Additional Insured Endorsements Revisited
William C. Last. Jr.
On July 18, 2003, a California appellate court opinion was rendered that concerns the obligations of a subcontractor insurer under an additional insured endorsement. The case is entitled Vitton Construction Co., Inc. v. Pacific Insurance Co. and is found at 2003 Cal. App. LEXIS 1098. The holding in Vitton case sheds light on why insurance carriers are becoming increasingly reluctant to provide blanket additional insured endorsements for general contractors and project owners on behalf of their insured subcontractors. This article will review additional insured endorsements in general and then discuss the holding in the Vitton case.
As discussed in an earlier article, insurance and indemnity construction contract clauses are the primary contractual vehicle for shifting the risk associated with bodily injury and property damage on a construction project. Due to the tightening insurance market, owners are using insurance and indemnity contract clauses to shift a disproportionate share of the risk of third party personal injury and property damage claims to general contractors. In turn, general contractors are passing that risk on to their subcontractors by making it a contract requirement that the subcontractor have insurance with the general contractor named as an additional insured in an additional insured endorsement under the subcontractor’s policy.
An Overview of Additional Insured Endorsements
Insurance requirements contained in typical subcontracts generally set forth the insurance coverage that the subcontractor must provide. Such clauses specify: (a) the types of policies that are to be provided; (b) the number of years for which insurance coverage is to be obtained; (c) the insurance policy monetary limits; (d) the form of the policy (“claims made” vs. “occurrence”); (e) the hazards that are to be covered (e.g.”completed operations”); and (f) what evidence of compliance with these insurance requirements must be supplied. The evidence is generally in the form of a Certificate of Insurance and an Additional Insured Endorsement. The nature of the additional insured endorsement is best described in context of what is included in a typical policy.
Endorsements are simply modifications to the policy provisions. Endorsements can expand, or limit the coverage that is being provided. An endorsement can be part of the policy when it is first issued, or added at a latter date. The Certificate of Insurance is only intended to provide evidence that insurance has been procured.
The primary purpose of an additional insured endorsement is to add additional names to those parties who are insured by the policy. However, the effect of adding additional parties to the policy can be far reaching.
Once a party to a contact becomes an additional insured, the insurer is obligated to defend and indemnify that additional insured in accordance with the policy terms and conditions. The fact that the additional insured pays no premium does not diminish the insurer’s obligation to the additional insured. Generally, the insurer remains obligated to fulfill its obligations under the policy even if the additional insured’s negligence is the sole cause of the liability for which damages are being sought. Insurers, however, always try to limit their exposure as to additional insureds.
The Insurance Services Organization provides standard forms for the insurance industry. It should be noted that insurance carriers also can specially manuscript (draft) the actual policy and any endorsement to a policy. As a result, the carrier can restrict or enlarge the coverage set forth in the ISO forms. One ISO is the Additional Insured Endorsement. The typical Additional Insured Endorsement that is issued in the construction industry is the CG 20 10. That form has been modified over the years. The date of the issuance of the form can be determined by reading the last for digits that follow CG 20 10. For example, a CG 20 10 03 97 indicates that form was issued during March of 1997.
The additional insured endorsement can set forth limitations on the coverage that is being provided to the additional insured. After 1993, the coverage provided under the CG 20 10 was changed. Prior to 1993, the form provided coverage for “completed operations.” After 1993, the form limited coverage to “ongoing operations.” “Completed operations” refers to insurance coverage for accidental bodily injury, or property damage that occurs after the insured completes its operations at a project. The insurer’s obligation under the policy for completed operations does not extend beyond the policy term. “Ongoing operations” limits coverage to liability arising out of the named insured’s (subcontractor) ongoing work on the project performed for the additional insured. In essence, the coverage is limited to the time that the subcontractor is actually performing work on the project.
Clearly, the owner will always want the broadest form of coverage and therefore will demand “completed operations” coverage. Recently, many insurance carriers are refusing to provided “completed operations” coverage and will only issue the “ongoing operations” additional insured form.
The Holding In The Vitton Case
The Vitton case concerns Vitton Construction Company, Inc. (Vitton), a general contractor who entered into a prime contract with Catalytica Bay View, Inc. (Catalytica) to construct a warehouse. Vitton entered a subcontract agreement with Pacific Erectors, Inc. (PEI). PEI’s scope of work included "[c]utting and installation of roof opening frames." The subcontract required PEI to carry general liability insurance and required that the general liability policy obtained by PEI name Vitton and the project owner as additional insureds.
In accordance with its subcontract, PEI laid decking for the roof structure and cut holes in the decking for skylights and HVAC equipment. PEI’s work was completed on February 5, 1997. Vitton employees then attached "wood nailers" and "curbs" to the roof openings, but did not cover the openings. On February 12, 1997, Anderson, an employee of a roofing subcontractor, who was working on the roof, fell through one of the uncovered holes. Anderson was injured. He sued Vitton, PEI, and Catalytica. At trial, Anderson’s expert asserted that the general contractor is responsible for maintaining a safe construction site. The expert faulted Vitton for failing to cover the roof openings. Vitton's president acknowledged that Vitton, as general contractor, had a responsibility to ensure no one was hurt on the job.
Subsequently, Anderson was paid six million dollars in settlement of his claim by all of the defendants’ insurance carriers. One of Vitton’s insurance carriers, who had contributed to the settlement, then sought a further contribution from PEI’s excess insurance carrier since that carrier had not contributed to the settlement.
PEI’s underlying carrier’s policy included a "Blanket Additional Insured" endorsement. The endorsement, that defined as an additional insured any person or organization PEI was contractually obligated to, provided that such a party would only be considered an additional insured "with respect to liability arising out of . . .’your [PEI] work’ for that additional insured by or for you [PEI]." The policy included an endorsement that specifically named Vitton and the project owner as additional insureds with respect to "liability arising out of" PEI's work on the Catalytica warehouse. PEI’s excess carrier was bound to the endorsement.
To avoid liability, PEI’s excess carrier argued that Vitton was not an additional insured covered by the policy because Vitton's liability for Anderson’s accident did not "arise out of" work performed by PEI. The Appellate Court, however, concluded that basis of liability was not complicated: (a) PEI created the openings in the roof pursuant to the work described in its subcontract; (b) the holes were left uncovered; and (c) Anderson accidentally fell through one of them while he was working on the roof and was injured. As a result the Appellate Court, concluded that “it seems fairly clear Anderson's fall "arose out of" PEI's work in cutting the roof openings. Regardless of whether it was PEI's responsibility to make the holes safe, the fact is PEI's work created the dangerous condition that gave rise to Anderson's accident. Under these circumstances, the appellate court concluded there is a sufficient "minimal causal connection" between the named insured's work and the situation giving rise to liability to trigger coverage for Vitton as an additional insured.”
PEI’s excess carrier argued that the undisputed evidence proved that PEI was not negligent. In response to that argument the Appellate Court stated:
“The fact that an accident is not attributable to the named insured's negligence is irrelevant when the additional insured endorsement does not purport to allocate or restrict coverage according to fault.” The Appellate Court also stated that "insurance companies are free to, and commonly have, issued additional insured endorsements that specifically limit coverage to situations in which the additional insured is faced with vicarious liability for negligent conduct by the named insured. We believe the better view is that when an insurer chooses not to use such clearly limited language in an additional insured clause, but instead grants coverage for liability 'arising out of' the named insured's work, the additional insured is covered without regard to whether injury was caused by the named insured or the additional insured."
The Appellate Court’s decision concurred with an earlier appellate court decision that concluded that "the injury-causing act must somehow be related or connected to [the subcontractor's] performance of the work under the subcontract beyond its mere presence on the jobsite".
As the Vitton court’s decision points out, it does not take much for a subcontractor’s insurance carrier to be placed in a position that it must defend and indemnify a claim against an additional insured when the claim that “arises out of” the subcontractor’s work. The Vitton court did state, however, that insurance carriers can write additional insured endorsements that are not as broad as that issued by PEI’s carrier in the Vitton case.
Nevertheless, the insurance carriers for general contractors will, in all likelihood, continue to demand the broader language be used in the additional insured endorsements issued under subcontractor insurance policies. Therefore, both general contractors and subcontractors should carefully review their insurance policy clauses and their insurance carrier’s requirements relative to insurance coverage. All contractors should make a practice of routinely reviewing contract insurance clauses with their insurance professional.
This article, ©2003, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-425-7679 (e-mail: firstname.lastname@example.org). A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.