INDEMNITY AND INSURANCE PROVISIONS IN CONTRACTS AND POLICY LANGUAGE

Indemnification and insurance provisions are common features of many types of commercial contracts, including construction, engineering, oil and gas, and product distribution contracts. These contractual provisions reflect an effort by parties to contractually allocate risk, and to provide for insurance as a backstop for the contractual allocation of risk.

This contractual allocation of risk and insurance backstop involve three separate components: (1) an indemnification provision; (2) an insurance provision; and (3) an additional insured provision.

Much has been written about the different types of indemnification provisions — how they have been interpreted and restrictions on indemnifying a party for its sole negligence. Thus, this article will focus on contractual insurance provisions and additional insured provisions that may be used as a backstop.

Scope of Additional Insured Coverage: Contractual Provisions and Language of Insurance Policy

Contractual insurance provisions and additional insured language in insurance policies are often viewed as intertwined with indemnification provisions in a contract. In other words, parties may intend that the additional insured’s right to coverage apply to the other party’s indemnification obligations, but not to cover any liability of the additional insured that is beyond the scope of any contractual indemnification provision.

For example, many jurisdictions prohibit indemnification for the indemnitee’s sole negligence, and the parties may assume that the additional insured’s rights only extend to liability arising out of the indemnitor’s negligence and not to the indemnitee’s negligence or even sole negligence To the extent the parties intend for the indemnitee’s rights as an additional insured to be limited to the indemnitor’s obligation to indemnify, it is important for the parties to pay careful attention to both the insurance provisions of the contract as well as any additional insured provisions or endorsements.

While the parties may assume that both merely backstop the indemnification provision, cases in several different jurisdictions — including recent cases in Texas involving the petroleum industry — demonstrate the potential that insurance provisions in a contract and additional insured provisions in a policy, may be interpreted to provide the additional insured with coverage for all of its liability, including liability beyond any contractual indemnification obligation, and extending to the sole negligence of the indemnitee.

Initially, if the parties’ intention is that the additional insured is entitled to coverage for only the indemnitor’s indemnification obligation, this intention should be explicitly stated in the contract’s insurance provision so that the court does not extend the additional insured’s right to coverage beyond its right to indemnification under the contract, including the sole negligence of the indemnitee.