Expert Commentary

Additional Insured Status and Waivers of Subrogation

Clients and lawyers routinely ask why they are being asked to provide, or why they should ask for, waivers of subrogation when they are already included as additional insureds on the other party's insurance policy.


Construction Liability Insurance
January 2022

Acknowledgment

Thanks to Quynh-Anh Kibler for assistance in updating this article.

Additional insured status and waivers of subrogation generate scores of questions.1 Routinely, these terms are used interchangeably and lumped together as though they are a single concept. The prevailing thought seems to be that it is safer to request both of them in a contract even if parties don't understand why they need them or what purpose they serve. This often leads to disputes between parties about whether they will grant the status rather than why they should. It is generally true that using both risk-transfer devices serves to transfer greater risk to another party, but the reasons for doing so often evade the parties.

Subrogation and Waivers of Subrogation

Subrogation, in the insurance context, allows an insurer who has paid a loss or debt on behalf of its insured to recover from the wrongdoer who actually caused the loss. In a common example, the owner has builders risk insurance covering the property against the risk of fire and the property burns down. The builders risk insurer investigates the cause of the loss and determines that a steel subcontractor caused the fire when it was welding. The builders risk insurer pays the insured owner the total value of the building as of the date of the loss. Under the principle of subrogation, the builders risk insurer may sue the steel subcontractor, the actual wrongdoer, to recover the money that that insurer paid to the injured owner for the loss. The insurer essentially steps into the shoes of the insured owner, who theoretically (putting aside any waivers) could have sued the subcontractor for its negligence. Allowing the insurer to do this prevents the owner from a potential double recovery and forces the actual wrongdoer to pay for the loss.

A waiver of subrogation agreed to by the owner for the contractor/subcontractor's benefit prevents the insurer from stepping into the shoes of the owner to sue the steel subcontractor to recover the money the insurer paid to the owner.

On a construction project, the contractor risks liability for negligence and the owner risks damage to his property. The contractor purchases liability insurance and the owner purchases property insurance. If the contractor damages the owner's property, the owner or its property insurer (as subrogee) may sue the contractor for negligence. To prevent such litigation, an owner may waive its rights against the contractor for property damage to the extent covered by the owner's property insurance.2

In other words, parties to a construction contract agree to such waivers of subrogation so that the project is not unnecessarily delayed by the parties suing each other, relying instead on insurance to cover any potential losses. To effectively waive subrogation rights, such language should be included in two different agreements. First, the insured and the party who is potentially going to cause the loss must either directly or indirectly agree to waive subrogation rights.3 Second, the insured and the insurer should agree that the insurer would have no subrogation rights.4 Failing to obtain both agreements can frustrate the waiver of subrogation and invites needless litigation, for example, on the issue of whether an insurer may subrogate against the third-party wrongdoer with whom the insured has a contract to waive subrogation but where the insured failed to obtain the same waiver in the insurance policy with the insurer.5

Additional Insured Status

While a waiver of subrogation protects against subrogation claims from each of the parties' respective insurers, a waiver of subrogation does not provide protection from third-party claims such as negligence. If an owner who only has property insurance is sued for bodily injuries caused by its contractor who has liability insurance, a waiver of subrogation will not help the owner defend the lawsuit brought by the injured third party. The owner should be included as an additional insured on the contractor's liability insurance policy to receive a defense from the contractor's insurer.

As an additional insured on the policy, the additional insured has the right to access the named insured's policy directly and can tender a defense to the named insured's insurer. Relying on the other party's insurance policy rather than its own is generally preferred because it allows the additional insured to do the following.

  • Reduce its claims rating
  • Increase its limits by using its own policies as excess
  • Avoid self-insured retentions (or the direct costs for entities who self-insure or maintain their own captives (i.e., an insurance subsidiary of a noninsurance parent owned by the insured))
  • Potentially avoid subrogation because of the general rule that an insurer cannot pursue subrogation against its insured or additional insured
  • Potentially obtain coverage it would not otherwise have

Why Do I Need a Waiver of Subrogation If I Am an Additional Insured?

Because of public policy reasons, insurers are ordinarily prohibited from subrogating against their insureds, either named or additional,6 which leads many to ask why they need to obtain a waiver of subrogation if they are additional insureds or named insureds. Several situations have arisen in which insurers successfully subrogated against their additional insureds and named insureds.

  • Losses falling outside the scope of coverage of the additional insured endorsement
  • Losses exceed the contractually agreed insurance limits
  • Where the risk is different than the risk for which the insured is covered
  • Losses falling outside the additional insured's interest
  • Where additional insureds are not included on excess or umbrella policies
  • Where certain policies do not offer additional insured status (such as workers compensation and professional liability policies)7
  • Where state law voids any attempt to require someone else to insure against the party's own negligence

The following cases and examples demonstrate how these issues arise.

Losses Fall Outside the Scope of Coverage of the Additional Insured Endorsement

Some insurance policies limit coverage to the named insured's ongoing operations. In Hartford Ins. Co. v. Ohio Cas. Ins. Co., 189 P.3d 195 (Wash. Ct. App. 2008), the court held that "since the additional endorsement for [additional insured] in the … policies was limited to 'ongoing operations,' [insurer] was correct in its argument that the additional insured endorsement 'limited [the additional insured's] coverage to property damage arising out of the subcontractor's work in progress only."8 This distinction can be especially important given that the CG 20 10 endorsement (ongoing operations) and CG 20 37 endorsement (completed operations) are separate endorsements. An insurer may attempt to subrogate against an additional insured for completed operations injuries caused by the insured if the additional insured endorsement provides coverage only for ongoing operations injuries.

Losses Exceed the Contractually Agreed Limits

As of the 2019 revisions, the Insurance Services Office's commercial general liability (CGL) additional insured endorsements limit coverage to the lesser of (a) the amount required by contract or agreement, or (b) the amount available under the applicable limits of insurance.9 Under these revisions, insurers may argue that the additional insured endorsement extends only to the contractually agreed limits in the contract if it is less than the amount available under the insurance policy. Courts may follow the same principles as Hartford Ins. Co. v. Ohio Cas. Ins. Co. and find that insurers can subrogate against the additional insured in amounts above the contractually agreed limits if it is lower than the policy limits, thereby allowing the insurer to subrogate for the difference between the contractual limits and the policy limits.

Losses Fall Outside the Covered Risk

Courts limit an insurer's right of subrogation against its own (additional) insured to the "very risk for which the insured is covered."10 So if an insurer issued two separate policies that cover different risks, subrogation may be allowed under certain circumstances. In Romano v. Whitehall Props., LLC, where one insurer issued both a CGL policy and a workers compensation policy, the court held that the insurer could assert a workers compensation lien (allowed by statute) against the settlement amount that the same insurer paid out under a liability policy—even though the insurer covered the parties under a wrap-up liability program that included both policies. This is because the insurer's "rights and duties with respect to its lien were created by statute and stems from the third-party settlement and not from the insurance contract" and so the "contractual relationship between defendants in the underlying action and the plaintiff's employer … is irrelevant with respect to [insurer's] rights as the workers' compensation provider to assert its statutory lien against the net proceeds of plaintiff's recovery."11

The Property Damage Extends Beyond the Additional Insured's Interest in the Property

In the property insurance context, many courts have held that an insurer can subrogate against an additional insured for losses to property outside the additional insured's interest.12 In St. Paul Fire and Marine Ins. Co. v. FD Sprinkler Inc., 76 A.D.3d 9312 (N.Y. App. Div. 2010), the court explained that the subcontractors were only additional insureds "to the extent of their property interest in the building under construction, to wit, the tools, labor and material furnished or owned by the subcontractor" and that "the policy did not provide the subcontractors with coverage for any damage they may have caused to property in which they had no interest."

Excess Insurers May Not Be Included

Even if an entity is added as an additional insured on a primary insurance policy, it does not mean that it will be added as an additional insured to all layers of excess coverage. Excess insurance is insurance that provides coverage for losses above and beyond the primary layer. Excess insurers who pay out for a loss may seek to subrogate against parties who may have been additional insureds in underlying primary policies but who are not additional insureds on the excess insurance.

Certain Policies Do Not Offer Additional Insured Status

For some insurance policies, such as workers compensation insurance and professional liability insurance, additional insured status is not available—and for a good reason.

Workers compensation acts only cover direct employees, typically "requiring an employer to carry insurance for the payment of compensation [to its injured employees] by a carrier insurance authorized to insure liability in the state."13 Workers compensation insurance "secure[s] to the employee payment for compensable injuries," "secure[s] an injured employee against financial irresponsibility of the employer," and "protect[s] the employee from the hazards incident to his or her occupation arising in and out of the course of employment."14 While this insurance mostly benefits the injured party, the employer also benefits because the insurance "protect[s] the employer against any liability imposed by the workers' compensation acts," and the "insurer assume[s] [the employer's] obligation to pay compensation."15

Professional liability policies typically cover professionals, insuring against professional risks. Indeed, "professionals are reluctant to arrange for additional insured endorsements under their professional liability policies," and "errors and omissions insurers resist providing such endorsements."16 In Massachusetts Bay Transp. Auth. v. United States, 254 F.3d 1367, 1375 (Fed. Cir. 2001), the court held that the governmental entity that contracted to add a local authority as an additional insured under its designer's professional liability insurance policy knew or should have known that "the insurance endorsements were impossible to obtain at the time of contracting."

State Law Prohibits a Party from Insuring the Other Party for the Other Party's Own Negligence

One state law provides that "any provision in a construction agreement that requires one party to purchase insurance covering the other party for liability resulting from the other party's own negligence is void as against public policy."17 In Higby Crane Servs., LLC v. National Helium, LLC, the Tenth Circuit Court of Appeals applied this state law and held that any promise that the named insured made in a construction contract with the additional insured to provide coverage for the additional insured coverage for the additional insured's negligence was void and unenforceable, where the additional insured's negligence was the sole cause of the loss to the insured.18 Accordingly, the insurer was allowed to subrogate against the additional insured because the additional insured was not considered to be the insurer's insured for purposes of the loss at issue.

Conclusion

There are valid reasons to request both additional insured status and a waiver of subrogation from the other party with whom you are dealing. It is important to understand why and when they should be used. Being listed as an additional insured on another's insurance policy has its advantages. But named insureds do not always add the additional insureds to their policy despite contractual promises that they will. Even if one is listed as an additional insured on the other party's policy, additional insureds are not always protected from subrogation by insurance companies because of the exceptions discussed above that have developed over time. In these situations, a contractual waiver of subrogation can provide some peace of mind by protecting parties to a contract from subrogation by insurers, placing the risk of loss solely on the insurance companies.


1 See, e.g., Mark Bell, "Indemnity and Additional Insured Requirements: Why Am I Demanding Them, Why Do Others Want Them, and What Does It all Mean?," IRMI, May 2013. For a definitive discussion on these issues, see Jeffrey Woodward, Lisa Smuckler, Patrick J. Wielinski, and Jack Gibson, Contractual Risk Transfer, IRMI, 2013.

2 4 Pt. 2 Bruner & O'Connor Construction Law § 11:403, Westlaw (database updated Aug. 2021) (quoting Hunt Constr. Group, Inc. v. Hun School of Princeton, No. 08-3550, 2010 WL 3724279, at *12 (D.N.J. 2010)).

3 It is impossible to know on the front end who is going to cause a loss, but insurance policies typically require the parties to have waived subrogation prior to a loss.

4 See ICC Indus., Inc. v. GATX Terminals Corp., 690 F. Supp. 1282, 1286 (S.D.N.Y. 1988) (holding that insurer "cannot be bound by a waiver of subrogation to which it was not a party and of which it was not aware").

5 Courts have held that an insurer is prohibited from subrogating against a third party for whom its insured waived subrogation rights in a contract between the insured and the third party, even if the insured failed to obtain a policy with the insurer containing waiver of subrogation. See, e.g., Continental Ins. Co. v. Boraie, 672 A.2d 274 (N.J. Super. Ct. Law Div. 1995); Couch on Insurance 3d § 224:85, Westlaw (database updated June 2021).

6 This rule does not apply where an insurer subrogates against the additional insured's insurer because such action seeks a determination of which insurer should bear the ultimate loss. Couch on Insurance 3d § 224:6, Westlaw (database updated June 2021) (citing Travelers Indem. Co. v. LLJV Dev. Corp., 227 A.D.2d 151 (N.Y. App. Div. 1996)).

7 But see Glen Brown, "Examining WC Waivers of Subrogation," IRMI, April 2019 (discussing potential negative implications of requesting waivers of subrogation from workers compensation insurers).

8 See also American States Ins. Co. v. Ins. Co. of the State of Penn., No. 2:12-CV-01489-MCE-AC, 2017 WL 1166144, at *1 (E.D. Cal. Mar. 28, 2017), aff'd sub nom. American States Ins. Co. v. Ins. Co. of Penn., 800 Fed. Appx. 452 (9th Cir. 2020) ("However, this insurance coverage for … additional insured was limited 'only to the extent [named insured] [is] held liable due to: … [named insured's] ongoing operations for [additional insured].' Thus, while there is no dispute that … coverage for [additional insured] was primary in nature, it was limited to [additional insured's] vicarious liability as to [named insured], and [additional insured's] independent liability was not covered under [insurer's] CGL policy with [named insured].").

9 Before the 2019 revisions, the second part was limited to the limits of insurance "shown in the Declarations." This 2019 revision provides that the coverage limits are not limited to the declarations page.

10 Romano v. Whitehall Props., LLC, 852 N.Y.S.2d 645, 647 (N.Y. Sup. Ct. 2007).

11 Id. at 648; see also Chenevert v. Travelers Indem. Co., 746 F.3d 581, 587 (5th Cir. 2014) ("Assuming [insurer's] assertion of its repayment lien against [injured employee's] Jones Act settlement fund may be construed in some way as asserting a right of subrogation against [employer/insured], this would be unproblematic because [insurer] did not insure [insured] against Jones Act liability.").

12 See e.g., Commerce & Industry Ins. Co. v. Admon Realty, Inc., 562 N.Y.S.2d 655, 656 (N.Y. App. Div. 1990) ("Insurer is barred from subrogation only to the extent of property in which the additional insured has an interest."); Couch on Insurance 3d § 224:7, Westlaw (database updated June 2021); Patrick J. O'Connor, Jr., Recent Developments in Insurance Law, Journal of the American College of Construction Lawyers, January 2013, at 1, at nn. 275–77.

13 100 C.J.S. Workers' Compensation § 734, Westlaw (database updated August 2021).

14 Id. (footnote omitted).

15 Id.

16 4 Pt. 2 Bruner & O'Connor Construction Law § 11:540, Westlaw (database updated Aug. 2021). "Still, it is possible, in certain instances, to obtain additional insured status under a professional liability policy." Id.

17 Higby Crane Servs., LLC v. Nat'l Helium, LLC, 703 Fed. Appx. 687, 691 (10th Cir. 2017) (citing Colo. Rev. Stat. Ann. § 13-21-111.5(6)(d)(I)).

18 Id. at 693.


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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