Contractual Risk Shifting, Workers’ Compensation and You

During the process of negotiating construction contracts, contractors often use certain clauses to shift the risk of loss onto subcontractors who may have less bargaining power. How do they do this? Most commonly through the use of indemnity and waiver of subrogation clauses. While these clauses apply in a variety of situations, they are particularly concerning with regard to workers’ compensation insurance.

All states have mandatory workers’ compensation statutes. These statutes make employers strictly liable for employee injuries on the job. Strict liability means liability without fault. Therefore, an injured employee of a subcontractor can recover damages from the subcontractor’s workers’ compensation carrier even if a third party is 100 percent at fault for the injury.

What Is Subrogation?

Subrogation arises when an innocent party incurs damages attributable to the fault of another. This most commonly applies when an insurance carrier pays an insured loss and subrogates to the rights—or “stands in the shoes”—of the injured party in recovering against the responsible party. This doctrine is based on equitable principles, primarily to prevent the at-fault party from escaping liability. Makes sense, right? Then how does a subcontractor waive subrogation?

Here’s a sample waiver of subrogation provision:
Subcontractor hereby waives all right of recovery against the Contractor, the Owner and their respective officers, directors, employees, agents and representatives with respect to claims covered by insurance obtained pursuant to insurance requirements under this Subcontract. The Subcontractor agrees to cause its Workers’ Compensation, General Liability and Automobile Insurance carrier to waive their rights of subrogation against the Contractor, Owner and their respective officers, directors, employees, agents and representatives.

Here’s an example:
A subcontractor’s employee is injured by the sole negligence of the contractor. The subcontractor’s workers’ compensation carrier pays out statutory damages to the injured employee. Pursuant to the waiver of subrogation clause, the subcontractor and its carrier have no right to recover the losses from the contractor.

What is the practical effect? The subcontractor suffers the consequences of the contractor’s sole negligence. How? The subcontractor’s experience modification rate (EMR) goes up. What else goes up with the EMR? Premiums!

What Is Indemnification?

Indemnification requires one party to pay damages to another, sometimes without regard to who was actually at fault. These types of clauses often include language requiring the subcontractor to “defend and hold harmless” the contractor, which puts the additional burden on the subcontractor of incurring fees and expenses for the contractor’s legal defense. There are generally three types of indemnity clauses: broad, intermediate and limited.

A broad indemnity clause requires the subcontractor to pay loss or damage regardless of who is at fault, even if the damage is caused by the sole negligence of the contractor. This is the most onerous type of indemnity clause because it shifts the entire risk to the subcontractor.

Here’s a sample broad indemnity provision:
Subcontractor shall indemnify, defend and hold harmless the Contractor, Architect and Owner against all liability claims, judgment or demands for damages and expenses, including, but not limited to, reasonable attorneys’ fees, arising from accidents to persons or property arising out of or resulting from the performance of the work.

An intermediate indemnity clause requires the subcontractor to pay loss or damage for its own sole or partial negligence. Some intermediate indemnity provisions require the subcontractor to pay the entire loss or damage while others only require the subcontractor to pay its pro rata share of the loss or damage.

Finally, a limited indemnity clause only requires the subcontractor to pay loss or damage that is the sole responsibility of the subcontractor.

How do indemnity and subrogation interplay? When the subcontract has abroad indemnity clause and a waiver of subrogation clause.

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Zurich Helps Risk Managers Understand Challenges and Solutions of Photovoltaic Systems

As businesses across the world increasingly are turning to green technology for lowering energy costs and reducing their own carbon footprints, Zurich is working to help risk managers understand the risks associated with photovoltaic (PV) solar panel systems and how they can protect themselves from those risks. Key information related to the risks and challenges and recommended solutions was recently released in a Zurich RiskTopics white paper on photovoltaic systems, available at RiskTopics – Photovoltaic Systems.

Photovoltaic systems are designed to supply usable electric power for a variety of purposes, using the sun as the power source. When installed on or integrated into existing building components, the systems have unique characteristics that can introduce a variety of potential challenges and risks.

“Solar PV system use has increased three-fold over the last three years, which means more and more businesses need to understand the risks associated with them in order to help protect their property and business operations,” said Mike Widdekind, Technical Director – Property for Zurich Services Corporation. “We have developed the Photovoltaic Systems RiskTopics white paper specifically to provide detailed information to help our customers make necessary decisions about hazards associated with PV operations.”

Fire-related risks are among the top challenges associated with PV systems. They have more fire ignition sources and present more opportunity for fires to occur beyond the reach of standard fire protection and fire detection systems. Also, when a building fire requires firefighting activities, firefighters typically turn off all sources of electric power to the building. However, when PV systems are involved, a complete shutdown of electric power may not be possible since the PV panels continue to generate current from either daytime sunlight or even night time fire service scene lighting.

Risk managers also need to be aware of unexpected structural loads not anticipated by codes and standards such as snow or ice loads that accumulate in shaded areas below panels. When PV panel systems are installed on low slope – or flat – roofs, snow accumulations on panels will melt which can refreeze and may develop into unexpected ice accumulation, and over time might event result in building collapse.

In addition, PV solar panel systems can be vulnerable to wind loads and susceptible to damage caused by wind borne debris. Zurich has been especially involved in the impact wind has on solar panels through its active participation as a member of Insurance Institute for Business & Home Safety’s (IBHS) Research Advisory Council. At Zurich’s recommendation, IBHS is currently testing the impacts of wind on solar panels and will apply the learnings from the study to help customers build more resilient communities around the world.

Zurich’s RiskTopics white paper identifies unresolved challenges as well as provides possible solutions to issues related to PV systems, and recommends that commercial building managers and risk managers try to avoid the installation or integration of photovoltaic systems onto or into buildings until the challenges and risks associated with this system are fully understood and addressed.