Reprinted from Construction Executive, May 2008, a publication of Associated Builders and Contractors. Copyright 2008. All rights reserved.
Reassessing Additional Insured Endorsements
Construction will never be accident proof which is why good construction contracts should always allocate the risks posed by potential jobsite accidents.
Additional insured endorsements are a common method by which owners and general contractors can obtain insurance coverage under the commercial general liability (CGL) policies of lower-tier contractors. However, the nature and extent of this coverage and its interplay with indemnification clauses in construction contracts should make all parties reevaluate their risk strategies before beginning a project.
Being listed as an additional insured does not automatically result in coverage. A lower-tier contractor, or named insured, must obtain an additional insured endorsement to its insurance policy that specifically confers additional insured status to the upper-tier contractor or owner. The Insurance Services Office (ISO) has developed standard forms for this purpose, although many nonstandard variations developed by individual carriers also exist. The additional insured is entitled to all the rights and benefits of the named insured, including access to the same policy limits in the event of a claim.
Risk-shifting provisions in construction contracts place the burden of anticipated risk in the hands of the party best positioned to prevent accidents. For example, a subcontractor is generally believed to be in a better position than a general contractor to prevent injuries to its own employees or damage to its own work.
Therefore, when that subcontractor's employee brings a lawsuit against the general contractor for a workplace injury, the additional insured endorsement provides the general contractor access to the subcontractor's insurance for a defense and indemnification.
Historically, the additional insured endorsement covered both ongoing and completed operations and extended coverage to the additional insured by some variation of the language "but only with respect to liability arising out of the named insured's work." Most courts broadly interpret the "arising out of" language in the endorsement to cover almost anything related to the insured's work.
As a result, coverage has been extended to the additional insured for claims that were caused solely by the additional insured, meaning the named insured shared no responsibility for the accident or injury.
In response to judicial determinations requiring insurers to pay for the sole negligence of additional insured entities, the ISO revised its endorsement to restrict coverage to those claims caused by the named insured by removing the "arising out of" language and inserting "caused, in whole or in part, by the named insured's acts or omissions." In addition, the current ISO standard endorsement limits additional insured coverage to ongoing activities, precluding coverage for anything after the work has been completed.
The ISO revisions reflect the original intent of the policies; namely, the changes provide coverage to an additional insured only in the event that the policyholder was at least partly responsible for the damage.
If a construction contract requires a subcontractor to indemnify a general contractor for accidents caused by its sole negligence, the subcontractor—whose additional insured endorsement excludes coverage for the additional insured's sole negligence—faces a gap between its contractual obligations and the coverage afforded by its policy. The subcontractor risks a breach of contract claim and expensive litigation costs if it promises to indemnify the general contractor for its sole negligence, but has no such insurance coverage.
To complicate matters, the American Institute of Architects introduced the revised A201 family of contract documents late last year with new language that, for the first time, requires contractors to name the owner, architect and even the architect's consultants as additional insured entities under the contractor's general liability policy. Other trade associations offer draft construction contracts that do not incorporate such a requirement.
An Alternative
Competing contract versions suggest an Owner-Contractor Protective (OCP) policy as an alternative type of insurance that allows the parties to more accurately price and allocate risk. The contractor or subcontractor could be required to provide an OCP in the name of the owner or general contractor.
Under an OCP, the owner or general contractor is the named insured and is entitled to primary coverage with a separate policy limit. It cannot be cancelled without the named insured's knowledge.
An OCP protects contractors from depleting the policy limits shared under an additional insured endorsement. Claims made by the general contractor do not reflect negatively on the subcontractor in the form of premium increases.
Policyholders must carefully analyze both the indemnification and additional insured provisions in their construction contracts and evaluate the coverage afforded to additional insureds under their CGL policies. The additional insured requirement may be unclear as to whether the named insured may eliminate coverage for the additional insured's sole negligence. Corrective language could be negotiated to require the additional insured's insurance policy to cover its sole negligence or to remove "sole negligence" language in the indemnification clause. Because many insurers are now using the 2004 endorsement that purports to preclude coverage for the additional insured's sole negligence, contractors may be forced to purchase broader insurance.
Entities seeking coverage through an additional insured endorsement should require the named insured to provide a complete copy of the insurance policy, not just a certificate of insurance, to confirm the insurance coverage equates with the risk allocation in the construction contract. Some owners or general contractors are requiring lower-tier contractors to obtain the 1985 or 1993 versions of the endorsement because they provide the broadest coverage for an additional insured.
Reprinted from Construction Executive, May 2008, a publication of Associated Builders and Contractors. Copyright 2008. All rights reserved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
