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The additional insured cannot assume that the agent of the named insured will provide notice to excess insurers of legal actions involving additional insureds.

Risk Management

Additional insureds: Challenges and solutions

Copies of the certificate and endorsement are not enough

By Donald S. Malecki, CPCU

Persons and organizations that are additional insureds on the liability policies of others usually obtain, as proof of coverage, both insurance certificates and additional insured endorsements.

Whether these additional insureds will have protection when brought into a claim or suit is a separate issue and will not be addressed here. Based on the court cases dealing with additional insureds, however, it is safe to say that many are denied coverage for any number of reasons, despite their status as additional insureds.

A great deal has been written about both certificates and additional insured endorsements, and both issues likely will remain at the forefront because they are controversial and also because they continue to evolve as insurers change their endorsements and new court decisions are reached. 

Although the Insurance Services Office has been introducing changes more frequently since 1986, the fact that additional insured endorsements are standardized helps everyone understand what the endorsements may cover.

Since the 1970s, however, a growing number of insurers have been introducing their own independently filed forms and endorsements. As a result, producers and others must determine how the provisions may compare to standard terminology.

Complicating matters is the fact that because a growing number of additional insured endorsements require that requests for coverage be stated in a written contract or agreement, it is necessary to read the contractual terms.

Read the contract

When persons or organizations draft contracts and include insurance requirements, they should know the nature of the coverage that will be provided. (Interestingly, however, in many cases it has been shown that the additional insured did not read the contract until after a problem arose.) These entities must specify the kind of additional insured coverage they want and then review the endorsement and insurance certificate to ascertain whether that coverage has been provided.

An attorney for a commercial entity recently lamented that when the entity was sued and sought coverage as an additional insured, it turned out that the named insured's policy had not been endorsed. Interestingly, however, the insurer was willing to issue and backdate an additional insured endorsement for this entity.

The problem was that the endorsement did not cover the allegations in the complaint. The entity's attorney contended that the insurer should have issued the November 1985 edition of the standard ISO endorsement titled "Additional Insured—Owners, Lessees, or Contractors—Scheduled Persons or Organizations." 

What this attorney and his client did not understand was that there are 33 standard ISO additional insured endorsements plus an infinite number of nonstandard endorsements, and that the November 1985 edition of the endorsement is not as widely available as it once was. 

By the way, the fact that ISO has not officially withdrawn the November 1985 edition of the endorsement means that it can still be issued. In fact, some insurers will issue it on a discretionary basis for an additional charge.

Beyond the certificate

An additional insured should possess copies of both the certificate of insurance and the additional insured endorsement, but neither provides the complete information necessary to avoid problems. The reason is that the policy to which the endorsement is to be attached describes the scope of coverage, and certified copies of policies are not easy to obtain.

The additional insured can either request a certified copy of the policy (with premiums redacted) or find out what the policy's notice requirements are. Sometimes the additional insured endorsement will explain the duties with regard to providing notice of a claim, offense or suit. These duties are fairly standard in most primary liability policies.

One problem is that additional insured endorsements are not usually required with umbrella policies, because additional insured status is often automatically included. As a result, it may be difficult for the additional insured to ascertain its duties and notice requirements. 

The additional insured cannot assume that the agent of the named insured will provide notice to excess insurers of legal actions involving additional insureds. In fact, agents usually do not have such an obligation in the first place, and assuming otherwise can be an expensive proposition.

A relevant case is Garner and Glover Company v. Barrett, et al., 2013 WL 979464 (Ct. App. Ga.), in which an agent of a named insured filed an appeal contending that it was entitled to summary judgment in its favor because (1) it owed no duty to notify an excess insurer of a claim on behalf of the additional insured, Atlanta Gas Light Company (AGL); and (2) the underlying plaintiffs could not file a direct action against the agent based on a settlement with and an assignment from AGL.

In this case, the AGL claims administrator faxed a letter to an employee of the named insured's agent stating that AGL had received a complaint for damages. Because AGL was an additional insured on a policy issued by the agent, it not only requested coverage but also tendered defense.

Included with this faxed letter were a copy of the complaint, seeking damages of $10 million, and a copy of the insurance certificate. After learning from the agent that the general liability insurer was CNA, the AGL claims administrator sent a copy of the complaint directly to CNA, as did the agent.

Although the complaint sought damages that exceeded the policy limits of $1 million, the excess insurer was not notified until four years later, when the adjuster for CNA instructed the agent to do so. The excess insurer, not unexpectedly, denied coverage, in part based on AGL's failure to notify it "as soon as practicable" after a suit was brought against it that was "reasonably likely to involve" the excess policy. AGL consented to a $2 million judgment in exchange for the plaintiffs' agreement not to enforce that judgment against AGL.

The consideration for the plaintiffs' agreement included the assignment of AGL's claims against the excess insurer and the agent, in addition to CNA's payment of its $1 million policy limit. The plaintiffs also filed suit against the excess insurer and the agent seeking the remaining $1 million, plus an additional $500,000 in attorneys' fees and bad faith damages.

On appeal, the agent contended that the trial court erred by finding that the agent breached a duty to notify the excess insurer on behalf of AGL because the agent owed no such duty. After examining Georgia law regarding the duties owed to additional insureds by an agent of the named insured, the court of appeals agreed.

The plaintiffs did not point to case law in Georgia or any other jurisdiction that directly addressed the scope of any duty owed by an agent to notify an excess insurer on behalf of an additional insured. In support of their claim, the plaintiffs produced an expert's affidavit asserting that such a duty existed. The court's response was that the affidavit could not create a legal duty where none had existed.

In rendering its decision in favor of the agent, the court of appeals stated that the record could not support the conclusion that the agent undertook a duty to notify the excess insurer on behalf of AGL. The agent did notify the primary insurer identified in the claims administrator's letter, and although the claims administrator had believed that AGL also would notify the excess insurer, this belief was not communicated to the agent.

The court also stated that no prior conduct on the part of the agent could have created a reasonable expectation that it would do so because the claims administrator had never previously dealt with the agent on any claim. At most, the court noted, the record showed that the agent undertook a duty to notify the CGL insurer, a duty that it performed without negligence.

No assumptions 

Persons and organizations that are additional insureds should not be satisfied when they have their additional insured endorsements and insurance certificates. They should also make an effort to find out what obligations of the policies apply to them, such as duties in the event of claims or suits.

Additional insureds cannot assume, as the claims administrator did in the above case, that the named insured's agent will notify the excess insurer. In fact, the principals of the agency testified that they do not automatically notify excess insurers in all cases. They testified that typically the adjuster who handles the claim against the underlying policy investigates the claim and then decides whether the excess insurer should be notified.

The agency principals explained that notifying the excess insurer of every potential claim could harm the interests of the named insured and the agency's client during policy renewal with regard to premiums. If the excess insurer is notified prematurely or too often and no claim materializes that triggers the excess limits, the underwriter may either raise the premium or decide to not renew the policy.

Agents should be aware that playing this waiting game with their own insureds can backfire and create a situation in which the agency will be left as the only source for the payment of damages. With additional insureds, on the other hand, much will depend on what the policy says. In fact, a policy that requires notice by additional insureds could provide a valid defense for the named insured's agent. 

The author

Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.

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