The perils of the additional insured endorsement
Coverage may extend only to contracting parties; completed operations may be excluded
By Donald S. Malecki, CPCU
When it comes to additional insured coverage in a construction setting, it is not unusual for coverage requests to involve more persons or organizations than simply the contracting parties. For example, when a construction contract is agreed to and signed by a general contractor and subcontractor, it is common for the project owner to also want some coverage.
Another example is when a subcontractor contracts with one or more sub-subcontractors and the general contractor, who is not directly involved with the contract, also wants to be an additional insured.
Whether these persons or organizations, such as the project owner or general contractor, will have their requests fulfilled depends not only on the requirements mandated in a contract, but also on how the additional insured endorsement actually reads.
If the additional insured endorsement is a scheduled one, and the underwriter is receptive to adding the person or organization as an additional insured, there should be no problem, other than possibly with the scope of coverage. If there is any problem, however, it will be with blanket additional insured endorsements.
Mention of the terms "blanket additional insured endorsement," or "blanket automatic additional insured endorsement" should not necessarily connote broad coverage. What these terms do mean is that specific description (scheduling) of the person or organization is not necessary. Where there is a misunderstanding, however, is when people equate "blanket" with "broad" coverage. Nothing could be further from the truth. What coverage willapply will depend on what the particular endorsement says.
It is not unusual, for example, for a blanket additional insured endorsement to be limited to the additional insured's partial fault. In fact, even more limited coverage is common with these endorsements, such as vicarious liability. What this means is that the additional insured is to be protected only when named in a claim or suit stemming solely from the acts or omissions of the named insured.
The crux of the problem
It is one thing to have additional insured coverage, however inferior it might be, and another when the endorsement is worded so that coverage is not even provided in the first place. This can happen even with blanket additional insured endorsements.
An example is the standard ISO blanket additional insured endorsement CG 20 33. The hint or tipoff is that part of the endorsement's title reading: "Automatic Status When Required In Construction Agreement With You." In other words, the one who is to receive additional insured coverage, in addition to the named insured (you), is the one who is directly contracting with the named insured, and no one else.
In fact, the endorsement's actual wording confirms the limited aspects of coverage when it states: ". . . Who Is An Insured is amended to include as an additional insured 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. . . ." (emphasis added.)
Unless the additional insured endorsement and contract are read or there is an understanding that more persons or organizations are to be covered than simply the contracting parties, it may not be until after a claim or suit is filed that the parties learn about the blanket additional insured's limited scope.
An actual case
Persons or organizations desiring additional insured status who are left in the cold, despite the issuance of blanket additional insured endorsements, are not isolated instances. One case in point is Westfield Insurance Co. v. FCL Builders, Inc., 948 N.E.2d 115 (App. Ct. IL, 1st Dist. 2d Div. 2011), which involved a general contractor who sought additional insured status but failed at that attempt.
The general contractor (GC) subcontracted out the steel fabrication and erection to a subcontractor (SC). The subcontractor, in turn, subcontracted out the steel erection to a sub-subcontractor (SSC). The GC's contract with the SC required the latter to obtain a CGL policy that would cover not only the SC and its employees, but also the GC.
The contract also mandated that any sub-subcontractors that the SC might further subcontract with also were required to maintain the same limits of CGL insurance and include the GC as an additional insured. In other words, the SSC was contractually required to purchase insurance that would cover itself, the SC and GC in the event of a mishap at the construction site.
The blanket additional insured endorsement attached to the SSC's policy read in pertinent part identically to the previously quoted ISO provision forming a part of endorsement CG 20 33.
As the SSC was performing work, one of its employees was injured and later filed a suit against both the GC and SC alleging breach of various duties of care. The sole issue was whether the GC qualified as an additional insured on the SSC's policy.
The language of the endorsement required that two conditions be met in order for a person or organization to qualify as an additional insured under the SSC. First, the person or organization must have been one "for whom you [SSC] are performing operations." Second, the SSC and that person or organization must "have agreed in writing in a contract or agreement" that the person or organization be added to the policy as an additional insured.
The court stated that, even assuming, without deciding, the SSC was performing operations for the GC within the meaning of the policy, there was no evidence in the record that the SSC had agreed in writing with the GC for the GC to be an additional insured.
The way for a person or organization desiring additional insured coverage is to obtain a blanket additional insured endorsement that does not limit coverage solely to the contracting parties. An example of acceptable wording is when the Who Is An Insured provision is written to include, as an insured, any person or organization whom (you) the named insured is required to add as an additional insured on the policy under a written contract.
The somewhat good news
One of the 2012 CGL revisions being introduced by ISO is a new multi-state blanket additional insured endorsement to cover situations like the preceding court case where the so-called "upstream" general contractor, which had no direct relationship with the contracting parties, was left without coverage. The new, optional endorsement is titled, Additional Insured—Owners, Lessees Or Contractors—Automatic Status For Other Parties When Required In Written Construction Agreement CG 20 38.
The distinct advantage of this endorsement is that a producer is not required to read the contract or inquire whether any "upstream" parties are requiring additional insured status. This endorsement, when issued, will automatically pick up persons or organizations that are not directly a contracting party.
Agents, however, have to make sure that the insurer issues this endorsement and not the other standard blanket additional insured endorsement, CG 20 33, because this latter endorsement will not include "upstream" persons or organizations.
What taints this good news somewhat is the fact that coverage of this new blanket additional insured endorsement is limited to the additional insured's partial fault, and more important, perhaps, is the fact that coverage is limited to ongoing operations. In other words, no coverage is provided for completed operations liability.
This puts the agent in a catch-22 situation, because many contracts dealing with additional insured status require completed operations coverage. What the agent may have to do is find an insurer that will provide a blanket additional insured endorsement similar to what ISO is proposing but includes completed operations coverage.
One must keep in mind, however, that some insurers that agree to add persons or organizations as additional insureds, and for a charge, still deny coverage. So the extent of completed operations coverage actually provided may be no better than if the endorsement does not include that coverage. It nonetheless is important that to the extent additional insured coverage is to include completed operations coverage, an endorsement be sought out to include it.
This is not an impossible task, given that some insurers still issue the 1985 edition of additional insured endorsement CG 20 10 for owners, lessees or contractors. Underwriters, of course, are not patsies. They may be willing to issue broader endorsements, but the named insured has to show promise in terms of being a profitable risk to accept.
This brings up one more point that needs to be kept in mind, and that has to do with certificates of insurance. Simply stating on the certificate that a person or organization is an additional insured may not be enough even when a blanket endorsement is issued.
The reason, again, is that blanket additional insured endorsements may not automatically include "upstream" persons or organizations. To say on the certificate, in other words, that a person or organization is an additional insured because a blanket additional insured endorsement has been issued, may not necessarily be true and finding this out after something happens is the wrong time.
Thus, when an additional insured endorsement is issued on a blanket basis, it makes good risk management sense to find out whether the person or organization requiring additional insured coverage will qualify as such by the kind of blanket endorsement to be issued, or locate a blanket endorsement that will automatically include "upstream" persons or organizations, and completed operations coverage.
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.