Nevada Indemnity and Additional Insured Endorsement Law

NEVADA

Common Law Indemnity in Nevada

            Noncontractual Indemnity

In Nevada, the law of indemnity is based upon the common law and contract law.  Nevada has not followed the trend in many states to legislate against various forms of risk transfer via indemnification clauses.[1] [2]

Under most claim analysis, we are confronting parties who have no contractual relationship and thus are looking at the equitable remedy of noncontractual or implied indemnity which permits a defendant to seek recovery from other potential tortfeasors whose negligence or wrongdoing caused the injured party’s harm.  Doctors Company v. Vincent, 120 Nev. 644, 650, 98 P.3d 681, 686 (2004).  Nevada courts impose a right of noncontractual indemnity when the indemnitee has been required to pay damages caused by a third party, the indemnitor.  Rodriguez v. Primaddona Company, LLC, ___ Nev. ___, 216 P.3d 793, 801 (2009); Black & Decker v. Essex Group, 105 Nev. 344, 345, 775 P.2d 698, 699 (1989)(“when one party is subject to liability, which, as between that party and another, the other should bear, the first party is entitled to full indemnity.”)  Nevada adopts the concept that noncontractual indemnity is appropriate when there is an unfairness which resulted when one party, who did nothing wrong, is held liable for the loss of the plaintiff or claimant which was caused by another party.  Id. Passive negligence does not establish active wrongdoing for purposes of equitable indemnity.   Doctors Company, 120 Nev. at 654, 98 P.3d at 688.  “’The right of indemnity rests upon a difference between the primary [active] and the secondary [passive] liability of two persons, each of whom is made responsible by the law to an injured party.’  The difference between primary and secondary liability depends on a difference in the character or kind of wrongs that cause the injury and in the nature of the legal obligation owed by each of the wrongdoers to the injured person.”  Doctors Company, 120 Nev. at 654, 98 P.3d at 687 – 688 citing Black & Decker v. Essex Group, 105 Nev. 344, 345, 775 P.2d 698, 699 (1989) (quoting Tromza v. Tecumseh Products Company, 378 F.2d 601, 605 (3d Cir.1967)).

This noncontractual indemnity remedy is available when the defendant has extinguished its own liability through settlement or judgment.  Doctors Company, 120 Nev. at 651, 98 P.3d at 686.  The elements of proof for one seeking equitable indemnity are:

(1)   Indemnitee has discharged a legal obligation owed to a third party;

(2)  The party from whom it seeks liability also was liable to the third party; and

(3)  As between the claimant and the party from whom it seeks indemnity, the obligation ought to be discharged by the latter.[3]

Furthermore, Nevada courts do not permit parties to proceed against just any other party for equitable indemnity.  There must be some nexus or special relationship between the indemnitee and indemnitor.  Rodriguez, 216 P.3d at 802 [“We adopted the warning found in Pender v. Skillcraft Industries, Inc., 358 So.2d 45, 47 (Fla.Dist.Ct.App.1978), that implied indemnification ‘should not be construed as permission to open a floodgate for cross-claims seeking indemnification where there is no connection between the cross-claimant and the party from whom indemnification is sought.’  Piedmont Equip. Co., 99 Nev. at 527-28, 665 P.2d at 259 (quoting Pender, 358 So.2d at 47).]

When a matter is settled in good faith, NRS 17.245 insulates the settling party from both claims for contribution and equitable indemnity.  However, when a court in Nevada is determining whether a settlement is made in good faith for purposes of a discharge from further liability, the relative culpability of the parties to an implied indemnity action is something the court should consider in making its good faith determination.  Doctors Company, 120 Nev. at 655, 98 P.3d at 688.  In pertinent part, NRS 17.245 states:

      1.  When a release or a covenant not to sue or not to enforce judgment is given in good faith to one of two or more persons liable in tort for the same injury or the same wrongful death:

      (b) It discharges the tortfeasor to whom it is given from all liability for contribution and for equitable indemnity to any other tortfeasor.

      2.  As used in this section, “equitable indemnity” means a right of indemnity that is created by the court rather than expressly provided for in a written agreement.

            Contractual Indemnity

Contractual indemnity arises when two parties in a contract agree that one will reimburse the other for liability resulting from the former’s work.  Medallion Dev. v. Converse Consultants, 113 Nev. 27, 33, 930 P.2d 115, 119 (1997), superseded by statute on other grounds as stated in Doctors Company v. Vincent, 120 Nev. 644, 654, 98 P.3d 681, 688 (2004).  Nevada in an unpublished decision has followed California law in holding that the “scope of a contractual indemnity clause is determined by the contract and not ‘the independent doctrine of equitable indemnity.’   Rossmoor Sanitation, Inc. v. Pylon, Inc., 532 P.2d 97, 100 (Cal.1975).”  Valucar v. Coachmen Recreational Vehicle Company, 2009 WL 3191715 (Nev. 2009) (Unpublished slip copy, may not be cited for legal precedent SCR 123).

In workman’s compensation matters, the State Industrial Insurance Act, NRS 616.265 voids any indemnity provision that changes or modifies a liability created by the Act.  Corrao Const. Co., Inc. v. Curtis, 94 Nev. 569, 571, 584 P.2d 1303 (1978).  However, an employer is liable in a third-party indemnity action when an express indemnity contract exists between an employer and a third-party.  American Federal Saving Bank v. Washoe County, 106 Nev. 869, 802 P.2d 1270 (1990).  In fact, in implied contractual indemnity cases, the employer may have liability.  In Nevada Power v. Haggerty, the Nevada Supreme Court implicitly indicated that where there is an independent duty owed by the employer to a third-party, such as with Nevada’s overhead power line statutes (NRS 455.200, et. seq.), there could be implied contractual indemnity.  See NEVADA POWER CO. v. HAGGERTY: THE NEVADA SUPREME COURT'S EXPANSION OF THE INDEPENDENT DUTY DOCTRINE, Sharon Steen, 1 N.L.J. 289 (2001).

Implied contractual indemnity are governed by the same principles as those that govern noncontractual or equitable indemnity.  Medallion Dev. v. Converse Consultants, 113 Nev. 27, 33, 930 P.2d 115, 119 (1997), superseded by statute on other grounds as stated in Doctors Company v. Vincent, 120 Nev. 644, 654, 98 P.3d 681, 688 (2004).  Thus, the line of cases discussing equitable indemnity are applicable to implied contractual indemnity.  See Black & Decker v. Essex Group, 105 Nev. 344, 775 P.2d 698 (1989); Reid v. Royal Insurance Co., 80 Nev. 137, 390 P.2d 45 (1964) and Piedmont Equip. Co. v. Eberhard Mfg., 99 Nev. 523, 528, 665 P.2d 256, 259 (1983). 

It is unclear whether claims of implied contractual indemnity are discharged with a good faith settlement.  See Insurance Company of the West v. Gibson Tile Company, Inc., 122 Nev. 455, 466, 134 P.3d 698, 704 - 705 (2006)(Stating that “a good-faith settlement only immunizes the settling party from claims of contribution and noncontractual, i.e., implied, indemnity.”)

In Calloway v. City of Reno, 113 Nev. 564, 578, 939 P.2d 1020, 1029 (1997), implied indemnity theories were held not to be viable when the parties had entered into an express indemnity agreement.  Thus, the Calloway court concluded that “[w]hen parties affirmatively deal with the question of indemnity in a written contract, it is fair to conclude that they intended what was expressed in their agreement, not that some common law rule should govern their rights and liabilities. Booth-Kelly Lumber Co. v. Southern Pacific Co., 183 F.2d 902, 906-07 (9th Cir.1950).”

Additional Insured Issues in Nevada

            In the world of contractual risk transfer, drafters of contracts must be vigilant regarding requiring additional insured endorsements.  When an indemnity provision in Nevada exceeds what the law permits or does not meet the Court’s “clear and unequivocal” standard of review, an indemnity clause could be held unenforceable.  Accordingly indemnitees will usually as a back-up require they be made additional insureds under the indemnitor’s liability policies.

For the last several decades, “additional insured coverage” has become a significant tool for controlling liability insurance costs on large commercial ventures, particularly in the construction industry setting.  This additional insured coverage also has significance in the commercial real estate lease arena and is utilized extensively in retail establishments. 

Additional insured coverage is accomplished through the attachment of a standard endorsement to a commercial general liability (“CGL”) policy.  The Insurance Services Office (“ISO”) has created over the years standard form additional insured endorsements.  Essentially all additional insured (“AI”) coverage endorsements have the same basic coverage grant extending coverage for the additional insureds’ liability arising out of (1) the named insured’s operations, (2) premises leased to the named insured, or (3) the named insured’s product sold in the regular course of the additional insured’s business.

Needless to say maintaining additional insured coverage has become an integral part of construction risk management.  Additional insured coverage means that a general contractor or developer can be insured under a subcontractor’s liability policy and this type of coverage can eliminate or reduce the general contractor’s or developer’s “out-of-pocket” expenses for third-party claims.  It may also have the salutary effect of reducing premiums when the general contractor’s or developer’s own insurer appreciates that additional insured endorsements have been secured.

While additional insured endorsements have a great deal of variety in their drafting, as a general rule an additional insured is an insured like any other insured and is entitled to a defense and indemnity from the insurer according to the terms and conditions of the policy issued to the subcontractor.  Courts have confirmed the difficult duties of good faith and fair dealing between insurers issuing AI endorsements and those additional insureds.

Pragmatically, as often seen in complex constructional defect litigation, the AI carriers don’t really stand up to the plate initially in providing a defense through their own selected defense counsel.  Instead, they sit on the sidelines allowing the general contractor/developer CGL carriers to carry out the defense and then through separate AI counsel negotiate how much they will contribute to defense costs at or near the end of the litigation.

Additional Insured Status

One of the hottest areas of litigation is in the world of construction defect claims where additional insured endorsements have been issued.  Real estate developers and general contractors require their subcontractors to be covered by a policy of comprehensive, commercial general liability insurance.  The subcontract normally requires the subcontractor to obtain an additional insured endorsement naming the developer or general contractor as an insured on the subcontractor’s CGL policy.

Through a “blanket” endorsement or specific additional insured endorsement, the developer or general contractor is provided coverage under the pertinent policy by being added as either a “named insured” or an “insured.”

Developers and general contractors can be exposed to significantly large claims in construction defect litigation for property damage and/or bodily injury claims.  The general contractor or developer finds itself in this predicament even though it is only passively at fault and did nothing actively to contribute to the injury.  In fact in some states like California, developers find themselves in a situation where they can be held strictly liable for construction defects caused by the acts or omissions of their subcontractors.[4] 

From a risk transfer management basis, the general contractor’s risk could be transferred by means of an indemnity clause in the subcontract agreement.  But as the prior section demonstrates, the indemnity tool has proved to be imperfect.  Courts and legislatures tend to be unfavorably disposed to indemnification agreements due to unequal bargaining positions and the fact there is a disincentive for the indemnitee to be vigilant in work-place safety.  Due to the anti-indemnity sentiment there have been enacted in 41 states some form of an anti-indemnity statute.  Furthermore, various courts have imposed rules of strict construction against indemnification for an indemnitee’s own negligence.[5]  Strict construction is followed everywhere but in Alaska, Massachusetts, Nevada, New Hampshire and Virginia.[6]  Additionally, even if the general contractor/developer has a strong indemnity agreement and even if it is covered by the CGL policy of the subcontractor, the indemnitee has no direct rights in that subcontractor/indemnitor’s policy.  The general contractor/developer is not an insured, simply a claimant.  The general contractor/developer is required to first go to court to obtain a judgment against the indemnitor before he can go after the insurance coverage.[7]

The most common AI endorsement form is issued by Insurance Services Office (“ISO”) form CG 20 10.  The basic form that came about in 1985 is CG 20 10 11 85.  This CG 20 10 11 85 due to the manner in which it has been interpreted is often called out for in contract provisions to render a general contractor or developer as an additional insured under a subcontractor’s liability insurance policy.  That CG 20 10 11 85 endorsement states:

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 work” for that insured by or for you. 

This type of coverage which is written on an occurrence basis in the CGL policy provides the general contractor or developer with liability coverage for the work of the subcontractors.[8]  The last dependent clause in the above section starting with “but only” has been construed to disallow the additional insured from securing blanket coverage under the subcontractor’s liability policy for liability that is not related to the subcontractor’s work on the project in question.[9]

The best aspect of CG 20 10 11 85 was the fact that it provided coverage for completed operations.  However, the 1993 version of the ISO CG 20 10 endorsement limited the coverage to “ongoing operations” of the subcontractor and that language has been interpreted as excluding coverage for completed operations since the issuance of that endorsement form.[10]

In Jaynes Corporation v. Zurich American Ins. Co., 2007 WL 2141611 (C.A. 9(Nev.))(Slip Copy), in determining the obligations of the parties under an AI endorsement, the Court required Zurich to indemnify and defend Jaynes for Jayne’s own negligence.  This endorsement contained a provision that Jaynes would be an additional insured “only with respect to liability arising out of [Las Vegas Electric’s} ongoing operations performed for that insured.”  Id. at p. 2.  The Court found the operations were still ongoing and thus Jaynes remained covered an additional insured.

Another form used by ISO is CG 20 09 11 85 which is an endorsement supposedly used when contractual liability coverage is not being provided to the named insured.  This widely used additional insured endorsement CG 20 09 11 85 excludes coverage for completed operations as stated as follows:

This insurance does not apply to:

(2)   “Bodily injury” or “property damage” occurring after:

(a)   all work on the project (other than service, maintenance or repairs) to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed; or

(b)   that portion of “your work” out of which the injury or damage arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as part of the same project.

As earlier stated, additional insurers providing AI coverage for their insureds rarely step up to the plate in construction litigation and provide an immediate defense and indemnification to the claims against the general contractor/developer.  Normal practice is for the primary carrier for the general contractor/developer to undertake the defense of the litigation and then those primary carriers make additional insured claims and secondarily negotiate with additional insurers to collect as a manner of reimbursement defense costs and indemnity costs. 

Coverage Issues Raised by Additional Insured Endorsement

Additional coverage issues raised by the 1985 CG 20 10 Additional Insured Endorsement draws questions of (1) what did “arising out of” mean,  (2) whether the additional insured could be covered for its own negligence, and (3) whether the additional insured was covered only when the named insured was negligent.

Interpretation of “arising out of” in CG 20 10.

The majority of courts give very broad meaning to the phrase “arising out of.”[11] A few Federal Courts of Appeals have utilized an intermediate standard of causation to the language “arising out of.”[12]

Presently, several states have adopted an intermediate standard as well.[13]

In cases where the injured plaintiff is suing the additional insured and the injured plaintiff is an employee of the named insured, the courts consider this “arising out of” the work.[14]

Courts also broadly construed the term “arising out of” to extend coverage to an additional insured where the work being performed by the subcontractor is not actually done by the subcontractor’s employee but someone else doing the work for the subcontractor.[15]

In Federal Ins. v. Am. Hardware Mut. Ins., 184 P.3d 390 (Nev. 2008), the Nevada Supreme Court held that an AI endorsement providing coverage for claims “arising out of (the named policyholder’s) operations” did provide coverage for a lawsuit wherein an employee of the policyholder sued the additional insured for negligence in the maintenance of a warehouse and the employee was injured while performing repair services on a conveyor belt.  Ambiguity in this AI endorsement as to whether the additional insured was only covered for its vicarious liability arising from named insured’s negligent acts or whether additional insured was covered for its own independent negligence required the AI endorsement to be construed in favor of providing coverage for the additional insured’s own negligence that resulted in injury to the named insured’s employee who was working on the additional insured’s premises.

What is noteworthy in this Nevada Supreme Court decision liberally construing an AI endorsement is not only did the Court use the common rule of contra proferentum (rule of construction commonly used in insurance contracts construing ambiguities against the insurance company that drafted the policy), but also stated that it would adopt a broad view that AI endorsement should favor coverage unless there was explicit limiting language.