Additional insured issues
17 April 2008
Crane, rigging and transport industry professionals have long been educated that indemnity agreements in theirlease agreements, contracts and work tickets are an effective means by which to transfer a risk to another contractor (lessee). However, perhaps the most important risk transfer device is the additional insured endorsement. Additional insured coverage is important on many fronts.
First, many companies may have had to pay losses on their insurance policies by giving broad additional insured coverage to contractors for whom they were working; the coverage under their policy extended to losses for which their company was not at fault, but because the loss “arose out of” their work on the jobsite, they were on the hook for it.
Conversely, many in the industry have seen the benefits of having additional insured status, especially when their equipment has been bare rented. Their equipment damage is picked up by the lessee, and if there is an injury on the jobsite, the lessee picks up the defense of a suit if the company is named. These two scenarios, however, paint a simplified picture of all the complicated issues surrounding additional insured status.
Before the additional insured boom began in mid 1980s, owners, general contractors and subcontractors split the risks associated with jobsite work through indemnity language. Usually, this indemnity language required a subcontractor to indemnify the general contractor for its own negligence and possibly the passive negligence of the general arising out of the sub's work. The focus of litigation in this area was whether the general contractor who was seeking indemnity had engaged in active negligence or was solely negligent.
This all changed in 1985, when ISO introduced the CG 2010 11 85 additional insured endorsement. Many large construction companies began requiring in their indemnity contracts that they be named as an additional insured under this endorsement. The language of this endorsement states “who is an insured is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your work for that insured by or for you.” The phrase “arising out of your work” was subject to interpretation, and courts interpreted this language to provide broad protection for the additional insured. In many instances, the subcontractor who provides this endorsement will be providing coverage for a loss even if the subcontractor had no involvement in the incident; courts have found that the subcontractor's mere presence on the jobsite is sufficient to have the liability arise out of the subcontractor's work. Further, even when the fault rests entirely with the additional insured, the named insured's policy will have to pay. This meant that many subcontractors, including crane companies, riggers and millwrights, had to pay out on their policies for losses that were not their fault.
Luckily, there have been evolving limitations on additional insured coverage, and general contractors are having more difficulty saddling all of their burdens onto subcontractors. Most insurers now refuse to give 11 85 coverage, as they have learned that the risks associated with this type of coverage are too great. Today, endorsements such as CG 20 10 01 01 and CG 20 10 07 04 are used more often; these offer exclusions for completed operations and attempt to limit coverage for the additional insured's sole negligence.
While progress has been made in this regard, subs are still required to provide insurance to the general contractors. This is because the general contractors recognize that having this protection makes risk transfer more plausible. Additional insured status provides a contractor with direct access to the subcontractor's insurer, prevents subrogation, and allows for risk transfer separate from risk transfer initiated by an indemnity agreement. For example, even if a state has an anti-indemnity statute, it does not apply to an agreement to provide insurance (with a few exceptions – e.g., Oregon, Montana and New Mexico). While having additional insured status may make risk transfer more plausible, it certainly doesn't mean that the transfer of the risk will be easy. Many complicated issues arise when determining when a general contractor is afforded coverage, and these issues become apparent when a claim occurs.
Claims handling issues
Little attention is paid to additional insured status until a loss occurs. Then, all hell breaks loose. Tender letters are flying, stacks of contracts are being reviewed, and certificates are being examined. When acting as a subcontractor and providing additional insured status to another contractor, it is crucial for you to be proactive and alert their insurance carrier of any additional insured issues as soon as a loss occurs. An entire claims investigation can be undermined if it is unknown by the claims adjuster that additional insured status has been given to another contractor. For example, the claims investigator focused the fault of the accident on the contractor, unbeknown to him that this contractor maybe covered under the insured's policy; later, when a suit is brought by the injured party the subcontractor (insured) may not be named in the lawsuit, but certainly the contractor who is named will be tendering the defense to the subcontractor's carrier. The subcontractor's policy could be looking at a couple hundred thousand dollars in legal fees, and that could be on the low end of what the policy pays out.
Proactive investigation critical
Although you may feel that you are not at fault for the accident and that there is no need to report a claim, your insurance carrier may need to provide a defense to another contractor to whom you provided additional insured coverage. If you do not report the accident and the contractor later tenders its defense in a suit to you, your insurer is defending the suit with its eyes closed, not knowing any of the factual circumstances that may prevent the additional insured coverage. For example, the additional insured could have been solely at fault for the loss or it could have been caused by intentional conduct; without a prompt investigation, all the facts surrounding the accident can be tweaked and twisted by the time you send your carrier notice. Further, all paperwork needs to be sent to your carrier right away in the event of a loss, including:
• Any certificates issued by your broker
• Any additional insured endorsements (either that your carrier has issued or you have been given) for the job
• Any contracts for the job/job documentation, including:
• Subcontractor agreements, both signed and unsigned
• Letters pertaining to the job that evidence the negotiation of the job, pricing, insurance requirements, etc.
• Any past additional insured endorsements that you have issued for the contractor that may tender to your policy, as well as any past certificates issued on the policy
• A list of any other subcontractors that may have been providing additional insured coverage
With this information, a competent claims handler will be able to determine the most cost-effective course of action that will ultimately save you money. Without this information being disclosed right away, a lot of time and money can be wasted in aggressive litigation that unnecessarily drives up costs. In addition, a competent claims handler will recognize the need to hire an attorney to determine the validity of a tender based on a certificate of insurance or an additional insured endorsement. Often times, the nuances in state statutory and case law affect whether a named insured has a duty to pick up defense or indemnity of an additional insured.
Lessons to learn
Additional insured issues can be complicated. When you are asked to provide additional insured status to a contractor for whom you are working, it is best to examine what you are actually providing and to consider the implications. In addition, if a loss occurs and there are additional insured issues that may need to be sorted out, it is best to take proactive measures and alert your carrier to both the incident and the possibility of additional insured status to another contractor as soon as possible. The more proactive you are, the more money that can be saved.