By Michael Giordano
Many contracts require one party to name the other as an “additional insured,” but too often without specifying the scope of coverage required. This is problematic because coverage for additional insureds comes varied, and the parties may have different ideas of what coverage the contract requires. By the time the parties realize they have different opinions, it is usually too late; a lawsuit has been filed against one party, who then learns it is not an additional insured under the other’s liability policy. In my practice representing insurers, I am often the one to inform parties of that fact. Like many legal issues, the parties could have avoided turmoil with proper planning and a well-drafted additional insured clause in their contract. This article explains the basics of additional insured coverage and tips to avoid common mistakes and get the coverage you expect.
The benefit of being an additional insured. Additional insured clauses, when properly drafted, are valuable tools for transferring risk, allowing one party to obtain liability coverage under another’s insurance policy. These clauses are commonly found in construction contracts, so this article will use as an example an additional insured clause that requires the subcontractor to name the general contractor as an additional insured on the subcontractor’s liability policy.
An additional insured clause should not be confused with an indemnity clause, which shifts the responsibility to pay damages from the general contractor to the subcontractor, usually for liability related to the subcontractor’s work or presence on the job site. That said, an indemnity clause is only as good as the subcontractor’s bank account; the subcontractor cannot indemnify with money it doesn’t have. For that reason, an additional insured clause is often a backstop for the indemnity clause, providing the general contractor with greater protection against having to pay damages.
Although additional insured and indemnity clauses both shift risk from the general contractor, they do not necessarily do so to the same degree or under the same circumstances. For example, an indemnity clause that purports to indemnify the general contractor for its sole negligence is void under Indiana law, but an additional insured clause that covers the general contractor’s sole negligence is not. Thus, it is important to read and apply the additional insured and indemnity clauses independently, as one does not necessarily determine the scope of the other.
How to become an additional insured. To understand additional insured coverage, it is important to first distinguish between a named insured and an additional insured. A named insured is a person or organization named in the policy, usually on the declarations page, and usually the person or organization to whom the policy has been issued. The named insured is responsible for choosing the coverages and limits, paying the premiums and providing the insurer with notice of accidents and lawsuits. In our example, the named insured is the subcontractor.
An additional insured is a person or organization added to the policy, usually by endorsement, at the request of the named insured. Some endorsements cover only the person or organization listed, and others, such as blanket endorsements, cover any person or organization with whom the named insured has agreed in a written contract to add as an additional insured. In our example, the additional insured is the general contractor.
How and when the general contractor qualifies as an additional insured depends on the endorsement in the subcontractor’s policy.
Request a specific additional insured endorsement. Requiring the subcontractor to name the general contractor as an additional insured is not specific enough to provide meaningful protection because there are dozens of additional insured endorsements available, and they provide varying degrees of protection. Here are a few ways liability coverage may differ:
• Sole negligence: Some endorsements provide the additional insured with coverage for liability “arising out of” the named insured’s operations. Indiana courts have interpreted this language to provide the additional insured with coverage even for its sole negligence. See Peabody Energy Corp. v. Roark, 973 N.E.2d 636, 642 (Ind. Ct. App. 2012).
• Comparative negligence: Although some endorsements still use the “arising out of” language, most new endorsements provide coverage only for claims caused “in whole or in part” by the named insured’s acts or omissions. These endorsements provide coverage for claims caused by the joint negligence of the general contractor and the subcontractor.
• Vicarious negligence: Other endorsements limit coverage for the additional insured to its vicarious liability for the negligence of the named insured.
Coverage also may differ in these ways:
• Ongoing and completed operations: Some cover the additional insured for damages arising out of the named insured’s ongoing operations, while others provide only for damages arising out of the named insured’s completed operations.
• Coverage no broader than required by contract: Endorsements often limit scope of coverage and liability to requirements of the “additional insured” clause.
• Priority of coverage: Many endorsements provide coverage to the additional insured on a primary and noncontributory basis, without exception, and others do so only if required by the contract between the named insured and the additional insured.
Contractors should confer with their risk managers and counsel to determine which endorsement is best tailored for the potential risks and liabilities, then request that specific endorsement in the “additional insured” clause. Doing so only increases the likelihood that the general contractor gets the coverage it desires, and it also forecloses a subcontractor who obtained an inferior endorsement from arguing that it fulfilled its duty to name the general contractor as an “additional insured.”
Don’t rely only on certificates of insurance. A general contractor should verify its status as an additional insured when the contract is signed, not after an accident happens or a lawsuit is filed. Many additional insured clauses require the subcontractor to provide the general contractor with a certificate of insurance verifying its status as an additional insured under the subcontractor’s policy, but this provides the general contractor only with a false sense of security because a certificate of insurance alone cannot create coverage or alter the terms of an insurance policy. See Am. Family Ins. Co. v. Globe Am. Cas. Co., 774 N.E.2d 932, 939 (Ind. Ct. App. 2002). For this reason, certificates usually have a disclaimer stating that they are for informational purposes only; that they confer no rights upon the certificate holder, and; that they do not amend or alter the terms of the policy. So if the certificate incorrectly states the general contractor is an additional insured, the general contractor will generally have no recourse against the subcontractor’s insurer. Thus, a general contractor should not rely on a certificate of insurance alone.
Ideally, the general contractor should require the subcontractor to produce a complete copy of its policy, including all forms and endorsements. But this requirement may be impractical, particularly because some companies are unwilling to share details about their insurance programs. If so, the general contractor should at least require the subcontractor to provide a copy of the applicable additional insured endorsement. Although the endorsement alone may be enough to determine whether the general contractor qualifies as an additional insured, it may provide an incomplete picture. In either case, the general contractor should provide legal counsel with a copy of the subcontractor’s policy or endorsement to ensure it satisfies the additional insured clause.
In conclusion, for lawyers who litigate construction cases, poorly drafted additional insured clauses are the bane of their existence. It is time for lawyers to learn to get it right.•
• Michael Giordano is an associate at Lewis Wagner LLP. Opinions expressed are those of the author.