EXAMINATION OF ADDITIONAL INSURED STATUS UNDER THE CGL, UMBRELLA AND EXCESS INSURANCE POLICIES

examination of additional insured status under the CGL, umbrella and excess insurance policies

This blog presents an examination of additional insured status under the CGL, umbrella and excess, automobile, commercial property, and workers compensation insurance policies.  Thousands of times a day, sophisticated companies around the globe negotiate commercial contracts.  Virtually all of those contracts contain indemnification agreements of one kind or another. The majority also include “additional insured” provisions — requirements that one party be covered under the other's insurance policies.

A Deepwater Horizon-related coverage dispute highlights the need for corporations to square their commercial contracts with their insurance policies.  We discuss the interplay between indemnification agreements and “additional insured” provisions and the importance of retaining a contract engineer to help navigate some very significant pitfalls.  Metropolitan Engineering Consulting does have contract engineers available to help you with the review of the contract and the insurance policy.

The topic of additional insured status is a challenging one.  Many misconceptions result when adding contracting parties to one another's insurance policies as additional insureds. There is also the tug-of-war between insurers and indemnitors who want to limit the scope of additional insured coverage under their policies and the indemnitees who want to maximize coverage under the policies of the indemnitors. Added to this, the interaction of additional insured status with indemnity clauses, insurance requirements, and other contract provisions is unique and complex. These complications have resulted in numerous coverage disputes and, consequently, a number of revisions to standard insurance policy forms and additional insured endorsements. Litigation continues unabated, however, and the controversy and confusion surrounding additional insured status under primary and umbrella liability policies, indemnity agreements, and certificates of insurance persists.

What is an additional insured?

Many construction agreements call for one company to name another company as an “additional insured”.  Before this occurs, each party should have a general idea of what this means.

In most situations, the insurance at issue is the Commercial General Liability (CGL) policy of the lower tier party. A common scenario is a prime contractor asking a subcontractor to name the prime contractor (and perhaps the owner or others) as an additional names insured on the subcontractor's CGL policy. This request is sometimes found within the terms and conditions of a proposed subcontract.

Before agreeing to this, both parties should have a basic understanding of what it means. In general, naming a company as an additional insured on your CGL policy enables that company to make a claim directly against your policy.

In today’s world of defective construction claims, prime contractors (and their insurance carriers) are becoming more insistent on obtaining a certificate of insurance where the prime contractor is a named additional insured. Then, if there is an allegation of defective construction by a subcontractor, the prime contractor can make a claim directly against that subcontractor’s CGL insurance. This can be particularly important if the subcontractor is no longer in business.

Notwithstanding the great importance of indemnification and “additional insured” provisions, companies all too often include them without performing the proper due diligence. Specifically, contracting parties fail to analyze and understand the insurance policies that stand behind their commercial agreements.  This occurs with high frequency and understandably so because there may be numerous policies effective and only one person in the organization may know anything about their limits and coverages.  Importantly, that person is probably the CFO or a lawyer who may not know much about the day to day operations or not familiar with the scope of work of the particular commercial agreement being negotiated.  Most of the time, the insurance person inside the organization will ask few questions and s/he may get some answers;  but this does mean that he either asked the right question or that he received the correct answer.  Quite often we get what is called information exchanged “falling through the cracks”.

Although this concern has always been top of mind for insurance coverage counsel and for contract engineers, two recent events have thrust the indemnity vs. insurance issue into a broader spotlight: the latest Deepwater Horizon coverage battle, and the insurance industry's promulgation of new policy language. Taken together, these two events underscore how negotiating indemnity provisions without a comprehensive understanding of the related insurance policies can lead to disastrous results.

The Deepwater Horizon catastrophe in April 2010 left a devastating mark on people, businesses and the environment around the Gulf of Mexico. Now, its ever-expanding ripples are about to hit the world of insurance policy interpretation. A coverage dispute pending before the Texas Supreme Court involving BP P.L.C., Transocean Ltd. and their various subsidiaries, affiliates and insurers will have a significant impact on countless insurance policies across the country.

It is a common practice among commercial entities to indemnify one another for losses arising out of their joint business operations. And it is equally common for such entities to add themselves as “additional insureds” under the other's general liability insurance policies. The question is: When a loss occurs, is the scope of recovery determined by the indemnity agreement or the insurance policy? This is the issue that the Texas Supreme Court is being asked to decide.

The scenario is simple: Company A hires Company B to perform services on its behalf. Company A insists that it be named as an “additional insured” on all of Company B's insurance policies. In their services contract, Company A agrees to indemnify Company B for any losses or claims attributable to Company A's negligence or fault.

In the Deepwater Horizon disaster, Company A was BP and Company B was Transocean, the owner of the Deepwater Horizon rig. BP engaged Transocean pursuant to a drilling contract, which required Transocean to maintain certain minimum insurance coverages and to name BP as an “additional insured.” The drilling contract also stated that BP would indemnify Transocean for any pollution- or contamination-related liabilities deriving from below the surface of the water. Transocean would indemnify BP for any pollution- or contamination-related liabilities above the water's surface. 

On April 20, 2010, the Deepwater Horizon exploded and sank.  After the explosion, it became apparent that oil was leaking from the former drilling operation.  The rest is well-documented history.

Over the past several years, as the liability issues have been winding their way through the courts, so too have the overriding insurance disputes.  And now, in one of the Deepwater Horizon disaster's highest-profile coverage battles, BP is seeking coverage under Transocean's commercial general liability policies.

From the outset, BP has asserted that, as an “additional insured,” it is entitled to full coverage under Transocean's policies.  Transocean's insurers have disagreed and denied coverage.  The insurers cite the drilling contract as evidence that Transocean is only responsible for pollution claims arising from incidents above the surface of the water. According to the insurers, the drilling contract limits BP's entitlement to “additional insured” coverage under Transocean's policy.  In their view, BP is an “additional insured” only for above-the-surface incidents.

The foregoing disagreement frames the key legal question: Can the scope of an insurance policy be altered by a separate commercial contract?

This issue was first posed to the U.S. District Court for the Eastern District of Louisiana, where the Deepwater Horizon multidistrict litigation is venued. The District Court found that the drilling contract limited the insurance coverage and held that BP could not avail itself of Transocean's policy.

BP appealed the issue to the 5th U.S. Circuit Court of Appeals. In March 2013, the appeals court reversed the District Court's decision. The 5th Circuit concluded that the policy language should govern in situations where the insurance provision in the parties' contract is “separate and independent” from the indemnification provision in the parties' contract.

According to the court, to be separate and independent, the insurance provision must be a discrete requirement that is distinct from, and in addition to, any requirements under the indemnity provision. Applying that definition to the facts at bar, the 5th Circuit found that the BP/Transocean indemnity provision was “separate and independent” and, therefore, that BP was entitled to additional insured coverage under the Transocean policy.

After reviewing the March 2013 opinion, Transocean's carriers requested a rehearing. And, in August 2013, the 5th Circuit withdrew its initial decision. Citing the significance of the issue, the fact that Texas law governed the dispute and the lack of state law on point, the 5th Circuit certified two questions to the Texas Supreme Court:

• Whether the language of the insurance policy alone determines the extent of BP's coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the drilling contract are “separate and independent”; and

• Whether the doctrine of contra proferentem (where ambiguous terms are construed against their drafter — here, Transocean's insurers) applies in cases involving highly sophisticated parties.

As of this writing, the issues are fully briefed before the Texas Supreme Court. Oral argument took place on Sept. 16, 2014.  The case name number is In Re Deepwater Horizon, 13-0670, Texas Supreme Court, 2014.

BP contracted with Transocean to provide "additional insured" protection covering Transocean's operations above the water line, while BP engaged in drilling below the water line. That narrow limitation was contained in the business contracts between the entities, while the insurance contracts themselves (arguably, at least) did not mirror the same limitation.

The first major issue is about construing the various contracts.  BP contends that only the insurance policy language matters in deciding whether it is an "additional insured," citing cases such as EVANSTON INSURANCE COMPANY v. ATOFINA PETROCHEMICALS, INC., No. 03-0647.  The insurers contend that the extent of coverage they agreed to provide to BP was limited to the scope of Transocean's agreement to provide that coverage, and thus excludes the claims here.

The second major issue might have broader implications. BP contends that if there is any ambiguity about whether it is covered, the policy should be construed against the insurer and in favor of the insured. The insurers contend that the doctrine does not apply in this sophisticated commercial context.  They argue that Transocean agreed to indemnify and add as an additional insured for all liabilities assumed by Transocean under the terms of the contract.  Transocean argued that it assumed many liabilities but not subsea pollution – that pollution was assumed by BP only.

We believe that the Transocean insurers will win this argument.

Recent ISO CGL Insurance Form Revisions Merit Close Attention By Contracting Parties

It is common among parties to sophisticated construction projects, service agreements, leases, and many other types of projects and transactions, to assess the risks associated with their contractual activities and allocate those risks through a combination of contractual indemnification provisions and insurance requirements.  In the construction setting, for example, project owners, general contractors and developers (so-called “upstream” parties) typically require their subcontractors and sub-subcontractors (“downstream” parties) to indemnify them for claims arising from the contract work.  In addition to the contractual indemnification provisions, upstream parties frequently require that they be provided with “additional insured” status on the downstream indemnitor’s/named insured’s general liability insurance policy.  This provides a number of benefits to the upstream indemnitee.  It effectively gives the additional insured/indemnitee direct coverage rights under the indemnitor’s insurance policy, preserves the indemnitee’s own liability coverage and may protect the indemnitee in the event the contractual indemnification provision in the parties’ contract is determined to be void and unenforceable.    

Additional insured status may be achieved in several ways.  Commonly, it is established through an omnibus definition of “Insured,” which may include, for example, the named insured and entities for whom the named insured is obligated by “insured contract” to provide insurance.  Alternatively, additional insured status is often achieved through the purchase of “blanket” or “scheduled” additional insured endorsements.  The additional insured status under a liability policy is an important bargained-for asset in many types of transactions.  

Of course, the extent of the benefit of additional insured status hinges on the actual terms of the insurance policy and applicable law.  With respect to policy terms, the Insurance Services Office (ISO) [1] commercial general liability (CGL) coverage forms provide the basis for many general liability policies.  Accordingly, familiarity with the ISO forms is important. With respect to applicable law, the indemnity and insurance scheme has precipitated frequently conflicting judicial decisions on numerous and complex issues.  A number of these decisions, based upon the fact that the underlying agreement and the insurance policy are in fact separate contracts, have held that the scope and validity of the contractual indemnification provisions have no impact upon the scope and validity of the additional insured coverage—with the effect that additional insureds sometimes enjoy broader protection under the insurance policy than under the contractual indemnification provisions.  By way of example, although anti-indemnification statutes in many states prohibit the transfer of an indemnitee’s sole (and/or concurrent) negligence through contractual indemnity provisions, some courts have construed the terms of the insurance policy as encompassing and covering the additional insured’s negligence even where the underlying contractual indemnification provision was void and unenforceable. In addition, some courts have held that, while the underlying contract may expressly limit the named insured’s indemnification and insurance obligations to the additional insured, the scope of additional insured coverage is not so limited, but rather is governed solely by the terms of the insurance policy.

Presumably in response to developing law impacting the scope of additional insured coverage, ISO has recently revised its standard CGL forms and endorsements, including twenty four of its thirty one standard additional insured endorsements.  Although the true scope of their effect will remain unclear until clarified by ISO or by judicial decision, the new endorsements clearly have the potential to further complicate an already complex area of law and may potentially negatively impact both additional and named insureds.  The new endorsements and developing law warrant the attention of named insureds, additional insureds, indemnitors, and indemnitees alike.  

ISO CGL Insurance Form Revisions

ISO’s new standard CGL policy forms, including both its “occurrence”-based form (CG 00 01 04 13) and claims-made form (CG 00 02 04 13), came into effect on April 1, 2013.  In addition to the revised main forms, ISO has issued new and revised additional insured endorsements as part of its overall revisions to the standard CGL policy.  ISO also has introduced a revised optional endorsement changing the definition of “insured contract.”  The basic ISO forms are used by a majority of insurers and it is likely that these new forms will come into use in the near future.  At a minimum, the language in these new forms underscores that contracting parties are well advised to pay attention to, among other things, potentially applicable law, the terms of the underlying contract and the specific insurance policy terms so that they can most appropriately structure risk transfer provisions.

A. Additional Insured Endorsements

The revised ISO endorsements contain three significant modifications of particular concern to contracting parties.  These are discussed in points 1, 2 and 3 below.  Importantly, these revisions impact twenty four additional insured endorsement forms that cover a broad range of transactions [2] and generally attempt to tie, and thereby limit, the scope of additional insured coverage to the underlying contract provisions.  In addition, ISO has issued a new “blanket” additional insured endorsement and a new “other insurance” endorsement.  These new endorsements are discussed in points 4 and 5 below.

1. Coverage Is Provided “To The Extent Permitted By Law.”
The revised additional insured endorsements now state that the insurance afforded to the additional insured “only applies to the extent permitted by law.”  For example, the new “Additional Insured—Owners, Lessees Or Contractors—Scheduled Person Or Organization” (CG 20 10 04 13) endorsement states:

A. Section II – Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury” caused, in whole or in part, by:

1.   Your acts or omissions; or

2.   The acts or omissions of those acting on your behalf;

in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above.

However:

1.   The insurance afforded to such additional insured only applies to the extent permitted by law[.]

(emphasis added)

Although it is not entirely clear what the italicized language is intended to accomplish, it clearly is attempting to address state anti-indemnification laws in some manner.  By way of background, at least forty five states have enacted anti-indemnification statutes that restrict, modify, or invalidate indemnification agreements in construction and certain other contracts. These statutes (and/or common law) frequently prohibit the transfer of an indemnitee’s sole and/or concurrent negligence through indemnification provisions. Even where the anti-indemnification statute would render a contractual indemnification provision unenforceable, however, a number of courts have upheld additional insured coverage—even with respect to the additional insured’s sole negligence. [3]  

Against this backdrop, as part of its July 2004 revisions to the additional insured endorsements, ISO added the “in whole or in part” verbiage reflected at the end of the first Paragraph A of the above-quoted language (these words replaced the phrase “arising out of”). [4]  The “in part” portion of the phrase, which is left undisturbed in the 2013 revision, means that the additional insured has coverage for its own liability provided that the acts or omissions of the named insured (or those acting on its behalf, such as subcontractors) played at least some part in causing the injury or damage at issue. Therefore, an indemnitee could maintain additional insured coverage for its own negligence even though the state anti-indemnification law might prohibit the transfer of any of the indemnitee’s negligence through contractual indemnification.  

Through the 2013 language, ISO could be attempting to address circumstances in which the 2004 language provides broader coverage than is allowed under the anti-indemnification laws of certain states, such that, for example, if a state anti-indemnification statute prohibits the transfer of any liability, the additional insured coverage would be limited to vicarious liability arising out of the named insured’s acts or omissions. [5]  Alternatively, a better reading appears to be that ISO is attempting to harmonize, without the need for state-specific endorsements, the scope of coverage where the state anti-indemnification law at issue extends to additional insured coverage.  In this regard, some states have expanded their anti-indemnification statutes to void contract provisions that seek to transfer risk via additional insured coverage. [6]  Additionally, the italicized language could be intended as a “savings clause” to preserve additional insured coverage in circumstances in which the contractual indemnification provision is determined to be void and unenforceable under the state anti-indemnification statute. This may be in response to the fact that some courts have voided contractual additional insured provisions where, for example, such provisions were “inextricably tied” to the indemnification provisions. [7]

There are likely to be disputes over the meaning of this wording and, when judicially tested, this language could have broad and negative implications for additional insureds. There also could be negative repercussions for indemnitors who may face breach of contract claims from indemnitees who thought they had bargained for and obtained broader additional insured coverage.  The reach and impact of this additional language will remain unknown until it is clarified by ISO or through judicial decisions. [8]  

In the meantime, the language clearly carries the potential to reduce additional insured coverage, leaving indemnitees without the expected coverage and indemnitors exposed to breach of contract litigation. 

2. Coverage “Will Not Be Broader Than” The Contract Requires.

The additional endorsements now state that if the coverage is required by a contract or agreement, the insurance afforded to the additional insured “will not be broader than” the coverage that the insured is “required by the contract or agreement to provide.”  For example, the new “Additional Insured—Owners, Lessees Or Contractors—Completed Operations” (CG 20 37 04 13) endorsement states:

A. Section II – Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for “bodily injury” or “property damage” caused, in whole or in part, by “your work” at the location designated and described in the Schedule of this endorsement performed for that additional insured and included in the “products-completed operations hazard”.

However:

****

2.   If coverage provided to the additional insured is required by a contract or agreement, 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.

(emphasis added)

ISO has not provided guidance regarding the intent of this new language.  However, it seems likely that the new language is intended to incorporate into the insurance policy any express limits on additional insured coverage that the parties have specified in the contract, e.g., where the contract specifies that additional insured coverage will only extend to vicarious liability. 

Whatever its intent, reference to the terms of the underlying contract documents to determine the scope of coverage afforded to additional insureds may well create areas of significant disagreement. 

Again, the additional language underscores the need to carefully review the terms of the underlying contract and the specific insurance policy language to be used to satisfy additional insured requirements. To the extent the 2013 endorsement is used, contracting parties should ensure that the underlying contract language clearly reflects the parties’ intent regarding the scope of additional insured coverage.

3. Limits Are The Lesser Of The Contract Requirement Or The Policy Declarations.

The additional insured endorsements now state that the most the insurer will pay on behalf of the additional insured is either: (1) the amount “[r]equired by the contract or agreement”; or (2) the applicable Limits of Insurance shown in the Declarations, whichever is less.   For example, the new “Additional Insured—Designated Person Or Organization” form (CG 20 26 04 13) states:

B. With respect to the insurance afforded to these additional insureds, the following is added to Section III – Limits Of Insurance:

If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance:

1.   Required by the contract or agreement; or

2. Available under the applicable Limits of Insurance shown in the Declarations;
      whichever is less.

This endorsement shall not increase the applicable Limits of Insurance shown in the Declarations

(emphasis added)

It seems clear that the intent of the italicized language is to limit the insurer’s exposure to the lesser of the policy limits or the amount agreed to by the contracting parties.  And at first glance this might seem reasonable.  This may come as an unpleasant surprise to contracting parties, however, because additional insureds often have access to the policy’s full limits of liability—sometimes in cases in which the underlying contract or agreement requires that the named insured provide an amount less than the policy’s limits.  Unanticipated changes may leave both parties exposed.  To the extent an additional insured has insufficient insurance to cover a loss, it may look to the named insured for indemnification for any amounts in excess of the insurance limits.  Again, the new language reflects an attempt to link the scope of additional insured coverage to the underlying contract and further underscores the need for contracting parties to pay careful attention to contact language concerning the limits of insurance as well as the insurance policy documentation.

4. New Blanket Additional Insured Endorsement.

ISO has introduced a new blanket endorsement, entitled Additional Insured—Owners, Lessees Or Contractors—Automatic Status For Other Parties When Required In Written Construction Agreement (CG 20 38 04 13). This endorsement, which contains the same potentially problematic language discussed in points 1, 2 and 3 above, provides blanket additional insured status to all parties whom the named insured is “required to add as an additional insured under the contract or agreement”: 

A. Section II – Who Is An Insured is amended to include as an additional insured:

1.   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; and

2.   Any other person or organization you are required to add as an additional insured under the contract or agreement described in Paragraph 1. above.

Such person(s) or organization(s) is an additional insured only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury” caused, in whole or in part, by:

a. Your acts or omissions; or

b. The acts or omissions of those acting on your behalf;

in the performance of your ongoing operations for the additional insured.

(emphasis added)

The endorsement extends additional insured status to an upstream party that is not a party to the underlying contract, where required, without the need for a specific listing.  This has been termed a “broadening of coverage” by ISO, [9] and may be a useful addition, since additional insured status is often required between entities who do not share a direct contractual relationship.  In the construction context, for example, subcontractors often agree to provide additional insured status to upstream parties with whom the subcontractor may not share a direct contractual relationship. The prior blanket endorsement, CG 20 33 07 04, contains only the language in subparagraph A.1. of the above-quoted new endorsement. [10]  The new endorsement should clarify that those upstream parties are covered where the named insured is obligated in writing in a contract or agreement to name them as additional insureds—even though they are not in contractual privity with the named insured.

5. New Other Insurance Condition Endorsement.

ISO also has introduced another new optional endorsement, entitled Primary And Noncontributory—Other Insurance Condition (CG 20 01 04 13), which revises the “Other Insured Condition” to specifically state that the coverage made available to an additional insured is provided on a primary and noncontributory basis where the named insured has agreed to such in writing in the underlying contract documents: 

The following is added to the Other Insurance Condition and supersedes any provision to the contrary:

Primary And Noncontributory Insurance

This insurance is primary to and will not seek contribution from any other insurance available to an additional insured under your policy provided that:

(1) The additional insured is a Named Insured under such other insurance; and                                            

(2) You have agreed in writing in a contract or agreement that this insurance would be primary and would not seek contribution from any other insurance available to the additional insured.

(emphasis added)

This endorsement presumably has been introduced in response to typical contractual wording requiring coverage to be extended to the additional insured on a “primary and noncontributory” basis.  The language is a useful addition, since it may clarify the parties’ intent.  One of the reasons that indemnitees bargain for additional insured status is to preserve their own insurance and this objective may be frustrated when the named insured’s carrier turns to the additional insured’s carrier for contribution pursuant to the “other insurance” clauses. [11]

B. “Insured Contract” Definition Endorsement.
As part of its 2013 revisions, ISO has amended its Amendment Of Insured Contract Definition (CG 24 26 04 13). The endorsement changes the definition of the “insured contract,” part f., to state that an indemnification provision in an underlying contract “shall only be considered an ‘insured contract’ to the extent [the named insured’s] assumption of the tort liability is permitted by law.”  By way of background, although the main CGL coverage form excludes “‘Bodily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement,” the form creates an exception for, among other things, liability for damages “[a]ssumed in a contract or agreement that is an ‘insured contract’ ….”  (CG 00 01 04 13, Section I.2.b.(2).)  The key to the breadth of the exception lies with the definition of “insured contract,” which includes “[t]hat part of any other contract or agreement pertaining to [the insured’s] business … under which [the insured] assume[s] the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization….”  (Section V.9.f.)  The insured/indemnitor thus maintains coverage for liability it assumes to its indemnitee in a hold harmless or indemnity agreement.  Indeed, the named insured’s assumption of liability for the sole negligence of the indemnitee may be covered under the unendorsed “insured contract” definition, making the coverage potentially broader than coverage granted by many additional insured endorsements.

As part of its 2004 revisions to the CGL policies, ISO added the Amendment of Insured Contract Definition (CG 24 26 07 04) endorsement to limit the definition of “insured contract” to those circumstances in which the liability assumed by the insured is caused “in whole or in part” by such insured. As noted, however, certain states do not allow a downstream party to indemnify an upstream party for any part of the upstream party’s negligence.  Now, as part of the 2013 revisions, ISO has modified the Amendment of Insured Contract Definition (CG 24 26 04 13) endorsement to add the qualification that “such part of a contract or agreement shall only be considered an ‘insured contract’ to the extent your assumption of tort liability is permitted by law”: 

The definition of “insured contract” in the Definitions section is replaced by the following:

“Insured contract” means:

****

f.    That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for “bodily injury” or “property damage” to a third person or organization, provided the “bodily injury” or “property damage” is caused, in whole or in part, by you or by those acting on your behalf. However, such part of a contract or agreement shall only be considered an “insured contract” to the extent your assumption of the tort liability is permitted by law. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.

(emphasis added)

When this endorsement is attached to a policy, the named insured presumably would not be provided coverage for the tort liability such named insured assumes of another party to the extent that the assumption of such liability is prohibited by applicable law.  The new ISO language thus has the potential of further restricting coverage in states in which an indemnitor cannot indemnify the indemnitee for any part of the indemnitee’s own negligence.  

Conclusion
The important takeaway to contracting parties is to pay close attention to potentially applicable law, including potentially applicable anti-indemnification statutes, and the underlying contract provisions setting forth the scope of contractual indemnification and additional insured requirements.  In addition, contracting parties are well advised to review the specific terms of the insurance policy under which additional insured protection is to be afforded, including all endorsements, to confirm the coverage terms and to understand the interplay between the underlying contract provisions and the additional insured coverage. Importantly, there are many different additional insured forms and there can be significant discrepancy in the breadth of coverage provided to additional insureds under the wordings of the various forms. By paying close attention to potentially applicable law, in addition to the specific contract and insurance policy terms, contracting parties may avoid potentially negative surprises, such as unexpected gaps or potential loss of insurance coverage.

For contracting parties to accurately evaluate risk transfer, they must be aware of evolving case law and the specific insurance terms and conditions—in addition to the terms and conditions of the underlying agreement.  In light of ISO’s recent issuance of new policy forms and endorsements that contain modifications to policy provisions addressing the scope of additional insured coverage, this may be a precipitous time for contracting parties to assess contractual requirements and additional insured provisions to ensure that the terms and coverage are aligned with the parties’ intentions.  

Notes:

[1]  ISO is an insurance industry organization whose role is to develop standard insurance policy forms and to have those forms approved by state insurance commissioners.

[2]  The revised ISO additional insured forms include: Additional Insured—Concessionaires Trading Under Your Name (CG 20 03 04 13), Additional Insured—Controlling Interest (CG 20 05 04 13), Additional Insured—Engineers, Architects Or Surveyors (CG 20 07 04 13), Additional Insured—Owners, Lessees Or Contractors—Scheduled Person Or Organization (CG 20 10 04 13), Additional Insured—Managers Or Lessors Of Premises (CG 20 11 04 13), Additional Insured—State Or Governmental Agency Or Subdivision Or Political Subdivision—Permits Or Authorizations (CG 20 12 04 13), Additional Insured—State Or Governmental Agency Or Subdivision Or Political Subdivision—Permits Or Authorizations Relating To Premises (CG 20 13 04 13), Additional Insured—Vendors (CG 20 15 04 13), Additional Insured—Mortgagee, Assignee Or Receiver (CG 20 18 04 13), Additional Insured—Executors, Administrators, Trustees Or Beneficiaries (CG 20 23 04 13), Additional Insured—Owners Or Other Interest From Whom Land Has Been Leased (CG 20 24 04 13), Additional Insured—Designated Person Or Organization (CG 20 26 04 13), Additional Insured—Co-owner Of Insured Premises (CG 20 27 04 13), Additional Insured—Lessor Of Leased Equipment (CG 20 28 04 13), Additional Insured—Grantor Of Franchise (CG 20 29 04 13), Oil Or Gas Operations—Nonoperating, Working Interests (CG 20 30 04 13), Additional Insured—Engineers, Architects Or Surveyors (CG 20 31 04 13), Additional Insured—Engineers, Architects Or Surveyors Not Engaged By The Named Insured (CG 20 32 04 13), Additional Insured—Owners, Lessees Or Contractors—Automatic Status When Required In Construction Agreement With You (CG 20 33 04 13), Additional Insured—Lessor Of Leased Equipment—Automatic Status When Required In Lease Agreement With You (CG 20 34 04 13), Additional Insured—Grantor Of Licenses—Automatic Status When Required By Licensor (CG 20 35 04 13), Additional Insured—Grantor Of Licenses (CG 20 36 04 13), Additional Insured—Owners, Lessees Or Contractors—Completed Operations (CG 20 37 04 13), and Additional Insured—State Or Governmental Agency Or Subdivision Or Political Subdivision—Permits Or Authorizations (CG 29 35 04 13).

[3]  See, e.g., Marathon Ashland Pipe Line LLC v. Maryland Cas. Co., 243 F.3d 1232, 1240 (10th Cir. 2001) (Wyoming law) (“we conclude this policy language does not limit coverage to the additional insured's vicarious liability”); McIntosh v. Scottsdale Ins. Co., 992 F.2d 251, 254 (10th Cir. 1993) (Kansas law) (“we believe that the Kansas courts, like courts in other jurisdictions that liberally construe ambiguous insurance policy provisions in favor of the  the insured, would conclude that the additional insured endorsement does not limit the policy's coverage to cases where [the additional insured] is held vicariously liable for [the named insureds]' negligence”).

[4]  Compare Additional Insured—Owners, Lessees Or Contractors—Scheduled Person Or Organization (CG 20 10 07 04) (“Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ caused, in whole or in part, by… Your acts or omissions…”) (emphasis added) with Additional Insured—Owners, Lessees Or Contractors—Scheduled Person Or Organization (CG 20 10 03 97) (“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.”) (emphasis added).

[5]  It should be noted that many of the states tthat have adopted some type of anti-indemnification statute also have adopted insurance savings provisions, which typically state that the statute does not affect the validity of an insurance contract.  These savings provisions have been upheld.  See, e.g., Chrysler Corp. v. Merrell & Garaguso, Inc., 796 A.2d 648, 653 (Del. 2002) (upholding the savings provision and noting that “if in fact an insurer issues an endorsement to cover the actions of a third party and charges a premium for that coverage, it should not be permitted to create an illusion that insurance exists”).

[6]  See Joanne Wojcik, States curb ability to shift contractor risk; Anti-indemnity changes cut additional insureds from some CGLpolicies, Business Insurance, Vol. 46, No. 18 (Apr.  30, 2012) (noting that “at least three states—California, Louisiana and Texas—recently enacted legislation expanding their anti-indemnity statute to restrict risk transfer via additional insured coverage”); Paul Primavera, Evolving AI Endorsement Interpretations Create More Headaches For Contractors, Nat'l Underwriter - Prop. & Cas. Ins., 2009 WLNR 3489852 (Feb. 23, 2009) (noting that “courts in several jurisdictions —such as Colorado, Oregon, New Mexico and Montana—have linked anti-indemnity statutes to also apply to potentially broadly worded additional insured endorsements”).

[7]  Compare Federated Serv. Ins. Co. v. Alliance Const., LLC, 805 N.W.2d 468, 477(Neb. 2011) (“[E]ven if an indemnity agreement is invalid, its invalidity does not affect the coverage extended to another party under an additional insured endorsement.”) with Transcontinental Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, 662 N.E.2d 500, 506 (Ill. App. Ct. 1996) (“the portion of the contract in which [the named insured] agreed to purchase insurance to insure its obligations under section 18 is also void because…it is inextricably tied to the void indemnity provision”) and W.E. O’Neil Const. Co. v. General Cas. Co. of Illinois, 748 N.E.2d 667, 672-73 (Ill. App. Ct. 2001) (noting that “[c]ases have upheld the validity of provisions requiring the party named as indemnitee to be named as an additional insured on the indemnitor’s insurance policy where the insurance provision is not inextricably tied to a void indemnity agreement”).

       However, a number of courts have determined that “to the extent permitted by law”-type verbiage suffices to preserve the contract requirements to the extent they do not offend a state's anti-indemnification statute.  See, e.g., Thrash Commercial Contractors, Inc. v. Terracon Consultants, Inc., 889 F.Supp.2d 868, 881 (S.D.Miss. 2012) (Mississippi law)  (“[T]he limitation of liability provision in the parties' agreement herein recites that the limitation of liability is intended by the parties to operate ‘to the fullest extent permitted by law.’ Numerous courts have found that such language permits enforcement of a limitation of liability to the extent it does not offend a state's anti-indemnification statute.”) (collecting cases).

[8]  To the extent the new language is ambiguous and/or contrary to the contracting parties’ reasonable expectations, the language would be construed in favor of coverage under well-established rules of insurance policy interpretation.  See generally 2 Couch on Insurance 3d § 22:31 (“provisos, exceptions, or exemptions, and words of limitation in the nature of an exception ... are strictly construed against the insurer where they are of uncertain import or reasonably susceptible of a double construction, or negate coverage provided elsewhere in the policy”); id. § 22:14 (“If an insurer uses language that is uncertain, any reasonable doubt will be resolved against it[.]”); id. § 22:11 (“the objectively reasonable expectations of [the insured] regarding the terms of insurance contracts will be honored even though a painstaking study of the insurance provisions would have negated those expectations”).  

       At least one court has observed that “an endorsement that provides coverage only for the additional insured's vicarious liability may be illusory and provide no coverage at all.”  Marathon Ashland,243 F.3d at 1240 n.5 (quoting Douglas R. Richmond & Darren S. Black, Expanding Liability Coverage: Insured Contracts and Additional Insureds, 44 Drake L. Rev. 781, 806 (1996)).

[9]  See 2012 General Liability Multistate Forms Revision To Policyholders (CG P 015 04 13).

[10]  Some decisions without the new language have held in favour of additional insured coverage in the absence of contractual privity. See, e.g., Pro Con, Inc. v. Interstate Fire & Cas. Co., 794 F.Supp.2d 242, 251-252  (D.Me. 2011) (Maine law)  (finding that the language in subparagraph A.1 does “not plainly restrict additional insured status only to those entities that have contracted directly with the named insured”).

[11]  In a similar vein, the CGL “Other Insurance” provision, at Condition 4, has been revised to state that the insurance provided “is excess over [a]ny other primary insurance available to [the named insured] covering liability for damages … for which [the named insured] ha[s] been added as an additional insured”— whether by endorsement or any other means. (CG 00 01 12 04, Section IV.4.b.(1)(b).)  The prior version stated that coverage is excess over any primary insurance for which the named insured had been added as an additional insured “by attachment of an endorsement.”  (CG 00 01 12 04, Section IV.4.b.(2).) This deletion of this phrase is generally helpful because some insurers provide additional insured status directly in their coverage form and not by endorsement. 

 If an indemnification clause is too broad, it may be declared void and unenforceable under a state’s anti-indemnity law

If the indemnification clause is not carefully drafted, the indemnitor stands to incur a substantial loss by assuming a responsibility for all risks, including damages arising from the sole negligence of the indemnitee. On the other hand, if an indemnification clause is too broad, it may be declared void and unenforceable under a state’s anti-indemnity law. For example, a state court may decline to enforce an indemnity clause that purports to indemnify a person’s loss from that person’s intentional or willful misconduct. 
State anti-indemnity legislation emerged to protect subcontractors, lower-tiered subcontractors, and suppliers who are often in a much weaker bargaining position in the negotiation process. These states take the position that overreaching indemnification clauses are against public policy, and thus anti-indemnity statutes place limits on the powerful protections afforded by an indemnification provision.

Two common examples of indemnification clauses are contained in standard contract documents called the AIA A201-2007 and ConsensusDocs 200. In section 3.18.1 of AIA A201-2007 (General Conditions), the indemnification provision states in pertinent part: 

To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section 3.18.

In other words, under section 3.18.1, the contractor must indemnify and “hold harmless” the owner against claims arising out of the performance of the work by the contractor, a subcontractor, or anyone employed by them and covers the owner’s loss only to the extent that it was caused by such act or omission. 
Another example of an indemnity clause in contained in ConsensusDocs 200 “Standard Agreement and General Conditions Between Owner and Constructor,” Article 10, INDEMNITY, INSURANCE AND BONDS which is significantly different from the indemnity clause in AIA A201-2007.

ConsensusDocs 200, section 10.1.1 states: 

To the fullest extent permitted by law, the Constructor shall indemnify and hold harmless the Owner, the Owner’s officers, directors, members, consultants, agents and employees, the Design Professional, and Others (the Indemnitees) from all claims for bodily injury and property damage, other than to the Work itself and other property insured, including reasonable attorney’s fees, costs and expenses, that may arise from the performance of the work, but only to the extent caused by the negligent acts or omissions of the Constructor, Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Constructor shall be entitled to reimbursement of any defense costs paid above the Constructor’s percentage of liability for the underlying claim to the extent provided for by the subsection below.
10.1.2  To the fullest extent permitted by law, the Owner shall indemnify and hold harmless the Constructor, its officers, directors, members, consultants, agents, and employees, Subcontractors or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable from all claims for bodily injury and property damage, other than property insured, including reasonable attorneys fees, costs and expenses, that may arise from the performance of work by the Owner, the Design Professional, or Others, but only to the extent caused by the negligent acts or omissions of the Owner, the Design Professional, or Others. The Owner shall be entitled to reimbursement of any defense costs paid above the Owner’s percentage of liability for the underlying claim to the extent provided for by the subsection above.

The ConsensusDocs 200 indemnity obligation is vastly different from the indemnity clause 3.18.1 in AIA A201-2007 in several ways. First, the duty to indemnify is reciprocal between the contractor and the owner. Contractors and owners are responsible for their own negligence and it covers only insurable risks such as personal injury and property damage. Also, either party is entitled to reimbursement of defense costs paid in excess of that parties’ percentage of liability for their underlying claim. 
Although often confused for each other, an obligation to provide “additional insured coverage” is not equivalent to an indemnity obligation. Since the ability to indemnify the indemnitee is tied to the indemnitor’s financial ability to pay such losses in the future, standard contract forms contain an added protection in detailed insurance clauses requiring a party to procure insurance coverage.
In AIA A201-2007, Article 11 sets forth the contractor’s requirement to purchase and maintain insurance to protect the contractor from claims arising out of its operations and completed operations for which it may be legally liable. Article 11 also requires the contractor to provide commercial general liability (CGL) insurance and identify the owner, owner’s lender, owner’s landlord, the architect, and the architect’s consultants as “additional insureds” for claims caused in whole or in part by the contractor’s negligent acts or omissions. Obtaining additional insured status is accomplished by a written endorsement or amendment to the named insured’s policy. An additional insured may receive the benefits of the coverage and make a claim directly against the named insured’s insurance company. Companies who are named as additional insureds under a policy are subject to the same policy exclusions and exceptions as the policy holder.

In ConsensusDocs 200, the insurance clauses are found under Article 10 under “Indemnity, Insurance, and Bonds.” ConsensusDocs 200 requires that the parties purchase and maintain CGL insurance, employers’ liability insurance, and business automobile liability insurance. However, in contrast with A201, ConsensusDocs 200 contains no requirement to identify any party as an “additional insured.” Rather, the owner has the option to require that the contractor maintain additional liability coverage in the form of providing additional insured status under the CGL policy or an Owners’ and Contractors’ Protective Liability insurance policy at the owner’s expense.

A Certificate of Insurance Does Not Change The Insurance Policy

A common problem encountered by additional insureds is that of proving their additional insured status. Insurance brokers sometimes merely issue a certificate of insurance to the additional insured, which is only evidence that a policy was issued to the named insured. See Ins C §384. It is not a contract between the insurer and the certificate holder and does not by itself convey additional insured status on the holder. Pardee Constr. Co. v Insurance Co. of the W. (2000) 77 Cal.App.4th 1340, 1347 fn. 2; Empire Fire & Marine Ins. Co. v Bell (1997) 55 Cal.App.4^th 1410, 1423 fn. 25. A certificate must state that it “does not amend, extend or alter” the coverage provided by the policy. Ins C §384.

Often, certificates also state that a party is an additional insured under the policy. Additional insureds should beware, however, that insurers sometimes take the position that such a certificate is not sufficient evidence of an endorsement or, even if it is, that the broker had no authority to issue the endorsement. Additional insureds should not rely on the insurance companies to maintain copies of their additional insured endorsements, but should ask for copies of the endorsements when the certificates are issued.

A certificate of insurance issued by an authorized agent obligates the insurer to provide coverage for the certificate holder, even if the policy has not been amended to that effect. Notably, however, the certificate of insurance most commonly used in the construction industry is the Acord certificate, a single-page standardized form stating that it “does not amend, extend or alter the coverage afforded by the referenced policies.” Diamond Woodworks, Inc. v Argonaut Ins. Co. (2003) 109 Cal.App.4th 1020, 1032. Unfortunately, too often, insurance brokers will issue a certificate of insurance on such a form even though they lack actual authority from the insurer to do so. In the event of a loss, to establish the insurer’s liability, the purported additional insured may have to prove that the broker had ostensible authority to issue the certificate of insurance. See, e.g., Roger H. Proulx & Co. v Crest-Liners, Inc. (2002) 98 Cal.App.4th 182 (broker’s employee erroneously believed issuance of certificate automatically extended coverage, whereas insurer required prior express approval); Preis v American Indem. Co. (1990) 220 Cal.App.3d 752 (broker’s subagent issued certificate without authority from insurer); American Cas. Co. v Krieger (9th Cir 1999) 181 F.3d 1113, 1122 (broker issued certificate without authority from insurer).   If an attorney represents a party who is to be named as an additional insured, obtaining a certificate of insurance is usually sufficient.  However, prudent practice is to confirm the client’s additional-insured status directly with the insurer in writing or review of a specific endorsement added to the policy.

The Duty to Defend Extends To The Entire Action

Although the insurer may restrict its duty to indemnify an additional insured to claims against the additional insured based on vicarious liability for the named insured’s negligence, such restrictions do not narrow the insurer’s duty to defend. The reason is that in a “mixed action,” in which some claims are covered and some are not, the duty to defend extends to the entire action. Buss v Superior Court (1997) 16 Cal.4th 35, 48–49.

In Presley Homes, Inc. v American States Ins. Co. (2001) 90 Cal.App.4th 571, the policy issued to a subcontractor as the named insured included an endorsement amending the definition of “insured” to specifically include the plaintiff, a real estate developer, subject to the following provisions:

1. This insurance applies only with respect to liability:

a. Arising out of “your work” for that insured by or for you; or

b. Arising from the general supervision of “your work” by [the additional insured].

2. This insurance does not apply to “bodily injury” or “property damage” arising out

of the sole negligence or willful misconduct of, or for defects in design furnished by,

[the additional insured].

The insurer argued that this language meant its defense of the additional insured could be limited to a defense regarding claims attributable to the named insured’s work. The court held that while the endorsements limited the coverage for plaintiff to “liability” arising from the contractor’s work, nothing in either the policies or the endorsement limited defendant’s obligation to provide plaintiff with a defense. 90 Cal.App.4th at 575.

Specially Drafted Additional-Insured Endorsements

Not all insurers utilize the ISO additional insured endorsements. Several insurers have elected to use their own additional-insured endorsements, especially for insureds connected with the construction industry. One commentator estimated that as many as 300 additional insured endorsement forms are currently in use.

Introduction to Certificates of Insurance

Most commercial agreements (e.g., leases, service contracts, or vendor agreements) contain risk allocation and insurance provisions that require one party to accept responsibility for certain losses and to obtain a sufficient amount of insurance to be able to meet their financial obligations should losses occur.  Certificates of insurance (COIs) are the customary method of showing that the party providing the certificate has met their insurance requirements.  This handout provides a brief overview of COI. 

What Is a COI?

A certificate of insurance is a form that is issued by an insurer or their authorized representative and provides evidence that a company carries insurance. The certificate usually summarizes the essential terms, conditions, and duration of the specified policy at the time that the certificate is prepared. Typical information that is provided includes: contact information for the insured, the broker or agent issuing the certificate, and the person being issued the certificate; the names of all insurers providing coverage documented on the certificate; the policy number(s); a description of the types and limits of insurance; the coverage dates; and a signature of the insurer’s agent or representative. In addition, the certificate should include any special insurance requirements that have been specified in the commercial agreement (e.g., the naming of the certificate holder as an additional insured).

Certificate Forms

COIs are published in three basic forms. Most certificates are printed using standardized forms developed by ACORD (Agency-Company Organized Research Development), an insurance industry organization. ACORD revises these forms as issues arise. The certificate requestor or provider may modify the basic ACORD form to address policy provisions. The certificate requestors or providers may also develop their own form (i.e., “manuscript forms”). Because manuscript forms are non-standard, it is often difficult to have such forms completed and their use is limited to companies with large market power or for large projects.

Benefits of Certificates

There are several benefits to using certificates, rather than requesting certified copies of the policies themselves. The primary benefit is convenience. The certificate can be obtained quicker and easier and require fewer resources to review and store than the policy itself. It can be used to demonstrate the coverage that existed at a particular time and provide the basic information that will be needed in the event a claim is filed or a dispute arises. The certificate will not contain any confidential business information that would be part of the policy, such as company sales or payroll information. Also, the certificate holder is less at risk for inadvertently waiving potential coverage arguments for failure to adequately review the policy.

Limitations of Certificates

There are several limitations to the use of certificates. A COI only confirms that the certificate provider carried the specified insurance at the time the certificate was prepared. It does not guarantee that the insurance will not be cancelled after certificate issuance and before the completion of the contractual arrangement, that the coverage limits will not be exhausted by other claims, that all required endorsements have been added to the policy, or that the policy does not contain other endorsements that reduce coverage, which are not included on the COI. Most importantly, a COI is not the legal equivalent of a policy and does not create a contractual relationship between the certificate holder and the insurance company issuing the policy. This is reinforced by disclaimers placed in the standard ACORD forms that the certificates are for “informational purposes only” and do not “amend, extend, or alter the coverage afforded by the policies.” Because of this, as a general rule, courts will enforce the language of the policy over the COI in the event of a conflict between the two documents.  In other words, such certificates do not make the certificate holder an additional insured and do not confer rights upon the certificate holder.

Recent Example Cases on the COI

A Connecticut Superior Court has further clarified the construction industry whether a certificate of insurance naming a party as an additional insured confers any rights on that party. In Hobbs, Inc. v. Charter Oak Fire Insurance Co.,  12014 Conn. Super. LEXIS 833 (April 8, 2014) a subcontractor’s employee was injured at a construction site and brought suit against the prime contractor, among others, for those injuries. The prime contractor, in turn, sought coverage from the subcontractor’s commercial general liability insurer, as the prime contractor was named on a certificate of insurance provided by the subcontractor’s insurance agent. It is fairly common practice in the construction industry for a contractor to treat as binding such certificates, even if the certificate contains a disclaimer that it does not change or add to the policy or confer any rights upon the certificate recipient. The commercial general liability insurer in this case, however, was never notified of the desired coverage and disclaimed coverage on that basis, even though the certificate stated otherwise. The court, relying on Connecticut Supreme Court precedent, held that a certificate of insurance, absent knowledge of the insurer, conveys no rights on the prime contractor.

What does this mean for you?

The outcome of this case may have been different if evidence of insurance had come directly from the insurer, not the agent.  The important lesson is for contractors to confirm that the insurance coverages required under contract have been provided by obtaining independent and unqualified verification directly from the insurer, preferably in the form of an endorsement or endorsed copy of the policy

On September 24, 2014, a New Jersey appellate court decided Selective Ins. Co. v. Hospicomm, Inc., 2014 WL 4722776 (N.J. Super., September 24, 2014). The dispute in that case arose out of a nursing home construction project gone awry. One of the contractors sought coverage for all of the claims against it, and, as often occurs in such cases, one of the arguments it made was that it was named on a certificate of insurance as an additional insured. The Court stated, “the certificate expressly confers no rights on its holder . . . .” Id., slip op. at *7. In a footnote, the Court drove the point home with a textual sledgehammer:

The [Appleman insurance] treatise quotes one state’s high court’s assessment that a standard certificate is a worthless document which does ‘no more than certify that insurance existed on the day the certificate was issued.

Id., slip op. at *7 n.6 (quotation and citation omitted).

Contract Management

If you are like many business owners, you might not take the time to thoroughly review a contract when it comes across your desk.  You may leave this up to your office manager or casually review it yourself.

Yet, effective contract management can help protect your business from many potentially expensive lawsuits and judgments.  It is important that you understand how a written contract can benefit and protect your business—and it is essential for you to practice effective contract management.

Purchase Orders, Waivers, Rental Agreements, Leases, Terms & Conditions and other types of written agreements can all function as contracts—to simplify matters, the term “contract” will be used in this document.

What a Written Contract Does

Today’s fast‐paced and highly litigious business environment requires proper contract management and knowledge. A written contract functions as a legal document and should do the following:

o    Provide a clear statement of the work to be performed or the products and services to be rendered, to prevent confusion and misunderstanding;

o    Provide clarification of the legal responsibilities and obligations of the parties through the use of indemnification clauses, “hold harmless” agreements and waivers or limitations of legal liability;

o    Provide a method of dispute resolution to reduce and possibly eliminate costly litigation expenses, which can be especially important with international business partners; and

o    In some cases, shift insurance responsibilities by including Additional Insured requirements; or the contract may increase exposures thereby requiring the purchase of additional insurance coverage.

When Drafting or Reviewing a Contract, Look For

·                     Which state’s law applies to the contract, and for international business partners, which country’s law? What effect does this have on the contract?

·                     Does the contract include all addendums (i.e. no side agreements or verbal statements apply)?

·                     Is the contract enforceable? Is it a signed agreement between two or more parties? Are the parties competent adults who have been given the opportunity to review and understand the contract? For instance, a waiver written in small print, not in plain English, on the back of another document might not meet this requirement.

·                     Does the contract require specific dispute resolution methods? Is there an “Arbitration Clause”? This is especially important when dealing with international business partners where the Arbitration Clause may require you to arbitrate disputes in a foreign country.

·                     How does the contract compare to other contracts that may be in effect? Are they broader? Are they equivalent?

·                     What are the milestone performance dates of the contract?

·                     What requirements does the contract impose upon you?

·                     What requirements does the contract impose on the other party?

·                     What safety and quality control procedures are required?

·                     Are surety bonds or other security required for the contract?

·                     Will one party be allowing the other use of its tools, equipment or facilities or sharing access to the project location with others?

·                     If a contractor will be permitted to use subcontractors, or a tenant allowed to have sub‐tenants, what requirements should this party be held to? How will they be addressed in indemnification clauses?

·                     What insurance requirements have been written into the contract? Some examples of insurance coverages that may be applicable include:

o        Auto Liability

o        Commercial General Liability

o        Contractual Liability

o        Fire Legal Liability

o        Liquor Liability

o        Product Liability/Completed Operations

o        Professional Liability/Errors & Omissions

o        Data Breach

o        Builder’s Risk

o        Installation Floater

o        Bailee Coverage

o        Motor Truck Cargo

o        Umbrella Insurance

o        Workers’ Compensation

·                     What limits of insurance are required for each coverage?

·                     Are there Additional Insured requirements?

o    Are insurance companies required to have particular financial ratings? Most financially sound insurers carry an A.M. Best Company rating. Refer to http://www.ambest.com for information regarding a carrier’s current rating.

o    When dealing with international business partners and foreign locations, are participating insurance companies licensed in the foreign countries where the contracted for work may be performed?

o    When contracting with international suppliers and trading partners for the supply of goods and services being brought into the United States, is the international trading partners’ insurance company licensed and admitted to do business in the United States?

o    Will you be notified if the required insurance has been cancelled?

o    Does the contract contain waivers of subrogation? If so, which insurance policies are affected? Will those insurance policies still pay if a waiver of subrogation is in effect? What other entities are affected?

o    What evidence of insurance must be provided to the contracting parties? Certificates of Insurance?

Insurance Coverage for Various Risks or Hazards Facing Companies

 

Risk or Hazard	Applicable Insurance Policy
Medical care and loss of income due to death or injury to worker working in the course and scope of his employment	Workers Compensation Insurance
Lawsuit brought by injured employee or dependent	Most Workers Compensation acts eliminate the employee’s right to sue his or her employer within the scope of the workers compensation statute.
Lawsuit brought by person for bodily injury or property damage	Commercial General Liability Insurance
Lawsuit brought by a contractor arising out of a lawsuit by a third party where insured signed an indemnity provision	Commercial General Liability Insurance includes coverage for certain liabilities assumed under contract.
Bodily injury to a business visitor to company facility	Commercial General Liability Insurance
Lawsuit brought by injured person where damages asserted exceed the limits of the insured’s Commercial General Liability Insurance policy	Excess Insurance covers claims in excess of the limits of the Commercial General Liability Insurance policy up to the limits of the Excess Liability Insurance policy.
Lawsuit to recover damages for bodily injury or damages to property of others arising out of the use of an automobile owned by the defendant	Commercial Automobile Liability Insurance.
Sexual harassment, racial discrimination or claim arising under the Americans with Disabilities Act	Employment Practices Liability Insurance

 

 

What Additional Insured Status Does

·         A party with Additional Insured status has direct access to the other party’s (the Named Insured’s) insurance policy, including immediate access to legal defense. Without Additional Insured status, the first party would need to submit a claim to their own insurance carrier, and then attempt to recover damages and legal fees using a contract’s indemnity clause or through subrogation.

·         The Named Insured’s insurance carrier cannot subrogate against Additional Insureds.

·         A Vendors Endorsement gives a company that is selling the products of another company Additional Insured status on the first company’s Product Liability insurance policy. A Vendors Endorsement may specify “blanket” coverage of all products and all vendors, or it may be specific to certain ones.

·         Additional Insured status is generally not available for Workers’ Compensation policies.

·         An Alternate Employer Endorsement provides primary Workers’ Compensation and Employer’s Liability coverage to another party, such as customers of a temporary employment agency.

What an Indemnity Provision Does

An indemnification clause or hold harmless agreement requires one party (the indemnitor) to assume financial responsibility for damages for which another party (the indemnitee) is liable. Does the contract have an indemnification clause? Is it more in favor of one party or the other?

Several types of indemnity provisions exist and generally fall into these categories:

·         Limited Form: Indemnifies only to the extent of the indemnitor’s own negligence. For instance, if the indemnitor is found to be 70% at fault in causing an injury, the indemnitor must pay the indemnitee 70% of the total damages. This is also referred to as comparative fault liability.

·         Intermediate Form: Indemnifies fully for the joint negligence of both parties but not for the sole negligence of the indemnitee. For instance, if the indemnitor is found to be 70% at fault in causing an injury, the indemnitor must pay the indemnitee 100% of the total damages. But if the indemnitor is found to be 0% at fault (i.e. the indemnitee is 100%, or solely, liable), the indemnitor is not contractually obligated to pay any damages.

·         Broad Form: Indemnifies fully for the joint negligence of both parties and also for the sole negligence of the indemnitee. For instance, if the indemnitor is found to be 70% at fault in causing an injury, the indemnitor must pay the indemnitee 100% of the total damages. But if the indemnitor is found to be 0% at fault (i.e. the indemnitee is 100%, or solely, liable), the indemnitor must still pay 100% of the damages. In some states, this type of agreement is against public policy and therefore, not enforceable.

·         Hybrid: Uses a combination of two or more of the above three basic types of indemnification. For instance, a contract might require intermediate form indemnification for payment of legal defense costs, but limited form indemnification for payment of the actual judgment. Or a contract might require limited form indemnification for claims from outside third parties, but broad form indemnification for claims from employees of a contractor (i.e. third‐party‐over claims).

·         Cross‐Indemnity or Mutual Indemnity: Each party agrees to indemnify the other for liabilities arising from its own negligent acts, errors or omissions. The above three basic types of indemnification focus on one party (usually the one that drafted the contract) being the indemnitee, and the other party being the indemnitor. Mutual indemnification focuses on each party being responsible for its own actions. This may be an easier or fairer way to allocate liability if the activities of both parties have about the same level of risk. But if one party has an inherently higher level of risk, mutual indemnification may not accomplish what each party intends.

Before a Loss Occurs

·         Properly execute all contracts:

·         Are they enforceable, properly signed and properly dated?

·         Keep an up to date list of all your contracts with the amounts and key deadlines noted.

·         Have documentation readily available – contracts, change orders, Certificates of Insurance, and any documentation required by the contracts. Retain these documents for at least the expected life of the product/service covered by the contract, plus the applicable statute of limitations or statute of repose.

·         Check Certificates of Insurance that you receive from others, to be sure that the coverages, limits, Additional Insured status, expiration dates, financial ratings and cancellation notification are as agreed to in the contract.

·         Follow up to obtain new Certificates of Insurance before the old ones expire.

·         Verify that you have proper insurance coverage as required in any contracts that you sign—for each project, location, and contract provision.

After a Loss Occurs

·         Regardless of who you believe may be at fault or whether all the facts are available, report the loss immediately to your agent and insurance company.

·         Gather all documents pertaining to the contract, scope of work, meeting or construction notes, and any other known loss issues.

·         Be prepared to discuss the facts and loss details with your insurance adjuster.

Always Seek Professional Advice

To fully protect your business and its assets, you should always consult experts who can properly advise you about a contract. It is important to:

·         Always consult an attorney to work with you to draft a contract suitable for your business and insurance needs.

·         Always contact your insurance agent when another party requires you to provide them with insurance, to make sure your current insurance program meets the needs of the contract.

Metropolitan Engineering, Consulting & Forensics (MECF)

Providing Competent, Expert and Objective Investigative Engineering and Consulting Services

P.O. Box 520

Tenafly, NJ 07670-0520

Tel.: (973) 897-8162

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E-mail: metroforensics@gmail.com

Web pages: https://sites.google.com/site/metropolitanforensics/

https://sites.google.com/site/metropolitanenvironmental/

https://sites.google.com/site/metroforensics3/

http://metroforensics.blogspot.com/

We are happy to announce the launch of our twitter account. Please make sure to follow us at @MetropForensics or @metroforensics1

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