By: Lee M. Hoffman CIC LIC CPIA1 - September 2017
Litigating and defending cases involving additional insureds is a whole new ball game so be careful. For cases involving any of the revised Insurance Service Office (ISO)2 Additional Insured endorsements3 where an occurrence giving rise to a claim happened on or after April of 2013, an additional insured may be an additional insured with no coverage at all!
There are thousands of cases involving additional insured4 coverage disputes. Seminal cases abound enabling trial lawyers to pick and choose cases in support of their position. But what happens when someone changes the additional insured game? When 1st, 2nd, and 3rd base is yanked off the field and all that’s left is a pitcher’s mound and home plate? How do you play the game?
That’s what happened on April 1st, 2013. With just a few added provisions, ISO may have wiped out decades of caselaw involving additional insureds. While ISO is not the only provider of insurance forms to the insurance industry, they are a major provider and industry influence.
It has only been 4+ years since ISO introduced the revisions so it may be awhile before we see any appellate rulings involving the new endorsements. Until then, it will be a local game with local rules on a new playing field.
Can adding a few words to an insurance endorsement wipe out a litany of seminal cases? Absolutely.
SO WHAT HAPPENED?
An insurance policy5 is a contract and must be interpreted as written – all four corners. Since the additional insured endorsement is a component of an insurance policy, it too must be interpreted as written.
The additions I am referring to were made by ISO to almost every type of Additional Insured Endorsement. It is apparent that ISO did not set out to change the purpose of each endorsement, but to clarify the coverage. They left most of the endorsement language unchanged from the prior edition but added provisions for clarification purposes. While it might appear that the changes are slight, they are not. The added language is very limiting. Coverage that was “automatically” provided by additional insured endorsements in the past are no longer automatic6.
Because of the nature of the change, the role of transactional lawyers who draft contracts7 containing insurance and indemnification clauses is now critical. Their contracts may no longer trigger the coverage. Unfortunately, it does not appear that very many transactional lawyers are aware of the insurance policy changes and therefore have not altered their contracts (leases, rental agreements, construction agreements, and others) to accommodate for those changes.
What changed? In short, unless a contact or agreement stipulates the type of coverage required and the limit (dollar amount) of insurance required, no coverage will be provided for the additional insured - - or at least that’s the intent. There are typically four types coverage available to an additional insured from the Commercial General Liability (CGL)8 coverage form. They are bodily injury, property damage, personal injury and advertising injury.
I have heard it from attorneys so many times - “Insurance is not my responsibility. That’s the job of my client’s insurance agent”. That is true for the contracting party/indemnitee. However, when it comes to insuring risks created, transferred to or assumed by the contracted party/indemnitor, that has never been further from the truth. In fact, the only obligation of the contracted party is to provide the insurance required by the contract. Once everyone has signed on the dotted line the likelihood of renegotiating an insurance clause is slim to none.
It should be noted that contracts with provisions that allow the contracting party to change the insurance requirements from time to time or as needed, but are void of specific insurance coverage and limit requirements at the onset, will be prime for challenge under the revised additional insured endorsements.
Almost all state codes allow attorneys to consult on matters of insurance as part of their practice of law – and none of the codes limit the consulting to trial lawyers. In Indiana, it is IC 188.8.131.52.23 and in Michigan MCL 500-1232. Isn’t the creation of insurance clauses a form of insurance consulting? After all, an insurance clause is the written opinion of an attorney regarding the insurance needs of his or her client based on the exposures contained in the contract he or she wrote.
When an insurance clause is not properly written, it is the contracting party that stands to lose the most.
The ball game changed. When it comes to additional insureds, it is now the responsibility of the attorney for the contracting party, NOT THE AGENT, to stipulate within the contract what type of insurance coverage AND what limits of insurance they require for their client. If the contract is void of those requirements, additional insured coverage may not exist, even if the contracting party is added as an additional insured on the contracted party’s insurance policy.
TO DATE (August 2017), THERE DO NOT APPEAR TO BE ANY APPELLATE RULINGS ON THE REVISED ISO ADDITIONAL INSURED ENDOSEMENT (April 2013 Editions). A simple reading of the endorsements makes their intent very clear, but the courts have yet to rule.
The ISO ADDITIONAL INSURED – OWNERS, LESSEES OR CONTRACTORS – SCHEDULED PERSON OR ORGANIZATION form CG 20 10 04 13 is the most often used and emulated additional insured endorsement and is an excellent form to illustrate the 2013 changes. As previously stated, the April 2013 endorsements read like their preceding edition9 with new provisions added. The following language in dark italics comprise the added provisions.
The first added provision is intended to address anti-indemnity statutes.
- The insurance afforded to such additional insured only applies to the extent permitted by law; and
There is no question that an additional insured is an “insured”. Additional insureds are typically indemnitees as well. However, it was never the intent of ISO to make an indemnitee an insured to avoid anti-indemnity statutes. This is what has been happening in anti-indemnity states. This limiting provision is intended to close that loophole.
The second change addresses the position held by many ISO member companies that coverage provided to an additional insured should be no broader than that required by contract or agreement.
- 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.
TRANSACTIONAL LAWYERS BEWARE! This language makes it clear that coverage for “Additional Insureds” will be no broader that that required by contract or agreement. This is a very limiting condition. Most prior additional insured endorsements provided all four coverages automatically. A simple interpretation of this provision indicates that each coverage desired must be stipulated in the contract or agreement. If not stated, the possibility exists that no coverage will apply.
I have created insurance clauses for attorneys to use in their contracts that address this and the other revisions. Some clauses itemize the coverages and some are all inclusive. However, without guidance from appellate decisions, no one can say for sure what language will work best. One thing is certain, with four types of coverage available, each type must be requested individually or collectively.
The third change is an entirely new section that addresses coverage limits. The intent is to allow limits of insurance that are no greater than that required by contract or agreement or the policy limit, whichever is less.
C With respect to the insurance afforded to these additional insureds, the following is added to Section III — Limits of Insurance:
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 shown in the Declarations;
whichever is less.
This endorsement shall not increase the applicable Limits of Insurance shown in the Declarations.
This section limits the dollar amount of insurance available for an additional insured to that required by the contract or agreement or to the limit of insurance carried by the contracted party - - “whichever is less”. Prior endorsements usually allowed full policy limits automatically. This is a big deal. Under the new forms, if no limit of insurance is stipulated, then no limit will apply - $0 Dollars. While this reasoning may be debatable, it is how the endorsement reads.
This provision just might be the most contested provision in the endorsement.
PREPARING FOR LITIGATION
There are two primary ways an indemnitee can obtain indemnification from an indemnitor’s CGL. The first is by being added as an additional insured by endorsement and the second is through the insured contracts provision of the indemnitor’s CGL. Both allow indemnification for an indemnitee. With the recent ISO change, it is possible that an indemnitee could receive indemnification from the insured contracts provision and no coverage as an additional insured.
The CGL lists six types of contracts that are “insurable contracts”. However, one of the six is very encompassing as it relates to tort liability imposed on a contracting party:
f. That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for "bodily injury" or "property damage" to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement…
If an indemnification agreement exists, this provision imposes on the contracted party the obligation to pay tort liabilities of the contracting party whether or not a contract provision exists. Since defense and/or defense costs are not automatically included, they should be made additional requirements within the contract or agreement.
Requiring additional insured status for clients has always been the method of choice by transactional lawyers for funding indemnifications and risk transfers. All a contract had to state was a requirement that the contracting party be added as an additional because and nothing more. Merely requiring the coverage was all that was needed for full coverage and limits to be provided. However, with the 2013 ISO changes, that is no longer the case. Litigators will need to look to the contract language to find out what coverage and what limits were requested.
It has always been my belief that a contract or agreement with well written insurance, indemnification, defense, hold harmless and waiver of subrogation clauses designed to capture all coverages available through the insured contracts and other provisions of the CGL will far surpass the coverages provided by an additional insured endorsement. The exception is personal and advertising injury liability coverage that is excluded under the insured contracts provision of the CGL but still available through the additional insured endorsement.
Additional Insured vs Insured Contract – Belt and Suspenders
Since additional insureds are usually indemnitees too, there are coverage options. Called the “belt and suspenders” theory, when additional insured coverage is declined or limited (belt), there is still the insured contracts provision (suspenders) of the CGL to fall back on.
For cases involving bodily injury and/or property damage, attorneys seeking coverage from an indemnitors insurance policy should always file for their client as “an insured” under the additional insured endorsement and as “an indemnitee” under the insured contracts provision of the CGL – Belt & Suspenders!
Suggestions for from an expert’s point of view
It is difficult to make an insurance policy respond to a contract when they are talking different languages. Wording contracts to trigger insurance should never be guesswork. Inserting key insurance words and phrases in contracts can link them together creating interoperability – seamless integration. The same goes for jurisdictional nuances and caselaw. Why insert provisions in contracts that prior cases have shown will void or block insurance coverage.
- When referencing insurance or creating insurance clauses in contracts, use insurance terminology. For example, the term “Personal Injury” in an insurance policy does mean direct physical injury to a person. It is defined in the policy as violation of one’s personal rights such as right of privacy, right of occupancy, and acts of libel, slander and false imprisonment. The term that refers to physical injury or death to a person is “Bodily Injury”. The term “Public Liability Insurance” does not even exist in commercial insurance policies. The correct terminology is “Commercial General Liability Insurance”.
- Trial lawyers involved with additional insured related litigation should understand the language and intent of the new ISO forms by comparing them to prior editions. A bit of history can only help. It is always best to position yourself to respond to current arguments that may be based on outdated insurance policy language and outdated case law.
- Prior caselaw may not apply. Be prepared to enter uncharted water. Engage an insurance “consulting expert” to help you chart your course for at least the first few cases involving the new ISO additional insured forms.
- Be aware that there are many independently filed (non-ISO) CGL forms with similar policy and endorsement language to that of the revised 2013 ISO forms. It is possible, therefore, that caselaw exists involving similar language from other forms. Legal research for such cases could yield positive results.
- The contracting party controls the additional insured requirement and consequently the coverage. Look for contract language that serves your position best. If you represent the contracting party and additional insured coverage is being denied, look for all-inclusive language in the contract like “Indemnitor will provide indemnitee with insurance coverage and insurance limits equal to, and no less than, those carried the indemnitor.” That should work! Also look for insurance clauses that itemize coverage and limits. However, if you represent the contracted party, look for absence of insurance specific language.
- When a contracting party files a claim, they should ALWAYS file for coverage under BOTH the additional insured coverage and the insured contracts coverage of the CGL. Remember the “Belt and Suspenders Theory”. Additional insureds and indemnitees can hold separate positions. Coverage denied to an additional insured may still be available to an indemnitee under the insured contracts provision.
ISO is a leading provider of insurance policies and forms to the insurance industry. It is a member driven organization and its members have a lot of input into the language of the policies and forms. When ISO makes changes to existing policies and endorsements it is usually because of adverse claims or litigation experienced by its member insurance companies. When ISO changes a whole series of forms and inserts similarly worded provisions, the message is profound. That is the case with the April 2013 change to the ISO additional insured endorsements.
While the intent may have been for clarification purposes, the outcome was very limiting for additional insureds. It should be a signal to transactional lawyers that their contracts need to change and a heads up to trial lawyers that seminal cases may no longer apply.
1. Lee M. Hoffman CIC LIC CPIA is the owner of Lee M. Hoffman & Associates, LLC (www.leemhoffman.com). He is an expert and consultant to the legal profession and others on matters related to insurance and risk and has held CLE classes on those subjects. Areas of specialization include agents E&O, claim denials, captive insurance, assisting attorneys with the analysis of client risks and risk transfers as well as the drafting of insurance, indemnification and risk transfer agreements. His practice is nationwide from his offices in Indiana & Michigan. Mr. Hoffman is also past president of the American Association of Insurance Management Consultants (www.aaimco.com) with HQ in Houston, TX. Its members are highly regarded fee based agents, risk managers, educators, attorneys and accountants who are experts and consultants on matters related to insurance and risk.
2.The Insurance Services Office (ISO) is a member driven organization and a leading source of information for property and casualty insurance and risk. They are one of the largest providers of insurance coverage forms and related information to insurance companies. See - http://www.iso.com/About-ISO/Overview/About-ISO.html.
3.This article contains copyright language of the Insurance Services Office (ISO).
4. As used throughout this article, the term “additional insured” refers to an individual or entity added for coverage by endorsement as an insured to a Commercial General Liability Insurance Coverage Form (CGL). With the exception of blanket additional insured coverage available on some policies, additional insured status must be created by endorsement, it cannot be created by contractual agreement alone.
5. It takes the combination of coverage forms, endorsements and terms and conditions sections to form a complete insurance policy.
6. The coverage allowed for most additional insureds are now tied to the contracting document. For example, the ISO endorsement titled ADDITIONAL INSURED – OWNERS, LESSEES OR CONTRACTORS – SCHEDULED PERSON OR ORGANIZATION CG 20 10 04 13 shows that the endorsement is intended to cover owners, lessees and/or contractors as insureds subject to policy provisions, but only if the contracting party’s contractual agreement requests one or more of the available coverages and the amount (dollar limit) of coverage.
7. As used throughout this article, the term “contract” will also include insurable “agreements”.
8. The ISO Commercial General Liability Coverage Form # CG 00 10 is the most common commercial liability coverage form. To this coverage form numerous endorsements can be attached to modify, alter and amend the coverage.
9. For comparison purposes, see “Additional Insured Endorsement CG 20 10 07 04”. It might be possible to google this form.
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