Got Additional Insured Coverage? Not If You Don’t Say the Magic Word

Harvey Nosowitz | Anderson & Kreiger LLP | April 24, 2018

Where a Lease Did Not Require the Additional Insured Coverage in the Lessee’s Policy To Be Primary, the Additional Insured Coverage Is Excess Over The Lessor’s Own Fronting Policy.

Businesses frequently seek to shift the risk of liability by including in contracts a requirement that they be named as an additional insured on the other party’s liability insurance policy. The road from contract negotiation to insurance payment, however, is a bumpy one. Key hurdles to coverage are the following:

  • Does the contract include the right language?
  • Has an additional insured endorsement been requested, or does the policy have a blanket additional insured clause?
  • Does the policy’s additional insured language encompass the claim against the additional insured?
  • Does the additional insured coverage line up as desired with the additional insured’s own insurance?

A recent federal court decision maps out this road in detail. In Scottsdale Insurance Company v. United Rentals (North America), Inc., United States District Court for the District of Massachusetts, Civil Action No. 13-12824-DPW (Memorandum and Order, March 30, 2018). In that case, a few words missing from the lease between the businesses cost the additional insured much if not all of its indemnity coverage under the other party’s insurance policy.

United leased a lift to Gomes Services under a contract that required Gomes to maintain liability insurance and, when requested, to supply proof of insurance naming United as an additional insured. In a prior decision in the same case, the court held that this language, while clumsy, was sufficient to require Gomes to add United to its policy as an additional insured. Because Gomes’ policy with Scottsdale included a blanket additional insured endorsement, amending the policy to include as an additional insured any person Gomes was required to add as an additional insured under a written contract United was an additional insured on the Scottsdale policy. The prior decision concluded that, because United’s own policy did not require its insurer to defend United, Scottsdale had a duty to defend United against a suit by a person who was struck and injured by the lift.

Three years later, after the underlying tort case settled, Scottsdale and United returned to the court for a ruling on the duty to indemnify. Two issues were in dispute:

  1. Does the Additional Insured Coverage Apply Only to Vicarious Liability?

First, the court addressed United’s and Scottsdale’s conflicting interpretations of the limiting language in Scottsdale’s additional insured endorsement. The endorsement stated that the additional insured coverage applied “only with respect to liability for bodily injury . . . caused, in whole or in part, by . . . [Gomes’] acts or omissions.” Was it United’s liability that must be caused by Gomes’ acts, as Scottsdale argued, meaning that the additional insured was only covered for vicarious liability? Or was it the claimant’s injury that must be caused by Gomes’ acts, as United asserted, meaning that United’s liability for its own negligence was covered, as long as Gomes’ conduct was a proximate cause of the injuries (a fact which no one disputed). The court ruled in favor of United, observing that if Scottsdale had intended to limit the additional insured coverage to vicarious liability, it could have said so directly. The court also noted that the limiting clause’s “in whole or in part” language was inconsistent with the interpretation that the clause applied only to vicarious liability, which is “an all or nothing proposition.”

  1. Is the Additional Insured Coverage Primary?

This brings us to the last bump in the road: how did the Scottsdale policy’s indemnification obligation interface with United’s own liability coverage? The Scottsdale policy stated that the additional insured coverage was excess over any other valid and collectible insurance, unless a written agreement required it to be primary. United’s own policy stated that it was excess over any other primary insurance for which United has been added as an additional insured, but was otherwise primary.

United’s contract with Gomes required United to be named as an additional insured on Gomes’ policy, but did not require Gomes’ policy to be primary. Therefore, under the policy’s respective “other insurance” provisions, the Scottsdale policy was excess, and United’s own insurance was primary. The court also rejected United’s argument that, because United’s own policy was a fronting policy (with $2 million limits and a $2 million deductible), it did not constitute “other valid and collectible insurance.” The result: United was on the hook for the first $2 million in indemnity.

So, as it turns out, United was tripped up by the very first step in the process. If its contract with Gomes had specified that Gomes was required to name it as an additional insured on a primary basis, then United’s fronting policy would have been excess, and Gomes’ insurer would have provided primary coverage for United.

A Few Observations:

  • The contract providing for additional insured coverage should specify that the additional insured coverage must be primary. Specifying that the additional insured coverage must be “primary and non-contributory” may help in some circumstances to avoid a determination that the insured’s own policy shares the risk with the additional insured coverage.
  • Most of the time, contracting parties rely on certificates of insurance to confirm additional insured status. As this case illustrates, you can’t know what protection you really have without reading the policy. This doesn’t happen very often before there is a claim. At a minimum, a review of the additional insured endorsement at the time of contracting will be well worth the effort.
  • The 2013 revisions to the ISO (Insurance Services Office) additional insured endorsements create another set of issues not discussed in this case (the policies at issue preceded the revisions). These endorsements provide that the scope of the additional insured coverage is no broader than what is required by the insured’s contract with the additional insured. Also, these endorsements state that the limit of the additional insured coverage is the policy limit or the amount of insurance required in the contract, whichever is less. It therefore is critical that the contract clearly describes the scope of the desired coverage. The additional insured will also want to determine what limits of liability the contracting party carries, so as not to contract for a lower limit when more coverage otherwise would be available.

In Washington, Insurers Can’t “Unring The Bell” After Wrongful Denial Of Coverage

Kevin Mapes | The Policyholder Report | April 23, 2018

For the second time in two months, a federal court in Washington state has rejected an insurer’s attempt to avoid the consequences of its wrongful failure to defend its insured by effectively changing its mind and later—in this case much later—offering a defense. In Rushforth Construction Co. v. Wesco Ins. Co., plaintiff Rushforth was a general contractor. Following good contracting practices, Rushforth made sure that it was included as an “additional insured” under liability policies issued to its subcontractors. When Rushforth was sued for construction defects, it tendered the claim to Wesco, the insurer for one of those subcontractors.

Wesco’s claims handling was less than stellar. Rushforth tendered the matter to Wesco on July 1, 2016. To its credit, Wesco opened a file and began investigating the claim, even going so far as to draft a reservation of rights letter sometime around September 1, 2016. From there, however, the claims-handling wheels came off. For reasons unexplained, the reservation-of-rights letter was never finalized or sent, despite repeated inquiries from Rushforth. Finally, more than a year after the claim was tendered, Rushforth filed suit against Wesco. Only then did Wesco send its letter, agreeing to defend under a reservation of rights. Rushforth rejected that offer.

Rushforth moved for partial summary judgment on three issues: 1) whether Wesco breached its duty to defend; 2) whether Wesco acted in bad faith; and 3) whether Wesco’s belated offer to defend cured its breach. According to Judge Coughenour of the Western District, the answers are 1) yes; 2) yes; and 3) no. The Court specifically rejected Wesco’s argument that it never actually denied a defense, and thus could not have breached. “An insurer may breach its duty to defend by failing to respond to an insured’s tender in a reasonably timely manner.” And because Wesco offered no justification for its delay, the Court went on to conclude that Wesco had acted in bad faith as a matter of law.

Finally, the Court rejected the insurer’s argument that its belated offer of a defense cured its prior breach. Because Wesco’s breach was material, the insured was released from its contractual duty to cooperate, and Wesco had no right to provide a belated defense. The insured “had the option of allowing Wesco to assume a defense, but it was not required to do so. Wesco cannot cure its breach by forcing [Rushforth] to accept a belated defense.”

For insurers handling claims in Washington, the case presents another reminder that Washington law favors the policyholder. Fail to defend at your own peril, and don’t expect the opportunity to “fix” a wrongful denial if the insured fights back. For policyholders, the lesson is similar: the law is frequently on your side in Washington, and insureds should not hesitate to aggressively protect their interests in the face of an insurer’s denial of coverage (or, as here, an insurer’s failure to act).

Compliance with Contractual Provisions to Procure Insurance: The Illusion of Coverage Provided by Certificates of Insurance

Micalann Pepe and Nate Meyer | Jaburg Wilik

Commercial contracts often require the party with less bargaining power to procure insurance for the party with more bargaining power as a way to shift risk and potential liability. General Contractors often require a Subcontractor’s policy to name the General Contractor as an “Additional Insured.” Lenders often require a Borrower’s policy to name the Lender as a “Loss Payee.”  Landlords sometimes require a Tenant’s policy to name the Landlord as an “Additional Insured.”  A Retailer or Distributor may require a Manufacturer’s policy to name the Retailer or Distributor as an “Additional Insured.” Many parties obtain and rely on “Certificates of Insurance” to demonstrate compliance with such obligations to procure insurance. When a personal injury occurs, property is damaged, a claim is made, and/or a lawsuit is filed, however, parties are shocked when they realize that the Certificate of Insurance actually states: “This certificate is issued as a matter of information only and confers no rights upon the certificate holder.” The Parties are even more shocked when they learn the insurance policy does not provide coverage because the insurer never endorsed the policy to add the contractually required coverage.

This article explains contractual insurance requirements, the illusory coverage provided by Certificates of Insurance, and best practices for a party to ensure compliance with a contractual obligation to procure insurance.

Contractual Insurance Requirements: What are They?

Contractual requirements to procure insurance coverage, which are standard in most commercial contracts, aim to contain and shift liability for risks associated with doing business with others. These provisions often require the party performing services, providing goods, or incurring debt under a contract to procure coverage for the other party, i.e. the General Contractor, Lessor, or Distributor. [i]Associated contractual provisions outline the type and limit of coverage required.

The following are two examples of specific contractual insurance requirements.  A construction contract may require the subcontractor to add: “[General Contractor] as Additional Insured, including products and completed operations (Form CG 20 10 11 85 or equivalent must be attached to certificate).”  A promissory note may require the borrower to name “Secured Party as (i) loss payee for the property damage coverage.”

Certificates of Insurance: I Have One, What Does It Mean?

A Certificate of Insurance is intended to verify basic facts regarding a Named Insured’s available insurance coverage, such as the effective dates of the policy, coverages provided, and limits. A Certificate of Insurance, however, is not part of the insurance contract, cannot contradict the terms of the actual insurance policy,[2] and does not create a contractual relationship between the insurer and any alleged Additional Insured or Loss Payee.[3] Most importantly, an entity is not an Additional Insured simply because a Certificate of Insurance identifies the entity as such. Rather, the policy, or an Endorsement thereto, must identify an entity as an Additional Insured or Loss Payee.[4]

Specifically, the most recent Certificate of Insurance[5] form issued by ISO[6] includes the following statements:

  • This certificate is issued as a matter of information only and confers no rights upon the certificate holder.
  • This certificate does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies below.
  • This certificate of insurance does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder.
  • IMPORTANT: If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed…[a] statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s).

In no uncertain terms, the Certificate of Insurance does not actually add any entity listed therein as an Additional Insured or Loss Payee, or change the policy in any way.

Entity’s Insured Status: How Do I Confirm Whether an Entity Has Been Added to an Insurance Policy?

An entity is covered under a policy only if an insurer issues an Endorsement that adds the entity as an Additional Insured or Loss Payee. An insurance policy is comprised of the declarations, forms, and endorsements.  The Declarations list the forms and endorsements that comprise the policy.  The forms are often standard forms issued by ISO, such as “Commercial Property,” “Commercial General Liability,” and “Common Policy Conditions.”  And, the Endorsements often add other entities as Additional Insureds. Any coverage form or endorsement not listed in the Declarations is not part of the policy.

There are two primary ways an entity may be added as an insured to an insurance policy:  (1) a blanket endorsement, or (2) a specific endorsement.[7]

A blanket endorsement automatically grants insured status to the category of entities outlined in the Endorsement.[8] For example, a blanket endorsement may provide that all entities that the Named Insured is contractually obligated to add as an Additional Insured are automatically Additional Insureds.[9] The potential drawback of relying upon a blanket endorsement is that the language of the blanket endorsement is open to the interpretation of the insurer and may, for a reason unforeseen at the time of contracting, lead to a denial of coverage for the purported Additional Insured.[10]

A specific Additional Insured endorsement is used to add coverage for specific Additional Insureds by name.[11] Again, however, the coverage afforded to the specifically-named Additional Insured depends upon the language of the endorsement itself.  If an Additional Insured is added to the policy because of a contractual requirement, then the language of the contract requiring coverage should guide the language of the endorsement. Unfortunately, this is not always the case.

Contractual Compliance: If the Certificate of Insurance Does Not Confirm Coverage, Then How Can I Confirm Coverage and Contractual Compliance?

Whether you are the party obligated to procure additional insurance or the party entitled to be named as an Additional Insured or Loss Payee, it is in the best interests of all parties to ensure compliance with the insurance requirement. Failure to procure the required insurance exposes the breaching party to a breach-of-contract action and exposes the expectant insured to either no or less insurance coverage.

You may ensure compliance with insurance requirements by implementing the following three steps as best practices:

  1. Never accept or rely upon a Certificate of Insurance as proof of Additional Insured or Loss Payee status.
  2. Always demand two documents to verify compliance and coverage:
    1. the Endorsement that ostensibly provides coverage to the expectant insured; and
    2. the Declarations to confirm the Endorsement was actually added to the policy.
  3. Ask an attorney to analyze the insurance required by the contract or lease, and all pertinent insurance policy provisions to confirm compliance with the contractual insurance requirements.

[i] Often, but not always, this is the party with more bargaining power requiring the party with less bargaining power to procure specific coverage.

[2] See Cont’l Cas. Co. v. Signal Ins. Co., 119 Ariz. 234, 580 P.2d 372, 376 (App. 1978) (a Certificate “cannot contradict the terms of a policy; it only provides information as to the policy’s contents.”).

[3] 3 Couch on Ins. § 40:31(June 2016 Update). Indeed, some courts have noted that Certificates of Insurance are so unreliable that some commentators have coined the term “fictitious insured syndrome” to refer to the many problems created by Certificates.

Certificate holders are often listed as [AI]s on certificates without the policy actually being endorsed to reflect that intent.  [One example] that often occurs is for a copy of an [AI] endorsement to be attached to the certificate but not the policy. This practice may not provide [AI] status and, thus, is sometimes called the ‘fictitious insured syndrome.’  Sometimes this problem stems from a lack of communication. The insurance agent, for example, may have the authority to add another party to a policy as an [AI] and may issue a certificate indicating that this has been done while forgetting to ask the insurer to issue the endorsement. When the insured later seeks protection, the insurer denies protection, shifting the blame elsewhere.  This, of course, is really a matter of principal-agency liability and should not detrimentally affect the certificate holder.

Marlin v. Wetzel Cnty. Bd. of Educ., 569 S.E.2d 462, 471 (W.Va. 2002) (quoting Donald S. Malecki, et al., The Additional Insured Book 341 (4th Ed., 2000)).

[4] 3 Couch on Ins. § 40:31(June 2016 Update).

[5] See the attached Sample Certificate of Insurance for one of the most recent forms.

[6] Insurance Services Office, Inc. (“ISO”) is an organization that collects statistical data, promulgates rating information, and develops standard insurance policy forms.

[7] For a general list of the types of additional insured endorsements, please see: Scott P. Pence and Wm. Cary Wright, “Not All Additional Insured Endorsements Are Created Equal: Brief History of ISO’s Additional Insured Endorsements and 2013 Changes,” Under Construction Newsletter, Vol. 15 No. 3, Aug. 2013, http://www.americanbar.org/publications/under_construction/2013/august_2013/iso_additional_insured_endorsements.html

[8] See www.irmi.com/online/insurance-glossary.

[9] See Form CG 20 33 07 04 (providing Additional Insured status when required by a written contract for parties in contractual privity).

[10] See Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255, 151 P.3d 538 (Ariz. Ct. App. 2007) (finding that general contractor was not an additional insured under subcontractor’s policy because the language of the contract did not specifically require additional insurance); see also KB Home Tucson, Inc. v. Charter Oak Fire Ins. Co., 236 Ariz. 326, 340 P.3d 405 (Ariz. Ct. App. 2014) (examining whether there was an “executed written agreement” such that the contractor qualified for additional insured coverage pursuant to the terms of the blanket additional insured endorsement).

[11] An endorsement naming a specific entity will generally have the same language as a blanket additional insured endorsement. The difference is that the schedule in the endorsement will have the specific entity listed, rather than the blanket category of entities listed.

Unfortunate (and Unexpected) Restriction on Additional Insured Status

Stan Martin | Commonsense Construction Law LLC | March 28, 2018

The New York Court of Appeals, in a split decision, has focused on one word in deciding that a owner’s construction manager was not entitled to additional insured status on the general contractor’s policy.

The contract required the GC to include the owner, DASNY, the State of New York, and the owner’s construction manager as additional insured parties. The contract included a sample certificate of insurance identifying each of those parties.

The GC’s policy, though, included the following definition (emphasis added):

WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you.

The Court of Appeal held that the GC did not enter into a contract “with” the construction manager, and so the construction manager was not a party “with whom” the GC had agreed to include as an additional insured. Thus, the Court of Appeal construed the phrase “with whom” as modifying the phrase “by written contract.” And said that absent the word “with,” the construction manager would have been included. Finally, the appellate court held that the definition was not ambiguous, and so principles of interpretation of an ambiguous term would not come into play.

The dissent goes on at greater length, exploring the nuance of the policy definition. It stated that “the majority focuses on a single word in the blanket additional insured endorsement at issue while ignoring others, thereby finding clarity where none exists.” Which aptly describes the situation, in my view. Noting that the language “is awkward and unclear, at the very least,” the dissent would have ruled that the phrase “by written contract” modifies “to add.” And not “with whom.” That reading further comports with normal expectations for the scope of additional insured coverage.

So a party who, by industry expectation and by standard convention, should have had additional insured status for claims arising from the general contractor’s work, has been left to shoulder the risk arising from the GC’s operations with its own coverage. The carrier is likely the only one arguing that this was the intent. A poor interpretation of an awkwardly-written clause.

Owner’s reps and other owner consultants may want to insist on reading the prime contractor’s additional insured language.

The case is Gilbane Bldg. Co./TDX Constr. Corp. v St. Paul Fire & Mar. Ins. Co., 2018 N.Y. LEXIS 490 (NY Court of Appeal, Mar. 27, 2018).

Are You Sure You’re an “Additional Insured”? The Second Circuit Says You May Not Be

Pillsbury Winthrop Shaw Pittman LLP | March 6, 2018

In a previous blog post we discussed a New York trial court decision in which the court granted additional insured status to entities that did not contract with the named insured, but were referenced by category in the named insured’s subcontract. But before concluding you’ve got additional insurance, there’s another opinion you should know about. Around the same time, the U.S. Court of Appeals for the Second Circuit came to the opposite conclusion holding that an Additional Insured endorsement did not cover the University of Rochester Medical Center, even though the subcontract specifically provided that the University would be an additional insured, and Harleysville Insurance Co. therefore had no obligation to defend or indemnify it in a suit filed by an injured construction worker.

In Cincinnati Insurance Co. v. Harleysville Insurance Co., et al., Jumall Little, an employee of The Kimmell Company Inc. was injured while making repairs at the Medical Center. Little sued the University, the general contractor on the project, and the subcontractor that engaged Kimmell to do the work Little was performing when he got injured.

As was required by its subcontract, Kimmel took out an insurance policy with Harleysville, which provided coverage for certain additional insureds through two separate endorsements, the Privity Endorsement and the Declaration Endorsement. Neither endorsement, though, expressly included either the University or the general contractor as an Additional Insured.

The Privity Endorsement provided additional insurance coverage to entities in contractual privity—a direct contractual relationship—with Harleysville’s named insured, Kimmel:

[w]hen you [Kimmel] and such person or organization [Kimmel’s subcontractor] have agreed in writing in a contract or agreement [the subcontract] that such person or organization [Kimmel’s subcontractor] be added as an additional insured on your policy.

The Second Circuit found that the “Privity Endorsement does not confer ‘additional insured’ status on [the University or the General Contractor] because the Privity Endorsement requires contractual privity,” and Kimmel did not enter into a contract with either entity directly. The panel held that while Kimmel contractually agreed to name the University as an additional insured, such an agreement does not modify the express terms of the insurance policy Kimmel actually purchased.

The University fared no better under the Declaratory Endorsement. That endorsement amended the policy “to include as an additional insured the person(s) or organization(s) shown in the Schedule.” The Corresponding “Schedule of Other Coverages” included “Owners, Lessees Or Contractors – Automatic Status When Required In Construction Agreement With You.” It did not name the University with particularity. The panel upheld the lower court’s ruling that the Declaration Endorsement did not confer “additional insured” status on either the University or the General Contractor because neither the University nor the General Contractor were specifically listed on the corresponding Schedule.

So, if you think you’re an additional insured, give it another thought. Don’t just rely on a representation that you’re covered! Make sure you take the time to review the Additional Insured Endorsement, just as you would any other insurance policy. And, as always, if in doubt, consult a coverage lawyer—preferably before you agree to additional insurance offered by your subcontractors.