Status?

Provision of insurance by one party may provide

protection to another
Trilogy of SCC cases that stand for the proposition
th t a covenantt tto iinsure b
that by a llandlord
dl d (i
(in a
commercial lease) should flow to the benefit of a
tenant unless that result would be inconsistent with
something in the lease.
UofA Real Estate Lease has specific wording to the
contrary.
H
Has b
been extended
t d d tto construction
t ti cases where
h
one party has agreed to supply insurance.

Tort Immunity

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A pre-determined amount to be paid by the

Contractor if he is in breach of contract terms (ie:
(
fails to complete on time)
Eliminates the need for suit or arbitration to
determine the actual amount of damages but
must not be punitive in order to be enforced

Are not insured by a GL

Liquidated Damages

Per Occurrence
Limit applies separately for each occurrence
(not each claim)
If no aggregate, the policy can pay multiple
times in a policy period
General Aggregate
All losses under all coverage subject to a
single annual aggregate

How Liability Limits Apply

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What amount of loss could the Contractor cause

you?
Dependent upon the work performed
Not related to the contract price

What amount of loss could he cause a Third Party

while working for you?
Dependent upon the neighbours (both industrial and residential)
and the work performed

Does h
D he h
have the
h financial
fi i l strength
h to pay an
uninsured loss?
If he doesnt, then do you?

What Limits Should the Contractor Carry?

Cross Liability / Severability

Each Insured is insured separately
Allows Insured vs Insured suits under the policy

Blanket Contractual Liability

Liability assumed under contract means taking on the other
partys negligence. It refers to tort liability, which can be
insured under a GL
Contractual Liability is a carelessly used term; more
appropriate is contractual obligations (promises made within
contract delivery times,
times standards),
standards) which arise in contract
law and not tort. These promises are not covered by a GL

General Liability Extensions

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Insurer has no rights of subrogation of its own,

but steps into the shoes of the Insured in order to
subrogate
May require prior approval from the Insurer to
waive these rights
If the Insured has signed away rights of
subrogation via contract, then Insurer must accept
that
Policy clause is Subrogation
Subrogation or Rights
Rights of
Recovery

Waiver of Subrogation

Policy Canada United States

General Liability Yes Yes

W k
Workers
N b
No, butt WC cant
t subro
b Y
Yes
Compensation against a member

Employers Automatic if GL has Yes

Liability waiver

Professional No No
Liability

Automobile No Yes
Liability

Which Policies Allow Waiver of Subrogation?

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Is Waiver of Subrogation and Additional Insured

status a belt and braces approach?
Additional Insured status does not always make
you a party to the insurance contract between the
Contractor and his Insurer. You can still be a third
party.
As a Third Party who has contributory negligence,
you can be subrogated against.

Have we agreed to indemnify for their negligence?

Avoid unless a knock for knock.

Additional Insured and Waiver of

Subrogation?

The value of requiring a 30 day notice of cancellation

is debatable:
Insurers rarely cancel for reasons other than non-
payment
Insurers need only give the Insured 5 to 15 days
notice of cancellation for non-payment
Insureds can cancel at any time without giving any
notice to the Insurer

Insurers are objecting to this contract provision.

Accepting Liability for items that can be beyond their
control Certificates typically endeavour
control. endeavour to provide
provide
Insureds cannot make a commitment on behalf of their
Insurer, but can take it upon themselves to provide
notice

Notice of Cancellation

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Material change is a subjective term, so what

changes are material?
Addition
Additi off exclusions
l i
Which new exclusions are material?
Reduction in limits

Notice of Material Change

Questions

Bob Picken
Manager, Insurance & Risk Assessment
Bob.Picken@ualberta.ca
(780) 492-8886

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