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Few cases in recent years have garnered as much attention or interest as the case of Engineering & Construction Innovations, Inc. v. L.H. Bolduc, Inc. In construction law circles, the case has become known simply as the“Bolduc” case. The reason the case is of so much interest is because it deals head on with a topic near and dear to every contractor and subcontractor in the state, namely the transfer of risk through the use of indemnity provisions and insurance.
The Bolduc case gained notoriety for the decision by the Minnesota Court of Appeals, which held that a lower tier subcontractor, Bolduc, who was found by a jury to have no fault for an accident that caused damage to an underground pipe was nevertheless liable to the subcontractor, ECI, for the damages because of a relatively broad indemnity provision in the subcontract. Not only did the Court of Appeals hold Bolduc liable to ECI for damages, but the Court of Appeals also found Bolduc’s insurer, Travelers, liable to ECI. Believing the Appellate Court’s decision to be unfair, Bolduc and ECI appealed to the Minnesota Supreme Court.
On January 23, 2013, the Minnesota Supreme Court reversed the Appellate Court and provided lessons for those contractors and subcontractors interested in that important topic: risk transfer.
The facts of Bolduc are relatively common. ECI, as subcontractor, and Bolduc, as a lower tier subcontractor, entered into a sub-subcontract whereby Bolduc was going to drive some sheet piles for ECI. The subcontract included an indemnity provision that provided: “[Bolduc] agrees to protect, indemnify, defend, and hold harmless ECI and Owner, to the fullest extent permitted by law and to the extent of the insurance requirements below, from and against [claims] arising out of injury to any persons or damages to property caused or alleged to have been caused by any act or omission of [Bolduc] …” The indemnity promise was then followed by the typical requirement to obtain insurance covering the indemnity: “[Bolduc] agrees to obtain, maintain and pay for such insurance coverage and endorsements as will insure the indemnity provisions”.
Bolduc’s commercial general liability insurance policy included a blanket additional insured endorsement that provided coverage to ECI “if, and only to the extent that, the injury or damage is caused by acts or omissions of you or your subcontractor in the performance of ‘your work’ to which the ‘written contract requiring insurance’ applies.” The additional insured endorsement also provided that that no additional insured status would apply “with respect to the independent acts or omissions” of the additional insured, here ECI.
ECI identified locations on the site where it wanted Bolduc to drive the sheeting. ECI subsequently noticed damage to an underground pipe. ECI determined that Bolduc had driven the sheeting through the pipe. ECI and Bolduc each faulted the other. Bolduc refused to repair the damage. ECI repaired the damage at a cost of $235,339.ECI tendered to Travelers, but Travelers refused the tender.
ECI Loses at Trial: Bolduc and Travelers are Not Liable
ECI then sued Bolduc alleging that Bolduc negligently drove the sheeting, caused the damage and was liable for the cost of repairing the damage. ECI claimed that Bolduc was liable to ECI citing the indemnity provision. ECI also sued Travelers directly for failing to honor the terms of Bolduc’s insurance policy, which ECI claimed should afford ECI coverage for the claim as an additional insured under Bolduc’s policy. The case was tried, and the jury found Bolduc not to have been negligent, and based on that result, thetrial court dismissed ECI’s claims against Travelers and Bolduc entirely.
ECI Wins on Appeal: Bolduc and Travelers are Liable
ECI appealed, and the Appellate Court reversed the trial court in a published opinion, Engineering & Construction Innovations, Inv. v. L.H. Bolduc Co., 803 N.W.2d 916 (Minn. App. 2011), holding that Travelers and Bolduc each were liable to ECI, notwithstanding the fact that the jury found Bolduc not to have been negligent. The Appellate Court enforced the risk transfer provisions in the subcontract, and also found that Travelers was liable to ECI as an additional insured on Bolduc’s policy.
ECI Loses at the Supreme Court: Bolduc and Travelers are Not Liable
Completing the circle, the Minnesota Supreme Court reversed the Court of Appeals and upheld the trial court. First, dealing with ECI’s claim against Travelers, the Supreme Court determined that the additional insured endorsement afforded no additional insured status “with respect to the independent acts or omissions” of ECI. Based in part on the existence of this language, and the fact that Bolduc was found not negligent to the jury, the Supreme Court found that ECI was not entitled to coverage as an additional insured on Bolduc’s policy. The Court determined that the Traveler’s policy provided coverage to ECI as an additional insured “only in instances of ECI’s vicarious liability for Bolduc’s negligent act or omissions.” (A11-1059, at 20) Because ECI was found not to have been negligent, there was no actionable conduct for which ECI could be vicariously liable and, thus, no coverage for ECI on the Traveler’s policy.
The Supreme Court next analyzed ECI’s contractual indemnity claims against Bolduc, and determined that the indemnity provision violated the Minnesota anti-indemnity statute, Minn. Stat. § 337.02, which renders unenforceable any indemnification agreement in a construction contract except to the extent “the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission. . . of the” subcontractor. The Supreme Court stated that § 337.02 “renders unenforceable indemnification agreements in which a party assumes responsibility to pay for damages that are not caused by the party’s own wrongful conduct.” However, the Supreme Court also recognized that promises to purchase insurance for the benefit of others are enforceableunder Minn. Stat. § 337.05, and that if a subcontractor fails to purchase insurance as specified in a contract, the subcontractor can become liable for failing to purchase that insurance.
The Supreme Court first found that Minn. Stat. § 337.02 barred ECI from enforcing the contractual indemnity agreement against Bolduc because a jury had found Bolduc not to have been negligent. The Supreme Court then analyzed whether ECI could nevertheless hold Bolduc responsible for failing to procure insurance for the indemnity. The Supreme Court held that the Traveler’s policy did not provide insurance for ECI as an additional insured, so there could be no breach of contract on Bolduc’s part with respect to ECI’s status as an additional insured under the Traveler’s policy. And, the Supreme Court determined that ECI had waived any claim that Bolduc should have purchased a policy different than the Traveler’s policy purchased by Bolduc. Thus, ECI could not hold Bolduc responsible.
Unfortunately, the Bolduc case raises as many questions as it attempts to resolve. While its full ramifications will be worked out in subsequent litigation, there are some immediate lessons and reminders that construction industry participants can take from the decision, which are listed below.
Lesson 1: Read and Understand Indemnity Agreements
This is a lesson all construction industry participants should know, but routinely ignore – at their peril. Whenever a contract contains an indemnity provision requiring a contractor to indemnify another in circumstances other than the contractor’s own negligence or fault, the contractor needs to be on the look out for another provision that requires the contractor to purchase and carry specific insurance to “insure the indemnity” provision. If the contractor does not have the required insurance, then it faces exposure on a claim that the contractor failed to purchase insurance to “insure the indemnity” provision and, therefore, is liable to the fullest extent of the indemnity provision. Without insurance actually insuring the broad indemnity, the contractor who mistakenly promised that it had insurance could face ruinous liability.
Any questions or concerns about the meaning or enforceability of an indemnity provision, whether it is appropriate or should be signed, should be directed to competent and knowledgeable professionals before the contract is executed.
Lesson 2: Read and Understand Insurance Specifications
The contract at issue in Bolduc broadly specified the insurance that Bolduc was to procure to insure the indemnity provision. The issue of whether Travelers’ policy satisfied the broad insurance provision in Bolduc’s contract was not decided. Instead, the Supreme Court Minnesota passed on that issue by citing ECI’s failure to raise in the trial court any claim that the Traveler’s policy did not meet the contract specifications.
Those seeking to enforce indemnity provisions should pay extra attention to the issue of whether the insurance procured by the contractor promising indemnity actually satisfies that contractor’s obligation to procure insurance to “insure the indemnity.” Contractors and subcontractors owing obligations to “insure the indemnity” would be well advised to thoroughly review their insurance policies and their additional insured endorsements, to understand whether they have in fact procured sufficient insurance. Regrettably, the Bolduc decision also raises the specter of more risk for insurance professionals. Industry participants will no doubt consult with their insurance advisors to determine whether their indemnity promises have been insured, but with the ever changing insurance decisions coming from Minnesota courts, it will be difficult for insurance professionals to predict whether the contractor’s existing policies match the required contractual indemnity coverage.
If the insurance is simply not reasonably available on the market, then the contractor should inform the other party, or make sure the contract contains a written exception, such as a strike through or exclusion, indicating that the insurance is not available in the market. The contractor should support a claim of non-availability with appropriate backup support, which may include correspondence from the contractor’s insurance broker or pricing sheets indicating the additional, perhaps unreasonable, cost of obtaining the insurance to “insure the indemnity.” If the contractor does these things, the contractor may not owe indemnity. See Minn. Stat. § 337.05, subd. 3.
Lesson 3: Adopt Procedures for Confirming Compliance with Insurance Specifications
A standard procedure for discerning compliance with insurance specifications involves reviewing certificates of insurance, which typically have basic information regarding the insurance policy, and which name who the additional insureds are to be. Contractors owing obligations to procure insurance to “insure the indemnity” should discuss their insurance with the party seeking such insurance so that both are satisfied that the proper insurance is in place. This confirmation could include, without limitation: (a) sharing policy language; and (b) negotiation of additional costs to secure any additional insurance beyond the contractor’s standard insurance to comply with the language.
To reduce later arguments as to whether the contractor purchased the proper insurance, the contractor could provide a specific receipt and waiver form whereby the other party acknowledges that the insurance procured by the contractor satisfies the contract requirements. A more rigorous procedure in which the party entitled to indemnification specifically acknowledges in writing and confirms that the contractor’s insurance meets the specification would reduce future disputes. Simply supplying a certificate of insurance showing insurance at variance from the specified coverage or the other party’s failure to insist upon evidence of insurance will not excuse a contractor from complying with an agreement to insure. See Minn. Stat. § 337.05, subd. 5.
Commonly, additional insured endorsements are used as part of a strategy to “insure the indemnity.” Another strategy is to confirm the existence of contractual liability coverage in a general liability policy. With respect to additional insured endorsements, there are varied additional insured endorsements typically procured to aid in “insuring the indemnity”, with many insurers having their own custom forms. These additional insured endorsements should be reviewed to determine whether they are appropriate for a particular contract. Purchasing the wrong additional insured endorsements could expose a contractor to a failure to procure insurance claim and the associated risk under a broad form indemnity provision. A common mistake is where the contractor’s additional insured endorsement provides coverage to the additional insured for “ongoing operations”, but not “completed operations.” Construction contracts commonly require insurance for “completed operations”. Lack of the specified completed operations additional insured endorsements can expose the contractor to significant uninsured exposure and indemnity liability for failing to provide the proper insurance, especially in the case of construction defect claims that are discovered after substantial completion.
Lesson 4: Be Cognizant of Fault
The Bolduc case is probably somewhat unique in that the sub-subcontractor, who was without question implicated in the claim, was determined by a jury not to have been negligent. As a practical matter, it is a very strange case indeed that a sub-subcontractor so clearly involved in the matter in question would be exonerated by a jury. This is another important lesson from Bolduc: jury results can be very unpredictable.
If the subcontractor had been held to be minimally at fault, the entire analysis of Bolduc likely would likely have changed and ECI would have obtained some, at least proportionate, recourse from Bolduc and Travelers. In the vast majority of construction related property damage cases, those implicated are typically found to have at least some minimal level of fault. It remains to be seen whether Bolduc will have any ramifications on cases where the contractor owing indemnity obligations has at least minimal fault.
Lesson 5: Availability of Contractual Liability Coverage Still an Open Issue
What wasn’t decided by Bolduc, however, may prove to be the most important ramification for future claims. There were at least two routes by which ECI could have obtained coverage and attempted to enforce its indemnity from Bolduc.One way was for ECI to seek coverage as an additional insured, and the Court found this way blocked because the additional insured endorsement required some finding of fault on the part of Bolduc. The second way was for Bolduc to seek coverage for itself under its own CGL policy.
Notably, the parties did not litigate, and therefore the Supreme Court did not address, what coverage Bolduc had from its own carrier in regard to ECI’s claim for indemnity. The contractual liability coverage in most CGL policies covers the contractual obligation of the insured when it assumes the tort liability of another. In other words, the CGL’s contractual liability coverage covers indemnity obligations, even those indemnity obligations in which the contractor assumes the fault of another. Thus, Bolduc could have made a claim under its CGL policy that it owed ECI insurance coverage for its indemnity promise, even if Bolduc was not at fault. Most industry observers were hoping that the Supreme Court would decide if contractual liability coverage would extend to situations in which the contractor had absolutely no fault – only a contractual obligation to indemnify. But, that answer will have to await another case because this issue was not addressed by the parties in their underlying litigation. As a result, the Court unfortunately (but understandably) declined to address the issue.
Lesson 6:Review your Policies and Contracts
The Bolduc case shows that standard contract terms can have unintended consequences. Based on this new holding, contractors and subcontractors should review with professionals their standard contracts and their insurance programs to ensure that both are aligned.
This discussion is generalized in nature and should not be considered a substitute for professional advice.© 2013 FWH&T