August 1 2014, By: Richard P. Byrne, Esq.
Although risk transfer is sometimes viewed as analogous to questions concerning a party’s potential liability and exposure, the reality is that risk transfer – perhaps, more aptly described as liability transfer – is the true “money game.” A successful transfer of a party’s defense and indemnification at the start of a lawsuit, on a practical and substantive level, is more valuable than ultimately prevailing on summary judgment or at trial.
As a result, practioners should pay careful attention to the prospect of risk/liability transfer from the start. Generally working to the benefit of an “upstream” party (e.g., owner/general contractor, retailer or commercial landlord), risk transfer takes the form of contractual indemnity provisions and agreements to procure additional insured coverage. These are independent paths to transfer the liability of a party to that of a “downstream” entity ( e.g., subcontractor, manufacturer, commercial tenant) and/or their insurer. The paths are independent of one another and open separate lines of inquiry which the practitioner must analyze and flow chart once in possession of all the relevant contracts and insurance policies.
In the case of contractual indemnity provisions, for example, issues must be vetted with respect to enforceability and insurability. In turn, with prospective additional insured status, questions arise regarding the scope of coverage and particular limitations present in the policies of insurance which may trim, if not preclude, coverage depending on the circumstances.
The timing of tenders is also an important consideration. Aggressiveness and persistence are generally rewarded, particularly since initial tenders – absent follow-up – are oftentimes ignored. (In the case of an insurer, though, such dilatory tactics may actually provide the practitioner with an ultimate advantage since coverage defenses may be waived due to an untimely declination.)
Unresolved issues of risk transfer in a multi-party case can stall, if not paralyze, a settlement dialogue. Declaratory judgment actions can be an effective mechanism to force risk transfer issues to the forefront and, possibly, to resolution, in advance of the underlying action. Absent that occurring, however, it is advisable to negotiate or mediate the issues upfront and secure an agreement on allocation before tackling settlement of the plaintiff’s claim. Nothing can be more deleterious to a matter than to have the plaintiff and their counsel sequestered at mediation, without even an opening offer conveyed by day’s end, while the defendants debate and argue risk transfer and appropriate percentages of contribution.
All of this underscores the importance of investing the time upfront to make sure that the contractual obligations attendant to risk transfer are adequately and appropriately spelled out in
the contract documents. “Upstream” parties should ensure that their indemnification provisions are well-drafted in purpose and scope, and define the indemnitees with particularity. The same holds true with the language regarding the procurement of additional insured coverage and the provision of documentation to reflect that such coverage has been obtained. Here, consideration should be given to the general ineffectiveness (but regular employment) of Certificates of Insurance. As many practitioners have come to learn, such certificates may have little value and often do not comport with the insurance coverage they purportedly represent. Thus, while somewhat more burdensome, a threshold effort of securing the promisor’s policy as the proof of coverage obtained (ideally, with the “upstream” parties specifically named as additional insureds by way of endorsement) is always the best practice.
The bottom line is that the careful planning and execution of a risk transfer strategy can wholly shift the burden of litigation at its inception. The ultimate victory is particularly satisfying because the success is directly tied to the practitioner’s vision and preparation.
Richard P. Byrne, Esq., is a member of NAM’s (National Arbitration and Mediation) Hearing Officer Panel and is available to arbitrate and mediate cases in the NY Metro area and throughout the United States. He was named one of the Top 3 Mediators in the U.S. by the 2015 Best of the National Law Journal Annual Reader Rankings Survey, and was voted a Top Ten Mediator in New York State by the New York Law Journal Reader Rankings Survey in 2014 and 2015. Mr. Byrne is Co-Managing Partner of L’Abbate, Balkan, Colavita & Contini, LLP.,in Garden City, N.Y.
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For any questions or comments, please contact Jacqueline I. Silvey, Esq. / NAM General Counsel, via email at email@example.com or direct dial telephone at 516-941-3228.