The topic of “risk transfer” in insurance can get very complicated. Who pays when you are faced with a lawsuit and there are multiple defendants, and some may owe other defendants (or a defendant) contractual indemnity or have named a co-defendant as an additional insured on their insurance policy? How does this all play out, and what if they don’t go ahead and honor that obligation? In this episode, Host, Jean Lawler–commercial + insurance mediator and arbitrator–draws from her deep knowledge of the insurance industry, insurance policies and the various risks they insure against to discuss two ways to transfer risk and how it works, including a discussion of a hypothetical.
To read the full episode transcript please see the Podcast Website.
About the Host:
Based in Los Angeles, CA, Jean Lawler is an attorney and mediator, focusing on commercial, insurance and civil litigation matters pending at the trial and appellate levels - wherever filed. She regularly mediates a wide variety of insurance, business, and tort matters, as well as federal ADA accessibility lawsuits re architectural barriers and websites. CIPP/US (Certified Information Privacy Professional) certified, Jean also mediates matters involving data breaches, ransomware, and cyber losses. She has mediated hundreds upon hundreds - thousands - of cases over the years with a myriad of issues. For a more detailed sampling of the types of mediations that she has conducted and participated in, both when in practice and as a full-time mediator, please refer to her web page detailing Representative Matters.
Prior to becoming a full-time mediator in 2017, Jean was a Senior Partner in a Los Angeles based litigation firm, representing corporations, professionals, non-profits, individuals, and insurers in a broad range of matters, at trial and on appeal - mediating hundreds upon hundreds of cases over the years. Her legal experience has been diverse and international, and she has a deep knowledge of the insurance industry, insurance policies and the various risks they insure against (primary, excess, reinsurance, program, surplus lines, London Market, and international insurers). She also served as a Managing Partner of her former law firm, at times chairing the firm’s Insurance Law, Cyber & Privacy Law, International Law, and Business & Real Estate Transactions practice groups and, ultimately, served her many clients as counselor and trusted advisor.
As she would tell you if asked: “I absolutely love what I do! I would be honored to serve as your Mediator or Arbitrator.”
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[intro music]
JEAN LAWLER:
Well, hello. How are you? It’s nice to be with you today. I’m Jean Lawler, I’m your host for the ROADS TO Resolution ~Closure ~Certainty podcast and YouTube videos. So, anyway, it's great to be here today. A couple of weeks ago, I had started a little mini series for the month here on insurance. In particular, insurance for people who don’t regularly practice insurance coverage, and for how it then can play out in mediations.
So, today, the third episode of this little mini series is going to be on a topic that can get very complicated, but I’ll try and keep it simple. It’s: Risk transfer. In other words…Who pays when you are faced with a lawsuit and there are multiple defendants and some may owe other defendants (or a defendant) contractual indemnity or have named a co-defendant as an additional insured on their policy–their insurance policy. Then how does this all play out, and what if they don’t go ahead and honor that obligation? So it's very interesting, and how it plays out is very important.
So the first thing that we’re going to do and look at here is: How the two ways work to transfer risk. And what we’re talking about is essentially contractual risk transfer, and so that would be in a contract situation where let’s say, Party B has agreed to indemnify Party A if something happens. And by indemnify I mean provide it with a defense and then pay whatever the settlement might be or judgment might be–if it's a liability for which B has agreed to protect A against. And then the other way is through additional insured status of Party A on Party B’s insurance policy–generally a general liability insurance policy, which is commonly referred to as a CGL.
So, here I made some little graphs and today instead of holding up a piece of paper, I’m posting it here so you can see this. Party A, in other words, the one who is going to be indemnified–generally for sake of examples–will be someone like a general contractor, a building owner, the lessor of a building, could be the developer along with the general contractor. It could be any business who hires vendors or uses vendors or has other business relationships for providing services or products, perhaps.
And then municipalities, they may be able to claim, or be entitled to indemnity or protection from others. And the others–which I’m calling Parties B–are entities and people such as subcontractors who would have entered into a contract with the general contractor or the developer. Perhaps a tenant who owes an obligation to a building owner or the lessor, if it's a subtenant. Vendors–if they’re dealing with a business or providing services.
And then ultimately, building owners and lessors and tenants may well have an obligation–an indemnity obligation to a municipality. Maybe the City or the County–If someone slips and falls on the sidewalk in front of a bank, maybe, and the bank needs to protect the City from those kinds of claims. They’re supposed to keep their sidewalk clear.
So that in a nutshell is what risk transfer involves. Again providing indemnity protection and then perhaps also providing additional insured status. You could have one without the other, but the way that they interplay with each other is very important.
So that said, let’s go back and let’s talk about then… Knowing that…How does it all work? Well it works in a way that is like a puzzle, I suppose you could say. And so figuring out the puzzle before you go into mediation or while you’re in litigation is really the key.
So here’s my little drawing on that. Let’s say you’ve got a claimant. We could use the slip and fall, for example, that I had started talking about before. So somebody slips and falls and they sue the Property Owner, the building owner, who is Party A. Now the building owner rents that property to a Bank and so the Bank is Party B, so the Property Owner turns to the Bank and says, “Hey, I didn’t do anything wrong and you’re supposed to take care of me and protect me in the event that there are any claims that fall within the scope our contract, our indemnity provision in the contract.” So A turns it over to B.
Now, there are those two ways I mentioned before–either indemnity under the contract or perhaps, B here, the Bank, has named the owner of the property as an additional insured on the Bank’s insurance policy–its general liability insurance policy. And those are the two ways. It’s kind of like part of a triangle–the two arms of the triangle. If you’re picturing this and listening to the podcast.
So let’s go to the contractual side–the indemnity side for a moment. Under that side, B, the Bank, owes A, the Property Owner, a defense to the lawsuit and owes the obligation to pay the claimant on behalf of the Property Owner. So either B pays or B’s insurer, the Bank’s insurer would pay on behalf of the Bank, and ultimately on behalf of A, the Property Owner. And so when B’s insurer pays, and I say B as "Party A" and "Party B", so when the Bank, in this case, Party B, the Bank’s insurer pays…If it’s just pursuant to the indemnity obligation then that payment is all within the Bank’s policy limits. So if it had a $1,000,000 liability policy and $100,000 was the settlement amount and the Bank had to pay for the Property Owner’s attorney, if they had separate attorneys and maybe that’s $10,000, that’s $110,000 that would be paid out as the Bank’s indemnity obligation to A, the Property Owner. To then…it really gets paid directly to the Claimant I suppose, except for the attorney fees. But, in any event, that all is within the policy limit so that $1,000,000 in policy limit is now worth–let’s see $110,000 less…so $890,000 for the next claim that might come along that would fall under that policy.
On the other hand, if the Bank had procured additional insured status for Party A--here the Property Owner--again under the Bank’s policy, then the Property Owner, Party A, would be an additional insured under the Bank’s CGL policy. That insurer would have defended Party A and that could have possibly been with the same attorney defending Party B, as long as there was no conflict between the two of them, or a separate attorney if necessary. And that insurer then would also pay on behalf of both A and B to get the case settled. And so in that case, the attorney fees would be outside of limits and it would not reduce the limits, because the duty to defend is included there and then the indemnity–that $100,000 settlement would be reducing the limits, so now the limits would be $900,000 that would remain.
So it's definitely better for Party B, whoever is agreeing to indemnify another person or entity to have that entity or person be named as an additional insured. It protects their available liability limit and just makes it cleaner.
If for some reason there was no indemnity…B, the Bank here in this example, refused to indemnify or its insurer refused to pay, then that would leave A, the Property Owner’s own carrier, defending and indemnifying the Property Owner and then probably looking back against the Bank for subrogation or the other insurer for indemnity or contribution in a coverage action of some sort. So, there you have it in a nutshell. That is risk transfer, and if you do have any questions about it–which it could go on and on for, you know, a whole half-day session on this–please feel free to reach out.
It’s great to see you here today. Thanks so much for joining and I’ll see you again. Bye Bye.
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