Additionally Insured or Held Harmful?
March 2000
Use of the additional insured and the hold
harmless clause approach without some other modifications to the CGL policy
can result in a risk being ineffectively transferred or not transferred at all,
contrary to the expectations of the parties.
by Richard
G. Rudolph
Seaver Rudolph and Associates
A common practice when a businesses or public entity contracts with another
is to require that the other party name the business or public entity as an
additional insured on its commercial general liability (CGL) insurance policy
in an attempt to transfer the risk. Another common practice is to use a hold
harmless or indemnification clause in a contract between the parties as part
of this transfer of risk. Quite often, both approaches are used jointly, just
to be sure, and to accommodate the inherent weakness of an unsecured indemnification
agreement.
The parties expect their CGL policies will support the transfers outlined
in the contract between them. However, use of the additional insured approach
and the hold harmless clause approach without some other modifications to the
CGL policy can result in the risk being ineffectively transferred or not transferred
at all, contrary to the expectations of the parties.
Since additional insureds should, and generally do, have their own insurance,
it is possible that the "Other Insurance" clauses of both the named insured's
insurance policy and the additional insured's own insurance policy will be activated
in the event of a claim. Further, there are possibilities for subrogation actions
against negligent parties in spite of their status as an insured party. Both
instances will give rise to results that were not intended by either party and
are beyond the goals of the parties to a contract.
There are two basic types of Other Insurance clauses found in the typical
CGL policy: primary and excess. The purpose of the primary clause is to make
it clear that the policy is intended to apply to all covered claims, and that
if other valid and collectible coverage with a primary Other Insurance clause
is available, the policy will still apply, but will share in the loss. The excess
clause distances its policy from other available insurance. One can view this
as a passive transfer of financial responsibility to the primary insurer paralleling
the transfer of financial responsibility between two contracting parties.
If the adjuster finds that one CGL policy has a primary Other Insurance clause
and the other an excess Other Insurance provision, the policy with the primary
provision will apply without any sharing of the loss until the limits of liability
are exhausted, regardless of what the parties originally intended. The insurance
policies dictate which insurer pays and how much-not the contract between the
two insureds.
Thus, if the Other Insurance clauses in the two parties' policies are not
compatible, it is possible the wrong party's insurance will pay, in part or
in whole, a result which will not reflect the intent of both insureds as expressed
and required in their transfer provisions. If the wrong party's insurance policy
pays, it appears the hold harmless provision is violated, as the indemnitee
was not held "harmless" by the indemnitor, also a result not intended by the
parties.
The conflict of Other Insurance clauses can be avoided if the provisions
are coordinated, but rarely does either party know what type of provision is
contained in the other party's CGL policy. One might assume that the provisions
have been made compatible to protect the insureds' best interests and contractual
agreements, but the reality is that such provisions frequently are not altered.
There are four possible combinations of Other Insurance clauses.
- Both primary
- Idemnitee excess, indemnitor primary
- Indemnitee primary, indemnitor excess
- Both excess
Combination 3. results in the exact opposite of the intent of the parties-the
wrong party's CGL policy pays first. Combinations 1. and 4. result in a loss
sharing based on equivalent provisions. Only Combination 2. reflects the contracting
parties' intent. Without any coordination of Other Insurance clauses, the expected
results, as intended by the contracting parties, are achieved in only one-fourth
of the possible combinations.
Until recently, there was no standardized solution to this dilemma. The typical
solution was to endorse the additional insured's own CGL policy, by a manuscripted
endorsement, with an excess Other Insurance provision. This approach suffered
from the following three weaknesses.
- Some insurers refused to use such endorsements as they were not filed
or court-tested.
- If both CGL policies had equivalent excess other insurance provisions,
both applied to the same loss.
- Neither party knew what provision the other policy had.
The recommended approach is to structure the relationship of additional insureds
through the Other Insurance clause to avoid unexpected conflicts of those provisions.
The critical wording in the additional insured's own CGL, provided either by
a manuscript endorsement, the Insurance Services Office, Inc. (ISO), endorsements
CG 00 55 03 97 (occurrence) and CG 00 56 03 97 (claims-made), or as built into
the 1999 edition ISO CGL forms, is a contingent excess clause.
For example, the Other Insurance clause in the 1998 editions of the ISO CGL
policy (both occurrence or claims-made) include the conditional wording
[this insurance is excess of other insurance...]
4. that is valid and collectible insurance available
to you as an additional insured under a policy issued to:
- a contractor performing work for you;
- a tenant renting or leasing land or premises from you;
- a lessee of equipment owned by you; or
- the operator of an oil or gas lease in which you have a nonoperating
working interest.
This wording avoids the possible conflict and sharing required by equivalent
Other Insurance clauses, as the language states the additional insured status
arises out of some type of contractual arrangement, e.g., construction agreement,
lease, or service contract.
Manuscript wording that approximates this ISO endorsement will achieve the
same result when the standard ISO endorsement is not available. Beware, however,
of manuscript endorsement wording that simply states "available to you as an
additional insured under another party's policy." This type of wording creates
a conflict between Other Insurance clauses when the two parties agree to name
each other as additional insureds.
Obtaining additional insured status and coordinating the Other Insurance
clauses does not successfully transfer the risk with certainty as long as a
subrogation possibility exists. Subrogation is the process of exercising the
right of recovery against a third party for damages paid out by the insurer
on behalf of an insured. As is commonly believed and supported by case law in
many jurisdictions, an insurance company cannot subrogate against its named
insured, as the named insured is a party to the insurance contract, not a third
party. In many of those same jurisdictions, an additional insured, a party on
the policy but not a party to the insurance contract (i.e., a third party),
has the same protection given to the named insured.
In some jurisdictions, however, an additional insured who contributes to
the loss that the insurer must pay could be held to be no different than a completely
unrelated third party for purposes of subrogation. Further, the possibility
of case law being overturned in those jurisdictions that bar subrogation against
additional insureds cannot be overlooked.
Since any such subrogation action would draw the party who attempted to transfer
his risk to another party directly back into a position of risk, this result
would clearly not be what the parties intended when the original contract, including
the hold harmless agreement, was inked. To avoid this possibility, however remote
as it might be, the party desiring additional insured status must obtain a pre-loss
waiver of subrogation. Further, the CGL policy should be endorsed to include
CG 24 04, "Waiver of Transfer of Right of Recovery Against Others To Us," to
avoid claims delays and difficulties.
Whenever one party does not fulfill its obligations under the contract, the
possibility of litigation arises. Not providing additional insured status when
such is required by the contract can give rise to a breach of contract action.
Having additional insured status makes the additional insured a target for subrogation
when he thinks he is protected, and, when a hold harmless agreement applies,
creates another possible breach of contract. The use of non-insurance transfers
and insurance transfers must be carefully thought out and executed if the intent
of both parties is to be realized and delays in claims settlement or other legal
unpleasantness avoided.
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