Steven D. Davis, CPCU, ARM is senior vice president and director of Construction Risk Services with McGriff, Seibels & Williams. He participates on the national construction risk management speaking circuit for organizations such as AGC, CFMA, AICPA and the International Risk Management Institute. He also serves on the National AGC Risk Management Committee and the National AGC Surety Committee.
Discover how the "additional insured" clause puts contractors at increased risk, and learn about commonly used endorsements.
One of the most commonly found clauses in any construction contract is the requirement of one party to name another party as an additional insured. It is found in The American Institute of Architects (AIA) documents, the Consensus DOCS and was inserted in almost all manuscript agreements I have reviewed in the past 30 years. In summary, it was clearly understood that it was to a party's advantage to be named as an additional insured to another's general liability policy.
The endorsement typically utilized to accommodate this contractual obligation was a standard form for the construction industry. Years ago, a certain balance in the "insurance world order" existed. The endorsement used for many years was the CG 2010 1185. General contractors needed it for project owners, and subcontractors were required to supply the same to general contractors. When a certificate was received by the general contractor, the provisions and its benefits were clear. The endorsement had decades of litigation and case law upholding it, so for the most part, few surprises occurred.
In 2004, the Insurance Services Office (ISO) announced changes to the additional insured endorsement language. The reason cited by the ISO was that its intent was never to pay claims under the CG 2010 1185 for the additional insured's sole negligence. While most indemnity agreements were of intermediate form, on the surface this did not seem to be an alarming change.
The effect of this modification today, however, has had unintended consequences to many contractors.
Currently, there are dozens of insurer proprietary endorsements whereby the intent is to restrict coverage significantly beyond the "sole negligence" issue. Many insurer endorsements may be several pages in length and restrict coverage in ways not expected by contractors. (Review the chart "Commonly Used Endorsements" for information on proprietary endorsements.)
Certificate of Insurance vs. Additional Insured
It is important to understand that although a certificate of insurance (often an "ACORD" form) may identify a particular party as a certificate holder, a certificate holder is not the same thing as being named an additional insured. Moreover, the certificate of insurance is generally issued only as a matter of information and confers no actual rights upon the certificate holder.
Certificates provide evidence that certain insurance policies are in place on the date the certificate is issued, and that these policies have the limits and policy periods shown. However, certificates do not guarantee that limits will not be exhausted by other claims to which that insurance may also apply, that endorsements will be attached to the policy as required or that policy coverage has been changed with restrictive endorsements. The language on the commonly used ACORD certificate clearly indicates that, "This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below."
Furthermore, the certificate clearly states that if the certificate holder is an additional insured, the policy must still be endorsed accordingly.
"Must be endorsed" means that unless there is an endorsement attached to the certificate received, the additional insured will not know what coverage is actually provided, regardless of the contractual obligations.
A contractor seeking additional insured status from a subcontractor should not have to go to such great lengths to determine whether or not the additional insured endorsement complies with the subcontract agreement. But many contract administrators are going to those extremes.
Insured vs. Named Insured
There is a difference between being an "insured" and being a "named insured." Unless specifically designated as such, an "additional insured" does not have named insured status. A primary distinction between the two is the application of endorsements that apply solely to the named insured. While an additional insured (general contractor) enjoys the benefit of insurance protection from another policy (subcontractor), he may lose control of the defense of the claim. Insurers are usually provided with the exclusive right to control the defense of claims that they cover.
It is important to verify that the coverage provided to an additional insured is primary and non-contributory. This is fairly standard in most contracts. Tenders of defense and indemnity for and from additional insureds must be addressed in a timely manner to avoid late notice and other possible coverage issues. Minimal limits and/or erosion of limits of the subcontractor can leave the additional insured (owner or general contractor) with inadequate protection. A trade contractor may have a million dollars in primary coverage and two million dollars in umbrella coverage, which may be adequate to protect that contractor in its own business. However, when that trade contractor is performing subcontract work at different sites and for different owners/general contractors, and each one of those entities is given additional insured status to comply with contract requirements, those minimal insurance limits may not provide sufficient protection.
Commonly Used Endorsements
CG 2010 (11/85) Additional Insured - Owners, Lessees or Contractors (Form B)
This includes as an insured any person or organization shown in the endorsement (or policy declarations), but with respect only to liability arising out of "your work" for the additional insured. Is subject to all the exclusions of the CGL coverage form and does not contain any additional exclusions.
CG 2010 (10/93) Additional Insured - Owners, Lessees or Contractors (Form B)
This version of the additional insured endorsement replaces the term "your work" with the phrase "your ongoing operations performed for that insured." The revised endorsement has also dropped the words "by or for you" following the word "insured."
CG 2010 (10/01) Additional Insured - Owners, Lessees or Contractors - Scheduled Person or Organization
This version of the endorsement is used to further clarify the exclusion of completed operations.
CG 2033 (10/01) Additional Insured - Owners, Lessees or Contractors - Automatic Status When Required in Construction Agreement With You
This endorsement fulfills the obligation when the named insured agrees in a written construction contract or agreement to add a person or organization as an additional insured. The person or organization is added as an additional insured only with respect to liability arising out of the named insured's ongoing operations performed for that insured person or organization. Coverage does not apply for injury or damages arising out of the rendering of, or the failure to render, any professional architectural, engineering or surveying services.
CG 2037 (10/01) Additional Insured - Owners, Lessees or Contractors - Completed Operations
This endorsement amends the "who is an insured" section of the policy to include the person or organization listed, but with respect only to liability arising out of "your work" at the location designated and described performed for that insured and included in the "products-completed operations hazard." Essentially, this endorsement provides coverage for completed operations only.
The "commonly used endorsements" shown are in reality not that common. In auditing general contractor compliance protocols, those represent less than half of all endorsements reviewed. The insurer proprietary endorsements represent the other 50 percent. This places significant risk to the general contractor, who may not have been contemplated during the procurement process.
For example, the following restrictions exist in many of the insurance company proprietary endorsements that modify coverage, sometime significantly:
- Time Limit - The additional insured benefits will exist only for the time specified in the contract.
- Limits of Liability - Many endorsements stipulate that the limits applicable to the additional insured are restricted by the amount of limits required in the contract.
- Written Contract - Most endorsements now are providing additional insured benefits only to the extent that a contract has been signed and executed and the loss occurs subsequent to the execution.
- Notice of Occurrence - Several endorsements are stipulating the notice of occurrence must be given as soon as practical. This creates other issues in that many actions over claims do not "raise their ugly head" for months and years afterward. This stipulation could be another means of declining coverage. Be aware that "pre-tender" legal expenses may be disputed as covered under the additional insured endorsement. Lawyers are not cheap, and this provision can easily become a large unexpected cash outflow.
- Ongoing Operations - Both ISO endorsements and proprietary endorsements will limit the coverage to the additional insured to "ongoing" operations only. They specifically exclude coverage after the work has been put to its intended use. Obviously, unless the ISO 2010-1185 is attached, multiple endorsements will need to be utilized to accomplish contractual requirements. Also, CG 2037 can include completed operations.
- Tender of Claim/Suit - Some endorsements will stipulate that the additional insured must tender the claim to "other insurance" that might provide coverage for the claim. It, in effect, restricts the ability for the contractor's insurance to be "primary" to the insurance of the additional insured.
- Negligence Versus Your Work - The most significant issue in many of the endorsements being peddled by insurers will state that coverage for additional insured only applies to the "negligence" of the contractor. This is very different than coverage "arising out of the work." This requires that negligence must be determined, and many insureds are not accepting tenders for defense until such has been vetted.
- Additional Insured Negligence - Many endorsements will exclude coverage for "sole negligence" of the additional insured under the endorsement. In this regard, the benefit to the additional insured is limited to the liability imputed only by the virtue of the conduct of the contractor.
- Locations Described - Some endorsements will attempt to limit any additional insured benefit to the location stipulated at the top of the endorsement page. While this limitation might have been trivial in past years, how the location is described and whether there are notations in the space provided will be critical in the future. Also, another key issue is that the "job location" must be within the state of the domicile of the named insured or within any contiguous state.
- Residential Restrictions - Several endorsements have restrictions for additional insured benefits related to the "type" of work undertaken. This applies typically to "residential" work. Note that the word "residential" is not defined in the endorsement but limits coverage to work not related to properties intended for residential or habitational occupancy, other than apartments. So, in a case involving a dormitory, hospital, senior living facility, etc., coverage would be denied.
- Effective Dates - There are endorsements that include specific effective/expiration dates of the endorsement for additional insured. Again, this is to restrict any coverage for completed operations, despite the coverage being specifically included in the endorsement. In many cases, the coverage for "completed operations" will be limited to the time extensions provided under the contract. For instance, if the contract provides for two years of completed operations, the endorsement will follow.
- Description of Work - This provision is disturbing in that within the additional insured endorsement, for coverage to apply, the "work performed" must be described in the classifications in the CGL coverage part of the named insured.
- Caused By Versus Arising Out Of - "Arising out of" is not defined in the CGL policy and has been left to the courts. Typically, "arising out of" requires only a "casual nexus" and not a causation. Therefore, "caused by" and "arising out of" or not legally equivalent terms. More and more endorsements are using the words, "caused by," not "arising out of."
- Supervision - Many of the proprietary endorsements issued by insurers contain a "professional liability" exclusion. This endorsement language will eliminate coverage for the additional insured for the typical "professional acts," such as preparation or approval of plans, drawings, etc. However, the exclusion also restricts coverage for "supervision," which is a typical duty of the general contractor. It is not difficult to allege failure to properly supervise the work for additional insured benefits to be eroded.
Construction Risk Management Tips
The following risk management protocols are recommended:
- Update all subcontracts and purchase orders to reflect these changes in additional insured endorsements. Many endorsements "follow" the subcontract requirements. Additional insured coverage will "mirror" the contract. Be specific on what is required. Both ongoing and completed operations should be required specifically by endorsement name/number.
- Modify the indemnity clause in the subcontract to survive the term of the contract itself and make sure that a time limit is inserted for completed operations.
- Review and change, if necessary, all limit requirements. Limits shown in the subcontract will likely be all that is available to the general contractor.
- Conduct training sessions for the contract staff to understand that many endorsements will be confusing and may or may not be in compliance. Determining whether coverage is available pursuant to the contract is a daunting process at best.
- Address the pre-tender expense restrictions in the subcontract agreement.
- Develop a matrix of acceptable endorsements that will allow contract compliance to easily identify problems.
- Use your broker or agent to assist in reviewing these certificates and endorsements.
- Conduct an annual contract compliance audit that will identify failure rates. This will aid in the education process.
- Evaluate outside vendors who can assist with this process using technology.
If there is no coverage for the contractor seeking benefits under the additional insured endorsement, such loss could ultimately be paid by its own general liability policy. As you might expect, insurance rates are predicated on historical losses. More losses equal higher rates. In this economy, the last thing a contractor needs is "higher" anything-especially insurance rates.
Construction Business Owner, November 2010