Pitfalls of Additional Insured Endorsements
Additional insured endorsements aren't always what they seem. Many contain exclusions or limitations that aren't apparent until a loss occurs. This article describes some pitfalls to watch out for if you are covered, or are covering someone else, under a liability policy as an additional insured.
Standard Versus Non-Standard
Many insurers utilize additional insured endorsements published by the Insurance Services Office (ISO). These endorsements are called standard additional insured endorsements. Some insurers have developed their own additional insured endorsements. These are called non-standard endorsements.
Insurers may create non-standard endorsements "from scratch" by drafting their own wording. Alternatively, they may "borrow" wording from ISO. Many insurers create proprietary endorsements by altering an existing ISO endorsement. Thus, many non-standard endorsements are similar, but not identical, to their standard counterparts. When an insurer has used some ISO wording in a proprietary endorsement, the endorsement will state that it includes copyrighted materials of ISO.
One of the most commonly-used additional insured endorsements is designed for contractors. It is used when a contractor is performing work on behalf of someone else, such as a general contractor or project owner. The endorsement covers the hiring party (general contractor or project owner) as an additional insured.
The contractor endorsement contains a key limitation. It restricts coverage to acts or omissions committed by the contractor while he or she is performing ongoing operations. The endorsement excludes bodily injury or property damage that occurs after the contractor's work on the project has been completed. The following example demonstrates how the limitation applies.
Elite Electric has been hired by Prime Properties to install new electrical wiring in an apartment building Prime owns. Prime is covered by an additional insured endorsement attached to Elite's general liability policy. The endorsement covers Prime only for claims that stem from Elite's ongoing work on the project.
One month after the work is completed a fire breaks out in the apartment complex. The fire is attributed to Elite's shoddy work. A tenant is injured and sues Prime Properties. If Prime seeks coverage for the claim as an additional insured under Elite's liability policy, the claim will not be covered. The tenant's injury occurred after Elite's work on the project was completed.
Claims against an additional insured that stem from a contractor's completed work may be covered under a separate additional insured endorsement. This endorsement covers bodily injury or property damage caused, in whole or in part, by the contractor's completed work.
Sole Negligence Exclusion
Some additional insured endorsements include a so-called sole negligence exclusion. This exclusion eliminates coverage for claims or suits that result from negligence committed solely by the additional insured. No coverage is provided if the named insured (policyholder) did not contribute to the loss in any way. The sole negligence exclusion is based on the idea that an additional insured who is completely responsible for a loss should rely on his or her own liability policy for coverage.
The sole negligence exclusion is often found in additional insured endorsements used to insure:
- Project Owners and Contractors This is the contractor endorsement described above
- Architects, Engineers and Surveyors
Some endorsements don't use the words "sole negligence." Rather, they limit coverage to injury or damage caused, wholly or partly, by acts or omissions of the named insured (policyholder). This means that if the named insured did not contribute to an accident that results in a claim against the additional insured, the claim is not covered.
In the Elite Electric scenario described above, suppose that the additional endorsement covering Prime Properties contains a sole negligence exclusion. While working at the apartment building, an Elite employee is injured when an acoustic ceiling tile falls on him. The employee collects benefits from Elite's workers compensation insurer and then sues Prime Properties for negligence. His suit claims that Prime is responsible for his injury because it knew the ceiling tile was defective and failed to warn him.
Prime sends the claim to Elite's insurer. The insurer denies coverage because the accident resulted from negligence committed solely by Prime Properties. No fault was attributed to Elite Electric.
Extent Provided by Law
Some additional insured endorsements contain a provision stating that the additional insured is covered "only to the extent provided by law." This limitation is typically found in endorsements used by contractors to insure "upstream parties" like general contractors and project owners. It is also included in some endorsements used to insure architects, engineers and surveyors. The "law" referred to in this provision means anti-indemnity statutes.
Anti-indemnity statutes are laws intended to protect subcontractors from harsh contract provisions that might otherwise be imposed by upstream parties. These laws limit the amount of liability that can be transferred from one party to another via a contract.
Anti-indemnity laws vary from state to state. Many prohibit contracts that require one party to assume liability for negligence committed solely by another. Some laws also prohibit contracts that obligate one party to purchase insurance covering another party's sole negligence.
Suppose that Elite Electric, a subcontractor, has entered into a contract with Busy Builders, a general contractor, to do electrical wiring in a building Busy is constructing. Via the contract, Elite has promised to insure Busy against any claims that arise out of Elite's work for Busy--even if the claims arise from negligence committed solely by Busy. Elite has insured Busy under an additional insured endorsement that covers Busy "only to the extent provided by law."
Busy Builders operates in a state that prohibits contracts obligating one party to insure party against the latter's sole negligence. An employee of Elite Electric is injured at the job site and sues Busy Builders for bodily injury. The worker alleges that his injury occurred because Busy failed to maintain a safe workplace. The lawsuit is based on negligence committed by Busy only. Thus, if Busy seeks coverage for the claim under the additional insured endorsement, the claim may not be covered.
No Broader Coverage
Another provision found in additional insured endorsements applies when the policyholder is obligated under a contract to insure the additional insured. It states that the additional insured will be provided no broader coverage than is required by the contract. That is, if the policy provides broader coverage than is required by the contract, the terms of the contract will apply.
For example, suppose a contract states that Elite Electric must insure Busy Builders against certain types of claims alleging bodily injury or property damage. The contract does not require Elite to insure Busy against personal and advertising injury claims. Busy Builders is later sued for slander by a third party because of acts committed by Elite Electric. Even though Elite's general liability policy covers slander under Personal and Advertising Injury Liability, the slander claim against Busy may not be covered.
Personal and Advertising Injury Liability coverage is not required by the contract.
No Greater Limits
Some additional insured endorsements contain a provision that restricts the limits provided to the additional insured. This provision may apply when one party is covering another as an additional insured to satisfy a contractual requirement. The provision states that the most the insurer will pay for a claim against the additional insured is the lesser of:
- the amount required by the contract
- the amount available under the limits of insurance
For example, suppose that a contract requires Elite Electric to insure Busy Builders under Elite's liability policy. The contract stipulates that Elite must provide $500,000 for both the Each Occurrence and the General Aggregate limit. Elite's liability policy includes $1 million for each of these limits. A suit covered by the additional insured endorsement is filed against Busy Builders. The claimant seeks $750,000 in compensatory damages, but Elite Electric's liability insurer pays only $500,000.
The contract requires Elite to provide only $500,000, so the insurer will not pay more than that amount.