Additional Insurance Coverage: Fundamentals and Misconceptions

Additional insured (“AI”) requirements for commercial general liability (CGL) policies are very common in construction contracts. An Owner routinely requires its general contractor (“GC”) to provide AI coverage for itself, its affiliates, and sometimes a handful of other entities (lender, architect, etc.). In turn, the GC mandates its subcontractors to provide AI coverage for the GC, the Owner, and a cast of other characters. While frequently used, for good reason, this risk transfer tool is often misunderstood. In this post, I will explain the purpose of AI coverage, identify what it does and does not cover, and provide answers to a few misconceptions about additional insured coverage.

The Purpose of Additional Insured Coverage

The design of AI coverage is to trigger the insurance procured by lower-tier contractors. The Owner, GC, and subcontractors all have CGL insurance, but the goal of additional insured coverage is to make sure that someone else’s insurer will be on the hook to provide defense and indemnity should a covered claim arise. The goal is to insulate the insurers of upper tier entities (as well as the insured Owners/GCs) from defending or paying claims because the lower-tier’s insurer will provide such defense and indemnity. While the Owner/GC may have coverage already, they will not be impacted by claimed losses in their insurance program if such loses are covered by another carrier.

Additional Insurance coverage provides an additional form of security for contractual indemnity provisions. In most construction contracts, a lower-tier contractor promises the upper-tier entity that it will pay for injury to person/property caused by the lower-tier contractor’s negligence. Indemnity means pay money. The promise to indemnify another is only as good as what backs up that promise. While a lower-tier’s CGL policy should provide coverage for assumed contractual liability, the advantage of AI coverage is that the upper-tier can go directly to the lower-tier’s insurer for coverage. A lawsuit against the lower-tier contractor is not required to trigger the coverage. Contractual indemnity and AI coverage are separate and distinct risk transfer mechanisms, but they work in tandem with each other. A reasonable level of redundancy is a positive attribute when it comes to planning to mitigate and transfer risk.

What Does Additional Insurance Cover?

AI coverage will not cover an Owner/GC if there is no relationship to the subcontractor’s work. If there is no such “nexus” between the subcontractor’s work and the claimed loss, then the Owner/GC cannot utilize the additional insured coverage. Clearly, there is no liability where the additional insured is 100% responsible for the loss. The “nexus” required between the loss and the subcontractor’s work varies based upon the language used in the additional insured endorsement and decisional law in the relevant jurisdiction. For example, earlier this year the Rhode Island Supreme Court held that a subcontractor’s insurer who had issued AI coverage for the general contractor did not owe additional insured coverage resulting from an injury to subcontractor’s employee because employee did not allege fault or negligence of the subcontractor. Bacon Constr. Co. v. Arbella Prot. Ins. Co. In Bacon, the Court interpreted the AI endorsement discussed in the next paragraph (ISO CG 20 3) and concluded that some negligence of the subcontractor needed to be alleged. Where the language of the AI endorsement is broader, such as coverage to an additional insured for “liability arising out of” the operations, the outcome is often different as seen in the 11th Circuit case of Zurich Am. Ins. Co. v. Southern-Owners Ins. Co. also decided earlier this year.

AI coverage for CGL policies are mostly written on standard forms written by the Insurance Services Office, Inc. (“ISO”). In many standard contracts, you will see a specific ISO form number identified. A commonly used form is ISO CG 20 33 07 04. In this form number, the last four digits “07 04” are the month (07) and year (04) the form was adopted by ISO. This form amends the CGL policy defining who is an Insured “to include as an additional insured any person or organization for whom you [the Named Insured] 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.” ISO 20 33 07 04 (emphasis added). The additional insured is then covered for “‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ caused, in whole or in part, by [1] [the Named Insured]’s 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.” ISO 20 33 07 04 (emphasis added). A few issues to be aware of with this standard AI form:

• The Privity of Contract Problem. This form is useful for general contractors who are, by definition, going to be performing operations and have a contract with the Owner. You can rely upon this “blanket endorsement” and be comfortable that you have provided AI coverage to your Owner customer. But, what about subcontractors who are asked to name the Owner as an additional insured?  They are not in privity of contract with the Owner and thus AI status from the subcontractor’s CGL policy may not be conferred as intended to the Owner. The result is that the subcontractor is in breach of its subcontract for failing to provide the specified AI coverage and the GC’s insurer will be stuck with coverage of the claim. To get around this issue, it is advisable to request a “scheduled endorsement” where the names of the entities who are intended to be conferred AI status are listed. An example of a scheduled endorsement is ISO form CG 20 37 07 04.
• Scope of Coverage. The language “caused, in whole or in part” leads to some insurers to deny coverage or issue reservation of rights letters. This is because there may not be a sufficient showing that the Named Insured “caused” the alleged loss in whole or in part. This was the holding of the Rhode Island Supreme Court discussed previously in Bacon. Other AI endorsements, such as the pre-2004 editions of the CG 20 10 ISO AI endorsements, provide broader language but they may be difficult to obtain from insurers.
• Completed Operations. The 20 33 form does not provide for completed operations. Many standard insurance requirements require a specific period of years for completed operations coverage. If you rely upon this form alone, you will not be providing the completed operations insurance. ISO form CG 20 37 07 04 provides for completed operations coverage.

In the AIA’s 2017 updates to its Owner/Contractor documents, the AIA specifically identifies ISO forms CG 20 10 07 04 and CG 20 37 07 04 as the minimum level of additional insured coverage to the extent commercially available. Updated forms exist of the CG 20 37 series, but they provide more limited coverage.

Common Misconceptions about AI Coverage

1. I am covered by my subcontractor’s insurance as an additional insured; I do not need my own policy. Yes you do. AI coverage by a subcontractor is not a replacement of a GC’s insurance obligations. For example, a subcontractor’s AI insurance only applies where the subcontractor’s conduct is related to the loss.
2. All I need to do in my contract is attach a sample certificate of insurance identifying my company and the owner as additional insureds. While this method may work in some circumstances, a few additional steps will better protect your company. First, insert a clear promise by your contracting party to purchase and maintain specific types of insurance. The promise to procure insurance is important. Failure to have such language could result in finding that there were no insurance procurement obligations. Second, be specific in the entities you want to be named as the additional insured. This avoids any confusion and ambiguity. Third, make sure the AI coverage is “primary and non-contributory” to other insurance. This accomplishes the objective of having the lower-tier insurance companies respond to the claims without receiving contribution from your insurer.
3. The AI coverage is automatic on my subcontractor’s “follow form” excess policies. Unlike AI endorsements that are commonly ISO forms, excess policies are manuscript policies – meaning each insurer prepares its own form. While many of these polices assert they follow the form of the underlying CGL policy, the scope of coverage for excess polices varies based upon the manuscript policies. Be sure to include the same requirements for additional insured status for your excess insurance specifications.
4. All I need to do is obtain the certificate of service from my subcontractor to ensure AI status. The certificate of insurance forms are useful documents, but if you want to ensure that the proper AI status is obtained, you need to obtain the endorsement. While this is an additional step in the procurement process I am sure you would like to avoid, it is the only way you can verify the coverage. The certificate of service expressly states you cannot rely upon it for the insurance provided. As described in the Bacon and Zurich cases above, there are substantial differences in the outcome by using different ISO AI forms. Obtaining the endorsement provides necessary certainty on the insurance you have procured or been provided. The extra step is worth the effort.
5. As an Additional Insured, I have the same rights as my subcontractor’ under its CGL policy. There is a difference in the CGL insurance policy between the definitions of the “Named Insured” – your subcontractor – and the “Other Insured” – the additional insured. The rights under the CGL insurance policy are different for the Named Insured versus the Other Insured. For example, as noted above, additional insureds are only covered where there is a nexus between the claim and the conduct of the named insured.
6. This sounds great for Owners. I want to make sure everyone, including my design professionals provide additional insured coverage for me. Sorry, but additional insured coverage is not available for professional liability insurance policies.

Conclusion

AI coverage is an important tool in your risk management toolbox. It is also a valuable service you are providing your customer and there is not much cost associated with it. ISO updates their forms on a regular basis so it is important to work with your insurance broker or other insurance adviser to ensure you are receiving the coverage promised to you and that you are providing the coverage you promised to your customer.

** This post was updated from an article written by Tom Dunn for the AGC of MA’s Building Best Practices publication.