Additional Insured Endorsements and Indemnification Requirements: A new Additional Insured Endorsement you should be aware of

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By Jeff Cavignac, CPCU, ARM, RPLU, CRIS, MLIS
© 2013 Cavignac & Associates — All Rights Reserved

There are two ways for an Upstream Party to obtain coverage under a Downstream Party’s General Liability program.  The Downstream Party can be required to indemnify the Upstream Party or add them as an Additional Insured to their General Liability program.  Almost always, the Downstream Party is required to do both.

An indemnity agreement is a contractual provision that requires one party (the Indemnitor) to indemnify another party (Indemnitee).  This is a legal obligation to make the other party whole for certain things encompassed within the indemnity agreement.  Note that every state has their own indemnity laws.

An Additional Insured endorsement amends a party’s General Liability coverage to extend coverage to an Additional Insured (AI).  The AI may be specifically named, or coverage may be extended under a Blanket Endorsement.  The Insurance Services Office (ISO) publishes policy forms that many insurance companies use.  It is important to note that insurance companies are not required to use ISO forms and many do not.  Regardless, the majority of companies do use the ISO forms and if they don’t, they usually build off these forms.*

Historically, in California it has been illegal to transfer the sole negligence of one party to another via an indemnity agreement.  This, however, was not always the case with an “Additional Insured” endorsement.  If you review the CG 2010 1185 Additional Insured endorsement** you will note that the only requirement for the Upstream Party to have insured status was that the incident arise out of the work of the Named Insured (Downstream Party).  The Named Insured didn’t have to be at fault which implies that the Additional Insured could be 100% at fault and still have Insured Status so long as the incident arose out of the Named Insured’s work.

CG 2010 1185

WHO IS AN INSURED (Section II) 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 insurance industry never intended to provide coverage this broad, and although it took a while, in 2004 they changed the CG 2010.   The CG 2010 0704*** provides Additional Insured status only if the damages are “caused in whole or in part by” the Named Insured’s acts or omissions or the acts or omissions of those acting on behalf of the Named Insured.  In order to trigger Additional Insured status under this endorsement, the Named Insured had to have some responsibility, however in an extreme example, the Named Insured could be 1% at fault and be on the hook for 100% of the damages.

CG2010 0704

A. Section II – Who is an Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury” caused, in whole or in part, by:

1.   Your acts or omissions; or

2.   The acts or omissions of those acting on your behalf; in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above.

Unfortunately this still provided broader coverage in some circumstances than the industry had wanted to provide and it also provided broader coverage than was allowed by law under the indemnity statutes of certain states, California included.  To remedy this situation, a new CG 2010 endorsement is being proposed (2010 0413).  The new endorsement includes the “caused by” wording but is further qualified to dovetail coverage with applicable indemnity laws.  The complete text of the endorsement is shown below, the underlines are mine:

A. Section II – Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury” caused, in whole or in part, by:

1.   Your acts or omissions; or

2.   The acts or omissions of those acting on your behalf; in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above.

However:

  1. The insurance afforded to such additional insured only applies to the extent permitted by law; and
  2. If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured.

B. With respect to the insurance afforded to these additional insureds, the following additional exclusions apply:

This insurance does not apply to “bodily injury” or “property damage” occurring after:

  1. All work, including materials, parts or equipment furnished in connection with such work, on the project (other than service, maintenance or repairs) to be performed by or on behalf of the additional insured(s) at the location of the covered operations has been completed; or
  2. That portion of “your work” out of which the injury or damage arises has been put to its intended use by any person or organization other than another contractor or subcontractor engaged in performing operations for a principal as a part of the same project.

C. With respect to the insurance afforded to these additional insured’s, the following is added to Section III – Limits of Insurance:

If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance:

  1. Required by the contract or agreement; or
  2. Available under the applicable Limits of Insurance shown in the Declarations;

whichever is less.

This endorsement shall not increase the applicable Limits of Insurance shown in the Declarations.

Clearly the insurance industry is trying to dovetail the coverage provided by the Additional Insured Endorsement with state indemnity laws.  If successful, this endorsement will substantially reduce potential coverage for an Additional Insured.  The matter is complicated by the fact that indemnity laws in most states are anything but clear, and it remains to be seen how the new endorsement will be interpreted.  Regardless you can bet that Upstream Parties will contractually require the older forms and in some cases refuse to accept the 0413 form.

If you are an Upstream Party, you will want to obtain the broadest coverage you can.  Recognize, however, that most of your key subcontractors or suppliers will not be able to provide the CG 2010 1185 form and many may not be able to provide the CG 2010 0704 form. This will become a business decision you will have to make.

If you are a Downstream Party, you need to understand the coverage you have and which endorsement you can agree to and then negotiate your contracts accordingly.

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*It is imperative you understand the scope of Additional Insured Coverage you can offer under your insurance program whether your insurer offers an ISO form or a manuscripted (custom) form.

**ISO Codes their forms as follows:  CG = Commercial General; 2010 = Form Number; 1185 = date, this means published November, 1985.

***The CG 2010 0704 addition only pertains to ongoing operations.  ISO introduced a similar endorsement, the CG 2037, which provides additional insured status for completed operations.