Why Am I Being Required To Provide An Additional Insured Endorsement? An Overview of Insurance and Indemnity Clauses
Why Am I Being Required To Provide An Additional Insured Endorsement?
An Overview of Insurance and Indemnity Clauses
William C. Last, Jr.
Insurance and indemnity construction contract clauses are the primary contractual vehicles for shifting the risk associated with bodily injury and property damage on a construction project. Due to the tightening insurance market, project owners are increasingly 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. As a result, the cost of complying with these contract clauses has increased the financial burden placed on general contractors and subcontractors. Many subcontractors are finding it difficult to find insurance coverage that satisfies contract requirements.
Since the party who drafted the indemnity clause recognizes that the indemnity obligation is only as good as the other party’s financial ability to satisfy its indemnity obligations, insurance clauses are drafted to require the other party to obtain insurance that can, hopefully, be used to financially satisfy the indemnity obligation. Most insurance clauses require Additional Insured Endorsements that name the owner. The purpose of such endorsements is to increase the obligation of the general’s and/or subcontractor’s insurer to defend and indemnify the owner.
The party who drafts the insurance clause also wants the party who is required to procure insurance to provide actual evidence of the policy. This evidence usually is in the form of a Certificate of Insurance and Additional Insured Endorsements. Recently, the form of the required Additional Insured Endorsements has been subjected to increasing scrutiny. Some insurance carriers now are refusing to provide the types of endorsements being demanded by project owners.
The remainder of this article will discuss the normal provisions of indemnity and insurance clauses. The primary focus of this insurance clause discussion will be Additional Insured Endorsements.
Indemnity clauses are the primary contractual device that is used to shift the common law and statutory risks associated with a party’s negligent acts from one party to another. In essence, one party promises (indemnitor) to pay the other party’s (indemnitee) attorney’s fees and any judgment that may result from both parties’ wrongful conduct. If there is no indemnity clause in a contract, the liability and resulting damages for the negligent acts of multiple parties will be allocated according to the comparative fault of each of the respective parties.
In the construction industry, the project owner will want to shift the responsibility for negligent acts from itself to the design professionals and the general contractor. In turn, the general contractor will want to shift that risk to the subcontractors and suppliers. For example, the project owner who seeks to shift the risk to the general contractor will include in the contract with the general, a clause that clearly and expressly obligates the general to defend the owner from liability and pay any damages that may result from the general’s negligence.
However, under California law there is a limitation as to how much of that risk can be shifted. By statute, you cannot have another party indemnify you against damages that result from your sole negligence, or willful acts. Any such clause in a contract is void as a matter of law. Thus under California law, a person at fault can only seek indemnity from another party who also has some degree of fault for the harm that results in the liability.
California courts have categorized indemnity clauses into three basics types. For the purposes of explaining these three types of indemnity clauses, this article will assume that the general contractor is the one seeking indemnity (indemnitee) from the subcontractor (indemnitor).
A Type I Clause is one that expressly and unequivocally provides that the subcontractor (indemnitor) is to indemnify the general contractor (indemnitee) for the negligence of the general contractor (indemnitee). Under this type of clause, the general contractor is indemnified irrespective of whether or not the liability results from his negligence alone, or if it results from his co-negligence with third parties.
A Type II Clause is one that provides that the subcontractor (indemnitor) is to indemnify the general contractor (indemnitee) for the negligence of the general contractor (indemnitee) for liability “however same may be caused . . . ” or “arising from the use of the premises, facilities, or services of (the indemnitee). . .”or “which might arise in connection with agreed work . . .” or “caused by or happening with the equipment or the condition, maintenance, possession or operation or use thereof . . .” or “from any and all claims for damages to personal property by reason of the use of leased property.”
Under Type I and II Clauses, the general contractor (indemnitee) is indemnified for his or her own acts of “passive negligence.” Passive negligence exists when there is a mere nonfeasance (failure to act); and active negligence exists when the party participates in the affirmative act of negligence. The crux of the difference is whether or not the party has had some direct participation in the negligent act that resulted in the liability for which indemnity is being sought. As a result, if the general contractor actively participated in the negligent act, he or she would not be able to seek indemnity.
The third type of indemnity clause, Type III Clause, provides that the subcontractor (indemnitor) is to indemnify the general contractor (indemnitee) for the general contractor’s liability (indemnitee) if caused by the subcontractor (indemnitor), but excludes indemnification for liability that was caused by someone other than the subcontractor (indemnitor). Under a Type III Clause, any negligence on the part of the general contractor (indemnitee), either active or passive, will eliminate indemnification against the subcontractor (indemnitor) whether or not he or she has caused the general contractor’s liability.
Due to the increase in construction defect and worker related lawsuits, insurance carriers have sought to limit their risk for such claims. The insurance carriers have recognized that express indemnity clauses are one method for limiting their insured’s liability, and the insurance carrier’s exposure. As a result, many carriers will condition the issuance of liability insurance on a contractor including certain types of indemnity clauses, or indemnity language in the carrier’s contracts. Other carriers are including conditions in GCL policies that effectively exclude coverage for certain types of work, or projects (e.g. condominiums).
Insurance clauses generally set forth the insurance coverage that the contracting party is obligated to provide. The clauses specify: (1) the types of policies that are to be provided; (2) the number of years for which insurance coverage is to be obtained; (3) the insurance policy monetary limits; (4) the form of the policy (“claims made” vs. “occurrence”); (5) the hazards that are to be covered (e.g. “completed operations” vs. “ongoing operations”); and (6) what evidence of compliance with these insurance requirements must be supplied. Most clauses will condition progress payments on the contractor providing evidence of the required insurance.
Many insurance clauses, also require that the policy be a primary policy. Primary policies are those which obligate the insurer to be the carrier to respond to a claim. Secondary policies are only obligated to respond when the primary policy limits have been exhausted.
Generally, the types of policies that usually are required include: (1) general liability (GCL); (2) automobile liability; (3) excess liability; (4) workers compensation and employer liability; and (5) professional liability. The general liability policy is intended to provide indemnity and a defense against third parties who seek damages for bodily injury and/or property damage.
The evidence required to show that a contractor has satisfied insurance requirements generally is in the form of a Certificate of Insurance and an Additional Insured Endorsement. A Certificate of Insurance is only intended to prove that insurance has been procured. The nature of the Additional Insured Endorsement is best described in context of what is included in a typical policy.
Insurance policies have the following components: (1) a declaration page that includes the name of the insured; the policy period; the designation of coverage; policy limits; deductibles, and a list of accompanying forms and endorsements; (2) an insuring clause that includes the basic agreement to provide insurance coverage; (3) a number of coverage exclusions and exceptions that limit the coverage provided under the insuring clause; and (4) conditions on coverage that place specific duties on the insured as condition to providing coverage.
Endorsements are simply modifications to the policy provisions. Endorsements can expand, or limit the coverage that is being provided by a policy. An endorsement can be part of the policy when it is first issued, or be added at a later date. 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 becomes an additional insured on the policy, 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 dimish the insurer obligation. Generally, the insurer remains obligated to fulfill its obligations under the policy even if the additional insured negligence is the sole cause of the liability for which damages are being sought. However, insurers naturally always seek to limit such exposure.
The Insurance Services Organization (“ISO”) provides standard forms for the insurance industry. It should be noted that insurance carriers also can special manuscript (write) the actual policy and any endorsement to a policy. In such a case, the carrier can restrict or enlarge the coverage set forth in the ISO forms. One such form is the Additional Insured Endorsement. The typical form 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 four digits that follow CG 20 10. For example, a CG 20 10 03 97 indicates that form was issued during March of 1997.
An Additional Insured Endorsement also 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, form GC 20 10 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 damages that occur after the insured completes its operations at a project. The insurer obligation under the policy for completed operations does not extend beyond the policy term. Ongoing operations limits coverage to liability arsing out of the named insured (for example, a subcontractor) ongoing work on the project performed for the additional insured (for example, the general contractor). In the case of ongoing operations coverage, the coverage is limited to the time that the subcontractor is actually performing work on the project.
Clearly, the project owner always wants the broadest form of coverage and therefore will demand completed operations coverage. Recently, many insurance carriers have refused to provided completed operations coverage and will only cover ongoing operations
Finally, if a subcontractor fails to provide the required coverage and additional insured endorsements, that subcontractor may be liable for any damages that the owner, or general contractor suffers as a result of subcontractor’s failure to procure the required insurance. However, if the owner carrier pays the claim, the subcontractor may escape such liability, but still may be required to pay any policy deductible.
First, when you are considering submitting a bid or proposal for a project, obtain the terms and conditions of the contracts that you will be required to sign for that project Examine these contracts to confirm if you have, or can obtain, the appropriate insurance coverages. Second, ask your insurance professional to review the contract requirements before you submit your proposal or bid. Third, if you can meet the coverage requirements, indicate such coverage limitations in your proposal or bid.
This article 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 [email protected] and [email protected] license. He can be contacted at 415-764-1990 or 650-425-7679 (e-mail: [email protected]). 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.