In July 2004, many jurisdictions will implement revisions that will reduce
coverage provided in various Insurance Services Office, Inc. (ISO) commercial
general liability (CGL) additional insured endorsements and will also introduce
a new, optional ISO endorsement that limits contractual liability coverage by
restricting the definition of "insured contract."
Considerable debate and litigation has surrounded the extent of coverage
provided to an insured that has been added by an additional insured endorsement
to the CGL policy. Potential litigation over the extent of coverage has led
some to question the value of having additional insured status.
For instance, the American Institute of Architect (AIA), Document A 201 (1997)—General
Conditions of Contract for Construction, has removed entirely the requirement that the contractor
name the owner as an additional insured on the contractor's liability insurance.
In their 1997 commentary, the AIA observed, "while some additional protection
may be gained in this way [adding the owner as additional insured], it ultimately
increases the cost of insurance to the contractor without measurably reducing
the risk of disputes on the project."
Sole Negligence of the Additional Insured
For several years now, most courts have interpreted additional insured endorsements
quite broadly, particularly the phrase "arise out of operations" or "arising
out of your ongoing operations." Coverage was generally found to apply to the
additional insured even if the additional insured's negligence was the sole cause of the injury—it was not necessary
for the named insured to have caused the accident.
Nonetheless, as far back as the 1940s, ISO and its predecessor, the National
Bureau of Casualty and Surety Underwriters, have maintained their intent was
to provide coverage for the additional insured only to the extent the additional
insured was found liable for the activities of the named insured. Some commentators
have referred to liability arising out of the named insured's acts as vicarious liability.
Black's Law Dictionary (6th ed.) defines
vicarious liability as:
The imposition of liability on one person for the actionable conduct
of another, based solely upon a relationship
between two persons. Indirect or imputed legal responsibility for
the acts of another; for example, the liability an employer for the acts
of an employee, or a principal for torts and contracts of an agent [Emphasis
The concept of vicarious liability is expounded upon in an Illinois Appeals
Court case, Great American Ins. v West Bend Mut. Ins., 723 NE2nd 1177 (Ill App 2000). In that case, the court stated:
Liability for negligence may be imputed where the person to whom the
negligence is imputed had a legal right to control the action of the person
actually negligent. Negligence in the conduct of another will not be imputed
to a party if he did not authorize such conduct, participate therein, or
have the right or power to control it.
Independent Contractor—Named Insured
Although it is not always the case, the named insured on a CGL is usually
an independent contractor hired by the additional insured. By definition, the
person engaging or hiring an independent contractor (the additional insured)
does not have a right to control the independent
contractor (the named insured). Therefore, the additional insured, according
to the Great American Ins. court, cannot be vicariously liable for the acts of the named
Restatement (Second) of Torts
An authoritative legal treatise, Restatement
(Second) of Torts, does convey the restrictions on vicarious liability
for the acts of an independent contractor. Subject to specific exceptions, Section
409 of Restatement does express the general
principle that an employer of an independent contractor is not liable for physical
harm caused to another by an act or omission of the contractor or his servants.
The exceptions are numerous, but fall into three general categories.
- Negligence of the employer in selecting, instructing, or supervising
- Nondelegable duties of the employer that arise out of some relation
toward the public or other persons.
- Work which is specifically, peculiarly, or inherently dangerous.
Certainly, the first category of exceptions above cannot be properly categorized
as vicarious liability as it is the direct negligence of the employer (additional
insured) and not the independent contractor (named insured) that is the basis
for liability. This basis of liability is more correctly categorized as direct liability and may be imposed upon
the additional insured (employer) even if liability results from the sole negligence of the additional insured.
The second and third exceptions, although categorized in Restatement as falling within the rules
of vicarious liability, appear distinguishable from vicarious liability as defined
in Black's as the liability is not based solely on a relationship. Rather, it may
be argued, that a separate element must be present in addition to the relationship with the
independent contractor—a non-delegable duty or inherently dangerous work.
Liability of Additional Insured
The above is not to suggest that the additional insured can never be held
liable for actions of the named insured. The exceptions enumerated above in Restatement will be applied as deemed
appropriate by the courts. Depending on the definition adopted, there is, however,
a genuine question as to whether or not an additional insured (employer) can,
under any circumstances, be held vicariously liable for the acts of a named
insured (independent contractor) and therefore receive any protection as an
Litigation has been ongoing over similar coverage issues. A few insurers
have been using additional insured endorsements that exclude coverage if the
additional insured is negligent, purporting to provide coverage only if the
additional insured is vicariously (and not directly) liable for the named insured's
actions. If an additional insured cannot be vicariously liable for the actions
of an independent contractor (the named insured), litigants have contended that
the additional insured endorsement provides no coverage and therefore the endorsement
is illusory. (See also Is Additional Insured
Coverage Becoming Just an Illusion?, Joseph P. Postel, July 2002, IRMI.com.)
This is more than an academic issue—if coverage for an additional insured
applies only if the additional insured is
vicariously liable for the activities of the named insured, very little, if
any, coverage may be provided to the additional insured. If this is ISO's intent,
coverage may be very limited indeed.
ISO Newly Revised Additional Insured Endorsements
In their Circular filing for the newly revised additional insured endorsements,
ISO does raise the issue of whether the additional insured endorsement is to
provide coverage only for the additional insured's vicarious liability arising
out of the named insured's acts or coverage for the additional insured's sole
A Middle Ground
It does appear to be ISO's intent to stake out middle ground. ISO points
out in their Circular that the revised additional insured endorsements will
not provide coverage for the additional insured's sole negligence, but will
provide coverage for what ISO refers to as the additional insured's "contributory
negligence." In other words, the newly revised additional insured endorsements
provide coverage to the additional insured that is broader than just vicarious
liability arising out of acts of the named insured.
Caused in Whole or in Part
The newly revised endorsements, which include the most commonly used ISO
additional insured endorsements, will provide coverage for the additional insured
but only with respect to liability for bodily injury, property damage, personal
injury, or advertising injury caused in whole or
in part, by the named insured's acts or omissions or the acts or omissions
of those acting on behalf of the named insured. The phrase "arising out of"
has been eliminated.
When Coverage Applies
If injury or damage is caused in part by the additional insured and in part
by the named insured (or caused in part by others working on behalf of the named
insured-such as another independent contractor), coverage does apply to the
additional insured. In other words, if the additional insured is concurrently
or jointly negligent along with the named insured (or others acting on behalf
of the named insured), the revised additional insured endorsement will provide
coverage to the additional insured (to the extent of the additional insured's
liability). The additional insured does have coverage for their own negligence,
provided it is in conjunction with the named insured's negligence.
Further, if the named insured (or others acting on behalf of the named insured)
is the sole cause of the injury or damage, the additional insured is also covered
by the additional insured endorsement (to the extent of the additional insured's
liability). The latter falls under the principle of vicarious liability—and
raises a genuine issue as to the extent of coverage, if any, actually provided
to the additional insured.
When Coverage Does Not Apply
By contrast, if the additional insured is the sole cause of the injury or
damage—and the named insured (or others acting on behalf of the named insured)
did not contribute to the injury or damage, the additional insured will not
have coverage. As it is the express intent of ISO to eliminate this sole negligence
situation, it follows that coverage will not apply to the additional insured.
Coverage also does not apply if the additional insured is currently or jointly
negligent with a person or organization other than the named insured or someone
acting on behalf of the named insured.
Nick's Plumbing was a subcontractor at a jobsite in Lansing, Michigan, controlled
by the general contractor, Chelsea's Builders, Inc. As required by contract,
Nick's Plumbing listed Chelsea's Builders on his CGL using the newly revised
Additional Insured—Owners, Lessees or Contractors (CG 20 10 07 04) endorsement.
Example One. A pipe Nick's Plumbing was installing
fell off the building and hit a pedestrian. It was determined that Nick's Plumbing
was careless in installing the pipe and Chelsea's Builders was also negligent
for failing to protect a passerby from falling objects. As the injury to the
pedestrian was caused in part by Nick's Plumbing (the named insured) and in
part by Chelsea's Builders (the additional insured), Chelsea's Builders, Inc.
is protected as an additional insured on Nick's Plumbing CGL for the claim by
Example Two. An employee of the roofing contractor
is injured in a fall when Chelsea's Builders does not properly set up a scaffold.
The injured worker demands damages from Chelsea's Builders and it is determined
that Chelsea's Builders improper placing of the scaffold is wholly the cause
of the injury. Chelsea's Builders expects Nick's Plumbing CGL insurer to pay
for injuries to the worker. As the injury to the worker was not caused in whole
or in part by Nick's Plumbing, Inc. (the named insured), Chelsea's Builders
(the additional insured) has no coverage as an additional insured for the injured
worker's claim. The injury arose out of the sole negligence of Chelsea's Builders
(the additional insured), who will have to rely on their own CGL policy for
coverage for this incident.
Example Three. Nick's Plumbing uses Acme Welding
to weld some large piping. Sparks from the welding ignite the adjacent building,
causing a serious fire. A court determines that Acme Welding's careless use
of welding equipment was the prime cause of the fire and that Chelsea's Builders
was also at fault in not properly supervising the welding operations. Chelsea's
Builders again expects Nick's Plumbing CGL insurer to pay for the damage caused
by the fire. As Acme Welding, acting on behalf of Nick's Plumbing (the named
insured), partially caused the damage, Chelsea's Builders is protected as an
additional insured on Nick's Plumbing's CGL for their liability for damage to
Example Four. Chelsea's Builders directly contracts
with an iron and steel subcontractor. The crane being used to lift the beams
collapses, injuring several workers and pedestrians. The investigation shows
that the iron and steel contractor was not qualified and competent to perform
the work delegated by Chelsea's Builders. Both the iron and steel contractor
and Chelsea's Builder's were found to be jointly responsible for the collapse
of the crane and resulting injuries and damages. Even though Chelsea's Builders
was not solely negligent, they will have no coverage under Nick's Plumbing CGL
policy as an additional insured as the injuries and damage was not caused in
whole or in part by Nick's Plumbing or by anyone acting on behalf of Nick's
Plumbing (coverage for Chelsea's Builders would also be eliminated by other
limitations found in Nick's Plumbing additional insured endorsement).
Amendment of Insured Contract Definition
ISO has also introduced an optional endorsement entitled "Amendment of Insured
Contract Definition" (CG 24 26 07 04). The endorsement changes the definition
of the "insured contract," part f., to that part of any other contract or agreement
pertaining to the named insured's business under which the named insured assumes
the tort liability of another provided the bodily injury (BI) or property damage
(PD) is caused, in whole or in part, by the named insured or those acting on
the named insured's behalf.
The intent is clear—if coverage for the sole negligence of an additional insured is being eliminated, contractual liability coverage for that
portion of an indemnity agreement in which the named insured has assumed liability
for the sole negligence of another is also being eliminated.
Broad Form Blanket Contractual Liability Coverage
The effect of the new amendment of insured contract definition is to reduce
contractual liability coverage from broad form blanket contractual to intermediate
form blanket contractual coverage. Although intended to be used along with the
new additional insured endorsements, it appears that amendment of insured contract
definition endorsement may be used at any time to limit contractual liability
The changes to the additional insured endorsements as well as the introduction
of the new limitation to the definition of "insured contract" are characterized
by ISO as reductions in coverage. Policyholders whose insurers use the new forms
may be confronted with a couple of problems.
First, the new additional insured coverage may not comply with a policyholder's
existing contractual requirements. Real estate leases, for example, are often
multiple year agreements that may require a tenant to provide coverage to the
landlord that is broader than the revised additional insured endorsements will
provide. A landlord may expect that their additional insured status on the tenant's
policy will protect the landlord for claims by business invitees of the tenant
that are injured on the premises, regardless of whether the liability arises
out of the sole negligence of the landlord.
Further, additional insured requirements found in various contracts or agreements
are often vague or ambiguous. Phrases such as "lessor is to be a coinsured on
lessee's public liability insurance" are common. Does the quoted requirement
allow the policyholder to eliminate coverage for the additional insured's sole
negligence? The answer may ultimately be decided in legal actions brought against
the policyholder alleging breach of contract.
Second, as the new additional insured endorsements are not time tested, and
based on the historical position of ISO and their member insurers, some insurers
may be inclined to interpret the revised endorsements to provide coverage only if the additional insured is vicariously liable
for the acts of the named insured. As documented above, such an interpretation
may greatly reduce or practically eliminate coverage to the additional insured,
leaving the policyholder susceptible to breach of contract litigation and the
insurer a target for declaratory judgment actions.
Finally, the optional reduction in contractual liability coverage from Broad
Form to Intermediate Form by use of the new Amendment of Insured Contract Definition
endorsement may evolve into an underwriting practice independent of the use
of any additional insured endorsements. While many jurisdictions do not allow
indemnification for the sole negligence of another, some do allow such indemnification.
Policyholders who need (possibly because of an existing indemnity agreement)
broad form contractual coverage may find it is no longer available or available
on a very limited basis for significant additional costs.