Additional Insured Endorsements—A Potential Minefield (Part 3)
March 2006
Part 1 of this
series deals with the connection between the named insured and the additional
insured and provides some areas to consider in a basic analysis of any additional
insured endorsement. Part 2 examines the scope
and order of coverage.
by Craig
F. Stanovich
Austin
& Stanovich Risk Managers, LLC
This final installment on additional insured endorsements addresses additional
exclusions, coverage restrictions, and conditions.
Additional Exclusions
Be aware that exclusions are often added by additional insured endorsements
and may apply to the additional insured, the named insured, or both.
Products-Completed Operations Hazard
An example of such an exclusion can be found in the ISO Additional Insured—Owners,
Lessees or Contractors (CG 20 10 07 04) endorsement. The additional insured has no coverage for any
for injury or damage that occurs after work
is completed. Of course, Insurance Services Office, Inc. (ISO), has promulgated
a separate additional insured endorsement, Additional Insured—Owners, Lessees
or Contractors—Completed Operations (CG 20 37 07 04), that will provide the
additional insured coverage for injury or damage that occurs after the work is completed—work that is
included within the "products-completed operations hazard."
Difficult To Obtain
Unfortunately, the Additional Insured—Owners, Lessees or Contractors—Completed
Operations (CG 20 37 07 04) endorsement is notoriously difficult to obtain.
Many insurers simply do not wish to provide such coverage. For some in the construction
industry, the difficulty (or impossibility) of obtaining certain specific additional
insured endorsements seems of little consequence. Witness the continued demand
for the ISO Additional Insured endorsement CG 20 10 11 85 edition, which is
generally not available today.
Other Examples
A couple more examples: Exclusions are also added to the Additional Insured—Lessor
of Leased Equipment endorsement (CG 20 28 07 04) (coverage is excluded for any
injury or damage that takes place after the equipment lease expires) as well
as the Additional Insured—Managers or Lessors of Premises (CG 20 11 01 96) (coverage
is excluded for any "occurrence" that takes place after the named insured ceases
to be a tenant and coverage is excluded for any structural alterations, new
construction or demolition performed by the additional insured or on the additional
insured's behalf).
Company Specific Additional Insured Forms
As with the "other insurance" condition, an insurer's own additional insured
forms vary widely as to the exclusions that have been added and to whom the
exclusions apply. This is another area that requires a detailed review.
Injury to Employee Exclusion
For example, one insurer adds an exclusion for injury to the employees of any insured. The intent seems clear—if an
employee of the named insured brings claim
against the additional insured for injuries
suffered at a job site, which is a very common event, no coverage is afforded
the additional insured. This exclusion is quite troublesome as it eliminates
coverage often provided to the additional insured. The result may be the named
insured will be found not to have complied with insurance requirements of a
construction agreement.
Other Coverage Restrictions
Exclusions do not contain all of the limitations that may apply to additional
insured endorsements. A careful reading of the entire additional insured endorsement
is vital to understanding the breadth of the coverage. The following coverage
restrictions are most often found in an insurer's own additional insured endorsements,
particularly those that offer automatic or blanket status to the additional
insured.
Written Contract or Agreement
The automatic additional insured endorsements require the named insured to
have agreed in writing (or in some cases in a permit) to add others to the policy
as an additional insured. Therefore, if the named insured agrees to add a person
or organization as an additional insured, but does not formalize the agreement
in writing (or no permit exists), the reliance on the automatic or blanket endorsements
is misplaced—the person or organization would have to be added separately as
a scheduled additional insured for coverage to apply.
Written Contract in Effect
Some insurers require not only the existence of a written agreement, but
further require the agreement to include a person or organization as an additional
insured to be in effect during the policy period.
While normally this should not pose a problem, it does broach the question as
to what exactly the insurer means by "in effect."
Construction Contracts
Consider a construction contract where the insurance requirements are that
the subcontractor will add the owner and general contractor as additional insureds
to the commercial general liability (CGL) during the course of the work and
for 2 years after the work is complete (in this example the subcontractor is
expected to add the owner and general contractor as additional insureds for
the products-completed operations hazard). Once the project is complete, and
all the work called for under the contract finished, will the insurer for the
subcontractor consider the continuing obligation to list the owner and general
contractor as a written contract in effect during the policy period? The answer
should be yes—performance on the written contract is not complete until all
obligations are discharged—but clarification would be helpful here.
Limits
Many automatic or blanket additional insured endorsements will state the
limits of liability provided to the additional insured by the endorsement will
be the lesser of the limits required in the written contract or the policy limits.
Such a limitation is generally fair to both the named insured and additional
insured and a good idea. There is no reason to provide an additional insured
with greater limits than requested or required.
Breadth of Coverage
Similar to limits, some additional insured endorsements will restrict the
breadth of coverage provided to the additional insured by stating the actual
coverage provided will not exceed that which was agreed upon in the written
contract. This issue is a little trickier as the wording in many contracts as
to the breadth of coverage to be provided the additional insured is either lacking
or completely nonexistent, resulting in disputes and litigation. However, if
the contract wording is clear, this is a desirable restriction as respects the
named insured. Once again, there is no need to provide the additional insured
with broader coverage than required.
Contractual Liability
One insurer restricts contractual liability coverage available to the named
insured in their additional insured endorsement. By their form, if the named
insured has not agreed in a written contract to add the additional insured for
the products-completed operations coverage, the endorsement amends the definition
of "insured contract" so the named insured has no contractual liability coverage
for an agreement to indemnify the additional insured for injury or damage included
within the products-completed operations hazard.
As hold harmless and indemnity agreements, such as the American Institute
of Architects A201 General Conditions for the Contract of Construction—1997
edition, often do not make any distinction between indemnity for operations
claims and indemnity for completed operations claims, this restriction is quite
harsh and may leave the named insured with no contractual liability coverage
for what might be a large indemnity obligation.
Additional Conditions
The ISO additional insured endorsements do not usually change the conditions
that apply to an additional insured. However, it is very common for insurers
who use their own endorsements to change or add conditions that apply to an
additional insured. For example, several insurers require the additional insured
to give prompt notice to the insurer of any occurrence or offense that may result in a claim as well as to immediately
forward legal papers. Another condition applicable to the additional insured
is the requirement to tender defense and indemnity to any other insurer that may cover the loss.
One insurer goes a step further and demands the additional insured make available
any other insurance that the additional insured has for a loss, with no exception
for the additional insured's own insurance. Such conditions may weaken or completely
eviscerate that "primary and noncontributory" wording.
Conditions are important to consider as failure to comply may result in denial
of coverage to the additional insured—and the resulting uproar from the additional
insured that they were never made aware or agreed to such conditions now being
imposed on them.
Conclusion
Additional insured endorsements seem to be like snowflakes—no two are alike.
Not only do additional insured endorsements reflect a great discrepancy in the
breadth of coverage provided to additional insureds, the issues that underlie
coverage are numerous and complex. Whether you are providing additional insured
coverage for others, requesting additional insured coverage for your organization,
providing advice to clients about additional insured coverage, or placing and
certifying coverage for additional insureds, understanding the workings of additional
insured coverage is imperative.
Part 1 of this series deals with the connection
between the named insured and the additional insured. Part 2 examines the scope and order of coverage.
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.