Your Contract Requires You To Be Named as an Additional Insured: Are You?

Last week, New York joined the ranks of several states that may limit a government contractor’s access to insurance coverage despite being added, as set forth in the contract, as an “additional insured” under a prime or subcontractor’s insurance policy. Generally, it is within the purview of a government contractor to add its prime or subcontractors, or a particular government agency, to its insurance policy as additional insureds, to cover injury resulting from contract performance. In last week’s ruling, New York’s highest court limited the practical effect of such coverage. Although contractors may be added as additional insureds to cover injury sustained during contract performance, insurance companies may restrict coverage to the additional insured for its acts or omissions, unless the primary policyholders are also found to be negligent for the injury. See Burlington Ins. Co. v. NYC Transit Auth., No. 57, 2017 WL 2427300 (N.Y. June 6, 2017).

In Burlington, a government contractor, Breaking Solutions, Inc. (“BSI”), contracted with the NYC Transit Authority to provide tunnel excavation work on a subway project in New York City. As required by its government contract, BSI added the NYC Transit Authority and MTA New York City Transit as additional insureds to its commercial general liability (“CGL”) insurance. After a BSI employee was injured on-site, he sought damages from BSI and the NYC Transit Authority. The NYC Transit Authority attempted to exercise its right to coverage as an additional insured under BSI’s insurance policy. The New York Court of Appeals, however, denied the extension of coverage to the NYC Transit Authority under BSI policy on the grounds that the acts and omissions of NYC Transit Authority, not BSI, caused the injury. Consequently, the insurer denied coverage on the grounds that coverage only extended to additional insureds when the primary policyholder was also found to be negligent. In particular, the court considered language in BSI’s policy, adopted from the standard form language drafted by the Insurance Services Office (“ISO”), which limited coverage for additional insured injury “caused, in whole or in part by: 1. [the primary policyholder’s] acts or omissions; or 2. The acts or omissions of those acting on [the primary policyholder’s] behalf.” The court interpreted this language to limit coverage for additional insureds to incidents proximately (legally) caused in whole or in part, by the primary policyholder’s acts or omissions. The court also rejected arguments that a mere causal link between the actions of the primary policyholder and the injury (“but for” causation) was sufficient for coverage to attach. Instead, relying on the language in the policy, the court explained that the parties could have negotiated language that would have allocated risk between the primary policyholder and additional insured parties, but as written, it did not allow coverage if the primary policyholder was not also legally negligent for the injury.

The Burlington ruling is part of a growing trend of courts restricting independent coverage for additional insureds. In 2004, the ISO modified its CGL “additional insured” template language from “arising out of” to “caused in whole or in part” – the language used in Burlington’s policy. As increasingly interpreted by state courts, this language is typically interpreted to restrict coverage for additional insureds to situations in which the injury was caused, at least in part, by the primary policyholder. For example, courts in Pennsylvania, Texas, Maine, Maryland, North Carolina, and New Hampshire have held that the “caused by” language in an ISO-template insurance policy necessitates liability on the part of the primary policyholder in order to trigger coverage for the additional insured. See, e.g., Gilbane Bldg. Co. v. Empire Steel Erectors, L.P., 664 F.3d 589, 598 (5th Cir. 2011) (citing Utica Nat’l Ins. Co. v. Am. Indem. Co., 141 S.W.3d 198, 201–02 (Tex. 2004) (“the Texas Supreme Court has defined ‘caused by’ as requiring proximate causation.”); Westfield Ins. Co. v. Nautilus Ins. Co., 154 F. Supp. 3d 249 (citing Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s London, 788 F.3d 375, 380 (4th Cir. 2015)) (under Maryland law “the purpose of the additional insured endorsement is to provide protection for the additional insured where the named insured is at least partially negligent.”); Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. NGM Ins. Co., Civ. No. 11-cv-303-JD, 2011 WL 6415484, at *4 (D.N.H. Dec. 21, 2011) (adopting reasoning in other cases that “caused by” refers to acts attributable to the named insurer and the additional insured); Pro Con, Inc. v. Interstate Fire & Cas. Co., 974 F. Supp. 2d 242, 256-57 (D. Maine 2011) (holding that “in whole or in part” language only intended for coverage to extend to “occurrences attributable in part to acts or omissions by both the named insured and the additional insured.”); Dale Corp. v. Cumberland Mut. Fire Ins., Co., Civ. No. 09-1115, 2010 WL 4909600, at *7 (E.D. Pa. Nov. 30, 2010) (same).

One way that government contractors can reduce the risk of coverage denial is to negotiate insurance policy language up front that clearly applies “but for” causation, rather than “proximate” causation as the hook to coverage. For example, the Burlington court explained that the “caused by” language used in the insurer’s policy is narrower than the “arising out of” language used in other policies, which provides broader coverage for additional insureds. See Burlington, 2017 WL 2427300 (“arising out of is not the functional equivalent of ‘proximately caused by’”). Other courts in New York have explained that language providing coverage for torts “arising out of” an additional insured’s own negligence is “ordinarily understood to mean originating from, incident to, or having connection with” – in other words, “but for” causation – the acts or omission of the additional insured. Id. (citing Maroney v. New York Cent. Mut. Fire Ins. Co., 5 NY3d 467, 472 (2005). Thus, contractors seeking to embrace broader coverage for additional insureds should avoid policy language suggesting that the act or omission must be “caused by” the primary policyholder to trigger coverage for additional insureds.

What VA Contractors Can Expect from Proposed Amendments to VA Acquisition Regulations

In efforts to bring the VA Acquisition Regulation (VAAR) “in line” with Federal Acquisition Regulation (FAR), the US Department of Veterans Affairs (“VA”) has proposed amendments to its acquisition regulation.  The VA proposes to eliminate any procedural guidance from the VAAR that is internal to the VA, to incorporate new regulations and policies, and to revise or remove any policy that has been superseded by changes in the FAR.

The Agency’s proposed rule and procurement reform should be of particular interest for federal health care contractors providing supplies and/or services to the VA, such as health care products, medical devices, pharmaceuticals, or nursing home care services.  The proposed changes may require modifications to contractors’ internal procurement policies and practices when doing business with the VA.  For example, the VA proposes clarifications to the calculation of overtime wages for contractors providing nursing home care to veterans.  Other suggested changes include a prohibition from making reference to VA contracts in commercial advertising, updating policies on improper business practices and personal conflicts of interest, and revamping sealed bidding procedures.

Federal health care contractors impacted by the proposed changes should submit public comments on the proposed rule on or before July 17, 2017 for the Agency’s consideration in formulating the final rule.  To learn more about the proposed amendments to VAAR, click here.

The European Commission Publishes Final Report on E-commerce Inquiry – What it Means for Brand Owners

On 10 May 2017, the European Commission published its final report on its two-year e-commerce sector inquiry (the Final Report).  Many of the conclusions in the Final Report closely follow the Commission’s preliminary report, which were analysed and summarised in our last client alert on the e-commerce inquiry, and were also featured in our webinar on the subject last April.

The Final Report reviews the use of territorial restrictions, geoblocking, restrictions on resellers’ use of online marketplaces, Google AdWords and price comparison sites, provides some warnings on resale price maintenance and some analysis of the current regime of licensing of rights to digital platforms like Netflix and Spotify.  The Commission continues to slowly chip away at e-commerce constrictions across the EU, in its ongoing desire to perfect and liberalise the European internal market.  To learn about the key takeaways from the report, click here.

On-Time Bid Proposals—Not a Second Too Late

Submitting your company’s bid proposal close to the deadline can be risky and have grave consequences. The government has repeatedly rejected proposals submitted before, but received after, the deadline because of technical glitches.  In submitting a proposal for a government contract, the onus is on the contractor to ensure that its proposal is received prior to the exact time specified for receipt of proposals.  The deadlines set forth in the solicitation are strictly enforced unless: the agency receives the proposal before the contract is awarded, the contracting officer determines that accepting the late proposal would not unduly delay the acquisition, and: (i) the proposal was submitted electronically and received at “the initial point of entry to the Government infrastructure not later not later than 5:00 p.m. one working day prior to the date specified for the receipt of proposals,” (ii) the proposal was “received at the Government installation” and was “under the Government’s control” before the solicitation deadline, or (iii) it was the only proposal that the Government received.  FAR 15.208(b)(1)(i)-(iii).  This applies not only to defense and IT contractors, but also to health care companies competing for government contracts. See FAR 15.208(b)(1) (“Any proposal, modification, or revision, that is received at the designated Government office after the exact time specified for receipt of proposals is ‘late” and will not be considered.”); see also FAR 52.212-1(f)(2) (“offer, modification, revision, or withdrawal of an offer received at the Government’s office designated in the solicitation after the exact time specified for receipt of offers is ‘late’ and will not be considered” ).

Sent Is Not Received   

A recent series of GAO bid protest decisions confirms that the government strictly applies the proposal deadlines and places a heavy burden on the offeror to ensure the proposal is received, rather than just submitted, before the deadline closes.  For example, in the health care space, in Western Star Hospital Auth., Inc., B-414216.2, 2017 WL 2212178 (May 18, 2017), the offeror submitted four separate emails presenting its proposal prior to the 4:00 p.m. deadline on the date of submission.  The agency, however, did not actually receive the offeror’s emails until after the deadline.  In a protest challenging the rejection of its proposal as untimely, the offeror provided evidence from its email provider showing that it had submitted the proposal by sending the emails prior to the deadline.  The GAO held, however, that this was insufficient to meet the offeror’s burden of ensuring the proposal is received by the agency’s initial point of entry before the proposal deadline.  Because the technical glitch occurred on the offeror’s end, before entering the agency’s email server, the GAO explained that it had not been transmitted by the deadline, and the agency reasonably rejected the proposal as untimely.

Too Large May Be Too Late  

Similarly, email attachments that exceed the agency’s size limit can also preclude the timely receipt of otherwise timely submitted proposals.  In Washingtonian Coach Corp., B‑413809, 2016 CPD ¶ 378 (Dec. 28, 2016), the offeror emailed its proposal submission before the proposal submission deadline, and contacted the agency via email and phone to ensure that its proposal had been received before the deadline.  The contracting officer did not learn and thus did not inform the offeror that its proposal had not been timely received because of the size of its email attachments until several days after the deadline for proposal submissions.  When the contracting officer did finally inform the offeror that its proposal was rejected, it explained that the emails were sent, but not received by the agency’s system because they exceeded the size limit for the agency’s email system.  The GAO upheld the agency’s rejection of the proposal as late, explaining that it was the offeror’s duty to ensure the proposal was timely received at the initial point of entry before the time set for closing.

23 Seconds Too Late  

In addition to ensuring that the proposals are received by the proposal deadline, notwithstanding any technical challenges, contractors must ensure that the responsible individual actually clicks “submit” prior to the exact time stated in the RFP — down to the second.  For example, in Tele-Consultants, Inc., B-414135.1 (February 27, 2017), the GAO confirmed that the agency will not consider a proposal as “actually received” if it was not submitted, in final form, by the exact cut-off time identified in the solicitation.  In that case, the protester challenged the rejection of its proposal submission as untimely as it was submitted a mere 23 seconds after the proposal submission deadline.  The agency’s procurement portal required the offeror to first upload the draft proposal to its system, and then separately submit it as final only after the offeror pressed the “Submit Signed Proposal” button.  The agency had an electronic record showing that the protester had uploaded the draft submission prior to the deadline, but it had not attempted to submit its proposal through the agency’s online portal until 23 and 34 seconds after the cut-off time.  In denying the bid protest, the GAO held that uploading the draft proposal was insufficient to place it within the government’s control when the solicitation clearly required a second step.

Given the GAO’s strict enforcement of proposal submission deadlines, contractors need to be sure to leave ample time to electronically submit their proposals (including all attachments) in the event of technical difficulties, which may preclude the agency’s receipt prior to the stated deadline.

Online sales restrictions continue to be top enforcement priority in EU

The European Commission recently published its long-awaited final report on its E-commerce Sector Inquiry launched two years ago. Therein, the Commission identifies that pricing limitations, dual pricing (i.e., charging different prices according to the channel through which a product is sold) and platform bans are among the most widespread vertical competition restraints in e-commerce implemented particularly often in distribution agreements between manufacturers and retailers in Germany. The report contains some helpful guidance on the competition assessment of the individual online sales restrictions. It comes as a warning, when the Commission indicates in the report that it intends to conduct a targeted enforcement in the e-commerce sector in the near future aimed at those business practices with the greatest potential to harm competition…read more.

Facebook Is Fined US$122 Million by European Commission for Misleading Information in WhatsApp Merger Review

Facebook is faced with a fine of EUR110 million (US$122 million) for providing misrepresentative or incorrect information to the European Commission when it filed the acquisition of WhatsApp for merger approval in 2014.

In the notification, Facebook stated it would not be able to reliably link Facebook users’ accounts and WhatsApp users’ accounts. However, two years later, Facebook updated its terms of service, which then allowed for a matching of Facebook and WhatsApp user accounts. According to the Commission’s ensuing investigation, Facebook had the ability to link users at the time of the WhatsApp acquisition, when Facebook filed the WhatsApp acquisition for merger approval.

Implications: A Warning Shot for Business

The Commission sees this as a warning shot, says Margrethe Vestager, the EU’s competition commissioner: “Today’s decision sends a clear signal to companies that they must comply with all aspects of EU merger rules, including the obligation to provide correct information.” On her Twitter account, she posted: “We need accurate #facts to do our job.”

Yesterday’s decision will not affect the merger clearance approving Facebook’s acquisition of WhatsApp. Although the Commission has the power to withdraw the clearance if it is based on incorrect or misleading information, the clearance in this case was based on facts beyond the automated matching capability, and even analyzed the effects of such an automated matching. The Commission therefore decided not to withdraw the clearance of the transaction.

Risk of Major Fines Even for Procedural Violations: 1% of Global Turnover

The Commission over recent years has repeatedly fined companies for violation for procedural requirements, but yesterday’s decision is the first fine for providing incorrect or misleading information. Under the current guidelines, the Commission can fine companies up to 1 percent of their global annual turnover for violation of procedural requirements, while violations of substantive EU competition law can be fined of up to 10 percent of global annual turnover. Based on 2016 data, the Commission could have imposed a fine on Facebook of up to EUR248 million (US$276 million) for the procedural violation.

Earlier, the Commission had fined Germany’s E.On EUR38 million (US$42.2 million) and France’s Suez Environnement EUR8 million (US$8.9 million) for breaching seals during inspections, as well as Belgium’s Electrabel and Norway’s Marine Harvest each EUR20 million (US$22.2 million) for gun-jumping in acquisitions. A Czech energy company had been fined EUR2.5 million (US$3.3 million) for obstruction during an inspection by not blocking email accounts of employees, and failure to disclose complete information.

WhatsApp Acquisition Raises Antitrust Jurisdictional Debate

Facebook’s WhatsApp acquisition had sparked a debate on whether the current turnover-based jurisdictional test in European merger control was suitable to deal with acquisitions in the digital economy. The US$19 billion acquisition was initially not reportable to the European Commission, as WhatsApp in 2013 generated only US$10 million in annual turnover. However, the transaction triggered market-share-based tests in various EU Member States, and was referred to the Commission upon application of Facebook. There are now discussions of introducing a transaction value-based system, and Germany has just updated its merger control rules to capture transactions valued at EUR400 million or more, even where the target company has only minimal turnover.

Similarly, the transaction has shown a spotlight on whether seemingly free platforms to end users are subject to the antitrust rules, as end users do not pay for the platform’s services in money. However, competition authorities in Europe have clearly stated that they see these interactions as business transactions in which users pay for the platform’s services via their personal data. Germany has, for example, very recently amended its Competition Act to clarify that markets that are subject to antitrust review will not require a payment in money. In addition, the amendment sets the parameters according to which market power in digital markets is measured.

Yesterday’s decision will not affect ongoing national antitrust procedures (such as in Germany), or privacy, data protection, or consumer protection issues, which may arise following the August 2016 update of WhatsApp terms of service and privacy policy.

Non-Federal Entities Receive Extra Year to Comply with Overhauled OMB Procurement Standards for Federal Assistance Agreements

Non-federal entities that receive federal assistance—such as colleges and universities, hospitals, nonprofits, and state, local and tribal governments—have been given an additional year to comply with the Office of Management and Budget’s (OMB) revised procurement standards for grants and federal funding.

In December 2013, OMB overhauled its guidelines for the oversight and administration of federal grants and other federal financial assistance. The sweeping changes included revisions to procurement standards codified at 2 CFR §§ 200.317-200.326.  OMB originally gave non-federal entities until December 25, 2016, to implement changes to their procurement policies and procedures to comply with the OMB revised guidance.  On May 17, OMB announced that it would allow non-federal entities a grace period of one additional year, to December 25, 2017, to implement such changes, and the implementation date for the procurement standards will start for fiscal years beginning on or after December 26, 2017.

The OMB procurement standards require non-federal entities to establish procurement procedures that are consistent with federal law, OMB standards, and any state regulations. The non-federal entities’ procurement procedures must be formally documented and must address a number of critical procurement issues, including, but not limited to:

  • Written standards of conduct covering organizational and personal conflicts of interest and contractor integrity
  • Emphasis on economical and efficient solutions during the procurement process, and the inclusion of a cost or price analysis in connection with every procurement action to determine the most economical approach
  • Promotion of full and open competition
  • Measures to assure that minority businesses, women’s business enterprises, and labor surplus area firms are used when possible

Federal grant recipients should continue to review the OMB procurement standards under 2 CFR §§ 200.317-200.326 and should formally document their revised internal procurement policies in order to bring the entity into compliance with OMB standards before the December 25, 2017, deadline.

Modernizing Government Technology Act Passes House, Moves to Senate

The revised Modernizing Government Technology Act (HR 2227) passed the House by voice vote May 17. Identical legislation already has been introduced in the Senate by Sens. Gerry Moran (R-Kan.) and Tom Udall (D-N.M.), and with strong bipartisan and industry support, the bill is expected to advance to the president in upcoming weeks.

As Reed Smith recently advised, the legislation aims to modernize federal IT infrastructure and to reduce wasteful government spending on the maintenance of existing “legacy” IT systems. The MGT Act stresses the importance of modernized information technology solutions, such as cloud computing. The heart of the legislation is the creation of two funding sources to support agency modernization efforts: working capital funds and a centralized technology modernization fund.

Agencies will be able to tailor the IT solutions to their particular needs. Contractors can anticipate an uptick in RFIs and RFPs related to this modernization effort upon passage of the MGT Act. Reed Smith will continue to monitor the legislation and provide periodic updates. To learn more about the MGT Act, click here.

DOD Audits Identify Evaluation Errors, Shows Need For Proactive Contractor Diligence

On May 9, the Department of Defense Inspector General (“DoD IG”) released Audit Report No. DODIG-2017-081, Summary of Audits on Assessing Contractor Performance: Additional Guidance and System Enhancements Needed (the “Audit Report”). The audit identified weaknesses within the DoD’s contracting officials’ preparation of contractor Performance Assessment Reports (“PARs”) and potential improvements to the Contractor Performance Assessment Reporting System (“CPARS”).

Because of insufficient training, lack of internal controls, and ineffective procedures for timeliness and PAR review, DoD contracting officials sometimes failed to: (i) write sufficient narratives to defend past performance ratings; (ii) properly rate past performance evaluation factors; and (iii) prepare sufficient contract effort descriptions.

The audit highlights that contractors must be proactive in their efforts to ensure the accuracy of PARs; a contractor’s reputation with agencies is vital to any contractor’s success. To guarantee the right to appeal an inaccurate PAR, the contractor must file a claim with the contracting officer in accordance with the Contract Disputes Act. Without that claim, and the contracting officer’s ultimate denial of that claim, the Board of Contracts Appeal or the U.S. Court of Federal Claims will have no jurisdiction over the challenge.

The Audit Report is a strong reminder that contractors, and their counsel, must be conscious about how executive agencies evaluate contractors’ performance. To read more click here.

DOJ Casts Shade on Proposed Chicago Sun-Times Newspaper Sale

The Department of Justice Antitrust Division (DOJ) announced May 15 that it is investigating the proposed acquisition of the Chicago Sun-Times newspaper by the owner of rival publication the Chicago Tribune. As a condition of proceeding with the sale, the DOJ has required that the Chicago Sun-Times advertise for an alternative buyer. The investigation demonstrates the Antitrust Division’s willingness to scrutinize the acquisition of market power even within depressed industries.

In disclosing the Chicago Sun-Times investigation, the DOJ stated that the Chicago Sun-Times must run an advertisement seeking additional bidders and allow for a 15-day waiting period. If another viable buyer steps forward, a “reasonable opportunity” will exist for the buyer to conduct due diligence and negotiate purchase terms. A press release from the current owners of the Chicago Sun-Times, Wrapports, LLC, announced the proposed sale to tronc, Inc., which operates the Chicago Tribune, and acknowledged the DOJ’s conditions. If an alternative buyer fails to surface, tronc will run the Chicago Sun-Times as a separate unit with an independent newsroom.

The DOJ is responsible for evaluating the competitive effects of newspaper acquisitions pursuant to a 2002 memorandum of agreement with the Federal Trade Commission. In 2016, the DOJ successfully sued to block the owners of the Los Angeles Times from acquiring two bankrupt California newspapers. In response to criticism of the DOJ’s decision to sue in light of internet-based competition, then-Assistant Attorney General Bill Baer predicted that the enforcement action would “ensure that citizens and advertisers . . . continue to benefit from competition and from a diversity of views in their local news coverage.” The Chicago Sun-Times investigation is a clear reminder that the DOJ remains ready and willing to enforce merger policy guidelines, despite the widespread layoffs and sustained decreases in subscriber counts that have plagued many regional and local publishers in the industry.