As part of their insurance and indemnity requirements, project owners and
general contractors often require additional insured coverage in excess of $1
million from the project’s subcontractors. Subcontractors ordinarily satisfy
this limits obligation through a combination of primary and excess general
liability insurance, with parties expecting the coverage to be consistent
throughout.
Acknowledgment
The author would like to acknowledge and thank
coauthor Brian J. Clifford for his contributions to this commentary.
This coverage is usually verified at the onset only by copies of the
certificates of insurance and additional insured endorsements, not the
production of complete policy forms. So, it often comes as a surprise that the
additional insured coverage under excess policies can be more restrictive than
the primary. The resulting gap in coverage can present unique exposure
considerations for upstream and downstream parties alike.
Unique Considerations for Additional Insured Coverage on Excess
Insurance
Excess policies are often issued on a "follow-form" basis, meaning
that they adopt and incorporate the terms and conditions of the primary layer
policies. However, it can often be mistakenly assumed that a so-called
follow-form policy provides the same coverage to the additional insured that
the underlying policy provides.1 In fact,
follow-form policies almost always state that the excess policy follows the
terms of the underlying policy except to the extent that the excess
policy's terms differ, in which case, the language of the excess
policy will control. See Insituform Techs., Inc. v. American Home
Assur. Co., 566 F.3d 274 (1st Cir. Mass. May 22, 2009) (no excess coverage
where excess policy does not include amendments to exclusions that had been
included in primary policy); In re HealthSouth Corp. Ins. Litigation,
308 F. Supp. 2d 1253 (N.D. Ala. 2004) (excess policies "follow form"
except where they specifically provide otherwise).
As other IRMI articles have pointed out, an excess follow-form policy
follows form except where it does not follow form. See "Commercial
Umbrella Policy—A Few Things To Consider" by Craig Stanovich. This
difference in coverage can undermine the contracting parties' expectations
and, in the case of narrower coverage, quickly generate tension among them.
Coverage Gaps To Look for
The "follow-form" gap usually becomes an issue when the additional
insured seeks excess coverage on a primary and noncontributory basis or a
waiver of subrogation in favor of the additional insured.
Primary and Noncontributory—Excess follow-form policies
almost always have an "Other Insurance" section stating that, when
other valid and collectible insurance applies to damages that are also covered
by the policy, the policy will be excess over the other insurance. Thus, if the
primary policy provides coverage to the additional insured on a primary and
noncontributory basis, the follow-form excess will not provide this coverage
because the "Other Insurance" clause is different from the
primary-and-noncontributory coverage of the underlying policy.
Without an endorsement making the excess apply to the additional insured on
a primary and noncontributory basis, many courts conclude that the excess
policy sits excess over any valid and collectible primary layer
insurance, including the additional insured's own policy.
Waiver of Subrogation—Additional insured agreements
customarily require the named insured's policy to waive the insurer's
right of subrogation in favor of the additional insured.2 Many follow-form policies have a "transfer of rights of
recovery" clause that transfers any rights to recover all or part of any
payment that the excess insurer has made under the policy to the insurer.
Again, because the "transfer of rights of recovery" clause is
different from any waiver of subrogation endorsement on the underlying policy,
the "transfer" clause bars the waiver of subrogation in favor of the
additional insured at the excess level. This too must be corrected by an
endorsement.
Possible Modifications to Excess Policies
Market forces play a significant role in a policyholder's ability to
change additional insured coverage. Generally speaking, a policyholder's
access to the excess market tends to be commensurate with the amount of risk
the policyholder is willing to transfer by means of insurance. Policyholders
that are more willing to retain risk are frequently reluctant to spend money on
insurance premiums. But, faced with the challenge of obtaining broader coverage
endorsements, these policyholders may be forced to purchase coverage in a
market that serves clients who are used to transferring steeper and more
complex risk by paying higher premiums.
These market forces particularly become a problem when small subcontractors
bid on large projects. Smaller subs tend to work in limited geographic areas
and generally have more modest risk exposure than larger subs. When these subs
buy excess insurance, they are usually not used to paying premiums to cover
exposure to the complex risks involved with bigger projects. In fact, sometimes
the reason small subs buy excess insurance in the first place is to comply with
the higher limits requirements they encounter when they bid on bigger jobs.
When Modifications of Additional Insured Coverage Cannot Be Made
For upstream parties, you can avoid some of these problems by planning in
advance. You will generally have an easier time getting the additional insured
coverage you want from subcontractors who have experience on big projects. But
be realistic and recognize that subs may try to "bid up" into big
projects to gain experience and commercial growth. You can plan for this by
making sure your contracts and bid documents specify all the terms of
additional-insured coverage that you expect from your subcontractors. This
candor puts bidding subs on notice that they may have to figure increased
premiums into their costs.
For upstream and downstream parties alike, persevere and think creatively
about ways to advance the dialogue and improve the process. For example,
sometimes brokers have challenges changing policy endorsements if they have not
had relevant experience. Open communication and education can help. Have a
discussion with your own broker about commercially available forms, and share
what you learn with your business partner. If your work involves bigger
projects, chances are you have a seasoned broker willing to educate you on the
availability of cover in certain markets. Approach this as a learning
opportunity, and be generous about passing this knowledge along. Educated
policyholders improve the insurance market for everybody.
If all else fails, you may have no other choice but to accept the additional
insured coverage as it is for a particular project. This is especially so if
you have a longstanding relationship with the other party and the contracts
have not clearly spelled out the insurance requirements. Good relationships
between contractors have a value of their own, and you may consider alienating
a good business partner is riskier than living with some coverage gaps. Still,
when the project is over, discuss your coverage concerns with your broker and
your subcontractor for future projects.