Expert Commentary

Today's Additional Insured Endorsements: Revisiting the Impact of ISO Form Changes

The 2013 Insurance Services Office, Inc. (ISO), forms include a variety of changes to additional insured (AI) coverage. In an effort to coordinate the AI coverage with the underlying contract, two of the more significant modifications may impact the limits and scope of coverage available to the AI. As a result, all relevant contract language is likely to be scrutinized more carefully and enforced with greater frequency, and relevant language should be chosen with great care so as to accurately reflect the parties' intent.


Additional Insured Issues
March 2015
Acknowledgment

The author would like to acknowledge and thank coauthor Phillip A. Perez, an attorney with Saxe Doernberger & Vita, P.C., in Hamden, Connecticut for his contributions to this commentary.

On April 1, 2013, ISO put into effect revised commercial general liability (CGL) insurance policy forms. Chief among those changes were modifications to automatic AI forms—the standard mechanism for providing automatic AI status to an upstream party. By now, policyholders have gone through at least one renewal cycle and should expect the latest version of these forms to be included in their CGL insurance program.

A principal theme of ISO's revisions is an increased interdependence between the CGL policy and the underlying contract. Though not specifically discussed in ISO's commentary, the apparent intent is to more closely align the coverage provided to the AI with that to which the parties contractually agreed.

The goal is a worthy one, but a close examination reveals that imprecise contract language may frustrate the intended risk transfer to the detriment of both parties.

Limits Are Restricted to Contract Requirements

The first change ties the limits available to the AI to those mandated by the underlying contract. The new AI endorsements include the following language:

The most we will pay on behalf of the Additional Insured is the amount of insurance ... Required by the contract or agreement ... or [a]vailable under the applicable limits shown in the Declarations; ... whichever is less.

See CG 20 38 04 13.

Generally, once a party has been afforded AI status via an automatic AI endorsement, that party is treated as an independent insured on the policy with all the rights and obligations of the named insured (save for a few exceptions), including equal access to the policy's full limits of liability (i.e., shared limits). Absent express policy language to the contrary, this would be the case even if the base contract from which the AI status stems requires the named insured to provide AI coverage in an amount less than the policy's limits. See Mobil Oil Corp. v. Maryland Cas. Co., 681 N.E.2d 553 (Ill. App. 1998) (absent language limiting coverage, AIs are entitled to full limits).

ISO's use of this language is not unprecedented. See Bovis Lend Lease LMB, Inc. v. Great Am. Ins. Co., 53 A.D.3d 140 (N.Y. App. Div. 1st Dept. 2008) (AI endorsement made explicit reference to the terms of the underlying contract and court held that limits for the AI were capped at the minimum amount required by contract). But, ISO's adoption of the language will ensure that it is seen with much greater frequency. In fact, the savvy upstream party should assume it is a standard component of a downstream party's program.

This interrelationship between the AI policy and the contract can present problems, however, if the related contract provisions are not carefully worded. Namely, the upstream party may not be afforded the overall limits to which it should be entitled, while the downstream party may, as a result, be exposed to a potential breach of contract action for failure to provide the required AI coverage.

Consider the following example. The upstream party's trade contract requires the downstream party to procure $1 million primary and $5 million excess AI coverage. The downstream party's program includes $2 million primary and $10 million excess insurance coverage. If the downstream party's primary policy uses this language, the upstream party may not be able to access the excess layer. If the claim settles for $6 million, the primary will only pay $1 million per the contract terms. The excess policy, however, is only triggered upon exhaustion of the primary policy's full limits—$2 million—leaving a $1 million gap.

Depending on state law, the upstream party may be permitted to bridge that gap by paying the $1 million differential, but in many cases, the excess layer will never be triggered. In any event, the upstream party will likely concentrate its risk transfer efforts on the downstream party—either by way of contractual indemnity or for breach of contract for not providing the required limits.

Given the prevalence with which this language is now likely to appear in policy forms, the most efficient solution is to modify the standard contract. Appropriate language must be tailored to fit within the overall risk transfer scheme, but parties can consider incorporating reflexive language that requires the policy's stated limits to apply above all else.

AI Coverage Restricted to That Required by Contract; Nothing More, Nothing Less?

Another issue with the 2013 ISO AI endorsements is that they purport to limit the scope of the coverage in a way that could subvert policy terms. The relevant language provides:

... the insurance afforded to such Additional Insured ... will not be broader than that which you are required by the contract or agreement to provide for such Additional Insured.

See CG 20 38 04 13.

In stark contrast to the "limits" language discussed above, where caselaw provides some guidance on what to expect, this language, in this context, is entirely new and untested. The scope and application of this language turns on the concept of "breadth," a potentially vague, subjective term. A plain reading suggests that the AI's coverage (insuring agreement, exclusions, terms, conditions) may now be governed by the provisions of the trade contract and potentially not by the terms of the policy itself.

The only other setting these authors have identified where similar language has been addressed by courts is in "follow form" excess policies. Those cases generally reinforce the plain reading that "will not be broader" closely ties the insurance coverage to any relevant description in the trade contract. See, e.g., Radil v. National Union Fire Ins. Co. of Pittsburgh, Pa., 233 P.3d 688 (Colo. 2010). ("The language of National Union's endorsement states that the UM/UIM insurance its policy provides 'will not be broader than the insurance coverage provided by [Great American's] policy.' I would read that language to mean exactly—and only—what it says: National Union's insurance will not be broader than the insurance coverage provided by Great American.") See also C.B. Fleet Co. v. Aspen Ins. UK Ltd., 743 F. Supp. 2d 575 (W.D. Va. 2010) (considering "whether an arbitration agreement in an underlying insurance policy would be incorporated into an excess 'follow-form' policy ..." and finding that the excess Aspen binder was subject to a written arbitration agreement expressly incorporated into the underlying Swiss Re policy because the Aspen binder provided that it would "follow form" to the Swiss Re policy wording); and Boeing Co. v. Agricultural Ins. Co., No. C05-921C (W.D. Wash. Sept. 19, 2005) (stating that "both AIG and Gulf constructed their policies to 'follow form' on Federal's policy, so that each know of and expressly incorporated the arbitration provision in Federal's policy").

This increased focus on the trade contract presents a substantial problem because the insurance requirements provisions are not crafted with the same level of detailed precision as an insurance policy (and they are not supposed to be). However, if the AI coverage "will not be broader" than required by the contract, and the trade contract is lacking or imprecise on a key detail, is the AI policy likewise limited?

Consider a common scenario: the trade contract language states merely that the upstream party must be made an AI but fails to provide any further specifications or requirements. The AI insurer may contend that the upstream party is not entitled to any AI coverage that was not explicitly specified within the trade contract (e.g., completed operations coverage, elimination of specific types of exclusions, etc.).

As with the "limits" issue, the best, most efficient approach is for the upstream party to revisit and modify that document over which it maintains control—the contract. One potential remedy is to revise the trade contract to reflect a broader scope of required insurance coverage, such as specialized language indicating that the AI insurance will be at least as broad as that provided to the named insured. Alternately, the language could provide that to the extent any such "will not be broader" language is used in conjunction with the AI coverage, it shall, in no way, limit the "breadth" of insurance provided to the AI.

Conclusion

Although there are numerous potential issues with the 2013 ISO AI endorsement, the aforementioned provisions present two major problems in that they place an unprecedented emphasis on the trade contract language. Until case precedent emerges addressing the 2013 ISO AI endorsement, parties should take a "fine-tooth comb" to their trade contracts, and AI endorsements where possible, to ensure compliance with the bargained-for trade contract. Modification of the trade contract requirements would serve as the first step toward avoiding an inadvertent overriding of the broader terms of the AI policy containing such an endorsement.


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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