Use of Additional Insured Endorsements Construction Agreements Use of Additional Insured Endorsements Construction Agreements

Use of Additional Insured Endorsements Construction Agreements

Standard risk management in construction contacts calls for provisions setting forth both the insurance requirements expected of the parties and the extent of indemnities expected. Typically, the insurance provisions include a requirement to provided additional insured status; as, for example, an Owner-Contractor Agreement may provide that the Owner is to be named an additional insured on the Contractor’s general liability policy. Likewise, consistent with the respective negotiating party’s leverage and risk allocation, the subcontractor is often obliged to name the Contractor as an additional insured on the subcontractor’s general liability policy.
 
The current AIA A201, General Conditions of the Contract for Construction, provides in Article 11.1.4, as follows:
 
The contractor shall cause the commercial liability coverage required by the Contract Documents to include (1) the Owner, the Architect and the Architect’s Consultants as additional insureds for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s operations; and (2) the Owner as an additional insured for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s completed operations.
 
In its simplest form, the request to be added as an additional insured is a request for the insurance coverage of the counterparty to be extended to include the additional insured when the additional insured is sued for the losses arising (in whole or in part) from the counterparty’s acts or omissions. Indeed, the AIA provision on additional insured status addresses only “claims caused in whole or in part by the Contractor’s negligent acts…” Moreover, this language is in line with the additional insured language in ISO insurance forms (used by nearly every insurer). The most common of these ISO additional insured forms for construction projects would include CG 20 10 and/or CG 20 37. There is some thought that an additional insured provision can provide coverage for the sole negligence of the additional insured (and, thus, cover claims involving no wrongful or negligent act or omission by the counterparty). However, such provisions are rare and will often involve other substantial limitation.
 
As a result, the additional insured endorsement often works together with the indemnity provision in transferring risk. It does not replace the indemnity or hold harmless provisions, but it may support or underwrite financially that portion of the indemnity or hold harmless provision that is insurable as related to negligent acts or omissions. Typically, the coverage only extends to bodily injury, sickness, disease, death or damage to real or personal property. The indemnity provision may or may not be so limited. But to the extent it extends beyond the scope of insurance coverage, an indemnity is only as good as the counterparty’s financial resources.
 
Additional insured status typically only applies to “third-party” insurance. Thus, it may not be available on a counterparty’s builder’s risk coverage (which is normally “first-party” insurance). Rather, a counterparty can seek to be a “named insured” or “loss payee” on a builder’s risk policy, at least with respect to its insurable interest in the materials, fixtures and/or equipment being used in the implicated project. Typically, additional insured status is not sought or afforded (or, frankly, even available) with respect to a counterparty’s worker’s compensation insurance coverage, or with respect to a counterparty’s professional liability coverage.
 
A number of issues arise in the additional insured context, all of them dependent, to a greater or lesser degree, on the terms of the specific additional insured endorsement and the terms of the additional insured contract provision.
 
First, depending on the particular language, the additional insured may or may not give up control of the defense and the decision as to settlement, or not, of claims. This may be a material benefit or detriment, depending on the additional insured’s desire and capacity to manage litigation.
 
Second, “additional insured” coverage comes “as is” or as selected by the named insured, and may be inferior to the additional insured’s own coverage. At a minimum, such coverage will still include typical exclusion (i.e., it will not cover claims as to the Work itself of the Contractor, will not cover breach of contract claims not involving negligence, and will not cover professional liability claims). In some cases, the scope of coverage can be determined from a careful review of a Certificate of Insurance (provided the reviewing party has a working knowledge of the insurer’s forms and endorsements). And under the AIA A201, Certificates of Insurance are to be filed with the Owner prior to commencement of the work. However, it probably goes without saying that the Certificate itself does not create coverage, although if inaccurate, it may give rise to a claim. Moreover, some Certificates of Insurance provide greater detail than others. While a Certificate of Insurance is the routine practice, in certain circumstances it may be prudent to require certified copies of the policy and the additional insured endorsement.
 
Third, whether the additional insured status applies only to ongoing operations of the named insured, or is intended to apply to completed operations is another issue. In the Owner-Contractor context, the Owner will want the coverage to be extended to include completed operations as well as ongoing operations during construction, in as much as defects in construction may give rise to third party claims after completion. The AIA provision makes this a clear requirement, but only extends complete operations additional insured coverage to the Owner itself, whereas additional insured coverage during Contractor’s operations extends not only to the Owner, but also to the Architect and Architect’s Consultants.
 
Ultimately, additional insured coverage is a key component of a construction contract’s risk allocation and risk management. The impact on the contractor is deemed relatively negligible compared to the relative equities. The cost of obtaining an additional insured endorsement is typically little to no additional premium. And the Contractor, certainly in the eyes of the Owner, is more in control of and actively a player at the project site, in a manner such as to place the Owner at risk, justifying placing the risk of loss on the Contractor and its carrier, even in the circumstance of contributory fault. Of course, there are multiple fact patterns arising in the project setting. The benefits to the additional insured include a reduction in the incidence of coverage disputes, the additional insured gets the benefit of coverage without a premium, the claims that arise do not erode your own policy limits, claims do not affect your claims history, you are not responsible for the deductible and you get first dollar defense coverage.
 
Nick Reuhs and Gary Dankert are partners with Ice Miller LLP. Ice Miller’s construction practice (www.icemiller.com/construction/) is ranked as a National Tier 1 Practice in U.S. News & World Reports’ Best Law Firms. Nick is an attorney in the firm's Litigation Group, where he concentrates his practice on insurance coverage disputes, risk management, professional liability matters and general business litigation. Gary's practice concentration is in construction law with a focus on assisting clients in preparing and negotiating construction and design contracts as well as handling construction disputes. Nick can be reached at Nicholas.Reuhs@icemiller.com or 317-236-2160 and Gary can be reached at gary.dankert@icemiller.com or (317) 236-2203.
 
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances. 
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