Category: AIs

Additional Insured Matters

How Indemnity and Additional Insured Interact

The lede, unburied: contractual provisions for indemnity and insurance are intimately related and need to be coordinated. If not, you could be massively over-extending yourself for liabilities of counterparties. This is especially true of Additional Insured provisions.

Key to know is that, except where specified otherwise, Indemnity provisions and Additional Insured provisions are separate agreements.1 This means limitations on one do not translate to limitations on another. As both statues and contract language typically very beneficial limitations on indemnity obligations, if insurance isn’t coordinated to match then it receives none of those benefits. Ultimately this means you can be required to pay via insurance (e.g. via Additional Insured extension) what you are legally prohibited from paying otherwise.2 In fact an indemnity obligation could be completely voided by a court but a policyholder is still responsible to pay via AI!3

This is perhaps most imperative to those with self-insurance mechanisms as the insured will ultimately bear the cost. Meaning while you may be statutorily prohibited from indemnifying another party for (e.g.) their sole negligence, you could end up paying the exact same costs from your own pocket to your self-insurance.4

With full knowledge of this disparity an insured can make an informed business decision. However, many are already making this decision, though unwittingly. This is because us insurance professionals (rightly) strive to add the “broadest” AI forms to an insured’s policy. While this maximizes compliance, it does so by maximizing coverage extended to third parties beyond that to which they’re otherwise entitled.

It’s likely this is unintended, but an insured with (e.g.) blanket “10/01” AI forms is doing precisely that. Newer ISO (and proprietary language) attempts to prevent this, but such is insufficient since it attempts to do this by limiting AI to that “allowed by law”. But extending insurance beyond indemnity limitations is “allowed by law”!

Most insurance provisions I see pay no reference to indemnity obligations, or if they do it may be non-specific and in passing. I’d say most insurance provisions I’ve encountered, and assuredly some I’ve personally drafted, attempt to be as “vague” as possible since upstream parties often benefit from ambiguity. But even with meticulously crafted insurance provisions the problem persists – one needs to understand and align insurance with the indemnity provisions of that contact.

Insurance professionals have known for a long time that adding certain versions of AI forms to their clients policy extends coverage to include even the “sole negligence” of a named AI; it’s why those forms are demanded even if they are patently unfair to the providing party. So putting a positive spin on this: amending a contract’s insurance obligations to conform with indemnity obligations is a way to negotiate around overbroad AI requirements. Sure a third party may be provided (e.g.) 10/01s, but if that AI status is triggered pursuant only to satisfying indemnity obligations, and indemnity obligations are limited by contract or statute, then you have clawed back the overreaching portion of that AI coverage grant. That’s the theory, at least.

From my research, I’d say the key take-aways are:

    1. Contractual indemnity and insurance obligations should always be assumed to be separate and distinct obligations with separate and distinct rules/permissions.
    2. Know your jurisdiction. Some have explicitly crafted legislation to prevent this issue, though most have not.5 However, even if in a favorable jurisdiction, such limitations can be circumvented via choice of venue, undeveloped case law, etc. So codify within the contract regardless.
    3. Draft indemnity and insurance obligations together; craft both provisions to be specific and symmetric. For bonus points, avoid using “minimum” or “no less than” or similar language when it comes to insurance obligations as that can over-extend limits.4
    4. Specifically identify that any insurance obligation, and Additional Insured obligations specifically, exist solely to satisfy requirements under the indemnity agreement. I.e., state contractually that AI coverage applies only to obligations under the contract’s own indemnity agreement.6 There should be standard language about this in all insurance requirement templates.
    5. Amend policy/AI wording. There is no “catch all” language here and, while tempting, inserting boilerplate to limit AI to (e.g.) only that which is allowed to be otherwise indemnified can pose an opposite problem: a policyholder is obligated to provide AI but coverage is not triggered. However, in general, you want to ensure you’re not providing a greater degree of coverage than is requested (especially as relates to specified form numbers/wording), and that coverage applies only to obligations assumed under contract or that would exist absent that contract. Again though, language on the policy forms themselves are useless without coordinating insurance/indemnity agreements.

Footnotes:

1:

McCarter & English, Attys.
Contractual Indemnity and Additional Insured Coverage (2014), as presented at RIMS
http://cms4files.revize.com/ctvalley/CONTRACTUAL_INDEMNITY_AND_ADDITIONAL_INSURED_COVERAGE___Connecticut_Valley_RIMS___REVISED_c.pdf

[Benefits for Additional Insured] Can be independent of, and provide broader protection than, the indemnity obligation, i.e., for the additional insured’s negligence. – Important where applicable state’s law prohibits indemnification for one’s own negligence

Illinois Court of Appeals (Cook County)
W.E. O’Neil Construction v. General Casualty, quoting prior precedent (2001, 1981)
https://casetext.com/case/we-oneil-construction-v-general-casualty

A promise to obtain insurance is different from a promise to indemnify. Zettel v. Paschen Contractors, Inc., 100 Ill. App.3d 614, 617, 427 N.E.2d 189 (1981)

2:

IRMI
2013 ISO Additional Insured Endorsements (2013)
https://www.irmi.com/articles/expert-commentary/2013-iso-additional-insured-endorsements-putting-the-changes-into-context-for-the-construction-industry

For many years, the construction industry has been able to avoid some of the effects of anti-indemnification statutes that prohibited the transfer of indemnitees’ concurrent negligence through contractual indemnity provisions. The construction industry did so by using the additional insured requirements to insure against losses that could potentially violate states’ anti-indemnification statutes.

3:

Supreme Court of Minnesota
Eng’g & Constr. Innovations, Inc. v. L.H. Bolduc Co., quoting prior precedent (2013, 1996)
https://casetext.com/case/engg-constr-innovations

Therefore, when faced with questions about the enforceability of an indemnification provision in a construction contract, we must “consider[ ] the combined effect of sections 337.02 and 337.05,” and “even though an indemnification provision may be unenforceable under section 337.02, a promise to purchase insurance to cover any negligent acts by the promisee is valid and enforceable.” Katzner, 545 N.W.2d at 381.

4:

Michael Rossi; Insurance Law Group, Inc.
Additional Insured Requirements in Contracts
https://www.linkedin.com/posts/michael-rossi-083743248_additional-insured-requirements-in-contracts-activity-7261403004837191681-0cZE

5:

Foundation of the American Subcontractors Association, Inc.
via Kegler Brown Hill + Ritter
Anti-Indemnity Statutes in the 50 States: 2020
https://www.keglerbrown.com/content/uploads/2019/10/Anti-Indemnity-Statutes-in-the-50-States-2020.pdf

6:

Illinois Court of Appeals (Cook County)
W.E. O’Neil Construction v. General Casualty, quoting prior precedent (2001, 1981)
https://casetext.com/case/we-oneil-construction-v-general-casualty

Cases have upheld the validity of provisions requiring the party named as indemnitee to be named as an additional insured on the indemnitor’s insurance policy where the insurance provision is not inextricably tied to a void indemnity agreement. E.g., Juretic, 232 Ill. App.3d 131, 596 N.E.2d 810 (despite a paragraph stating that the insurance would cover the contractor’s obligations to the owner under the indemnification clause of the agreement, other paragraphs stated that the insurance would also cover the contractor’s and owner’s liability to pay for injury and damages connected with or growing out of the contractor’s performance, and the owner was required to be added as an additional insured under these areas of coverage)

[…]

Although the insurance provision in the Blommaert subcontract requires insurance “to cover” the indemnity agreement and states that coverage is “afforded for” the indemnity provision, the provision also requires that O’Neil be named as an additional insured on Blommaert’s comprehensive general liability insurance. It stands separate and apart from the indemnity agreement as an agreement to purchase insurance for the general contractor. We conclude that the insurance provision is not tied inextricably to the indemnity agreement.

Additional Insureds: a Reference (Work in Progress)

As there are already tons of learning opportunities regarding Additional Insured status, this post will instead be a general reference – it already assumes you’re well versed in the world of Additional Insureds. The following notes are especially relevant to construction industry clients as these are the primary drivers of complex AI requests, in my experience.

Since this is a reference it will be updated periodically. I will initially start with the oft-used GL AI forms, found especially in the construction world, and then proceed to review other options and how different lines handle AI. Please excuse any inelegant formatting and such as I’m still debating on how best to organize.

General Liability:

  • CG 20 10 11 85 – the “OG”, first created after the CGL overhaul in 1985.
    • No limitation for Ongoing vs. Completed Ops
    • Has historically been litigated to provide *sole* coverage for the AI (i.e., not limited to vicarious only)
    • Technically out of use for ages but many, many carriers still offer it as market demand (via contracts) is high
    • Still contains “[work] for that additional insured” limitation (see later) which can cause havoc with improper blanket wording
  • CG 20 10 10 01 – Very similar to CG 20 10 11 85, except limited to ONGOING operations only.
  • CG 20 37 10 01 – Very similar to CG 20 10 11 85, except limited to COMPLETED operations only.
    The pair of CG 20 10 10 01 and CG 20 37 10 01 are functionally equivalent to the CG 20 10 11 85.
  • CG 20 10 07 04 & CG 20 37 07 04 – Uses the “10 01” language but adds the restriction that liability which triggers coverage for the AI must arise “in whole or in part” by your actions or those acting on your behalf.  I.e., removes “sole negligence” coverage for the AI.
  • CG 20 10 04 13 & CG 20 37 04 13 – Uses the “07 04” language but adds the further restrictions that coverage is only provided to the AI if permissible by law and, if the AI status/coverage is dictated by contract, only to the extent required by the contract. E.g., if your contract requires limits of $500,000 GL (to which the AI is added), but you actually carry $1M limits, the endorsement limits payment to the AI to the contractually obligated amount ($500K).
  • CG 20 10 12 19 & CG 20 37 12 19 – Functionally equivalent to the “04 13” versions but an administrative clarification was made – the “Limits of Insurance” verbiage was amended to remove the reference to the limits “shown on the Declarations”; rather the endorsement merely states the AI coverage will not increase available limits (rather than “will not increase the limits [shown on the declarations]”). This is in recognition of the fact that limits can be amended by endorsement and thus the “hard” reference to the declarations may be in error. I am not aware of a lawsuit that prompted this but if you know of one please send my way!

The above endorsements are strictly “Scheduled” AI forms – meaning their technical use is limited to name a single, explicit entity to whom AI coverage is given. However it’s very common to have endorsements with manuscripted “blanket” language – for example the schedule might read “All parties with whom you have an executed written agreement to provide Additional Insured Coverage” or similar.

This is usually not a problem – and often the preferred way of writing these endorsements since many contractual parties want to see specific endorsement numbers – but it definitely can be. This is because each of these endorsements, even the “11 85”, has a limitation that states, essentially, coverage is limited to operations performed for the listed Additional Insured. Here is the relevant text from the CG 20 10 12 19:

[…] in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above.

Note the explicit reference to both the Additional Insured and, in the CG 20 10 12 19, a specific location.  This means that if your blanket language is insufficient, you could be leaving out a LOT of coverage for a LOT of third parties.

This is primarily a concern when the blanket language references only parties with whom you have a direct contractual relationship (privity).  For example, in Westfield Insurance v. FCL Builders, Inc. the insured’s “Blanket” wording read:

“A. Section II — 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 a person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy.”

Reading that via the “four corners” analysis (as insurance courts do), the only entities to whom that “blanket” AI language applies are those with whom you have a direct contractual agreement to add that party as an AI. Basically, only the other party signing the contract will get the AI status.

But contracts regularly require other parties to be named as AI – and an insured signing such contract typically doesn’t have a direct contractual relationship with these parties. This happens all the time in the construction world – a first tier sub will almost always require their lower tier subs to add the project owner, project financiers, other subs further up tier. Heck, most construction contracts “kitchen sink” the whole thing by saying, “Hey, lower tier sub, you need to add anyone I, the upper tier sub, have agreed to add via all my other agreements.”

But this isn’t just in the construction world. Tons of contracts require you to name third parties. Think contracting with a landlord of a multi-use property – they may require you to indemnify other tenants, or their mortgage holder, or a specific vendor, or etc.

Because of this, the above blanket AI wording was found limiting – it does not apply to those third parties whom you were obligated to add as AI but with whom you do not have a direct contract (contractual privity). Yowza.

Because of this you must, must, must negotiate the proper “blanket” wording for AI forms. Simply securing the 10/01 or 11/85 editions is not enough – you must ensure it responds properly to all those entities to whom your insured is obligating themselves. As the “blanket” wording is often custom (and held over from when it was written on a typewriter), it’s imperative for the broker and legal counsel to determine propriety.

  • CG 20 33, CG 20 38, CG 20 39, CG 20 40 – This privity concern is also a huge issue when ISO attempted to provide a standard “automatic” AI status. Firstly, ISO released such endorsement only for Ongoing Operations, then while they did finally release one for Completed Ops as well both contained the privity issue, necessitating another set of endorsements (automatic status for other parties). When this post is updated in the future we will review those endorsements (CG 20 33, CG 20 38, CG 20 39, CG 20 40). The “TL;DR” of that is that the combination of those will imitate CG 20 10/20 37 12 19, but if you need “old” coverage you’re stuck with the above scheduled forms until the cows come home.