Expert Commentary

How Well Does That Blanket Cover You?

Blanket additional insured endorsements are useful tools for preventing administrative oversights and reducing paperwork, but they also carry risks for both the named and additional insureds. Discover methods contractors and subcontractors can use to minimize the risks of breaching their contracts when using blanket AI endorsements.


Construction Liability Insurance
February 2001

One of the age-old problems in obtaining additional insured status under a contractor's or subcontractor's insurance policy is making sure the appropriate actions have been taken to effect the required coverage. Certificates of insurance are commonly used to verify that the certificate holder has been added as an additional insured, but because they are not part of the policy, information contained on certificates may not be binding on the insurer. This article examines the use of blanket endorsements to effect additional insured status as a means of overcoming at least some of the imperfections of the process.

Additional insured status is a common and effective tool for protecting one party from certain risks arising out of another party's activities. For example, municipalities typically require additional insured status from anyone holding a public event on city property, such as concerts, parades, and carnivals. The rationale behind this requirement is that the activities expose the city to certain risks that would not otherwise exist, so the person or organization that creates the risk should assume responsibility for any losses incurred as a result of the activities. In the case of a public concert, for example, if someone is injured when the crowd gets unruly, both the city and the concert sponsor will likely be sued. As an additional insured under the sponsor's policy, the city can tender the claim under that policy instead of having to file the claim under its own insurance. The risk has been effectively transferred to the concert sponsor (assuming the available policy limits are sufficient to cover the claim.)

On a construction project, the owner typically requires additional insured status under the general contractor's liability insurance policies; general contractors may do likewise with subcontractors. As in the example above, the rationale is that the construction activities create certain risks that would not otherwise exist and increase the magnitude of certain other risks. For example, a construction project in a retail district carries the risk that a pedestrian will be injured from flying debris, collapsed scaffolding, or a tool dropped from several stories up. These risks are directly related to the contractor's operations on the site. Further, goes the rationale, the contractor (or subcontractor) performing the work is generally in the best position to prevent or control losses arising out of the work, and should therefore bear the corresponding financial risk.1

However, requiring additional insured status does not necessarily guarantee that you will get it. The named insured (contractor or subcontractor) must notify the insurance company of the request, and absent a provision to the contrary, the person or entity requesting additional insured status must be listed, or "scheduled", by name on an endorsement that is attached to the policy. Figure 1 demonstrates the language of a typical scheduled additional insured endorsement used in conjunction with construction projects, where the general contractor (Kyle Volz Construction) is the additional insured.


FIGURE 1

ISO SCHEDULED ADDITIONAL INSURED ENDORSEMENT LANGUAGE*

SCHEDULE


Name of Person or Organization:

Kyle Volz

Construction

Company

Who Is An Insured (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured.

*This figure contains an excerpt of the endorsement language, not an exact reproduction.

Source: CG 20 10 03 97, Copyright, Insurance Services Office, Inc., 1996

Because this requirement is so common in construction contracts, some contractors may handle hundreds of requests for additional insured status in a given year. Further, because the contracting process is often drawn out, and the insurance requirements given little more than a cursory review, this method of providing additional insured status carries inherent risks of error and oversight. Whether the result of failing to forward the request for additional insured status to the broker or insurer, failing to ensure additional insured status under a new or renewal policy, or some other oversight, a contractor (or subcontractor) can easily find itself in breach of a contract, among other unpleasant outcomes. Likewise, the would-be additional insured may find itself embroiled in a coverage dispute with the insurer and a contract dispute with the named insured contractor; meanwhile, it may be forced to tender the claim to its own insurer (or, if self-insured, fund its own defense). All of these possible outcomes frustrate the intent of the contracting parties.

Blanket additional insured endorsements were introduced as a means of avoiding administrative errors and oversights in providing additional insured status. These endorsements typically contain language indicating that additional insured status is automatically provided when the named insured agrees to provide such status. To avoid overly broad grants of coverage, these endorsements typically limit their application to certain types of written contracts, such as construction contracts or equipment rental agreements.

The obvious benefits of blanket, or automatic, additional insured endorsements are that they protect against failure to add a party as an additional insured in accordance with the contractual agreement, and reduce the administrative burden of making each request individually. However, from the additional insured's perspective, there are also some potential drawbacks to obtaining additional insured status in this manner. First, until recently, blanket additional insured endorsements had to be manuscripted as no standard endorsements were available. Because they are not standardized, manuscript endorsements can differ from one policy to the next. Consequently, they offer less predictability in terms of scope of coverage, as well as how a court might interpret the language of the endorsement.

Insurance Services Office, Inc. (ISO), introduced a standard blanket additional insured endorsement in 1997, but it is still too new to offer a rigorous testing by the courts. The coverage granting text of this endorsement, which is reproduced in Figure 2, is similar to that found in recent editions of CG 20 10. Unfortunately, the endorsement provides more restrictive coverage than many owners/contractors require and includes some troublesome language. Specifically, it does not include completed-operations coverage (neither do current version of the scheduled endorsements, but many insurers have continued to offer the older versions of the endorsements that do provide this coverage), and applies only to written contracts.

More troublesome than that, however, is the inclusion of a sentence stating that additional insured status ends when the operations are completed. Although ISO contends this sentence merely clarifies that no completed-operations coverage is intended, this phrase could be invoked by some insurers to attempt to eliminate coverage for losses that occur while the work is in progress but do not get filed as claims until after the project is completed. We find this wording troublesome enough that, until it is remedied, we recommend sticking to manuscript endorsements that do not include this type of statement.


FIGURE 2

ISO AUTOMATIC ADDITIONAL INSURED ENDORSEMENT LANGUAGE*

A. Section II—Who Is An Insured is amended to include as an insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability arising out of your ongoing operations performed for that insured. A person's or organizations status as an insured under this endorsement ends when your operations for that insured are completed. [Emphasis added.]

*An additional exclusion, which eliminates coverage for professional design services, is not reproduced here.

Source: CG 20 10 03 97, Copyright, Insurance Services Office, Inc., 1996

Because blanket additional insured endorsements typically require a contractual obligation on the part of the named insured to provide such status, those who obtain additional insured status through such an endorsement must retain proof of the contractual requirement to effect coverage. Even when the additional insured's coverage does not apply to completed operations, claims arising out of occurrences that took place during the course of construction may not surface until years later. Some additional insureds assume that a certificate of insurance showing additional insured status at the time of the occurrence will be sufficient to trigger the insurer's duty to defend and indemnify. That is not necessarily true. The additional insured will also need evidence that there was in fact a contract requiring such coverage. While a certificate of insurance indicating that the certificate holder has been added as an additional insured is evidence of a contractual requirement, a better approach may be to require the certificate to refer to the contract requirement. For example, the following language could be required on the certificate:

In compliance with the contract requirements, certificate holder is an additional insured under the policy.

If possible, the contracts themselves should be retained. (This should not impose a significant additional burden in most instances, as construction contracts are typically retained for access to indemnity and other provisions that may come into play well after the project is completed.)

Finally, blanket additional insured endorsements restrict insurers ability to provide notice of cancellation to additional insureds. Most insurance policies require such notice to be provided only to the named insured. Additional insureds often try to obtain a guarantee of notice of cancellation by modifying the certificate language, but this is an unreliable approach. However, additional insureds in some states, most notably California but possibly others, have added protection regarding cancellation of coverage. Although the California statute requires insurers to provide notice of cancellation to named insureds, the courts have interpreted that to mean any insured who is named on the policy, including "additional insureds." [See Kotlar v Hartford Fire Insurance Company, B133614, Cal App 2d, (September 27, 2000)]

For this statutory right to apply, the additional insured must be listed by name on the endorsement. (From a practical standpoint, when blanket endorsements are used, the insurer generally doesn't know who the additional insureds are until a claim is made; obviously insurers can't provide notice of cancellation to as yet unidentified additional insureds.)

Summary

Blanket additional insured endorsements are useful tools for preventing administrative oversights and reducing paperwork, but they also carry some risks for both the named insured and the additional insured.2 Fortunately, these risks can be managed fairly effectively.

Owners and contractors requiring additional insured status should make certain the additional insured requirement is part of a written and properly executed contract, and retain copies of these contracts (as well as the certificates of insurance) for an appropriate period of time—at least 3-5 years if completed-operations coverage was required and included in the additional insured's coverage. Further, they should stipulate in the contract insurance requirements a minimum scope of coverage to be provided to them as an additional insured, i.e., the equivalent of that provided under one of the standard ISO endorsements, such as CG 20 10. (See Figure 1.) In California, additional insureds should shun blanket endorsements and require that they be listed on the policy by name to retain their statutory right to notice of cancellation.

Contractors and subcontractors using blanket additional insured endorsements to provide contractually required coverage can minimize the risks of breaching their contracts by sticking with language that has been tested, such as that provided under ISO CG 20 10, and making sure the endorsement extends the contractually required scope of coverage.


1The question of whether and to what extent additional insured status should be required of contractors and subcontractors is hotly debated, and it is not the purpose of this article to provide an exhaustive examination of the arguments. Back to the Text

2A finding of no coverage for the additional insured does not typically relieve the named insured from its obligations to the additional insured, as most requests for additional insured status are accompanied by indemnity agreements that operate independently of the additional insured status. The named insured's coverage for such contractual obligations remains intact, but the process is more complicated, and coverage may be more limited than what would be provided to the indemnitee as an additional insured.


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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