More than 18 years (and 5 editions) after
Additional Insured Book, the use of additional insured status as a
contractual risk transfer technique remains one of the most misunderstood
and controversial practices in all of risk management.
by Jack P. Gibson and
W. Jeffrey Woodward IRMI
A complicating factor that has arisen in the past 5 or so years is the
advent of nonstandard endorsements that sometimes take drastically different
approaches to granting or restricting the coverage provided to an additional
insured in a commercial general liability (CGL) policy. Indeed we have
collected nearly 300 hundred different nonstandard CGL endorsements that are
used by insurers to add additional insureds to liability insurance policies.
With the hope of clearing some of the confusion regarding these
endorsements, we presented an IRMI Webinar, "Additional
Insured Endorsements: The Good, the Bad, and the Ugly," in May 2009. It
focused on nonstandard additional insured endorsements used with the CGL
insurance policy, comparing them to the standard Insurance Services Office,
Inc. (ISO) endorsements. This article is the first of a two-part series that
presents a selection of the questions submitted by the attendees and our
brief answers in reply.
While a few of the questions do refer back to the Webinar presentation,
most are self-standing. If you attended the Webinar, you received a link to
the archived version in an e-mail that allows you to review it again. If you
were unable to attend, the archived version of the
Webinar will be
available on IRMI.com for purchase through November 2009.
For ease of understanding, we arranged the questions into five categories
Since most of the questions fall into the
scope of coverage category, this article deals exclusively with these.
2, which will be published in a couple of weeks, will then tackle the other
four categories of questions. Check back in a few weeks for part 2 or watch
for a link to it in IRMI Update.
Many of these questions and answers have also been posted in the IRMI Group
on LinkedIn to allow discussion among IRMI Group members. If you are a
member of LinkedIn, join the
IRMI LinkedIn Group
and add your thoughts on these issues.
discussion in the IRMI Webinar was (and these answers to questions are)
based on the current July 2004 editions of both CG 20 10 and CG 20 33
additional insured endorsements. It is easy to recognize these editions
because of the reference to injury or damage "caused, in whole or in part,
by your acts or omissions."
We did refer in passing to the original November
1985 edition of CG 20 10, which covered the additional insured with respect
to "liability arising out of your work for the additional insured." That
language—rarely, if ever, available anywhere to the best of our
knowledge—provided coverage (1) for the additional insured's sole negligence
and (2) with respect to the named insured's completed operations.
No person or
organization is an insured with respect to the conduct of any current or
past partnership, joint venture or limited liability company that is not
shown as a Named Insured in the Declarations.
The ISO additional insured
endorsements do not modify this CGL wording in any way. As a result, if a
partnership, joint venture, or LLC is added to the CGL policy as an
additional insured, doesn't this provision effectively preclude coverage
since the endorsement doesn't modify this CGL provision? The way I read the
CGL language, partnerships, joint ventures, and LLCs are
only covered if shown as a
Named Insured on the
Declarations page. Do you agree? I know there is at least
one federal court case, Bott v. J.F. Shea Co., Inc., 299 F.3d
508 (5th Cir. 2002), that supports this, but it involved a blanket
additional insured endorsement that didn't specifically name any of the
additional insureds. Despite that, do you concur that it wouldn't matter
even if the entity was named on an additional insured
endorsement like the CG 20 10, since it's not named on the Declarations page
as required by the CGL wording?
It seems clear that the "Who Is an Insured"
provision pertaining to joint ventures, partnerships, and LLCs is intended
to keep the persons and organizations already listed as insureds in Section
II from being afforded insured status with respect to a joint venture,
partnership, or LLC in which the named insured is a participant. By
requiring the disclosure of any joint ventures, partnerships, or LLCs in
which any of the named insureds or other insureds are members, the insurer
is provided an opportunity to underwrite the risk and charge an appropriate
premium for the risk.
In circumstances when an entity that would normally
seek additional insured status under another party's CGL policy is a joint
venture, partnership, or LLC, there is no underwriting justification for
applying the limiting language at the end of Section II of the policy to
prevent such insured status from being arranged by endorsement. (For
example, a project owner seeking AI status under its general contractor's
policy could easily be a partnership or LLC; just as it is not uncommon for
two or more general contractors to form a joint venture and require AI
status under their subcontractors' policies.) Under arrangements of this
kind, the provision of insured status to such entities should be no more
problematic than it would be with any other kind of additional insured
(e.g., a corporation).
We believe that two details of insurance policy
interpretation would support arranging additional insured status in this
way. One of these details is the rule of insurance policy interpretation
that a specific policy provision (such as scheduling an
additional insured by endorsement) supersedes a general policy provision (such as the Section II limitation regarding partnerships,
etc.). The other detail is the language of standard additional insured
endorsements. For instance, endorsement CG 20 10 begins this way: "Section
II—Who Is an Insured is amended to include as an additional insured the
person(s) or organization(s) shown in the Schedule…." One of the ways in
which Section II would have to be "amended" by this language to afford
additional insured status to a partnership, etc., is to eliminate the
restriction on partnerships, etc., at the end of Section II—with respect to
the particular additional insured scheduled in the endorsement. The
endorsement says it will amend the policy so as to include insured status
for the scheduled party, and we think that's exactly what it does.
Shea involved a subcontractor who was required to add a joint
venture of general contractors as an additional insured. Instead, it added
only one of the joint venturers as an insured under its policy. The court
recognized the contractor's insured status by virtue of the endorsement, but
still applied the restriction regarding partnerships. In other words, it
ruled that the individual joint venturer was an insured but not in
connection with the operation of the joint venture. The court's decision
does not address in what way coverage would have been amended if the joint
venture itself had been properly scheduled as an additional insured. We
believe that, in that alternative situation, our rationale above would
establish coverage for the joint venture despite the language of Section II.
additional insured endorsement intended for the purpose of adding architects
or engineers as additional insureds—CG 20 32, Engineers, Architects or
Surveyors Not Engaged by You—does contain its own design professional
liability exclusion. Thus, if that endorsement were used, the named insured
contractor would not be providing coverage for that exposure even if the
policy itself contained no such exclusion. If there were no such exclusion
in either the CGL policy or in the AI endorsement (a nonstandard endorsement
without an A/E professional exclusion, for example), then the additional
insured would indeed receive some coverage for the professional liability
exposure. That coverage would, however, be subject to the CGL terms and
conditions that make professional liability coverage under the policy
difficult to establish (such as the requirement of an "occurrence").
question does point out one of the drawbacks of using an overly broad grant
of blanket additional insured coverage, as may be the case with endorsements
that provide automatic status to anyone the named insured, for example,
"agrees in a written contract or agreement to add as an additional insured."
Absent some additional limitations on the coverage scope included in the
endorsement itself, only the terms of the CGL policy will limit the
additional insured's coverage. A careful study of the ISO forms reveals that
many of the endorsements include provisions and restrictions that match the
type of contract for which the endorsement is intended, whether
construction, rental agreements, franchise agreements, vendors, leases, etc.
It is probably impossible to draft a single endorsement that will
contemplate every type of contract into which an insured might enter.
Coverage for suits brought against an additional
insured by an injured employee of the named insured (often called
"third-party-over actions") should be covered under any edition of standard
ISO additional insured endorsements CG 20 10 or CG 20 33. Some uncertainty
attaches to this question with regard to the current (July 2004) editions of
those endorsements, which require that injury be caused at least in part by
an act or omission of the named insured employer. No allegations of
negligence or fault on the part of the named insured will be made in
connection with such suits because the named insured's legal obligations to
the injured party will be addressed by the workers compensation system,
which does not operate on the basis of allegations of fault.
though, that in practically every conceivable case, some act or omission of
the named insured employer (whether negligent or not) can be pointed to as
one cause of work-related injury to the employee. Thus, a sustainable
coverage denial for these types of claims based solely on the current
endorsements' requirement that the named insured contribute to the cause of
the loss should be an exceedingly rare event.
The standard CGL policy defines "your work" as "work or
operations performed by you or on your behalf." That language has been
consistently interpreted by the courts to mean both work that
performed by the named insured, and work that
performed by the named insured. In other words, both
ongoing operations and completed operations are included in the term "your
work." ISO acknowledged this meaning of the term in its filing materials
when it dropped "your work" in favor of "your ongoing operations" in the
1993 edition of several of the standard additional insured endorsements for
use in the construction industry.
You raise an excellent point. Previous editions of CG 20 28,
which provides additional insured status to the owner of equipment leased to
the named insured, contained an exclusion of injury or damage arising out of
the owner/lessor's sole negligence. That exclusion was eliminated in the
current (2004) edition of the endorsement. The issue of causation under CG
20 28 is especially problematic because the named insured will virtually
always be at least a partial cause of any injury or damage that occurs under
the lease—at least in those cases when the named insured is operating the
leased equipment. Under such circumstances, the owner/lessor could still be
the only negligent cause of an accident (say, through
faulty maintenance of the equipment), and that sole negligence would be
covered under CG 20 28.
Assuming that a contractor/lessee is not assuming
liability in the lease for fault that arises exclusively out of negligent
maintenance or some other instance of sole negligence on the owner/lessor's
part, the contractor's interests might be well served by putting a "sole
negligence of the additional insured" exclusion back into the endorsement.
If, on the other hand, the contractor is holding the owner/lessor harmless
for the latter's sole negligence, there is little to be gained by
restricting the coverage available for the owner/lessor under the AI
Assuming the project owner drafted the contract, it is likely the courts
would interpret any ambiguities against the owner. Of course, how this would
affect coverage under a blanket or automatic additional insured endorsement
would depend on the specific language of the endorsement and the contract.
If the owner specified no minimum limit of liability in the contract, it
would appear that the owner would not be covered as an additional insured
under many of the blanket additional insured endorsements used in the
marketplace. In such an instance, the owner would have to rely exclusively
on the indemnity provision in the contract. This illustrates why we believe
that both indemnity clauses and insurance requirements are important to
effect solid risk transfers.
If the 2001 edition of CG 20 10 (the ISO endorsement
used to comply with construction contracts) is available from the insurers
that cover the contractors or subcontractors you retain, it would arguably
provide broader coverage than the July 2004 edition since there is no
question under the 2001 "arising out of" language that the AI is covered
even for its sole negligence as long as liability can be tied in some way to
the named insured's operations.
However, it is important to understand that,
when ISO files a new policy form or endorsement, it withdraws the previous
edition of that form or endorsement. As a result, previous editions of the
additional insured endorsements—whether, for example, the October 2001 or
November 1985 editions—are no longer approved for use in most states.
Therefore, the insurer would be likely required to make a special filing to
use them. It is our understanding that, in the current marketplace, these
older endorsements are at best difficult for most contractors to secure and
impossible for many. Based on this marketplace reality as well as our belief
that the current endorsements will be found by the courts to be nearly if
not equally as broad as the previous versions, we advocate specifying the
current versions of the endorsements in contract insurance requirements.
Note: For more, see
Answers on Additional Insured Issues—Part 2.
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