BY STEPHEN N. GOLDBERG, JEFFREY L. SCHULMAN, AND JONATHAN ARI ZAKHEIM
Many companies involved in commercial property construction and development are additional insureds under other entities’ policies, and thereby hold valuable protection from potential losses. Yet in spite of the construction industry practice of routinely negotiating to extend or receive additional insured coverage, the parties involved sometimes do not fully understand these concepts or their complicated yet crucial role in effective risk management. A company’s risk managers and attorneys must be familiar with the nuances of the coverage the company it obtains as an additional insured as well as the coverage afforded by its own policies because of the important role that both sets of policy play in the event of an unforeseen incidents.
In order to assist policyholders in the construction industry, this article offers an overview of the issues related to additional insured coverage, as well as straightforward, practical suggestions for avoiding several common problems.
Many project owners require their contractors to purchase general liability insurance that specifically names the owner as an additional insured to maximize the defense and indemnity coverage available to the owner in the event of an accident.1 Contractors will, in turn, often demand similar treatment for themselves by negotiating for additional insured status from their subcontractors. These obligations typically arise by way of a contract provision that requires the party providing the protection to name the one demanding it as an additional insured under the former’s own policy. The contract provision typically stipulates specific liability limits and policy periods. The practice of including specific, insurance-related terms in construction contracts can work to supplement a firm’s independent coverage in the event of a claim. If done correctly, additional insured protection can create an interconnected mechanism in favor of the party demanding that status by which to spread the risks attendant to large-scale development. But however common this approach, it is far from foolproof and presents several potential pitfalls.
CONTRACTING FOR COVERAGE
Industry actors correctly negotiate over and contract for additional insurance coverage. They should not assume, however, that the terms of their contract documents are more authoritative than those of the policies themselves. The policy language determines who counts as an additional insured. The contract documents do not operate automatically unless the policy itself contains a “blanket” additional insured endorsement. These endorsements extend coverage to any person or entity to whom the named insured is contractually bound to provide such coverage. These endorsements, therefore, provide the demanding party with that status with no action beyond the execution of a binding contract prior to the time of the loss.
In the absence of a blanket additional insured endorsement, the party required by the demanding party to add the latter as an additional insured must take steps, usually through its agent or broker, to add an endorsement to the policy specifically naming the organizations, individuals, or projects to be covered as additional insureds. Unless and until an additional insured endorsement is issued, coverage for the demanding party may not exist. The demanding party’s only available recourse in such a situation could be a breach of contract action against the party who failed to procure the necessary coverage, in addition to whatever independent rights the demanding party may have against the breaching party for the substantive liability alleged against the demanding party from the acts of the breaching party. The lesson, however, is that the demanding party may not be able to turn to the insurance company that it thought it could rely upon for its defense of whatever lawsuits against it arise.
CERTIFICATES OF INSURANCE
Once the proper endorsement is issued, the parties should at least receive a certificate of insurance reciting the entities named as additional insureds under the policy. Certificates of insurance are pre-printed forms usually prepared by the insurance carrier or its broker. Bear in mind, however, that they are of limited use. Certificates often contain disclaimers that they provide any coverage at all. For instance, most certificates state that they have been issued only for the purpose of demonstrating that the policyholder has insurance coverage, in a specific amount and for a specific period. The fine print notes that these certificates do not confer any rights under a policy for the so-called additional insured and that the information they provide remains subject to additional insured endorsements that may or may not exist and to all of the terms and conditions of the actual policies. And yet, certificates of insurance are often the only proof of coverage that an additional insured will ever see despite the highly qualified nature of such documents.
Those parties that demand additional insured status but rely solely upon certificates of insurance to confirm that coverage is in place may not be adequately protecting their own interests. They may in fact be leaving themselves open to enormous liability. In past instances, certificates have indicated that a particular policy contained an additional insured endorsement, when in fact no such endorsement existed. In other situations, certificates have been silent as to the existence of an endorsement, and the additional insured failed to notice the omission. Additionally, subtle omissions can pose serious problems because the terms of a policy have control over even accurate certificates. Most states do not require policy exclusions to be included in a certificate to be given effect. Accordingly, an additional insured might be denied coverage due to policy language they never knew existed.
CONFLICTS OF INTEREST
The extension of coverage to additional insureds can create tensions between the entities insured under the policy. In the event of a loss, the policy limits identified in a certificate will be available to both the named insured and the additional insured. Both parties have access to the same pool of liability protection. Accordingly, the policy could be fully exhausted by settlements by the insurer of claims against the named policyholder, thereby leaving the additional insured without adequate coverage. The law of many jurisdictions creates a bad faith exposure to an insurance company that so acts if it is aware of competing claims and insufficient limits. Other jurisdictions, however, allow an insured to settle on a “first come, first served” basis.
These same fixed limits will also be available to the named insured, as well as any other additional insureds, for unrelated losses that occur during the period the policy is in effect. The insurance carrier is obligated to provide only the single aggregate limit stated in the policy to all those seeking coverage under it no matter how many agreements the named policyholder enters into, how many additional insureds are added, or how many losses occur. Those named as additional insureds under another entity’s policy might therefore consider obtaining representations from the named policyholder regarding the number and identity of any other additional insureds and the amount of policy limit erosion allowable under their contract. Often, the first time the additional insured learns that virtually no coverage is left under the named insured’s policies is when it tenders the claims against itself to the insurer that insures the named insured.
ADVICE FOR POLICYHOLDERS
Construction professionals should proceed cautiously when contracting for coverage as additional insureds. At the least, companies should not rely solely upon a certificate of insurance from the obligated party. Rather, they should instead review the actual policy itself and require in its contract documents that the obligated party provide a copy of the policy for review by the risk manager, a request or demand that some named insureds may resist.
Moreover, the company demanding additional insured status should require that the named insured expressly list the company as an additional insured on the policy itself or by way of an endorsement. While such a requirement might still not be enough, being expressly named offers more assurance than relying solely upon the terms of many liability policies that automatically add additional insured coverage to an entity for whom the named insured is obligated to provide such coverage by the terms of the contract documents between them.
The party demanding additional insured status should also require in its contract documents that the named insured obtain a policy with a severability of interests clause, which is a type of policy provision that states that the insurance applies to each insured as though they had each been issued separate policies. Such policy language might protect against rescission claims against the named insured, though obtaining this coverage may be difficult. The demanding party might also require the party providing it with additional insured status to provide notice when other claims against the policy have reached specific targets or require that the providing party increase its insurance at such time. The demanding party might also require that the insurance that the insured party obtains contain only a deductible of a stated amount and not a self-insured retention of any amount. At least some policy forms state that self-insured retention can only be paid by the named insured and not the additional insured, thus denying coverage to the additional insured should the named insured be unwilling or, as is more common, unable to pay that retention.
Vigilance and care are perhaps the best means of ensuring that the desired liability protection is in place given the many difficulties inherent in the process of securing additional insured coverage.
1 An additional insured is a person or entity that receives insurance coverage under the terms of a policy issued to the named policyholder.
Stephen Goldberg is a partner and Jonathan Zakheim is an associate in Dickstein Shapiro LLP’s Insurance Coverage Practice. Jeffrey Schulman is a New York-based partner in the Insurance Coverage Practice.