iIn Part I of this series, we illustrated how not all additional-insured endorsements are created equal. This month, we look at the importance of coordinating all the elements of the portion of your risk-management program that affects additional insureds.
In tailoring additional-insured requirements, it is important to realize that your needs may change depending on your perspective. For example, if you are the party required to grant additional-insured status to a customer or upper-tier contractual party, you may want to limit the scope of coverage so that your additional insured is not being covered for problems of its own making. By doing so, you are able to preserve more of your own policy's limits for yourself.
On the other hand, in situations where you are the customer or upper-tier contractual party, and are concerned about the increase in your liability risk due to the activities of your lower-tier contractors, suppliers or manufacturers, you probably want the broadest possible coverage as an additional insured on the other party's policy.
Assuming the parties reach consensus on the scope of additional-insured coverage, the named insured's insurance company must then agree to issue the coverage according to the agreed-upon terms. The need for diligence, however, does not end there. Following a loss or claim, what happens after the terms of an additional-insured endorsement are agreed upon is even more important for taking advantage of valuable insurance coverage. In this month's installment, we discuss three common problems in the additional-insured area, all of which typically arise out of assuming too much: (1) relying on a certificate of insurance; (2) failing to meet the notice obligations of an additional insured; and (3) lack of coordination with the entire insurance program.
The following case studies demonstrate why proper administration and coordination of additional-insured programs are key components of a broader risk-management strategy that should be meeting your needs.
Case Study 1: The Dangers of Relying on a Certificate of Insurance
It is not uncommon that the only evidence an additional insured has of its status is a certificate of insurance. This form document, usually issued by an insurance broker, certifies that the named insured has the coverages listed. It also states that nothing in the certificate supersedes or replaces what is contained in the identified policy(ies). Too often, certificates of insurance are collected in a project binder and quickly forgotten. But a certificate of insurance is not part of an insurance policy, nor is it an additional-insured endorsement. If there is a dispute about whether the necessary endorsement was issued, the certificate will be, at most, one factor taken into account.
The following hypothetical scenario illustrates the potential consequences of treating a certificate of insurance as a stand-in for an additional-insured endorsement:
SleepyCo, a bedding conglomerate, hired BuildCo to construct its new headquarters. The contract between the parties required that BuildCo provide insurance to SleepyCo for bodily injury resulting from the project. But the contract did not specify the type of policy or the terms under which the required coverage would be provided. Neither BuildCo nor its broker requested that BuildCo's general liability insurer issue an endorsement identifying SleepyCo as an additional insured. As a result, no endorsement was issued. SleepyCo, however, did receive a certificate of insurance from BuildCo stating that SleepyCo was an "additional insured on a primary and non-contributory basis with respect to the operations of the insured." The certificate also stated that it was "issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below [a schedule listing general liability, automobile and excess coverage]."
Following an accident at the construction site, several seriously injured workers sued SleepyCo. SleepyCo tendered the lawsuit to BuildCo's insurer, which promptly denied coverage because there was no endorsement identifying SleepyCo as an additional insured, nor was there a suitable blanket additional-insured endorsement. Instead of being provided with coverage for the defense of the bodily injury lawsuit, SleepyCo was forced to sue the insurer, BuildCo and its broker in an effort to establish coverage.
Case Study 2: Notice and the Additional Insured
One of the easiest ways for an insurer to avoid coverage is to argue successfully that notice of an occurrence was given too late or not in accordance with the policy's notice requirements. Usually, the only evidence that a party has to prove its status as an additional insured is a certificate of insurance. But as we've already established, only the insurance policies themselves set forth the terms and conditions of coverage. Even if the additional insured has a copy of the controlling additional-insured endorsement, it won't state the policy's notice conditions. Further, additional-insured endorsements may contain a disclaimer stating that the general terms and conditions of the policy apply unless expressly modified by the endorsement.
Accordingly, the only way an additional insured can know the requirements is to obtain a copy of the policy and all its endorsements, and actually read them! And because jurisdictions differ in how they interpret notice conditions imposed on additional insureds, it is wise to contact knowledgeable coverage counsel in the event of any uncertainty.
Here is just one example of the value of knowing and understanding policy conditions. If identical occurrences take place in two jurisdictions, and in each jurisdiction an additional insured provides notice several months after its own insurer has denied coverage, courts in the two jurisdictions may reach contrary conclusions as to the timeliness and sufficiency of notice. In some jurisdictions, timely notice by the named insured on its own behalf may be sufficient to constitute notice on behalf of the additional insured. So long as the insurer has notice of an occurrence or suit under one of its policies, it cannot be prejudiced if an additional insured has not yet provided notice of the same suit. But in other jurisdictions, the additional insured is required to provide notice on its own behalf in a manner consistent with the policy's conditions. The rationale here is that the additional-insured endorsement states that the terms and conditions of the policy also apply to the additional insured, unless otherwise provided under the endorsement.
Case Study 3: Know Your Insurance Program
Businesses purchase liability insurance based first and foremost on their own risk exposures and insurance needs. But if you are in an industry in which additional-insured requirements are a part of doing business, you should also take those requirements into account when structuring your insurance program because they, too, are a part of your risk exposure.
In the realm of contract negotiations, for example, language regarding additional-insured requirements can range from a bare statement that additional-insured status must be provided to very detailed specifications of the terms under which additional-insured coverage must be provided. The degree of specificity within a contract may depend on a number of factors, including the state of the insurance market and what insurers are willing to provide; whether particularly rigorous additional-insured requirements will limit the number of potential contracting parties; whether generic or lax additional-insured requirements will lead to inadequate or insufficient coverage provided to an additional insured; and the potential value that a well-thought-out additional-insured endorsement will add to a business' broader coverage and risk profile.
The ease with which a policyholder is able to obtain an insurer's consent to issue a particular additional-insured endorsement may also vary considerably depending on the insurer's loss experience with the policyholder and the nature of the risk involved, among other factors. Therefore, prior to signing a contract that includes additional-insured requirements, it is important to analyze the scope of those requirements, understand the possible effect of the obligations on the adequacy of your coverage and make certain your insurer will indeed issue additional-insured endorsements on the required forms.
Ultimately, it is critical that you know what your insurance covers and what your policies require you to do to get that coverage. We cannot emphasize this point enough. It makes no difference that you are "just an additional insured." Every additional insured on an insurance policy is another potential claimant under that policy. It is also important to know how much insurance you are being provided as an additional insured, whether that amount is sufficient and, if not, whether you have adequate excess or umbrella coverage as a backstop.
A business' internal risk and insurance planning may interact in surprising ways with additional-insured requirements as the following hypothetical scenarios illustrate:
DrillCo has a general liability insurance program with a sizeable self-insured retention (or deductible). Sitting on top of the retention is an umbrella policy that will reimburse DrillCo for its defense costs instead of obligating the insurer to defend. DrillCo has the opportunity to participate in what potentially is an extremely lucrative project for which there is substantial competition. The contract specifications, however, require that the project developer be identified as an additional insured under a general liability policy providing first-dollar duty-to-defend coverage. DrillCo has a couple of options, neither of which is very appealing. It can try to revise its coverage program on short notice (which is likely to be very difficult and extremely costly) or it can assume a heightened indemnification obligation for which it will have to provide the developer with some form of security in lieu of satisfying the additional-insured requirement.
In another example, VirtualCo owns an energy generation facility that sells all of its output to transmission companies. VirtualCo subcontracts for nearly all operational and maintenance personnel at the facility and requires that all contractors name VirtualCo as an additional insured on their general liability policies—providing a duty to defend and coverage for bodily injury and property damage liabilities arising out of the acts, errors or omissions of the contractors. From its own risk management perspective, VirtualCo is concerned chiefly with potential "big bang" events such as explosions. Moreover, VirtualCo wants the freedom to control its own defense in a catastrophic loss event case. Accordingly, VirtualCo's own liability insurance program is designed to maximize coverage for potentially catastrophic loss events with a high per-occurrence self-insured retention and high limits. Additionally, the first layer of coverage does not provide a duty to defend but treats defense costs as an item of loss. For smaller accidents that arise out of errors or omissions by the contractor's employees, VirtualCo looks for coverage from the general liability policies under which it is an additional insured.
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Additional-insured status is an asset to the party enjoying that status, and imposes obligations on both the giver and receiver of that status. How much coverage you want or are willing to give depends on your perspective. Once the parties and the affected insurers agree on the scope of coverage, it is important to manage these insurance assets and obligations actively and consistently—or risk significant erosion of their value. Either as a policyholder or as an additional insured, however, there are a number of principles (expanding on the checklist provided in Part I of this series) that can aid in prudent business planning and minimize undesired outcomes:
- Assess your insurance needs and expectations when developing additional-insured requirements and draft those requirements so that they are legally enforceable and consistent with your expectations;
- Know the terms and conditions of your additional-insured endorsements, as well as their legal consequences, and assess whether those terms are appropriate for your needs;
- Know the terms and conditions of the insurance policies into which your additional-insured endorsements are incorporated; and
- Manage, maintain and administer additional-insured coverage (whether as a named insured or an additional insured) as you would any other significant contractual record and as an integral component of your coverage program.
