Third Party Recovery:
Getting the Most Out of
Other People’s Insurance
Tim Law, Reed Smith, tlaw@reedsmith.com
Brian Chance, ECBM, bchance@ecbm.com
Thomas Culotta, Burlington Coat Factory,
thomas.culotta@coat.com
Introduction to Speakers
• Speakers
• Brian Chance, ECBM
– Broker Perspective
• Tom Culotta, Burlington Coat Factory
– Risk Management and Business Perspective
• Tim Law, Reed Smith
– Legal Perspective
Introduction to Topic
• Third Party Recoveries
– Recovering from parties other than your own
insurance company
– Additional Insured Status
– Contractual and Common Law Indemnity
– Subrogation
– Contribution
Legal Benefits of Additional Insured
• When done right:
– Gives Additional Insured Direct Rights Against
Insurance Company
– Duty to Defend Additional Insured v. Duty to
Reimburse Indemnitor for Payment of Defense
Costs
– Belt and Suspenders With Indemnification
– Should Prevent Subrogation Against Additional
Insured By Carrier
Business Benefits to Additional Insured
• Saves Premium
• Protects Claim Experience
• Good Risk Transfer
Show Me the Endorsement
• Becoming an Additional Insured
– Blanket Additional Insured Provisions
• Definition of Insured
• Broad endorsements
• Typical Requirements
– Written Contract
– Prior to Occurrence
– Requires Naming of Particular Company as Additional Insured
– Specific Endorsements
Additional Insured: Common Problems
• Failure to List All Organizations and People Who
Should Be Additional Insureds
• Conflicts Between Insureds and Need for
Independent Counsel
• Extent of Additional Insured Protection
– Certain States limit the scope of coverage
• Other Insurance Provisions
– Your Insurance Still Applies
– Primary and Non-Contributory?
– Conflicting other insurance clauses; courts determine
allocation; may be pro rata.
ISO Additional Insured Endorsements
• 32 Different ISO Additional Insured
Endorsements
– Not going to address all 32, but . . .
• Each has different language and purpose
ISO Endorsements
• Additional Insured – Owners, Lessees or
Contractors – Scheduled Person or
Organization
– CG 20 10 11-85
– Covers Sole Fault of the Additional Insured
– Includes Completed Operations
ISO Endorsements
• Additional Insured – Owners, Lessees or
Contractors – Scheduled Person or
Organization
– CG 20 10 03 97
– Covers Sole Fault
– No completed operations coverage?
ISO Endorsements
• Additional Insured – Owners, Lessees or
Contractors – Scheduled Person or
Organization
– CG 20 10 10 01
– Similar to previous endorsement, but completely
eliminates coverage for completed operations
ISO Endorsements
• Additional Insured – Owners, Lessees or Contractors
– Scheduled Person or Organization
– CG 20 10 07 04
– Designation of locations of covered operations
– Changes
• “with respect to liability arising out of your ongoing operations
performed for that insured” to
• “your acts or omissions or the acts or omissions of those acting on
your behalf in the performance of your ongoing operations for the
additional insured(s) at the location(s) designated above.”
ISO Endorsements
• Additional Insured – Owners, Lessees or
Contractors – Automatic Status when
Required in a Construction Agreement with
You
– CG 20 33 07 04
– Blanket endorsement
– Does not include completed operations
Vendors Endorsements
• Covers purchaser or distributor for liability arising
from its sale of the manufacturer’s products in the
ordinary course of business
• Exclusions – coverage extends only to matters in
which the vendor has not contributed independently
to injury or damage
• Coverage can be direct, making vendor an insured, or
can require payment of vendor’s liability at request
of insured.
• Additional insured coverage can be better than
vendor’s liability coverage for vendor.
OCIPS & CCIPS
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Owner-controlled insurance programs
Contractor-controlled insurance programs
All participants are named insureds
Avoids subrogation and additional insured
issues
• Administratively complex; only for big projects
• Can reduce overall limits available to pay
major loss.
Certificates of Insurance
• Not a contract
• Not insurance
• Does not automatically make you an
Additional Insured – but it could!
• Does not provide a right to payment or notice
• Proof of Someone Else’s Insurance
– At a particular time
– Without coverage details
Benefits of Certificates of Insurance
• Provides proof that contractual requirements to have
certain amounts of insurance are met
• Provides proof that subcontractors have worker’s
compensation insurance, so no premium is charged
to general contractor for employees of subcontractor
• May get right to notice of cancellation, but not
expiration. Prior “notice” language in ACORD form
required the insurer to “endeavor” to notify of
cancellation. Now, requirement only to deliver
notice of cancellation “in accordance with policy
provisions.”
Insurance Requirement
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Amount of Limits
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Size of subcontractor
Per occurrence v. aggregate
Per location
Claims made coverage
Type
– General Liability
– Umbrella
– Worker’s compensation
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Terms
– Primary and Non-contributory
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Duration
– Require insurance to be in place for duration of work, and beyond if completed
operations coverage is desired.
– Require prompt notice of cancellation, replacement, changes in terms, renewal, and
non-renewal
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Rating
– “A-rated” by A.M. Best?
Indemnity Agreement
• Requirement to indemnify for certain loss
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“Arising out of” subcontractor’s work
“Resulting from” subcontractor’s negligence
Reciprocal indemnity? Applies only in the event of sole negligence?
Contractor’s independent negligence?
Bodily injury, property damage, anything else?
“Hold Harmless”
Duty to Defend or Conditional Duty to Pay Defense Costs
Attorney fees for enforcing indemnity
Dollar limits on indemnification obligation? Contract price?
Indemnification obligation to survive contract expiration, but any time
limit?
– Does indemnity apply in addition to insurance or after insurance?
Contractual Liability Coverage
• Contractual liability coverage should parallel scope of
any indemnity agreement
• Typically, applies only to tort liability assumed in
indemnity agreement
• Should also apply to your contractual liability for
someone else’s contractual liability for yet another
party’s tort liability
• Indemnity agreements are “Insured Contracts” so
excepted from exclusion for liability assumed in
contract.
• Does not provide indemnitee with “insured” status.
Name as Additional Insured
• Additional Insured Requirement
– Different than Indemnification requirement
– Must be in written contract prior to occurrence
– Must include all persons and entities that should be
insured
– Consider requiring completed operations coverage
– Policy may need to be specifically endorsed or “blanket”
coverage may be provided.
– State in contract that additional insured coverage is
intended to be primary and non-contributory. This should
also be addressed in insurance policy, if possible.
Documentation Requirement
• Contract can require party to provide certain
insurance documentation.
– Insurance Policies
– Certificate of Insurance
– Communications with Insurance Companies re Claim
• Any documentation requirement should survive
expiration or termination of contract
• Be careful of expiration of policy term. Contract can
require documentation to be provided on renewal.
For completed operations losses, subsequent policies
may be required to provide coverage.
Absent Contract
• State law addresses multiple parties being
liable for single loss.
– Joint and several liability
• If you are the least bit at fault, you can be required to
pay everything
• Some states limit to those 25% or 50% liable
• Some states limit to certain categories of damages
(medical, “objectively verifiable monetary losses”)
– Several liability
Contribution Law
• If tortfeasor pays more than allocated share,
may seek excess from a joint tortfeasor
• Each tortfeasor is responsible for its own
attorneys fees
• Practical: shifts risk of non-collectibility to
those tortfeasors who can pay
Indemnity Law
• After enactment of contribution and
comparative fault statutes, common law
indemnity limited to shifting entire loss from
innocent indemnitee to negligent indemnitor
• California – partial comparative indemnity
• Texas – seller or distributor can seek
indemnity from manufacturer
Subrogation
• Insurance company’s right of recovery in subrogation
from a third-party is wholly derivative of the
policyholder’s right of recovery
• If the negligence of a third party contributed to the
policyholder’s loss, then that third party may be
liable to the policyholder. If the policyholder is
insured for the loss, the policyholder has a right to
prompt recovery from its insurance company, which
is then permitted to pursue the liable third party.
Anti-Subrogation Rule
• Subrogation is an equitable doctrine
• The “anti-subrogation rule” forbids an
insurance company from seeking subrogation
from its own insured.
• If an insurance company pays a loss to one
insured company, it is forbidden from seeking
recovery from that same company or an
insured sister company.
Made Whole Doctrine
• “Make Whole” or “Made Whole” doctrine, a/k/a the
“Complete Compensation” rule
• Allows an insurance company to enforce its subrogation rights
only after the insured has been fully compensated for all of its
loss.
• When deciding priority of recovery, should it be the insurance
company who provided some measure of insurance against
loss in exchange for a premium or should it be the
policyholder who purchased some measure of insurance
against the loss?
• Any inability to recover fully from third parties should rest on
the seller of insurance, not on the insurance consumer.
“Made Whole” Problems
• Situations in which an insurance company’s payment will not
make the policyholder whole
– Certain loss is not covered by the insurance policy
• Policyholder should receive payment of uncovered loss before insurance
company receives payment of covered loss
– Loss is in excess of the policy limits
• Policyholder should receive payment of loss in excess of limits before
insurance company receives payment of loss within limits
– Loss may fall within a deductible or retention
• Policyholder should receive payment of loss within deductible or
retention before insurance company receives payment of loss in excess of
deductible or retention
• Recoveries should not be taken “off the top” of damages
Made Whole: Deductible Example
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If a $100,000 policy contains a $10,000 deductible, the insurance company would
be obligated to pay $100,000 of a $110,000 insured loss. Similarly, the insurance
company would be required to pay $1,000 of an $11,000 insured loss.
In the first example, the policyholder has a $110,000 claim against any third party
tortfeasors, and in the latter example, an $11,000 claim.
Policyholder’s contractual right to recover $100,000 or $1,000 from the insurance
company is not impacted by the third party’s liability to the policyholder for
causing the loss.
Policyholder’s right to recover $110,000 or $11,000 in tort from the third party is
not impacted by the insurance company’s actual or potential contractual liability
under the insurance policy.
The insurance company “steps into the shoes” of the policyholder to recover from
third parties to the extent of its payment, but the policyholder’s right of recovery
remains primary, while the right of subrogation remains derivative and secondary,
applicable only when the policyholder is made whole.
Working Effectively with Lawyers
• Law firm selection
– How to choose
– What to consider
• Alternative Fee Agreements
– Using contingent fees
– Fixed Fee retentions
• Use of subrogation vendors
Prepare for Recovery
• Investigate cause of loss and damages
• Assemble relevant documents
• Identify possible tortfeasors and place potentially
responsible parties on notice
• Make indemnity demands promptly and follow up
• Evaluate collectability and timing
– better to get 1 in hand, than pursue 2 in bush
• Cooperate with insurance company and press for
active recovery effort.
Workers Compensation Recoveries
• Many worker’s compensation policies have
retrospective premiums or large deductibles.
• Important to press carrier to evaluate and
pursue third party recoveries.
• May be requirements for prompt notice of
subrogation liens.
• Monitor litigation by employee against
tortfeasor
Maintaining Customer and Vendor
Relationships
• Satisfy the Customer First
• Don’t lose track of corporate mission
• Determine goals of business units in your own company and
do not act at cross purposes
• Many disputes can be avoided through careful selection of
business partners
– Consider financial condition of business partners and ability to make
whole
– Surety bonds and collateral
• Leveraging the business relationship
– Continue to use vendor
– Initiate competition with other vendors
– Eliminate vendor
Third Party Recovery as Risk Shifting
• Risk Management must have role not just in
insurance policies but in contracts with
business partners to ensure proper indemnity
and additional insured protections.
• Risk Managers must also partner with inhouse counsel, facilities, construction and
other applicable departments—beyond the
contracting process—to ensure that additional
protections are addressed.
Alternative Dispute Resolution
• Consider arbitration provisions. Arbitration has
positives and negatives:
• Positives
– Possibly quicker
– Possibly shorter
– Less public, more confidential
• Negatives
– You have to pay the arbitrators
– Limited due process and appeal rights
– Tendency of arbitrators to split the baby
Conclusion
• There are very significant opportunities to
pursue third party recoveries.
– Get your contracts in order.
– Get your insurance policies in order.
– Exercise diligence in pressing indemnity demands,
pursuing insurance coverage from others,
encouraging recovery efforts by your carrier, and
satisfying customer.
• Questions