Expert Commentary

Additional Insured Status and Waivers of Subrogation: When and Why You Want To Consider Both

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.


Construction Liability Insurance
March 2015

Additional insured status, indemnification duties, and waivers of subrogation generate scores of questions.1 Routinely, these concepts 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 all 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 all three 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 allows a party that has paid a loss or debt on behalf of someone else to recover from the party that actually caused the loss. A subcontractor burning down a building presents a common example. In this example, the owner has builders risk insurance covering the property against the risk of fire. 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 owner the total value of the building as of the date of the loss. Under the principle of subrogation, the builders risk insurer sues the steel subcontractor to recover the money that it paid to the owner for the loss.

A waiver of subrogation prevents the insurer from suing the steel subcontractor to recover the money it 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

The most effective waivers of subrogation contain two separate agreements. First, there is an agreement (either directly or indirectly) between (1) the insured and (2) the party who is potentially going to cause the loss.3 Second, there is an agreement between (1) the insured and (2) the insurer.4 Failing to obtain both agreements can frustrate the waiver of subrogation and allows an insurer to subrogate against a third party the insured hoped to insulate from exposure.5

Additional Insured Status

A waiver of subrogation does not provide protection from third-party claims (other than from the insurer). If an owner is sued for bodily injuries caused by its contractor, a waiver of subrogation will not help the owner defend the lawsuit against the third party. The owner needs to be included as an additional insured 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 it. Relying on the other party's insurance policy rather than its own is generally preferred because it allows the additional insured to:

  • reduce its claims rating,
  • increase its limits by using its own policies as excess,
  • avoid self-insured retentions (or the direct costs for entities that self-insure or maintain their own captives),
  • potentially avoid subrogation, and
  • potentially obtain coverage it would not otherwise have.

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

Insurers are ordinarily prohibited from subrogating against additional insureds and named insureds, which leads many to ask why they need to obtain a waiver of subrogation if they are additional insureds or named insureds. Generally, this principle is true, but there are several contexts where insurers have successfully subrogated against their additional insureds and named insureds where:

  • losses fall outside the scope of the additional insured endorsement,
  • losses exceed the contractually agreed insurance limits,
  • the risk is different than the risk for which the insured is covered,
  • in property insurance claims, when the damage falls outside the additional insured's interest,
  • additional insureds are not included on excess or umbrella policies, and
  • policies do not allow additional insured status (such as workers compensation and professional liability policies).6

Insurers have also been successful in subrogating against the additional insured's insurer.7 The following cases and examples demonstrate how these issues arise.

Losses Fall Outside the Scope of the Additional Insured Endorsement

Some courts limit waivers of subrogation 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 [the developer] in the American States policies was limited to 'ongoing operations,' American States was correct in its argument that the additional insured endorsement 'limited [the developer's] coverage to property damage arising out of the subcontractors' work in progress only.'" This distinction can be especially important given that the CG 20 10 endorsement (ongoing operations) and CG 20 33 endorsement (completed operations) are separate endorsements. An additional insured under a CG 20 10 endorsement may be subrogated against for completed operations injuries.

Losses Exceed the Contractually Agreed Limits

In 2013, Insurance Services Office, Inc., revised the commercial general liability (CGL) additional insured endorsements to limit coverage to the lesser of (a) the amount required by contract or agreement or (b) the amount available under the limits of insurance listed in the declarations. Under these revisions, insurers may argue that the additional insured endorsement extends only to the contractually agreed limits in the contract. Courts may follow the same principles as Ohio Cas. and find that insurers can subrogate against the additional insured in amounts above the limits—thereby allowing the insurer to subrogate for the balance between the contractual limits and the policy limits.

Losses Fall Outside the Covered Risk

Courts limit additional insured endorsements to the "risk for which the insured is covered." Romano v. Whitehall Props. LLC, 852 N.Y.S.2d 645 (N.Y. Sup. Ct. 2007). In Romano, where one insurer issued both a CGL policy and a workers compensation policy, the court held that Travelers could assert a workers compensation lien even though it covered the parties under a wrap-up liability program.

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

In the property insurance context, there are a host of cases that have held that an insurer can subrogate against an additional insured for losses outside the additional insured's interest.8 In St. Paul Fire & Marine Ins. Co. v. FD Sprinkler Inc., 76 A.D.3d 9312 (N.Y. App. Div. 2010), the court explained that the subcontractor was only an additional insured for "the tools, labor and material furnished or owned by the subcontractor. 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 Carriers May Not Be Included

Even if an entity is added as an additional insured on a CGL policy, it does not mean that it will be added to all layers of excess coverage. Excess insurers may seek to subrogate against parties that may have been additional insureds in underlying policies but that are not additional insureds on theirs.

Conclusion

There are valid reasons to request both additional insured status and a waiver of subrogation. It is important to understand why and when they should be used. A contractual waiver of subrogation can provide peace of mind. Named insureds do not always add the additional insureds to their policy despite contractual promises that they will. Obtaining the waiver of subrogation can protect parties from subrogation even if the named insured forgot to add them as additional insureds.


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

2Bruner & O'Connor on Construction Law, 4 § 11:192 (citing Hunt Const. Group, Inc. v. Hun School of Princeton, 2010 U.S. Dist. LEXIS 97421 (D.N.J. Sept. 16, 2010)).

3It 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.

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

5Courts have held that an insurer is prohibited from subrogating against a party to which its insured waived subrogation rights. See, e.g., Continental Ins. Co. v. Boraie, 672 A.2d 274 (Sup. Ct. N.J. 1995); Couch on Insurance 3d § 224:85 (2014).

6But see Glen Brown, "Examining WC Waivers of Subrogation," discussing potential negative implications of requesting waivers of subrogation from workers compensation insurers.

7Couch on Insurance 3d § 224:6 (citing Travelers Indem. Co. v. LLJV Dev. Corp., 227 A.D.2d 151 (N.Y. App. Div. 1996)).

8See e.g., Commerce & Indus. Ins. Co. v. Admon Realty, Inc., 562 N.Y.S.2d 655 (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; Patrick J. O'Connor Jr., "Recent Developments in Insurance Law," Journal of the American College of Construction Lawyers 7, no. 1 (2013): 275–277.


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