Effective April 1, 2013, most of the additional insured endorsements announced by the Insurance Services Office (ISO) to be attached to the ISO Commercial General Liability Coverage Form (April 2013 Edition) include three significant changes:
- Insurance provided to an additional insured will apply only to the extent permitted by law;
- If additional insured coverage is required in a contract or agreement (which is customary), the additional insured will not be provided coverage that is any broader than required in that contract or agreement with the named insured;
- The limits available to an additional insured will be the lesser of the limits required by contract or available under the policy.
Extent Permitted by Law
For the past ten years, Acme General Contractors has required its subcontractors to include them as an additional insured for Acme’s negligence, but only if the negligence of the subcontractor also has contributed to resulting bodily injury or property damage. This means that Acme expects additional insured coverage only if they are partly at fault and the subcontractor is also partly at fault for the injury or damage (Acme is not demanding coverage for its sole negligence). While Acme has had some pushback from its subcontractors, most have complied with their demands using standard ISO additional insured endorsements.
After a serious injury to an employee of subcontractor Rose Iron & Steel, the courts found Acme to be 95 percent at fault for the injury (and Rose to be 5 percent at fault). Acme has tendered the claim to Rose’s CGL insurer and has demanded coverage as an additional insured. To Acme’s surprise, Rose’s CGL insurer has denied all coverage to Acme as an additional insured. Rose’s CGL insurer is claiming the state’s construction anti-indemnification statute prohibits protection of Acme for any of its negligence â€" either as an indemnitee or an additional insured.
Because the state’s anti-indemnity statute is vague as to whether it applies to contractual indemnification and additional insureds, it takes years for the case to reach the state’s highest court. Ultimately, the court finds that the word “indemnify†as used in the statute applies to both the indemnity agreement and additional insured coverage.
The result of the court’s decision is that Acme is not covered as an additional insured for its shared negligence with its subcontractor, Rose. Thus, despite the fact that the wording of the additional insured endorsement expressly includes coverage for Acme as an additional insured for bodily injury caused at least in part by Rose’s fault, no insurance will be provided to Acme as an additional insured. Coverage for an additional insured per the April 2013 Edition ISO endorsements applies only to the extent permitted by law. As the insurance for Acme was not permitted by law, Acme will not be covered.
No Broader Than By Contract
Wilson’s Windows adds the general contractor, Holmes Homes Corp., as an additional insured, but the construction agreement between Wilson and Holmes states Holmes is to be an additional insured for ongoing operations only. Holmes does not require coverage as an additional insured for claims arising out of the products and completed operations hazard.
Nonetheless, Wilson uses standard ISO additional insured endorsements, including Holmes as an additional insured not only for ongoing operations but also as an additional insured for the products and completed operations hazard.
After construction was completed and the building occupied, a window fell out of the building and landed on the Lamborghini owned by Ronald Frump, who also owns the building. Frump sued Holmes as his car was badly damaged. It turns out Wilson failed to properly install the window, causing Holmes to seek coverage from Wilson’s CGL insurer as an additional insured for damages to Frump’s car.
While the endorsements’ wording would normally provide coverage for Holmes as an additional insured for products and completed operations as that is the coverage actually purchased by Wilson for Holmes, Wilson’s CGL insurer denies Holmes is covered as an additional insured. Holmes required only that Wilson purchase coverage for its ongoing operations and did not require any coverage for a completed operations claim.
Thus, the additional insured endorsement of the April 2013 ISO Edition restricted coverage that is not broader than required by the contract (ongoing operations only), which is less broad than the actual additional insured wording purchased (including products-completed operations). Holmes will not receive more coverage than required in its contract with Wilson â€" even if the additional insured endorsement wording actually provided coverage.
Lesser of Limits
Benoit’s Bottling Company includes its retailers as additional insured vendors as required by its supply contracts between the retailer and Benoit’s. Although the contract between Benoit’s and the retailers requires $5 million of liability coverage, Benoit’s is a large organization and has traditionally purchased greater liability limits â€" usually $25 million.
A new product liability claim against its retailer is quite large â€" the jury finds damages of $9 million against the retailer. The retailer seeks coverage for the damages as an additional insured-vendor on Benoit’s liability policies. As the certificates of insurance provided by Benoit’s to the retailer for the last five years have listed Benoit’s liability limits of $25 million, the retailer expects all $9 million of the damage to be covered. The retailer is stunned to learn that Benoit’s insurer will not pay more than $5 million on behalf of the additional insured/retailer.
Even though Benoit’s actual liability limits far exceed the damages suffered by the additional insured/retailer, the retailer will receive the lesser of the policy limit or the limit required in the supply contract between Benoit’s and the retailer ($5 million).
Conclusion
The above illustrations capture only a very limited number of possibilities â€" the implications of coverage that is determined by documents or laws extrinsic to the additional insured endorsements are far ranging. While it appears that the purpose of these above three changes is to prevent an additional insured from reaping the benefit of coverage never requested or required, there is little doubt the changes increase the uncertainty of coverage. By increasing the uncertainty as to whether a person or organization will ultimately be an additional insured, one of the prime advantages of being an additional insured may be lost â€" defense of that additional insured. In other words, an insurer’s duty to defend applies only to an insured. With the April 2013 additional insured changes, it seems evident that in many circumstances it may be more difficult for the person or organization to demonstrate the status of additional insured â€" and thus more difficult to obtain the defense that is central to an additional insured.