Insurance and Indemnity Issues in Real Estate Transactions

Webinar Section I Presented By:
Michael S. Hale, J.D., CPCU, AAI
360 Risk Management, Inc.
Northville, MI
Thursday, April 3, 2014
1:00pm-2:30pm EDT
Strafford Webinars

Introduction

  • Parties to real estate transactions and their counsel often overlook key insurance issues and overly rely upon certificates of insurance.
  • While attorneys cannot be all things to all people, it is worth the time to carefully address insurance and indemnity provisions.
  • Insurance errors are rampant and can expose you and your clients to disaster.
  •  Additionally, this webinar will provide you  with a checklist on frequently found gaps in  business insurance programs.
  • Recent updates in certificates of insurance  being used to evidence coverage present  substantial issues for drafters of contracts  and leases.
  • New additional insured endorsements to  Commercial General Liability (CGL)policies  add to the complexities for the attorney  drafter.
  • Indemnification provisions do not often track with the insurance coverage being provided.

Certificates Are Now Even More of a Problem

  • Certificates of insurance should, for most purposes, be assumed to have little effect. Such certificates not only say they are for information only and do not change the  policy, they are almost always drafted by insurance agents who may be legal agents of  the policyholder and not the insurer. Thus,  the certificates are not likely binding on many   insurers, who are quick to ask agents not to even send them copies.
  • Certificates include disclaimer language that the holder should not rely upon the certificate.
  • The certificate is only one page and does not reference key coverage provisions or gaps.
  •  See example of a certificate on the next slide.

Acord Certificate of Liability Insurance

“This certificate is issued as a matter of information only and confers no rights upon the certificate holder. this certificate does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies below. this certificate of insurance does not constitute a contract between the issuing insurer(s),  authorized representative or producer, and the certificate holder.”

Certificate of Insurance Language

  • The insurance afforded by the policies described herein is subject to all the terms, exclusions and conditions of such policies.

Acord Certificate of Liability Insurance

  • IMPORTANT: If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed. If SUBROGATION IS WAIVED, subject to the terms and conditions of the policy, certain policies may require an endorsement. A statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s).
CANCELLATION
“Should any of the above described policies be cancelled before the expiration date thereof, notice will be delivered in accordance with the policy provisions.”

Acord Certificate of Property Insurance

  • This certificate is issued as a matter of information only and confers no rights upon the certificate holder. this certificate does not amend, extend or alter the coverage afforded by the policies below.

Certificate of Property Insurance

Special Conditions
RE: Leased/Rented Equipment
“The Certificate Holder is a Loss Payee.”

 

New Acord Certificate Problems

  • The Acord 25 Certificate of Insurance replaces an older version. This new certificate includes no representation at all that the insurer (or agent) will provide any notice to a listed additional insured.
  • This presents major concerns when representing landlords or construction project owners.
  • Notably, mortgagees are usually protected by the property insurance policy protecting the real property collateral. This may not, however, be the case as respects business inventory lien holders.
  • In light of the above, be very cautious about your client agreeing to language that requires notification of cancellation or material change to the other party.

Addition Insured Issues

  • There are at least over 31 different types of additional insured endorsements available on a standard CGL policy. This includes additional insured club members, charitable institutions, volunteers, executors, administrators, lessors and many other types. Which endorsement is right for your client?
  • Additional insureds do not have the same rights as named insureds. Additional named insured is usually not doable unless same ownership as other named insureds. Even though a landlord, for example, may be listed as an additional insured on the other party’s liability insurance policy, such coverage is only derivative of the negligence of the named insured tenant.

New Additional Insured Endorsements Further The Issue

  • 1993 Endorsement Stated: WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured.
  • The 2004 revisions created the greatest change, deleting the favorable (from the insured’s perspective) “arising out of” language from the policy and inserted in its place the phrase “caused in whole or in part” by the acts or omissions of the named insured or those acting on the named insured’s behalf at designated locations.
  • The 2013 endorsements begin with a broad “HOWEVER,” narrowing coverage such that insurance afforded to an additional insured (1) only applies as permitted by law, and (2) if such coverage is required by contract, the coverage afforded “will not be broader than that which you are required by the contract or agreement to provide for such additional insured.”

Addition Insured Issues

  • Primary and noncontributory” additional insured language in a contract’s insurance provisions can be important to the additional insured but warrants caution. Many CGL policies do not automatically contain such language which purports to elevate the additional insured to primary status on the named insured’s policy.
  • Blanket” additional insured endorsements may extend coverage but should not always be relied upon. There is an endorsement available on the CGL policies of many insurers that will provide “automatic” additional insured status where this is required by a written contract including a lease.
  • Such endorsements can sometimes limit coverage in certain ways such as excluding coverage for renovations or improvements made to real estate.
  • Requirements to name additional insureds should not apply to all of the defined policies. This is a common mistake. Workers’ compensation, for example, is not a policy on which an additional insured can be listed.
  • An additional named insured is completely different than an additional insured.
  • A loss payee has not independent rights to coverage.
  • Major issues arise in triple net leases where an owner is allowing a tenant to insure the property.
  • If your client is agreeing to name a company and its “employees, officers, agents and members” in the contract, know that this is not automatic. The insurer will typically only list the company without the other persons.
  • Be cautious about professional liability insurance policies and additional insureds. Be particularly careful about requiring additional insured status of your client on such a policy because it usually means that coverage for suits by your client against the hired company would be barred under the insured versus insured exclusion which is almost always contained in such policies.

Summary

  • Be cautious about certificates of insurance.
  • Additional insured status may not be providing the coverage that you think it is.
  • Many attorneys, understandably, are not insurance experts and do not clearly comprehend the nature of what should be included in insurance requirements provisions or how to best protect their clients through adequate insurance policies. It is advisable to consult competent insurance agents and insurance counsel in these evaluations.

How To Assure Proper Coverage For Your Clients (and Yourself)?

  • Get an agent who is not going to hide behind an “order-taker” shield.
  • Get an agent who will be an adviser and risk management consultant.
  • Consider hiring an insurance consultant to be an objective adviser.
  • Work with other experts like valuation experts, CPA’s, attorneys, etc. as part of an overall team. Don’t expect that the agent is an expert at things like valuation.
  • Always try to negotiate blanket limits on property insurance.
  • Get a signed statement of values to the agent and also a business income worksheet.
  • Do not tolerate coinsurance where it can be avoided – for building, contents or business income.
  • Understand business interruption coverage:
  1.  Monthly limit
  2.  Coinsurance
  3.  Maximum period of indemnity
  4.   Extra expense coverage
  5.  Loss of rents form
  6.  Extended period of indemnity
  • Inadequate liability limits are a major problem, especially re: motor vehicles.
  • Inadequate coverage for premises damage liability is an issue that needs to be dealt with.
  • Employment practices liability coverage is critical and the available forms differ considerably among carriers.
  • Fiduciary liability insurance is inexpensive and important.
  • Names are critical and are often overlooked.
  • Autos present major issues where owner insures on company fleet.
  • Be very cautious about lease agreements and coverage for property damage to the leased space.

Question and Answer Session

  • Questions from webinar participants.
  • Your tuition is good for a lifetime. Call or write:

 

Michael S. Hale – 248-321-8941
mhale@360rmi.com.
Contact Us Today:

For your no-cost consultation, contact us today

360 Risk Management, Inc
21500 Haggerty, Suite 140
Northville, MI 48167
Phone: 248-360-4100
Fax: 248-305-5154