36 Offices in 17 Countries

United States Workers’Compensation/Indemnification

Overview

January 18, 2012

Jill Kirilajill.kirila@squiresanders.com

Kevin Hesskevin.hess@squiresanders.com

Workers’ Compensation SystemGeneral Characteristics

• Compulsory Coverage

• State-by-State Requirements

• Only Cover Work-Related Injuries

An injury that arises out of and in the

course of employment

Insurance Coverage

• Private Coverage

Generally a deductible applies with

private coverage.

• Self-Insurance

Most states have specific qualification

requirements to become self-insured.

• State Fund Coverage

State run insurance program.

No Fault System

• Workers Compensation is generally the

exclusive remedy for the employee

against the employer.

• Employers receive statutory immunity

against related common law claims by

employees.

Employee vs. Independent Contractor

• Workers’ Compensation only coversclaims by employees.

• Independent contractors are not covered.

• Independent contractor status can bechallenged by workers’ compensationclaimants.

Employers cannot characterizeworkers as independent contractorssimply to avoid workers’ compensationliability.

Workers’ Compensation Benefits

• Lost wages

• Medical Expenses

• Disability Benefits

Temporary total disability

Permanent partial disability

Permanent total disability

• Vocational Rehabilitation

• Death/Survivor benefits

Administration of Workers’ Compensation

• Each state typically administers itsworkers’ compensation system via anadministrative agency or commission.

• Generally, informal administrativehearings are conducted on issueschallenged under any given claim.

• Most states provide for an appeal into thestate court system following a finaladministrative determination.

Exceptions To Statutory Immunity

• Employer Bad Faith

• Intentional Tort Actions

VSSR Claims

• Criminal Acts by Employer

• Third Party Lawsuits

Third Party Claims for Contributionor Indemnification

• Majority Rule – In a workers’ compensation setting,

most states provide that there can be no recovery

against the employer of an injured worker by a third

party on a theory of contribution.

• Minority Rule – Some states permit third parties to

recover on a theory of contribution with certain

qualifications.

• HOWEVER, states adopting the majority rule

generally provide that a third party can recover

against an employer in situations where contractual

privity exists.

Indemnification clauses.

Indemnification

• Contractual provision that shifts liability

from one party to another party

• Purpose of indemnity provision is to

allocate risk in advance

• Creates a cause of action under contract

when the person indemnified incurs

liability or is forced to defend a lawsuit

covered by the indemnity.

What can you indemnify?

• Generally indemnification provision which

makes the other party whole for:

Indemnifying party’s negligence OR

For the other party’s own negligence

• Generally cannot indemnify for gross

negligence or for intentional conduct

• Generally indemnity results from a third-

party’s claims, but some cases have

allowed a party to the contract to use

indemnity clause for a breach of contract

action.

Indemnification Laws Vary

• Indemnification laws vary by state and by

industry

Some states have laws that prohibit

indemnification for another party’s own

negligence in certain industries

– Examples:

–California, Minnesota, Utah, Illinois & Indiana –prohibition for indemnification of own negligencein construction contracts

–Utah, Illinois and Indiana – prohibition forindemnification of own negligence in motorcarrier contracts

–Texas & Louisiana – prohibition forindemnification of own negligence in oilfield andmining

Drafting of Indemnity Provision

• Specific Drafting of Indemnity Provision

Needed

Some states require express notice in the

contract for indemnification and especially if

you are indemnifying for a parties’ own

negligence

Examples of express notice: different font,

bold typeface, larger typeface from other

provisions of the contract

• Courts strictly construe indemnity

provisions

Sample Indemnification

Contractor assumes entire responsibility andliability for any claims or actions based on orarising out of injuries, including death, topersons or damages to or destruction ofproperty, sustained or alleged to have beensustained in connection with or to have arisenout of or incidental to the performance of thiscontract by Contractor, its agents andemployees and its subcontractors, their agentsand employees, regardless of whether suchclaims or actions are founded in whole or inpart upon alleged negligence of Company,Company’s representative, or the employees,agents, invitees, or licensees thereof.

Prompt Notice of Claims

• Contract with indemnity provision should include

a clause requiring Company to notify

indemnifying party of any claim, lawsuit or

threatened claim promptly (usually within 60 –

90 days).

• Contract should also specify that indemnifying

party be given advance notice of any settlement

offer that will be subject to the indemnity

provision.

Hypothetical

ABC Corp. was performing work for XYZ

Company on XYZ’s property. An XYZ employee

was driving a truck on XYZ’s property when he

hit a tank owned by Doe Enterprises damaging

the tank. Doe Enterprises sues XYZ for damage

to the tank and XYZ gives notice to ABC for

indemnity under contract.

Hypothetical Indemnity Provision

Contractor assumes entire responsibility andliability for any claims or actions based on orarising out of injuries, including death, to personsor damages to or destruction of property,sustained or alleged to have been sustained inconnection with or to have arisen out of orincidental to the performance of this contract byContractor, its agents and employees and itssubcontractors, their agents and employees, onlyif the negligent act of Contractor or itsemployee or representatives is a contributorycause of the resultant injury, death, or damage,and shall have no application when thenegligent act or strict liability of Company isthe primary cause of the resultant injury, deathor damage.

Third Party Beneficiary and Indemnification

• Majority Rule – Most states do not permit a party

to assert a claim for indemnification on the

theory of being a third party beneficiary.

• Minority Rule – A few states permit non-parties

to a contract to take advantage of an

indemnification clause in that contract under a

theory of being a third party beneficiary.

Hypothetical #2

• ABC enters into a contract with DoeEnterprises with jointindemnification of each other andeach other’s contractors forpersonal injury claims arising out ofwork performed under theagreement. XYZ is also performingwork at Doe Enterprises.

• An ABC employee suffers an injurywhile working at Doe caused by thenegligence of ABC, XYZ and Doe.

• ABC Employee receives workers’compensation benefits from ABCand successfully sues both XYZand Doe for Negligence.

• In turn, XYZ and Doe sue ABC forIndemnification under the contractbetween ABC and Doe.

• Can Doe recover?• Can XYZ recover even though they

are not a party to the contract withABC?

DoeEnterprises

ABC

InjuredEmployee

DoeEnterprises

XYZ Corp.

Arizona Workers’ Compensation Summary

• In Arizona, workers' compensation is compulsory, andsome employee waivers are permitted. There is acompetitive state fund. Employers may insure throughprivate carriers, self-insurance, or through groups ofemployers. There is no exemption for employers withsmall numbers of employees.

• The Industrial Commission of Arizona is responsible foradministering workers’ compensation in Arizona. http://www.ica.state.az.us

• Arizona Revised Statutes Title 23 Chapter 6.• Third Party Contribution/Indemnification – Not directly

addressed by Arizona statute. However, Arizona case lawprovides that a third-party cannot seek contribution froman employer absent a contractual agreement between theemployer and the third-party. Unique Equip. Co. v. TRWVehicle Safety Sys., Inc., 197 Ariz. 50 (Ct. App. 1999).

California Workers’ Compensation Summary

• In California, workers' compensation iscompulsory, and no employee waivers arepermitted. There is a competitive state fund.Employers may insure through private carriersor self-insurance, but not through groups ofemployers. There is no exemption for employerswith small numbers of employees.

• Managed by the California Department ofIndustrial Relations under the Division ofWorkers’ Compensation. http://www.dir.ca.gov/dwc/dwc_home_page.htm.

• California Labor Code §§3200-6208.• Third Party Contribution/Indemnification – Cal.

Labor Code §3864.California follows the majority rule. California does not

permit contribution/indemnification absent privity ofcontract.

Illinois Workers’ Compensation Summary

• In Illinois, workers' compensation is compulsory, and noemployee waivers are permitted. There is no state fund.Employers may insure through private carriers, self-insurance,or through groups of employers. There is no exemption foremployers with small numbers of employees, but soleproprietors, business partners, corporate officers, andmembers of limited liability companies may exemptthemselves.

• The Illinois Workers' Compensation Commission isresponsible for administering the Workers' Compensation Actin Illinois. http://www.iwcc.il.gov/index.htm.

• 820 ILCS 305/1-30• Third Party Contribution/Indemnification – 820 ILCS 305/5(b)

Illinois follows the minority rule. It permits a third party to seekcontribution absent an express contract but it limits the employer’s liabilityto the amount of compensation paid by the employer under the workers’compensation claim. Therefore, the third party’s liability to the employeeis simply reduced by the amount already received from the employerunder the workers’ compensation claim and the employer is not requiredto pay anything additional out of pocket.

Indiana Workers’ Compensation Summary

• In Indiana, workers' compensation is compulsory, and noemployee waivers are permitted. There is no state fund.Employers may insure through private carriers or self-insurance, but not through groups of employers. There isno exemption for employers with small numbers ofemployees.

• The Worker's Compensation Board is responsible foradministering the Workers' Compensation program inIndiana. http://www.in.gov/wcb/

• Burns Ind. Code Ann. § 22-3-1-1 through § 22-3-12-5.• Third Party Contribution/Indemnification – Not covered

directly by Indiana Workers’ Compensation Act, but themajority rule that statutory immunity protects an employeragainst a claim of contribution is followed.

• However, Indiana courts have allowed contractualindemnity claims. Sprigler v. Osnabrucker Mettallwerke(U.S. Dist. Ct. S. Dist. Of Indiana 1991), 761 F. Supp. 86.

Minnesota Workers’ Compensation

• In Minnesota, workers' compensation is compulsory, andno employee waivers are permitted. There is a competitivestate fund. Employers may insure through private carriers,self-insurance, or through groups of employers. There isno exemption for employers with small numbers ofemployees.

• The Workers' Compensation Division of the Department ofLabor & Industry administers Workers' Compensation inMinnesota. http://www.dli.mn.gov/main.asp

• Minnesota Annotated Statutes Chapter 176.001-862.• Third Party Contribution/Indemnification – Minn. Stat. §

176.061. Minnesota follows the minority rule in that it does permit a

third party to seek contribution from an employer evenwithout contractual privity. However, Minnesota law providesthat the employer can waive its right to recover from the thirdparty and avoid contribution.

Texas Workers’ Compensation Summary

• In Texas, workers' compensation is elective, and noemployee waivers are permitted. There is a competitive statefund. Employers may insure through private carriers or self-insurance, but not through groups of employers. There is noexemption for employers with small numbers of employees.

• The Texas Department of Insurance (TDI), Division ofWorkers' Compensation administers the Texas Workers'Compensation Act. http://www.tdi.texas.gov/index.html

• Texas Labor Code Chapter 400.• Third Party Contribution/Indemnification - Texas Labor Code

§ 417.004. “In an action for damages brought by an injured employee, a

legal beneficiary, or an insurance carrier against a third partyliable to pay damages for the injury or death under this chapterthat results in a judgment against the third party or a settlementby the third party, the employer is not liable to the third party forreimbursement or damages based on the judgment or settlementunless the employer executed, before the injury or deathoccurred, a written agreement with the third party to assume theliability.” (emphasis added).

Utah Workers’ Compensation Summary

• In Utah, workers' compensation is compulsory, and noemployee waivers are permitted. There is a competitivestate fund. Employers may insure through private carriers orself-insurance, but not through groups of employers. Thereis no exemption for employers with small numbers ofemployees.

• The Labor Commission of Utah, Division of IndustrialAccidents is responsible for administering Workers'Compensation in Utah. http://www.laborcommission.utah.gov/IndustrialAccidents/index.html

• Utah Code Title 34A Chapter 2• Third Party Contribution/Indemnification –

Utah case law provides that where employer and third party voluntarilyenter into a written indemnification agreement whereby the employeragrees to indemnify the third party against claims arising out of injuriesto the employer's employees, and where an employee is injured and iscompensated by the employer in accordance with the workers'compensation law, the exclusive remedy provision of this section doesnot preclude the enforcement of the indemnification agreement by thethird party against the employer for amounts paid by the third party tothe employee as a result of the injury. Shell Oil Co. v. Brinkerhoff-Signal Drilling Co., 658 P.2d 1187 (Utah 1983).

Best Practices in Drafting

• Determine applicable jurisdiction’s law regardingworkers’ compensation,indemnification/contribution, third party claimsagainst employers, and third party beneficiarystatus.

• Limit indemnification to indemnifying party’snegligent acts or omissions

• Watch out for provisions shifting entire liability toindemnifying party based upon any proportionCompany responsibility

• Try to limit liability through capsMatter of contract

• Include prompt notice provisions, including forsettlement

• Limit definition of indemnity to the company• Limit indemnity to actual loss or damagesExclude attorneys’ fees and/or duty to defend

Remember …

While lawyers sometimes “kill the deal,” managers

sometimes “agree to the deal that kills.”

36 Offices in 17 Countries

United States Workers’Compensation/Indemnification

Overview

Jill Kirila – jill.kirila@squiresanders.com

Kevin Hess – kevin.hess@squiresanders.com