The “additional insured” provision is one of the most critical provisions in a contract, yet is usually an afterthought. Contract negotiations over scope, schedule, and budget can and should demand your full attention, but the majority of legal problems that arise during and after a construction project are impacted by a one or two-sentence clause, usually tucked in at the end of an indemnification or insurance section, sometimes as part of a boilerplate provision . . . in other words, an afterthought.
What Could Possibly Go Wrong?
The insurance industry recently adopted two new standard additional-insured endorsements (ISO CG 20 10 04 13 and GC 20 37 04 13) which can impact your insurance coverage in three major ways:
- The new forms confine additional-insured coverage limits to what is required in the parties’ contract (even if less than the actual amount carried by the subcontractor).
- The new forms’ coverage is only as broad as what the parties’ contract requires, while in previous versions coverage extended to anything “arising out of” the subcontractor’s work.
- The new forms also limit coverage “only to the extent permitted by law,” which implicates any local anti-indemnity laws.
As a result, without the right insurance coverage and indemnification-scope clauses, you might not have additional-insured coverage for third-party bodily injury or property damage. You might not have additional-insured coverage for completed operations. You might not have additional-insured coverage for problems arising from your subcontractor’s work. And, you might have the lesser of the coverage required by the contract or the coverage available under your subcontractor’s full policy limits. In other words, you may be exposing your company to more risk than it bargained for. That risk comes with a price tag, in the form of legal fees and your own insurance coverage, deductible, and loss history. It also means you may be missing out on the full amounts of your subcontractor’s available insurance coverage.
What Do You Need to Do to Get Covered?
By employing a carefully crafted additional-insured clause, you put yourself in a position to secure coverage through a third party (though this step is certainly not foolproof). Because the current Insurance Services Office’s (ISO) additional-insured forms are only a few years old, there is scant case law interpreting and enforcing them. When appellate courts eventually consider these issues, outcomes may vary from state to state. Nevertheless, if you’re a general contractor or developer, you may want to consider requiring all subcontractors to name you as an additional insured on their commercial general liability (CGL) insurance policies, at coverage limits your risk manager considers sufficient.
How Can I Preserve My Sanity?
Request copies of your subcontractors’ additional-insured endorsements to see if they conform to your contract’s requirements. Even if you can’t get copies of additional-insured endorsements, employing an additional-insured clause will still go a long way towards securing coverage from your subcontractors. As always, consult with your risk manager or insurance professional in determining the proper coverage limits.