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System Requirements

Additional Insureds and Completed Operations

January 2001

Construction contracts require additional insured status that will respond to completed operations claims. Contractors faced with such obligations often attempt to have additional insured endorsements drafted with older language in the belief that this provides the required coverage. This article discusses a recent court decision that should provide reassurance that contractors who do so are complying with the insurance requirements of their contracts.

by Jeff Woodward

It has long been a standard practice in construction projects for parties who are additional insureds under other parties' liability policies to require that the additional insured status extend to completed operations. A project owner, for example, faces loss exposures both on account of its contractors' operations in the course of construction (damage to adjacent premises, for example, or injury to a visitor at the job site); and due to claims arising out of the completed project (a dangerous condition in a finished building).

In 1993 Insurance Services Office, Inc. (ISO), revised several of its standard additional insured endorsements, including the endorsement most commonly used in connection with construction projects (endorsement CG 20 10), specifically to rule out the additional insured's protection against completed operations claims. Coverage under the revised endorsements applies only to liability arising out of the named insured contractor's or subcontractor's "ongoing operations" for the additional insured. In explaining its revision of the standard forms, ISO commented that it was never the intention of the insurance industry to provide additional insureds with completed operations coverage.

Encouraged by the 1993 change in standard additional insured language, or by ISO's explanatory comment about the insurance industry's attitude toward completed operations coverage for additional insureds—or quite possibly by both—a number of insurers began reexamining their positions with respect to the coverage that was available under pre-1993 versions of endorsement CG 20 10. If there was never any intent to give additional insureds completed operations coverage (the insurers' reasoning went), then perhaps there is nothing specific in the 1986 or 1988 editions of the additional insured endorsements that would afford such coverage either. The language of those earlier editions, which were always widely assumed to provide completed operations coverage, reads as follows.

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 work" for that insured by or for you.

The difference between this language and that of the 1993 "no-completed-operations" revised version is in the use of the phrase "your work" in the older version and "your ongoing operations" in the newer. "Your ongoing operations" clearly does not include completed operations. But does "your work"?

A California appellate district court was recently called on to answer that very question—a question that had largely gone unasked and unanswered until the issue of coverage intent was brought to life by ISO's revision of the standard endorsement language. The court's decision, in Pardee Construction Co. v Insurance Company of the West, Cal 4th App Dist Div 1 (D031946, 2000), addresses some interesting issues related to the time period during which completed operations coverage applies, and the intent of parties to construction contracts in requiring and providing additional insured status.

The case arose out of a multi-phase residential construction project that lasted for a period of at least 3 years. In the course of the project, the developer-general contractor (Pardee) contracted with a number of subcontractors, in each case requiring the subcontractor to add Pardee to its commercial general liability (CGL) policy as an insured.

Seven years after completion of the project, Pardee was sued by residents for property damage arising out of alleged construction defects involving work of the subcontractors. Pardee received partial funding of its defense against these suits from some of the insurers under whose policies it was an additional insured, but had to pay part of the cost of defense itself. It then brought an action against four of its subcontractors' general liability insurers that had declined to provide a defense, and that suit resulted in the appellate district court's decision.

The subcontractors' insurers had declined to defend Pardee on a variety of grounds. The most significant from a coverage standpoint was the argument that the policies had been written after the allegedly defective construction was completed, during later phases of the project, and were not intended, therefore, to cover the operations out of which the claims arose—either course-of-construction or completed operations claims. Pardee argued, on the other hand, that nothing in the language of the policies or the attached additional insured endorsements precluded coverage for completed operations claims against the additional insured.

Some of the additional insured endorsements in question were versions of standard ISO endorsement CG 20 10, in pre-1993 editions, which provided additional insured status to Pardee with respect to liability arising out of "your work" [i.e., the subcontractor's work] for that insured by or for you [the subcontractor]. One of the additional insured endorsements was an insurer's independently filed form, which provided Pardee with additional insured status "only to the extent that [Pardee] is held liable for your [the subcontractor's] acts or omissions arising out of and in the course of operations performed for [Pardee] by you or your subcontractor."

The insurers asserted several arguments against their duty to defend Pardee on the basis of the language of these endorsements. The most significant was that the coverage being provided to Pardee for claims arising out of "your work" (i.e., the subcontractor's work) did not include completed operations, but rather only work in progress. The court ultimately dismissed this line of argument on a number of grounds. It pointed out that the ISO CGL definition of "your work" includes warranties and representations—liability exposures that do not even exist until the work is completed.

The court quoted the analyses of a number of insurance commentators, all of whom agreed that "your work" includes completed operations. One of the authorities cited for this point was Contractual Risk Transfer by IRMI. That manual's explanation of the phrase "operations performed by you" as it appears in the policy definition of "your work" was quoted by the court as follows.

"Performed by you" in this definition can reasonably be understood to mean [work] "being performed by you" (i.e., work in progress) or [work] "that has been performed by you" (i.e., completed operations).

The court also invoked the principle of contra proferentem, the rule of policy interpretation holding that disputed meanings in insurance contracts should be construed against the party that offered the contract (i.e., the insurance company):

The insurers could have limited coverage by express policy language that coverage was limited to claims arising from work performed during the policy period. However, they did not . . . when an insurer elects not to use clearly limiting language in an additional insured clause, but rather grants coverage for liability arising out of the named insured's work, the additional insured is covered under the circumstances here without regard to whether the work is still in progress.

A final argument of the insurers in denying coverage to Pardee was their assertion that it was never the intent of the contracting parties that Pardee should have coverage for claims arising after the completion of the contracted work. The court characterized this assertion as "myopic spin."

Damage resulting from a subcontractor's work often does not arise for years. It is thus prudent for general contractors to obtain completed operations coverage as additional insureds from their subcontractors' insurers. Why would Pardee have required its subcontractors to maintain CGL coverage that included completed operations coverage and to name it as an additional insured on those policies unless it expected to be covered for the same completed operations as its subcontractors? Certainly that expectation is reasonable given that the additional insured coverage is intended by the insurance industry to cover vicarious liability that an additional insured may incur due to operations of the originally named insured.

Requirements of additional insured status that will respond to completed operations claims are still the rule in construction contracts. Contractors and subcontractors faced with the obligation to arrange such coverage frequently attempt to have additional insured endorsements drafted with language that matches that of the pre-1993 editions of CG 20 10. They do so in the belief that that older language provides the required completed operations coverage. The Pardee decision should provide some security for these contractors in the assumption that they are complying with the insurance requirements of their contracts.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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