How Well Does That Blanket Cover You?
February 2001
Blanket additional insured endorsements are
useful tools for preventing administrative oversights and reducing paperwork,
but they also carry risks for both the named and additional insureds. Discover
methods contractors and subcontractors can use to minimize the risks of breaching
their contracts when using blanket AI endorsements.
by Ann Hickman, CPCU, ARM
IRMI
One of the age-old problems in obtaining additional insured status under
a contractor's or subcontractor's insurance policy is making sure the appropriate
actions have been taken to effect the required coverage. Certificates of insurance
are commonly used to verify that the certificate holder has been added as an
additional insured, but because they are not part of the policy, information
contained on certificates may not be binding on the insurer. This article examines
the use of blanket endorsements to effect additional insured status as a means
of overcoming at least some of the imperfections of the process.
Additional insured status is a common and effective tool for protecting one
party from certain risks arising out of another party's activities. For example,
municipalities typically require additional insured status from anyone holding
a public event on city property, such as concerts, parades, and carnivals. The
rationale behind this requirement is that the activities expose the city to
certain risks that would not otherwise exist, so the person or organization
that creates the risk should assume responsibility for any losses incurred as
a result of the activities. In the case of a public concert, for example, if
someone is injured when the crowd gets unruly, both the city and the concert
sponsor will likely be sued. As an additional insured under the sponsor's policy,
the city can tender the claim under that policy instead of having to file the
claim under its own insurance. The risk has been effectively transferred to
the concert sponsor (assuming the available policy limits are sufficient to
cover the claim.)
On a construction project, the owner typically
requires additional insured status under the general contractor's liability
insurance policies; general contractors may do likewise with subcontractors.
As in the example above, the rationale is that the construction activities create
certain risks that would not otherwise exist and increase the magnitude of certain
other risks. For example, a construction project in a retail district carries
the risk that a pedestrian will be injured from flying debris, collapsed scaffolding,
or a tool dropped from several stories up. These risks are directly related
to the contractor's operations on the site. Further, goes the rationale, the
contractor (or subcontractor) performing the work is generally in the best position
to prevent or control losses arising out of the work, and should therefore bear
the corresponding financial risk.1
However, requiring additional insured status does not necessarily guarantee
that you will get it. The named insured (contractor or subcontractor) must notify
the insurance company of the request, and absent a provision to the contrary,
the person or entity requesting additional insured status must be listed, or
"scheduled", by name on an endorsement that is attached to the policy. Figure
1 demonstrates the language of a typical scheduled additional insured endorsement
used in conjunction with construction projects, where the general contractor
(Kyle Volz Construction) is the additional insured.
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FIGURE 1
ISO SCHEDULED ADDITIONAL INSURED ENDORSEMENT
LANGUAGE*
SCHEDULE
Name of Person
or Organization:
Kyle Volz
Construction
Company
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Who Is An Insured (Section II) is amended to include as an insured
the person or organization shown in the Schedule, but only with respect
to liability arising out of your ongoing operations performed for that
insured.
*This figure contains an excerpt of the endorsement language, not
an exact reproduction.
Source: CG 20 10 03 97, Copyright,
Insurance Services Office, Inc., 1996
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Because this requirement is so common in construction contracts, some contractors
may handle hundreds of requests for additional insured status in a given year.
Further, because the contracting process is often drawn out, and the insurance
requirements given little more than a cursory review, this method of providing
additional insured status carries inherent risks of error and oversight. Whether
the result of failing to forward the request for additional insured status to
the broker or insurer, failing to ensure additional insured status under a new
or renewal policy, or some other oversight, a contractor (or subcontractor)
can easily find itself in breach of a contract, among other unpleasant outcomes.
Likewise, the would-be additional insured may find itself embroiled in a coverage
dispute with the insurer and a contract dispute with the named insured contractor;
meanwhile, it may be forced to tender the claim to its own insurer (or, if self-insured,
fund its own defense). All of these possible outcomes frustrate the intent of
the contracting parties.
Blanket additional insured endorsements were introduced as a means of avoiding
administrative errors and oversights in providing additional insured status.
These endorsements typically contain language indicating that additional insured
status is automatically provided when the named insured agrees to provide such
status. To avoid overly broad grants of coverage, these endorsements typically
limit their application to certain types of written contracts, such as construction
contracts or equipment rental agreements.
The obvious benefits of blanket, or automatic, additional insured endorsements
are that they protect against failure to add a party as an additional insured
in accordance with the contractual agreement, and reduce the administrative
burden of making each request individually. However, from the additional insured's
perspective, there are also some potential drawbacks to obtaining additional
insured status in this manner. First, until recently, blanket additional insured
endorsements had to be manuscripted as no standard endorsements were available.
Because they are not standardized, manuscript endorsements can differ from one
policy to the next. Consequently, they offer less predictability in terms of
scope of coverage, as well as how a court might interpret the language of the
endorsement.
Insurance Services Office, Inc. (ISO), introduced a standard blanket additional
insured endorsement in 1997, but it is still too new to offer a rigorous testing
by the courts. The coverage granting text of this endorsement, which is reproduced
in Figure 2, is similar to that found in recent editions of CG 20 10. Unfortunately,
the endorsement provides more restrictive coverage than many owners/contractors
require and includes some troublesome language. Specifically, it does not include
completed-operations coverage (neither do current version of the scheduled endorsements,
but many insurers have continued to offer the older versions of the endorsements
that do provide this coverage), and applies only to written contracts.
More troublesome than that, however, is the inclusion of a sentence stating
that additional insured status ends when the operations are completed. Although
ISO contends this sentence merely clarifies that no completed-operations coverage
is intended, this phrase could be invoked by some insurers to attempt to eliminate
coverage for losses that occur while the work is in progress but do not get
filed as claims until after the project is completed. We find this wording troublesome
enough that, until it is remedied, we recommend sticking to manuscript endorsements
that do not include this type of statement.
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FIGURE 2
ISO AUTOMATIC ADDITIONAL INSURED ENDORSEMENT
LANGUAGE*
A. Section II—Who Is An Insured is amended to include as an insured any person or organization for whom
you are performing operations when you and such person or organization
have agreed in writing in a contract or agreement that such person or
organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect
to liability arising out of your ongoing operations performed for that
insured. A person's or organizations
status as an insured under this endorsement ends when your operations
for that insured are completed. [Emphasis added.]
*An additional exclusion, which eliminates coverage for professional
design services, is not reproduced here.
Source: CG 20 10 03 97, Copyright,
Insurance Services Office, Inc., 1996
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Because blanket additional insured endorsements typically require a contractual
obligation on the part of the named insured to provide such status, those who
obtain additional insured status through such an endorsement must retain proof
of the contractual requirement to effect coverage. Even when the additional
insured's coverage does not apply to completed operations, claims arising out
of occurrences that took place during the course of construction may not surface
until years later. Some additional insureds assume that a certificate of insurance
showing additional insured status at the time of the occurrence will be sufficient
to trigger the insurer's duty to defend and indemnify. That is not necessarily
true. The additional insured will also need evidence that there was in fact
a contract requiring such coverage. While a certificate of insurance indicating
that the certificate holder has been added as an additional insured is evidence
of a contractual requirement, a better approach may be to require the certificate
to refer to the contract requirement. For example, the following language could
be required on the certificate:
In compliance with the contract requirements, certificate holder is an
additional insured under the policy.
If possible, the contracts themselves should be retained. (This should not
impose a significant additional burden in most instances, as construction contracts
are typically retained for access to indemnity and other provisions that may
come into play well after the project is completed.)
Finally, blanket additional insured endorsements restrict insurers ability
to provide notice of cancellation to additional insureds. Most insurance policies
require such notice to be provided only to the named insured. Additional insureds
often try to obtain a guarantee of notice of cancellation by modifying the certificate
language, but this is an unreliable approach. However, additional insureds in
some states, most notably California but possibly others, have added protection
regarding cancellation of coverage. Although the California statute requires
insurers to provide notice of cancellation to named
insureds, the courts have interpreted that to mean any insured who is
named on the policy, including "additional insureds." [See Kotlar v Hartford Fire Insurance Company, B133614,
Cal App 2d, (September 27, 2000)]
For this statutory right to apply, the additional insured must be listed
by name on the endorsement. (From a practical standpoint, when blanket endorsements
are used, the insurer generally doesn't know who the additional insureds are
until a claim is made; obviously insurers can't provide notice of cancellation
to as yet unidentified additional insureds.)
Summary
Blanket additional insured endorsements are useful tools for preventing administrative
oversights and reducing paperwork, but they also carry some risks for both the
named insured and the additional insured.2 Fortunately, these risks can be managed fairly effectively.
Owners and contractors requiring additional insured status should make certain
the additional insured requirement is part of a written and properly executed
contract, and retain copies of these contracts (as well as the certificates
of insurance) for an appropriate period of time—at least 3-5 years if completed-operations
coverage was required and included in the additional insured's coverage. Further,
they should stipulate in the contract insurance requirements a minimum scope
of coverage to be provided to them as an additional insured, i.e., the equivalent
of that provided under one of the standard ISO endorsements, such as CG 20 10.
(See Figure 1.) In California, additional insureds should
shun blanket endorsements and require that they be listed on the policy by name
to retain their statutory right to notice of cancellation.
Contractors and subcontractors using blanket additional insured endorsements
to provide contractually required coverage can minimize the risks of breaching
their contracts by sticking with language that has been tested, such as that
provided under ISO CG 20 10, and making sure the endorsement extends the contractually
required scope of coverage.
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