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:
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.
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 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.
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.4th 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:
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
Fax:
(973) 810-0440
E-mail:
metroforensics@gmail.com
Web
pages: https://sites.google.com/site/metropolitanforensics/
https://sites.google.com/site/metropolitanenvironmental/
http://metroforensics.blogspot.com/
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sure to follow us at @MetropForensics or @metroforensics1
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Feel free to recommend our services to your friends and colleagues.