The Basics: Are you really covered as an additional insured?

Leases, construction contracts, easement agreements, and other contracts often require one party to name the other as an “additional insured” under its liability insurance policy.  The insuring party often provides its counterpart with a “certificate of insurance.”  The receiving party may believe that the insuring party complied with its obligations.  But unless an additional insured endorsement is issued, the negotiated risk transfer to the insuring party’s insurance carrier was not accomplished.

A certificate of insurance is nothing more than evidence of insurance.  It typically identifies the insurance carrier, states the kinds of coverage that are maintained, and outlines the insured’s policy limit(s).  A certificate does not provide additional insured status to the certificate holder.

Additional insured status may be conferred by a “scheduled” or “blanket” additional insured endorsement.  A “scheduled” endorsement is specific to the additional insured, includes its name on the endorsement, and amends the insurance policy:

Section II—Who Is an Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule. . . .

(Insurance Services Office, Inc. (“ISO”) endorsement CG 20 10).  When an insured who is frequently required to provide additional insured coverage to other parties (e.g., a subcontractor), its insurance carrier may simply include a “blanket” additional insured endorsement in the policy.  Such endorsements may identify the “Name of Additional Insured Person(s) Or Organizations(s)” as follows:

Any person whom you have agreed in a written and executed contract, prior to an “occurrence”, that such person or organization be added as an additional insured on your policy.

(ISO CG 20 10 12 19).  But the coverage is typically limited by the endorsement.  For instance:

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.

Additional limitations often appear, including:

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;

Whichever is less.

(ISO CG 20 10 12 19 (2018)).  The limitations outlined in additional insured endorsements are important because the additional insured may receive less coverage than it might otherwise expect, or none at all.

An example highlights the issues:

A construction contract requires a contractor to procure and maintain a minimum of $5,000,000 in liability insurance coverage.  The contractor assumes indemnity obligations and agrees to provide $5,000,000 in additional insured coverage for the benefit of the property owner.  The parties agree that the contractor will cause its subcontractors to indemnify and provide additional insured status to the owner and contractor, and that any subcontractor that performs excavation will insure against subsidence risks.  The owner’s objective is to assure that if damage results from the excavation, the excavation subcontractor’s insurance company will defend the owner and pay the loss.  The owner intends to transfer the risk to the subcontractor’s insurance carrier.

But when the contractor enters into its subcontracts, the excavation subcontractor is only required to carry $2,000,000 in liability insurance coverage, agrees to provide additional insured status to the contractor only, and is not explicitly required to carry subsidence coverage.  The contractor provides a certificate of insurance to the owner that (a) shows the owner as the certificate holder on a $10,000,000 liability insurance policy, and (b) attaches a blanket additional insured endorsement.

During construction, the excavation subcontractor is negligent, and a neighboring property is damaged.  The owner asks the subcontractor’s insurance carrier to defend the claim.  But the insurance carrier will likely not defend or indemnify the owner, because the subcontractor did not agree to provide the owner with additional insured status.  If the carrier does provide coverage, it is likely that only $2,000,000 of the subcontractor’s $10,000,000 insurance coverage will be available.  Worse yet, the carrier may deny the claim entirely because the loss was caused by land subsidence, and the excavation subcontractor did not agree to provide that coverage (even if the subcontractor’s policy actually insures against that risk).  The insurance carrier will rely on the language of the blanket additional insured endorsement to support its positions.

When parties negotiate risk transfer provisions, they intend that losses will be allocated between them (and their insurance carriers) in a particular way.  But the risk transfer is not typically complete when the contract is signed.  Business owners and property owners will be well-served by paying attention to the details of insurance coverage – before there is a problem – to assure that their objectives are achieved.

Authored by Reuben, Junius & Rose, LLP Attorney Corie A. Edwards.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.