Pitfalls of Additional Insured Endorsements
Endorsements May Contain Limitations That Are Difficult To Detect
Looks can be deceiving when it comes to additional insured endorsements. They may not be as broad they seem. Many contain exclusions or limitations that aren't apparent until a loss occurs. Here are some pitfalls to watch out for if your business is covered, or is covering another party, under a liability policy as an additional insured.
One of the most commonly-used additional insured endorsements is designed to protect project owners, lessees or general contractors from claims arising from the negligence of contractors or subcontractors. It is used when an owner or general contractor has hired contractors or subcontractors to perform work on a construction project.
The contractor endorsement restricts coverage to acts or omissions committed by the contractor while he or she is performing ongoing operations. It excludes bodily injury or property damage that occurs after the contractor's work on the project has been completed. The following example demonstrates how this limitation applies and why it matters.
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 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 marshal cites Elite's faulty work as the cause. A tenant is injured and sues Prime Properties, claiming its negligence contributed to the fire. If Prime seeks coverage for the claim as an additional insured under Elite's liability policy, the claim won't 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
Another limitation found in some additional insured endorsements is the sole negligence exclusion. This exclusion is often found in endorsements used to insure project owners or general contractors (the endorsement described above); vendors; or architects, engineers, and surveyors. The 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 did not contribute to the loss in any way.
The sole negligence exclusion is based on the idea that an additional insured that is completely responsible for a loss should rely on its own liability insurance for coverage. Some endorsements don't use the term "sole negligence." Rather, they limit coverage to injury or damage caused, wholly or partly, by acts or omissions of the named insured. In other words, 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 a dead tree falls on the building. 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 tree was dead and failed to remove it. Prime sends the claim to Elite's insurer.
The insurer denies coverage because the employee's claim is based on allegations of negligence committed solely by Prime Properties. It does not cite any negligence committed by 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 intended to protect subcontractors from harsh contract provisions imposed by upstream parties. These laws limit the amount of liability that can be transferred from an upstream party to a downstream contractor 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 also prohibit contracts that obligate one party to purchase insurance covering another party's sole negligence. A few states have no anti-indemnity statute.
Suppose that Elite Electric, a subcontractor, has been hired by Busy Builders, a general contractor, to do electrical wiring in a building Busy is constructing. Elite signs a contract in which it promises to insure Busy against any claims that arise out of Elite's work on the project, including claims arising from negligence committed solely by Busy Builders. Elite insures 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 a downstream contractor to insure an upstream party against the latter's sole negligence. An Elite Electric employee is injured at the job site and sues Busy Builders, alleging his injury resulted from Busy's failure 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 Than the Contract
Another provision to watch out for is a clause stating that the additional insured will be provided no broader coverage than is required by the contract. This means that if the policyholder is contractually obligated to insure another party and the policy provides broader coverage than the contract requires, the additional insured will be covered only to the extent required by the contract.
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
Finally, some endorsements contain a clause that is similar to the one described previously except that applies to limits. It 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 and the limits provided by the policy.
For example, suppose Elite Electric signs a contract in which it promises to provide Busy Builders liability insurance at limits of $500,000 per occurrence and $500,000 in the general aggregate. 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 damages but Elite Electric's liability insurer pays only $500,000, the amount required by the contract.