Contractual Risk Transfer TPPA LEGAL SEMINAR November 2-3, 2006

1. 1 Contractual Risk Transfer TPPA LEGAL SEMINARNovember 2-3, 2006 Susan R. Groce Assistant City Attorney Austin Energy

2. 2 Contractual Risk Transfer 1. Contractual Indemnity Agreements 2. Enforceability of Indemnity Agreements 3. Other Protective Contractual Devices 4. Practice Pointers

3. 3 1. Contractual Indemnity Agreements Indemnity Provisions: Shift the Risk of Tort Liability for One Party�s Conduct, in Whole or in Part, to the Other Party to the Contract Compensate for Damage, Loss or Injury Suffered Usually in the Form of Repayment of Monies Paid Significance of Indemnity and Insurance Contractual Promises does not arise until a Loss or Claim Occurs

4. 4 1. Contractual Indemnity Agreements Broad Indemnitor Assumes an Unqualified Obligation to Hold the Indemnitee Harmless for All Liability Associated With the Subject Matter of the Agreement, Regardless of Which Party Was Actually at Fault Intermediate Indemnify the Indemnitee except when the Indemnitee Is �Solely Negligent� Limited Restricted to a Narrow Vicarious Liability Situation Sometimes Referred to As a Comparative Fault Indemnification Agreement

5. 5 2. Enforceability of Indemnity Agreements Frequent Source of Litigation and Subject to Close Scrutiny in Law Public Policy: Freedom to contract vs. Overreaching against the less culpable Party Effective Transfer of Risk Involves a Critical Review and Understanding of the Enforceability of the Indemnity Provision Evaluation of Enforceability is a Four Step Process (Fifth Step required for Municipal Indemnities)

6. 6 2. Enforceability of Indemnity Agreements Step One: Does the Liability �Arise Out of� the Subject Matter of the Clause? If NO, the Indemnity is Disallowed; If YES, Continue Analysis Intent is to Indemnify for Problems Arising From the Subject Matter of the Contract, Not for an Independent or Unconnected Reason

7. 7 2. Enforceability of Indemnity Agreements Step One Analysis The facts and circumstances surrounding the injury, property damage, or claim must be carefully examined to determine whether they fall within the scope of the indemnification obligation. Example: Did the injury occur while the scope of work under the contract was underway? Example: Did the injury arise out of services that were within the contractual scope of work?

8. 8 2. Enforceability of Indemnity Agreements Step Two: Is the Indemnitee Seeking Indemnity for Its Own Negligence? If NO, the Indemnity is Allowed; If YES, Continue Analysis Express Negligence Rule provides that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms. Risks must be expressly identified to transfer the Risk. The word �Negligence� must be used when referring to the conduct of the Indemnitee which will give rise to the Indemnification Obligation.

9. 9 2. Enforceability of Indemnity Agreements Step Two Analysis: Is the risk that is the cause of the damages expressly identified? Examples of the types of claims listed in indemnification provisions : Negligent act; error or omission; sole, concurrent, joint, active, passive, strict or gross negligence; negligence per se; strict liability; condition of property or its premises; latent defects, defects in materials, workmanship or design; workers compensation claims; disability act claims; failure to comply with any of the provisions of the contract document.

10. 10 2. Enforceability of Indemnity Agreements Step Three: Is the Indemnification Provision Sufficiently Clear or Definite To Meet the Courts� Standard for Enforceability? If NO, the Indemnity is Disallowed; If YES, Continue Analysis In addition to meeting the requirements of the Express Negligence Test, the Conspicuousness Rule requires that an indemnification provision must be conspicuous in order to be enforceable.

11. 11 2. Enforceability of Indemnity Agreements Step Three Analysis: Is the indemnification provision clear, definite and conspicuous? Texas Business and Commerce Code contains the standard for determining conspicuousness for indemnity agreements and releases that relieve a party in advance of responsibility for its own negligence.

12. 12 2. Enforceability of Indemnity Agreements The Conspicuous Rule (Step Three continued): Tex. Bus. & Com. Code Ann. �1.201(10) (Tex. UCC): "Conspicuous," with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it. Whether a term is "conspicuous" or not is a decision for the court. Conspicuous terms include the following: (A) a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and (B) language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language.

13. 13 2. Enforceability of Indemnity Agreements Step Four: Does State�s Anti-Indemnity Statute, If Applicable, Allow Indemnification Provision to Be Enforced? If NO, the Indemnity is Disallowed; If YES, Indemnity Allowed

14. 14 2. Enforceability of Indemnity Agreements Step Four Analysis: Texas Anti-Indemnity Statutes: The Oil and Gas indemnity statues that pertain to a well for oil, gas, or water or to a mine for a mineral are contained in �127.003 Tex. Civ. Prac. & Rem. Code The Architects and Engineers indemnity statues that pertain to liability of a registered architect, registered engineer (or their agents) are contained in �130.003 Tex. Civ. Prac. & Rem. Code.

15. 15 2. Enforceability of Indemnity Agreements Texas Anti-Indemnity Statutes: For liability for damage that arises from: (A) personal injury or death; (B) property injury; or (C ) any other loss, damage, or expense that arises from personal injury, death, or property injury. (Continued)

16. 16 2. Enforceability of Indemnity Agreements �and (for architects, registered engineer or their agents, servants, or employees) that is caused by or results from: (A) defects in plans, designs, or specifications prepared, approved, or used by the architect or engineer; or (B) negligence of the architect or engineer in the rendition or conduct of professional duties called for or arising out of the construction contract and the plans, designs, or specifications that are a part of the contract.

17. 17 2. Enforceability of Indemnity Agreements �and (for promises affecting an agreement pertaining to a well for oil, gas, or water or to a mine for a mineral) if it purports to indemnify a person against loss or liability for damage that: Is caused by or results from the sole or concurrent negligence of the indemnitee, his agent or employee, or an individual contractor directly responsible to the indemnitee.

18. 18 2. Enforceability of Indemnity Agreements Fifth Requirements for Municipal Contracts: Funding Requirement Avoiding the problem of an unconstitutional �debt� Municipal utility is generally required to provide an indemnity in power plant construction or operation contracts and supply or service contracts, and it is beneficial to have a mutual indemnity with other entities with which it shares facilities. Include the following: �This contract is payable only and solely from available revenues of the Electric Utility. Notwithstanding the City�s intent to pay for the goods or services rendered pursuant to this contract from such revenues, this contract does not create an encumbrance, pledge, or lien on such revenues.�

19. 19 2. Enforceability of Indemnity Agreements Fifth Requirements for Municipal Contracts: Funding Requirement Example: �The City�s obligations under this Contract, expressly including all indemnity obligations, are payable solely from current electric operating and maintenance funds of the City�s Electric Utility Department appropriated and available for this purpose in accordance with City of _____Charter Article __. All payment obligations of the City under this Contract are special limited obligations of the City, payable solely from the revenues of the Electric Utility Department and not from any tax revenues of the City, and this Contract does not constitute an indebtedness or a loan of the credit of the State, the City or any subdivision of the State within the meaning of any constitutional or statutory provisions. Neither the faith and credit nor the taxing power of the State, the City or of any political subdivision thereof is pledged to the payment obligations of the City under this Contract.�

20. 20 3. Other Protective Contractual Devices Additional Insured Covered Under the Policy Through an Affirmative Act of the Named Insured Coverage Is Provided Through an Additional Insured Endorsement No Broker Consulted No Premium Paid Provided As Part of Business Arrangement

21. 21 3. Other Protective Contractual Devices Additional Insured by Endorsement Indemnitee becomes an Insured Defense Obligation Is Triggered Directly �Duty to Pay� Obligation Is Triggered Direct Communication With the Carrier Representative Additional Insured Status May Provide More Financial Security

22. 22 3. Other Protective Contractual Devices Waiver of Subrogation Provision Subrogation common law doctrine attempts to allocate liability to the party responsible for the injury or damage Example of the effect of a Waiver of Subrogation: When an insured design-builder agrees to give up the right of its insurer to seek recovery for a third party (including the client) for the amount it paid to the policyholder for a loss caused by that third party.

23. 23 3. Other Protective Contractual Devices Indemnification by Subcontractor Provision Example: �Consultant further agrees to require all subcontractors to agree to a similar indemnity of Utility and limitation of Utility�s liability as provided under Paragraphs __ and __ hereof relating to any portion of the Work to be performed by the subcontractor. Consultant, upon failure to require such indemnity or limitation from subcontractor, agrees to INDEMNIFY, SAVE AND HOLD HARMLESS Utility from any liability arising from such failure.�

24. 24 3. Other Protective Contractual Devices DTPA Waiver Provision Example: �Consultant waives its rights and releases Utility from liability or any claim which might arise under the Texas Deceptive Trade Practice-Consumer Protection Act or any similar statute in the state in which the Work is performed, if other than Texas, for Consultant�s performance hereunder.�

25. 25 3. Other Protective Contractual Devices Provision requiring receipt of Approved Certificate of Insurance (In bold) Example: �NO WORK MAY COMMENCE UNTIL UTILITY ACKNOWLEDGES RECEIPT OF AN APPROVED CERTIFICATE OF INSURANCE. UTILITY RESERVES THE RIGHT TO IMMEDIATELY TERMINATE THIS CONTRACT IF CONSULTANT�S INSURANCE IS UNACCEPTABLE.�

26. 26 3. Other Protective Contractual Devices Provisions pertaining to �claims-first-made� basis coverage �For any coverage purchased on a �claims-first-made� basis, Consultant agrees to maintain said coverage in force for a minimum of five years after expiration, cancellation or termination of this Agreement or to modify such coverage so as to include an extended discovery period of no less than five years thereafter. All retroactive date (s) of such coverage shall at all times be listed with a date up to or prior to the inception of the services provided to Utility.� �In its reasonable discretion, Utility may also require Consultant to purchase upfront tail coverage, with duration of no less than five years following the expiration, cancellation or termination of this agreement.�

27. 27 4. Practice Pointers How to Read the Indemnity Clause Indemnity Agreements Come in All Shapes and Sizes Distill the Paragraph into Its Most Basic Terms Delete or Strike Through Word Equivalents Look for Emboldened and/or Capitalized Language Look at All Parts of Contract

28. 28 4. Practice Pointers Certificates of Insurance Not an Additional Insured Endorsement Does Not Automatically Mean a Party Is an Additional Insured Under the Listed Policy Certificate of Insurance Is Completely Ineffective to Create Coverage That Does Not Exist

29. 29 4. Practice Pointers Legal Practitioners should consider the use of Exculpatory Clauses* * Presenter Makes No Representation or Warranty, Express or Implied, regarding the accuracy of the information contained in this Presentation. Participants should independently verify the accuracy of any information contained herein, and the information contained herein may not apply to all legal or factual situations.

30. 30 ANY QUESTIONS?